Durmuş Yılmaz: Access to finance and capital markets development
Speech by Mr Durmuş Yılmaz, Governor of the Central Bank of the Republic of Turkey, at
the XIIth Euro-Mediterranean Conference on Economic Transition, Bruxelles,
20 February 2008.
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Ladies and Gentlemen,
Over the last two decades, we have witnessed a dramatic shift towards internationally
integrated financial markets. In today's world, asset prices and domestic interest rates have
become increasingly determined by international developments rather than domestic factors.
A sharp expansion in the scale of capital flows is one manifestation of this integration.
Another indicator is the pace of financial innovation and corresponding surge in new financial
instruments and markets. This rapid growth in financial markets has been accompanied by
massive economic and financial deregulation, which has enabled financial institutions to
move beyond national borders, making the conduct of monetary policy more complicated.
In this rapidly changing financial environment, the position of a central bank in the financial
system has become an important issue to address.
It is generally accepted by many central bankers that the primary objective of the monetary
policy should be to achieve and maintain price stability. Here, what is meant by price stability
is low and stable inflation.
Most central banks also acknowledge that they have a significant responsibility for ensuring a
stable financial environment in which both financial and non-financial institutions operate.
Unlike the primary mandate (price stability), the precise meaning of the second mandate is
more elusive. Moreover, central banks are not usually alone in fulfilling this mandate. In
many countries central banks are in close cooperation with independent regulatory agencies.
These agencies have the authority of regulation, supervision and oversight of financial
markets and institutions. In the context of Turkish financial system, we have two such
agencies: Banking Regulation and Supervision Agency and Capital Markets Board.
At this point, I should emphasize that price stability and financial stability objectives are
complementary in nature. Disruptions in financial markets would eventually affect the real
economy through their impact on interest rates, exchange rates or asset prices. Thus, it is
not far fetched to regard them as two sides of the same coin.
Dear Guests,
Financial stability lies at the core of a well-developed financial system. And the smooth
operation of payment and settlement systems is a prerequisite for financial stability.
The Bank for International Settlements defines the oversight of payment and settlement
systems as a task left primarily to central banks with the objective of promoting the smooth
functioning of payment systems and protecting the financial system from the possible
"domino effects" which may occur when one or more participants in the payment system
experience credit or liquidity problems.
Central Bank of Turkey has played a leadership role in the development of payment and
settlement services in Turkey. Today, the payment system is fully complied with the
provisions of the CPSS (Committee on Payment and Settlement Systems) Core Principles
for Systemically Important Payments Systems.
Interbank funds and securities transfer are performed via the Interbank Clearing - Real Time
Gross Settlement System that is supervised and operated by the Central Bank. This system
commenced operation in April 1992. In 2000, the second generation Electronic Fund
Transfer System replaced its predecessor. Today, Electronic Fund Transfer System is a real-
time gross settlement system in line with best international practice. Payments are settled
individually on the accounts and transferred to receiver immediately. Thanks to the
infrastructure provided by Electronic Fund Transfer System, institutions and individuals can
make any kind of payments in real time through telephone banking or internet banking
services free of charge or with minimum cost. A noteworthy feature of the payment system is
that it was designed to process both large value and low value transactions.
The Central Bank of Turkey also established Interbank Clearing - Electronic Security
Transfer and Settlement System for real time electronic transfer and settlement of
government bills and bonds. The system has been taken into operation in 2000 under the
supervision of the Central Bank of Turkey. It is fully integrated with the Electronic Fund
Transfer System and operates under delivery versus payment principal.
The third pillar of the payment system in Turkish economy is the Interbank Cheque Clearing
Houses Center. The Clearing House is a private legal entity that carries out the clearing and
settlement of cheques under the supervision of the Central Bank.
Today, we can easily say that payment and settlement system in Turkey is at par with its
counterparts in developed countries promoting the efficiency and effectiveness of the
financial system.
Distinguished Guests,
Removing market imperfections is essential for the smooth operation of financial system. In
this context many central banks have been involved in addressing information problems
experienced in credit markets. At this point I will draw your attention for a few minutes to the
asymmetric information problem, which can lead to credit rationing.
It is known that obtaining credit information to ensure sound-lending activities is a costly
procedure requiring an efficient monitoring process. The lack of adequate information about
a borrower's credit solvency and the viability of a project may raise screening and monitoring
costs for banks. This situation sometimes leads banks to cut credit supply or make them
reluctant to supply loans. Of course, collateral based lending could ease banks' reluctance
as it partially reduces the risk involved in lending. However, collateral may play a limited role
in the case of small and medium size enterprises since they are less likely to possess
appropriate collateral.
In order to improve exchange of information on credit history of a borrower, regulators of
many countries have actively involved in setting up public credit bureaus. In Turkey, the
Central Bank took the lead in setting up the Risk Center of Turkey in 1951. The Risk Center
has been operating within the Central Bank since then. This database enables to prevent
extension of credit to a person or legal entity exceeding its payment capacity. Applications
are based on data exchange on loan limit and risk information on bank customers, protested
bills information, identity information of the customers subject to non-performing consumer
loan and credit card, and loan limit and risk information on customers of financial leasing
companies and factoring companies. Currently we are at the process of transferring the Risk
Center Unit to the Banks Association of Turkey.
A separate and private company was also set up by private banks in 1995 as Credit Bureau
to respond to the demands of the financial community. The Credit Bureau promotes the
exchange of information among financial institutions about the credit history of potential
customers.
I should also emphasize the importance of the new capital accord, the Basel-II. Along with
the implementation of Basel-II, the access of small and medium size enterprises to bank
credit will depend heavily on their financial and organizational structures. According to the
new accord, those enterprises that adhere to sound corporate governance principles will
have an advantage in access to cheaper finance through banking sector. They will also have
better access to finance if they improve their financial disclosure standards. Hence, it is
imperative for small and medium size enterprises to take the necessary steps and prepare
themselves for the requirements of the Basel-II without any delay.
At this point, I would like to briefly touch another obstacle that hinders access to capital:
Fiscal dominance. Due to high level of public sector borrowing requirements in many
emerging market countries, fiscal policy ultimately governs price determination in financial
markets. Fiscal dominance reduces the amount of loanable funds available to private sector
and disrupts effective credit allocation in the economy. Turkey can be seen as a case study.
Years of high real interest rates and budget deficits in the 1990s forced the Turkish banking
sector to credit rationing. Banks were not able to perform their intermediary function
effectively. Instead, they mostly financed public sector deficits. Fiscal dominance has
gradually eased following the reform program enacted after the 2001 crisis. The declining
public debt burden and the diminishing fiscal dominance in Turkey put an end to the
crowding-out of the real sector. That boosted the supply of loanable funds. Banks have
returned to their traditional role of financial intermediation instead of financing government
expenditures. Share of public securities in Turkish banking sector assets declined by
onethird to 28% in the last 5 years; while share of credits to private sector more than doubled
and reached to 49% during the same period. The credits extended to the small and medium
enterprises by Turkish banking sector have also increased significantly to USD 95 billion as
of 2007. This corresponded to almost 20% of the GDP. As a further note, 32% of these
credits were in the category of credits extended to micro enterprises. The ratio of private
sector credit used by households and firms to GDP has also rapidly increased, though it is
still low in international standards.
Of course, raising the share of private credits in the financial system does not necessarily
mean that each and every segment of the population would gain access to financial services.
The low-income segment of the society, in particular, may not have access to capital and that
would have two principal adverse effects. First, they may not be able to raise the expected
value of their income and therefore of consumption and future investment and asset
accumulation. Second, due to lack of access to credit, the poor would face high variation in
their income and consumption, and the downward risk on income threatens their ability to
satisfy basic consumption needs.
Increasing the funds available for entrepreneurs that have micro-scale business plans but do
not have access to credit, have merits such as contributing to the production level and
unemployment ratio while also strengthening the social structure of a country. Of course, it
should be noted here that while the benefits from financing these activities are more or less
common, selection of main business areas where these funds should be used obviously
depends on country specific circumstances and needs.
Dear Guests,
In the last part of my speech, I would like to share with you my thoughts on the external
sources of "access to finance".
As I touched upon initially, financial innovation and financial integration have led to explosive
growth in the international movement of capital. These flows serve as an important catalyst
for domestic financial market development, as reflected both in the size of the banking sector
and equity markets, as well as the quality of institutions for supervision and regulation.
In recent years, attention has been given on how macroeconomic policies should respond to
the unexpectedly big wave of capital flows to many emerging market economies. Regardless
of the form or way of these inflows, they create important challenges for policymakers due to
their potential to cause overheating of economies.
Emerging market countries have responded to address these concerns in a variety of ways,
such as exchange rate alignments, efforts to neutralize the monetary impact of interventions
through sterilization, and controls on capital flows. At this point, I should note that
coordinated fiscal and monetary policies are necessary to attract high quality capital flows
and to manage flows efficiently regardless of their type. Low inflation and prudent fiscal
polices signal to investors the extent of government's commitment to achieve
macroeconomic stability and adds to the credibility of the government. On the other hand,
efforts in the field of financial supervision and regulation, together with policies such as labor
and product market reforms are important for the stability and soundness of financial
systems in handling capital inflows. Regulatory and supervisory authorities should strengthen
prudential and other financial market regulations in order to deepen financial markets and
improve investment climate, whereas central banks should focus more on greater currency
flexibility and price stability.
In conclusion, as a central banker, I would like to highlight three key messages from the
thoughts I have shared with you.
First, to achieve price stability, central banks need to ensure efficiency of financial
infrastructure and maintain smooth operation of financial services. An efficient and effective
payment and settlement system is at the core of financial infrastructure.
Second, removing market imperfections is essential for the smooth operation of financial
systems. Establishment of credit bureaus to improve exchange of information on credit
history of economic agents and reducing fiscal dominance are important steps to ensure
sound-lending activities. In this context, the role of micro finance in promoting the access of
the low-income segment of the society to credit should be supported and encouraged.
Third, the overall level of external financing and its composition is important for domestic
access to finance. The benefits of capital inflows to economic growth would be higher with a
developed financial sector. Central banks could best support this process through their
contribution to macroeconomic stability.
Thank you.