FINANCIAL INCLUSION LANDSCAPE IN TURKEY

June 25, 2015

ALPER OGUZSENIOR FINANCIAL SECTOR SPECIALIST

Agenda

1

2

Financial Infrastructure3

Demand

Supply

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.

World Bank Findex 2011, CBRT

Credit card transactions in value and volume

ATM Penetration

Account Penetration (% of adult population)

Demand : Individuals

Demand side data at the individual level reveals three key

challenges

World Bank Findex 2011 and Turkey Household Budget Survey 2013 and WB Financial Capability Survey

• There are distinct gaps – most notably with regard to gender

• Low saving behavior especially using formal financial system

• Relatively low financial capability

Proportion of adults that has saved in last 12 months (income quintiles)

Household reporting using instrument to save (%)

Account use by gender (%)

Adults who correctly answer on basic fin. Concepts (%)

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.

WB Enterprise surveys (2014)

Percent of firms with account or loan/ line of

credit

Percent of firms who report having a loan/ line of creditPercent of firms that report constraint as

biggest problem (top 6 constraints)

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.

Presentation Title

33.16 32.89 32.80 33.46 31.71 28.71

21.17 23.76 23.87 25.16 25.88 26.85

45.66 43.35 43.34 41.38 42.41 44.44

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014

Consumer Loans SME Corporate Loans

0

50

100

150

200

250 Value of the collateral/ Loan (%)Bank Loans by Segments (%)

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

Supply:

Banking Sector Resilience

Presentation TitleIMF

Foreign borrowing of banks has been increasing

which is accumulating vulnerability in the system

against fluctuations in capital flows

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

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

Supply:

Banking sector access

• Financial services are relatively well developed and enabling broad access

World Bank Finstat 2015

• Competition is putting pressure on banks to be more active in unbanked segment

both on loan and deposit sides

Loan:Micro LoansWoman entrepreneurs Start ups/ young firmsFarmers

Deposit: Gold accountsHigh return, no fee demand deposit for small tickets

Supply:

Firm Life Cycle and Sources of Finance: Further diversification

of the financial sector is needed to better support growth

Presentation Title

Firm Size

Firms Age

Information availability

Very small firms

possibly with no

collateral and no

track record

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

Initial insider finance

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

Supply:

Government programs

Financial Inclusion Strategy of Turkey (2014-17)

• 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 .

Presentation Title

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

• KOSGEB SME and entrepreneur soft loans

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 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 2012. 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 -29.1 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.WB Doing Business 2014

Indicator Turkey

Can any business use movable assets as collateral without dispossession, and can any financial

institution accept such assets as collateral?

Yes

Does the law allow businesses to grant non-possessory security rights in single category of movable

assets, without requiring specific description of the collateral?

No

Does the law allow businesses to grant non-possessory security rights in substantially all assets,

without requiring specific description of the collateral?

No

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?

No

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?

Yes

Is a collateral registry in operation, that is unified geographically and by asset type, with an electronic

database indexed by debtor’s names?

No

Are secured creditors paid first (i.e. before tax and employee claims), when a debtor defaults outside

an insolvency procedure?

Yes

Are secured creditors paid first (i.e. before tax and employee claims), when a business is liquidated? No

Are secured creditors either not subject to an automatic stay on enforcement when a debtor enters a

court-supervised reorganization procedure?

Yes

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?

No

Source: Doing Business 2014 (number of yes reponses) Score 4