Turkey has been hit with another financial scandal. By the end of the year when detailed talks begin on the republic’s membership of the European Union, the men from Brussels will want to know how Turkey plans to tackle a problem to which it seems remarkably prone. Virtually every debacle in the past 25 years has taken the same form yet always seems to surprise.
The Uzan family, at the heart of the latest crisis, are protesting their innocence. They are vowing to fight the government’s seizure, in settlement of $5.5 billion in debts when the family’s Imar Bank was forcibly closed last summer, of 219 companies belonging to their companies. It is the family’s misfortune, however, that the circumstances bear a remarkable resemblance to past banking failures which have rocked and undermined the Turkish financial system. Only once in the last quarter century did the Turks suffer from a classic financial scam and that was in the early 1980s when the Banker Kastelli pyramid collapsed.
That debacle led to the introduction of stricter banking regulations and also a deposit guarantee fund to which all banks were supposed to contribute. But all the changes ignored a basic flaw in the system. While banks rarely had a shortage of deposits, it was hard finding good corporate customers for credits, a problem exacerbated by a high inflation environment. It was easier, and far more profitable anyway, to fund the government’s ever-expanding deficits by buying short-term treasury bills.
Yet Turkish companies have grown vigorously since the economic liberalization in the early eighties. This is because the majority of successful firms belong to a score of family-owned holding companies, each of which has one or more of its own banks. It has been this secure access to funds which has allowed the companies to prosper.
Less scrupulous or able would-be business moguls have sought to duplicate this formula. The result has been a regular series of banking collapses, behind the scenes rescues by the central bank or enforced closures — 25 in the last five years — when the central bank finally acted. The overwhelming impression is that Turkish financial authorities should not have approved many new institutions in the first place. Thereafter poor monitoring enabled problems to arise and mushroom. The central bank could have insisted that it have its own people present alongside in-house compliance officers until it was content that a new bank was operating properly. Thereafter spot inspections would be conducted.
However at the core of the problem is the need to separate banks from other businesses. The top holding companies have long accepted the principle. However nothing has happened because Ankara which has its own portfolio of state-owned banks has not made it happen. Part of the EU’s demands for Turkish membership will undoubtedly be that the Turkish banking system must grow up.
