Turkey - Rural finance study (Vol. 2 of 2)

 69968 v2 DRAFT (05/11/2006) TURKEY Rural Finance Study (In Two Volumes) Volume II: Expanded Report May 2006 Environmentally and Socially Sustainable Development Sector Unit Europe and Central Asia Region Document of the World Bank  Currency and Equivalent Units (Exchange Rate Effective as of April 28, 2005) Currency Unit = NEW TURKISH LIRA (NTL) US$1.00 =1.322 NTL (=1,322,000 TL) Fiscal Year January 1 to December 31 ACRONYMS AND ABBREVIATIONS ACC Agricultural Credit Cooperative ARIP Agriculture Reform Implementation Project ASC Agricultural Sales Cooperatives ASCU Agricultural Sales Cooperative Union ATM Automatic Teller Machines BANSEFI Mexico National Savings and Financial Services Bank BRI Bank Rakyat Indonesia BRSA Banking Regulation and Supervision Agency CEE Central and Eastern Europe DIE (SIS) State Institute of Statistics DIS Direct Income Support DSI State Hydraulic and Waterworks Organization EU European Union FAO Food and Agriculture Organization FM Financial Module GDP Gross Domestic Product GOT Government of Turkey KOSGEB Small and Medium Industry Development Organization MARA Ministry of Agriculture and Rural Affairs MFI Micro Finance Institution MIT Ministry of Industry and Trade MOF Ministry of Finance NGO Non-Government Organization NTL New Turkish Lira PPP Purchasing Power Parity QHS Quantitative Household Survey SAGARPA Mexico Secretariat of Agriculture, Rural Development and Nutrition SDIF Savings and Deposits Insurance Fund SME Small and Medium Enterprise SOE State-Owned Enterprise SPO State Planning Organization TESKOMB Union of Tradesmen and Artisans Credit and Guarantee Cooperatives TKGM General Directorate of Land Registration and Cadastre TL Turkish Lira TOBB Union of Chambers and Commodity Exchanges of Turkey -i-  TABLE OF CONTENTS VOLUME II – EXPANDED REPORT Chapter 1 - Financial Sector Development in Turkey........................................1 A. Introduction.......................................................................................................1 B. Financial Sector Depth and Breadth..................................................................1 C. The Turkish Banking Sector .............................................................................7 D. The Agricultural Credit Cooperatives..............................................................11 E. Micro-Finance Institutions ...............................................................................14 Chapter 2 - Regional Structure of Financial Markets .....................................19 A. Socio-Economic Background .........................................................................19 B. Regional Distribution of Financial Services ...................................................20 C. Analysis of Selected Financial Institutions .....................................................24 D. Responsiveness of Banking Services to Rural Indicators...............................27 E. ACC Restructuring ..........................................................................................30 Chapter 3 - Participation in Financial Markets by Rural Households...........35 A. Introduction.....................................................................................................35 B. Data Sources....................................................................................................35 C. Participation in Credit Markets .......................................................................37 D. Use of Financial Savings and Insurance Services...........................................39 E. Profile of Rural Users of Financial Services ..................................................41 -ii- Chapter 4 - Rural Credit Market Structure......................................................47 A. Composition of Rural Households’ Borrowing ..............................................47 B. Characteristics of Main Financial Products Used by Rural Households ........49 Chapter 5 - Credit Constraints and Investment Behavior...............................54 A. The Extent of Credit Constraints ....................................................................54 B. The Profile of Rural Households which are Credit Constrained.....................55 C. Investment Behavior .......................................................................................57 Appendix 1 – District Level Indicators of Bank Presence and Activity................63 Appendix 2 - Regression Results for Findings in Chapter 3 .................................69 Appendix 3 – Additional Data Tables for Results in Chapter 5 ............................83 References.............................................................................................................84 -iii-  Chapter 1 – Financial Sector Development in Turkey A. Introduction 1.1 This chapter examines the depth of the financial sector, the presence of banks and credit cooperatives, and the use of their credit and deposit services throughout Turkey. The chapter is divided into two sections. Section B discusses financial sector depth in Turkey and compares it to that for other emerging markets. Section C describes the Turkish banking sector in more detail, placing special emphasis on characterizing its role in intermediating funds to the private sector. Sections D and E examine the Agricultural Credit Cooperatives and micro-finance institutions, respectively. B. Financial Sector Depth and Breadth 1.2 Recent trends in financial sector depth in Turkey. The evolution of financial sector depth in Turkey since the mid 1980s, depends on how it is measured. Common indicators of financial sector depth include the ratio of liquid liabilities (currency plus demand and interest bearing liabilities of banks and other financial institutions) to gross domestic product (GDP), the extent of credit provided by bank and other bank like institutions as a share of GDP, as well as measures of stock market and bond market capitalization to GDP. Capitalization measures are indicators of capital market development, while the other measures track mostly banking sector depth. Figure 1.1: Financial sector depth indicators for Turkey, 1987-2003 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Liquid liabilities to GDP Private credit by deposit money banks and other financial institutions to GDP Stock market capitalization to GDP Public bond market capitalization to GDP Source: International Financial Statistics (IMF). -1- 1.3 Both the share of liquid liabilities to GDP and public bond capitalization to GDP grew almost steadily since the mid-1980s, with some reversals during the 1995 and 2001 crises. Stock market capitalization also grew considerably during this period, however, both the 1995 and, in particular, the 2001 crises brought about large declines in this ratio. 1.4 Relative to the other indicators of financial sector depth, the evolution of credit to GDP has been rather disappointing. This indicator exhibited almost no growth during the late 1980s and early 1990s. After the 1995 crisis, credit to GDP did increase, but at a much slower pace than the liability and capital market indicators of financial sector development. However, progress made in terms of credit development was almost completely wiped out during the recent crisis, as a result of which credit to GDP levels went down to pre-1995 levels. Table 1.1: Financial sector depth indicators across selected countries Private credit by Stock market GDP per Liquid liabilities to Public bond market Country Name banks & other capitalization to capita in GDP capitalization to GDP financial inst. to GDP GDP PPP US$ 2000 2003 2000 2003 2000 2003 2000 2003 2003 Turkey 39.5% 41.9% 18.7% 14.0% 46.0% 21.3% 24.6% 49.0% 6,398 Argentina 31.8% 26.8% 24.4% 11.8% 44.1% 62.4% 10.9% 5.6% 11,436 Brazil 28.3% 29.2% 35.3% 33.2% 38.6% 36.2% 40.7% 42.6% 7,360 Bulgaria 32.3% 43.8% 11.6% 22.4% 5.3% 6.3% 7,304 China 145.0% 176.4% 119.2% 135.5% 42.6% 40.6% 13.7% 18.9% 4,726 Czech Rep. 63.0% 70.0% 49.9% 29.5% 19.6% 18.3% 38.0% 51.5% 15,453 Estonia 32.1% 38.3% 22.6% 29.2% 31.7% 2.1% 12,790 Hungary 43.3% 45.6% 27.5% 37.8% 29.1% 17.4% 33.6% 40.9% 13,777 India 52.5% 60.2% 26.7% 30.6% 36.0% 34.3% 23.3% 29.2% 2,732 Indonesia 57.4% 51.9% 20.4% 22.0% 29.8% 20.4% 3,175 Jordan 107.8% 74.7% 63.6% 4,081 Korea 82.9% 87.9% 112.9% 119.9% 55.3% 47.9% 14.4% 18.3% 16,977 Latvia 25.2% 33.4% 15.2% 29.3% 6.2% 8.1% 9,702 Lithuania 21.4% 29.0% 11.9% 16.8% 12.0% 12.9% 11,055 Malaysia 125.3% 126.5% 128.5% 132.7% 145.2% 141.4% 29.6% 36.3% 8,986 Mexico 27.9% 28.1% 17.8% 18.1% 24.5% 18.1% 10.5% 20.3% 8,661 Philippines 62.7% 60.2% 42.5% 34.9% 66.8% 39.7% 27.9% 28.0% 4,082 Poland 39.0% 41.6% 25.7% 28.1% 17.6% 15.3% 17.9% 29.1% 10,749 Slovak Rep. 61.4% 62.8% 51.5% 35.0% 5.6% 7.1% 12,747 Slovenia 43.7% 53.3% 33.7% 39.2% 11.9% 20.7% 18,091 South Africa 42.2% 49.6% 65.0% 75.0% 173.5% 136.3% 40.1% 31.7% 9,774 Thailand 112.2% 109.2% 110.5% 95.7% 35.4% 56.4% 13.5% 21.0% 7,175 Ukraine 16.1% 30.0% 8.9% 19.7% 4.8% 7.5% 5,188 Source: Financial Structure Database (World Bank). 1.5 Benchmarking financial sector depth and banking sector outreach in Turkey. Compared to other emerging countries, Turkey fares favorably in terms of liability and capital market measures of financial sector depth, but performs very poorly in terms of credit market development. The ratio of liquid liabilities to -2-  GDP for Turkey ranks slightly below the median for a sample of 24 countries and below all the Asian economies included. However, the ratio for Turkey surpasses that for many of the Latin American economies and European Union (EU) accession countries included in the sample. Capital market development in Turkey, measured by the ratio of stock market capitalization to GDP, exceeds that for most of the countries in the sample with the exception of Jordan, Korea, Malaysia, Philippines, and South Africa. On the other hand, with the exception of Argentina, which experienced a very significant crisis in 2001, the ratio of private credit to GDP for Turkey is well below most of the other countries in the sample. 1.6 Though an assessment of why private credit depth in Turkey is lower than in many emerging markets is beyond the scope of this study, it is interesting and relevant to consider the likely impact of the quality of institutions and the business environment. Table 1.2 compares a number of macroeconomic variables known to influence credit market development. In particular, the table shows figures for real interest rates, inflation, government budget to GDP, and the percentage of bank claims directed to the public sector. A cursory look at the statistics reported in Table 1.2 suggests that Turkey is characterized by higher levels of inflation, interest rates, government deficits, and public sector borrowing from banks than most of other emerging markets in the sample. Table 1.2: Macroeconomic variables that can influence credit market depth across countries - Averages, 1998-2003 Real deposit Overall budget balance, Bank claims on the public Country Name Inflation interest rate including grants (% of GDP) sector (% of total) Turkey 11.2 50.2 -13.1 58.2 Argentina 8.6 6.3 -2.5 42.7 Brazil 13.4 8.3 -7.8 41.4 Bulgaria -4.8 7.8 1.7 26.6 China 2.5 -0.1 -2.6 6.9 Czech Republic -0.7 4.4 -2.0 21.1 Estonia -1.3 5.5 0.6 4.6 Hungary 1.1 9.4 -4.4 26.0 India 4.3 -5.2 37.4 Indonesia -0.8 20.6 -1.3 46.9 Jordan 5.3 1.5 -3.2 14.6 Korea, Rep. 4.8 2.5 4.4 Latvia 1.4 3.0 -1.9 17.6 Lithuania 2.3 1.1 -2.3 28.8 Malaysia 1.3 3.0 6.2 Mexico -2.3 10.3 -1.4 45.9 Philippines 1.2 6.6 -3.4 27.5 Poland 6.7 4.2 -1.4 26.2 Slovak Republic 4.4 5.1 -3.2 41.2 Slovenia 1.4 7.2 -0.9 23.2 South Africa 4.0 7.4 -1.8 7.8 Thailand 2.2 1.9 -6.0 8.0 Ukraine -0.3 14.1 -1.2 16.5 Source: World Development Indicators (World Bank) and International Financial Statistics (IMF) -3- 1.7 Furthermore, some aspects of the business and institutional environment relevant for credit market growth appear to be worse for Turkey (see Table 1.3). Turkey ranks particularly badly when it comes to the legal rights of borrowers and creditors. The costs of creating collateral – often a prerequisite for getting credit – and the cost of enforcing contracts are not the highest among all countries considered, but they are still quite high both in absolute terms and also relative to those observed for most EU accession countries. Table 1.3: Business environment indicators that influence credit market depth, 2004 Cost to create collateral Legal rights Credit information Cost of enforcing (% of income per capita) index index contracts (% of debt) (1) (2) (3) (4) Turkey 19.9 1 4 12.5 Argentina 21.3 3 6 15.0 Brazil 21.4 2 6 15.5 Bulgaria 1.0 6 4 14.0 China - 2 3 25.5 Czech Republic 0.6 6 5 9.6 Estonia 5 10.6 Hungary 13.5 5 3 8.1 India 11.3 4 - 43.1 Indonesia 2.5 5 3 126.5 Jordan 56.3 6 3 8.8 Korea, Rep. 8.1 6 5 5.4 Latvia 1.5 8 4 11.0 Lithuania 4.1 4 3 14.1 Malaysia 3.2 8 6 20.2 Mexico 25.7 2 6 20.0 Philippines 8.3 5 2 50.7 Poland 1.2 2 4 8.7 Slovak Republic 20.1 9 3 15.0 Slovenia 3.2 6 3 16.3 South Africa 2.3 6 5 11.5 Thailand 1.1 5 5 13.4 Ukraine 3.5 6 - 11.0 Source: Doing Business Indicators (World Bank). (1) The indicator assesses the ease of creating and registering collateral. The data are based on research of collateral and insolvency laws and responses to a survey on secured transactions laws, developed with input and comments from experts, including from the Center for Economic Analysis of Law, the International Bar Association Committee E8 on Financial Law, and the European Bank for Reconstruction and Development. Costs include taxes, notary fees and duties associated with creating the security right and registering it in the collateral registry, where such a registry operates. (2) The index measures the degree to which collateral and bankruptcy laws facilitate lending. The index ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit. (3) This index measures rules affecting the scope, access and quality of credit information available through either public or private bureaus. The index ranges from 0 to 6, with higher values indicating that more credit information is available from either a public registry or a private bureau to facilitate lending decisions. (4) The indicator measures the official cost of going through court procedures, including court costs and attorney fees where the use of attorneys is mandatory or common, or the costs of an administrative debt recovery procedure, expressed as a percentage of the debt value. -4- 1.8 While the indicators above help to characterize financial sector depth, they are less meaningful in portraying the reach or breadth of financial services in an economy. Broad access to financial services is considered central to the economic and social development of countries for several reasons. The first argument builds on the theoretical and empirical finance and growth literature, as surveyed by Levine (2005) and the importance of a well-developed financial system for economic development and poverty alleviation (Beck, Demirguc-Kunt and Levine, 2004). Financial market imperfections such as informational asymmetries, transactions costs and contract enforcement costs are particularly binding on poor or small entrepreneurs who lack collateral, credit histories and connections. Without broad access, such credit constraints make it difficult for poor households or small entrepreneurs to finance high-return investment projects, reducing the efficiency of resource allocation and having adverse implications for growth and poverty alleviation (Galor and Zeira, 1993).1. 1.9 Second, one of the channels through which financial development fosters economic growth is through the entry of new firms (Klapper, Laeven and Rajan, 2004) and the Schumpeterian process of “creative destruction