FINANCIAL INCLUSION LANDSCAPE IN TURKEY ALPER OGUZ SENIOR FINANCIAL SECTOR SPECIALIST

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Gillian Dawson
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1 FINANCIAL INCLUSION LANDSCAPE IN TURKEY ALPER OGUZ SENIOR FINANCIAL SECTOR SPECIALIST June 25, 2015

2 Agenda 1 Demand 2 Supply 3 Financial Infrastructure

3 Demand : Individuals Turkey excels among BRICS and ECA countries when it comes to account penetration Account penetration stands at 58 percent, higher than the average of BRICS and other ECA countries at 51 and 38 percent respectively. FI landscape is standing out (i) by high account usage with few dormant accounts, (ii) common use of accounts for remittances, (iii) high growth in electronic payments in recent years, (iv) an extensive network of access points- branches, ATMs and POS. Account Penetration (% of adult population) Credit card transactions in value and volume ATM Penetration World Bank Findex 2011, CBRT

4 Demand : Individuals Demand side data at the individual level reveals three key challenges There are distinct gaps most notably with regard to gender Low saving behavior especially using formal financial system Relatively low financial capability Account use by gender (%) Proportion of adults that has saved in last 12 months (income quintiles) Adults who correctly answer on basic fin. Concepts (%) Household reporting using instrument to save (%) World Bank Findex 2011 and Turkey Household Budget Survey 2013 and WB Financial Capability Survey

5 Demand : Firms Micro, Small and Medium Enterprises (MSMEs) have benefited from a long period of macro-financial stability Vast majority of Turkish firms have access to basic financial services, lugging slightly behind ECA. Seventy-nine percent of firms report having a checking or savings account while in other ECA economies where 88 percent of firms report having a checking or savings account. Approximately 40 percent of Turkish firms reported currently having a loan or line of credit from a financial institution, slightly higher than ECA or BRICS where 37 percent and 36 percent of firms, respectively, report having a loan or line of credit Only nine percent of Turkish firms identify access to finance as a major or very severe obstacle to the operations of their establishment while this is 16.8 percent in other ECA economies 28.7 percent worldwide. Percent of firms with account or loan/ line of credit Percent of firms who report having a loan/ line of credit Percent of firms that report constraint as biggest problem (top 6 constraints) WB Enterprise surveys (2014)

6 Demand : Firms Overall, several key challenges appear to constraint access for the MSME sector There is a quantity problem for the smaller enterprises: Overall, MSMEs receive only 27 percent of total bank loans. In addition, SME loans are subject to steeper fluctuations compared to corporate loans as a result of the business cycle. The IFC Enterprise Finance Gap Database estimates a significant SME credit gap of US$72 billion in Turkey Young firms in Turkey (those in operation for less than 5 years) and firms registered as sole proprietors are less likely than other firms to report having a loan or line of credit: just 30 percent of firms in each of these categories. Regionally, having a loan or line of credit varies from approximately 24 percent of firms in the Eastern/Southeastern Anatolia regions to 54 percent in the West and Black Sea regions. Firms face onerous collateral requirements. On average, the value of the collateral was 199 percent of the loan amount, which is above the global average of 194 percent. The most common form of collateral required was land or buildings (58 percent), followed by personal assets (30 percent). There is a quality problem resulting from lack of long term finance and of broader use of alternative financial instruments. 100% 80% 60% 40% 20% Bank Loans by Segments (%) Value of the collateral/ Loan (%) % Consumer Loans SME Corporate Loans Presentation Title

7 Supply: Size and Structure of the Financial Sector There is room for further financial deepening Turkish financial sector is dominated by banks. Almost 90 percent of the Turkish financial sector consists of bank assets Presentation Title

8 Supply: Banking Sector Resilience After banking sector restructuring in 2001 banking sector maintained a healthy growth and weathered out the global crisis The banking system is well capitalized, shows low levels of non-performing loans, and is fairly profitable and liquid Foreign borrowing of banks has been increasing which is accumulating vulnerability in the system against fluctuations in capital flows Bank liabilities are short term and 57 percent of liabilities are funded by deposits with less than 3 months average maturity while loan maturities are growing which is expanding the maturity mismatch IMF Presentation Title

9 Supply: Banking sector access Financial services are relatively well developed and enabling broad access Competition is putting pressure on banks to be more active in unbanked segment both on loan and deposit sides Loan: Micro Loans Woman entrepreneurs Start ups/ young firms Farmers Deposit: Gold accounts High return, no fee demand deposit for small tickets World Bank Finstat 2015

10 Supply: Firm Life Cycle and Sources of Finance: Further diversification of the financial sector is needed to better support growth Firm Size Firms Age Information availability Very small firms possibly with no collateral and no track record Initial insider finance Small firms with high growth potential but often with limited track record Medium-sized firms. Some track record, collateral available if necessary Large firms known risks and track record angel finance Venture capital Public equity Trade credit Commercial paper Short term financial institution loans Intermediate term financial institution loans Medium term notes Mezzanine fund financing Private placement Public debt Presentation Title

11 Supply: Government programs There is a significant amount and variety of government programs targeting vulnerable groups, however the linkages and coordination with the financial inclusion strategy can be improved to better target the gaps; gender, savings and financial literacy Financial Inclusion Strategy of Turkey ( ) Strategy is only focusing on consumer protection and financial education There are comprehensive action plans on both consumer protection and financial education prepared by BRSA and CMB respectively. However there is no strategy on improving access. Key Government Programs: Ziraat Bank Farmer Loans Union of Turkish Agricultural Credit Cooperatives Farmer Loans Halk Bank Artisan and Craftsman Loans Credit Guarantee Fund: Credit guarantees for woman and young firms Angel Investors: Tax incentives for Angel Investors registered by Undersecretariat of Treasury Venture Capital: Treasury puts capital to SME and start up focused venture capital funds Conditional Cash Transfer Programs for Social Assistance, Education and Health: these programs provide an account and debit cards for beneficiaries State owned banks and development banks gap filling and countercyclical role Presentation Title KOSGEB SME and entrepreneur soft loans

12 Financial Infrastructure Favorable payment infrastructure : Turkey has been relatively successful with respect to access and usage of transaction accounts. This is attributable to: (i) its robust enabling environment (infrastructure, and legal and regulatory environment), (ii) payment product design features that are attractive to both payees and payers, and (iii) the widespread usage of electronic payment of wages and salaries by public and private sector employers. Reformed credit information system: Turkey has been reforming its credit registry system since New registry is operational under Banking Association and operated by private credit bureau. New system has expanded the membership, availability, quality and convenience of data substantially (credit bureau covers 63 percent of the adults million individuals and 2.7 million companies) Secured transactions framework needs to be improved: The Turkish secured transaction system is fragmented in nature, both with regard to the law and to the registry system. A new law and a unified registry is needed. System does not allow non-possessory security rights and extension of the security rights to future acquired assets and require specific description of collateral. Indicator Can any business use movable assets as collateral without dispossession, and can any financial institution accept such assets as collateral? Does the law allow businesses to grant non-possessory security rights in single category of movable assets, without requiring specific description of the collateral? Does the law allow businesses to grant non-possessory security rights in substantially all assets, without requiring specific description of the collateral? May a security right extend to future or after acquired assets, and may it extend automatically to the products, proceeds or replacement of the original assets? Is general description of debts permitted in collateral agreements, can all types of debts be secured by parties, and can the collateral agreement include a maximum amount for which the assets are encumbered? Is a collateral registry in operation, that is unified geographically and by asset type, with an electronic database indexed by debtor s names? Are secured creditors paid first (i.e. before tax and employee claims), when a debtor defaults outside an insolvency procedure? Are secured creditors paid first (i.e. before tax and employee claims), when a business is liquidated? Are secured creditors either not subject to an automatic stay on enforcement when a debtor enters a court-supervised reorganization procedure? Does the law allow parties to agree in a collateral agreement that the lender may enforce its security interest out of court, at the time the security interest is created? WB Doing Business 2014 Turkey Source: Doing Business 2014 (number of yes reponses) Score 4 Yes No No No Yes No Yes No Yes No

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