FACULTY OF ECONOMICS
FINANCIAL INSTITUTIONS IN TURKEY
BY: ALTYNBEK USUPBAEV
Financial Institutions in Turkey
Financial institutions are the parts of the financial system. The financial system is the complex structure, and every year it channels billions of dollars, euros, yens, Turkish liras from savers to people with productive investment opportunities. Financial institutions commonly separated as depository institutions and as non-bank institutions.
Our major target in this paper is to have a wide look at financial institutions in Turkey. For easy work and best understanding it makes sense to follow mere wisdom "think globally- do locally". So, in order to make a proper outline, I plan firstly work on general financial institutions all over the world, and then look whether they exists in Turkey, their structure and how they work.
Non-bank Financial Institutions
Although depository institutions, or by other words banks are the financial institutions we deal with most often, they are not the only financial institutions we come in contact with. In such transactions like purchasing insurance from insurance company, or buying a share of common stock with the help of the broker, we are dealing with non-bank financial institutions.
The role of non-bank financial institutions is to transfer funds from lenders-savers to borrowers-spenders. In the time of technological progress, non-bank financial institutions innovate new services, and now compete more directly with banks by providing banklike services to their customers.
Insurance Companies: Every day we face the possibility of the occurrence of certain catastrophic events that could lead to large financial losses. Because these losses could be large relative to our financial resources, people found the solution by buying insurance coverage that will compensate the sum of money if catastrophic events occur.
Life Insurance Companies: The first life insurance company in the United States (Presbyterian Ministers' Fund in Philadelphia) was established in 1759, in Turkey it was established in 1893 by Osmanli Sigorta, a member of Osmanli Bank. In 1918 was created İttihad-i Milli – the first insurance company created by Turkish laws. This huge difference in time was because insurance in Ottoman Empire was accepted as gambling, and correspondingly was forbidden. But after two great fires in Beyoglu and Kumkapi (Stanbul) in 1870 the laws were rearranged, and gave permission for foreign insurance companies to service in Ottoman Empire.
Life insurance company sells policies that provide income if a person dies and incapacitated by illness, or retire. Such companies are organized in two forms: as stock companies or as mutual companies. Stock companies are owned by stockholders; mutuals are technically owned by policyholders.
Because death rates for population as whole are predictable with a high degree of certainty, life insurance companies can accurately predict what their payouts to policyholders will be in the future. Consequently, they hold long-term assets that are not particularly liquid – corporate bonds and commercial mortgages as well as some corporate stocks.
There are two principal forms of life insurance policies: permanent life insurance (such as whole, universal, and variable life) and temporary insurance (such as term). Permanent life insurances policies have a constant premium throughout the life of the policy. In the early years of the policy the size of the premium exceeds the amount needed to ensure against death because the probability of death is low. Thus the policy builds up a cash value in its early years. But in later years the cash value declines because the constant premiums falls below the amount needed to ensure against death, the probability of which is now higher. Term insurance, by contrast, has premiums that are matched every year to the amount needed to ensure against death during the period of the term (for example one or five years). Hence term policies have no cash value, thus, in contrast to permanent life policies, provide insurance only, with no savings aspects.
Property And Casualty Insurance Companies: Property and casualty insurance companies specialize in policies that pay fro losses incurred as a result of accidents, fire, or theft. Property and casualty insurance companies same as life insurance companies separated both as stock and mutual companies, and regulated by government. The investment policies of property and casualty insurance companies are affected by two basic facts. First, because they are subject to income taxes, the largest share of their assets is held in tax-exempt municipal bonds. Second, because property losses are more uncertain than the death rate in a population, these insurers are less able to predict how much they will have to pay policyholders than life insurance companies are. The earthquake in Izmit in 1999 exposed the property and casualty insurance companies to huge losses. Therefore, property and casualty insurance companies hold more liquid assets than life insurance companies. Property and casualty insurance companies will insure against losses from any type of events, including fire, theft, negligence, malpractice, earthquakes, and automobile accidents. If possible loss being insured is too large for any firm, several firms may join together to write a policy in order to share the risk. Insurance companies may also reduce their risk exposure by obtaining reinsurance. Reinsurance allocates a portion of the risk to another company in exchange for a portion of the premium and is particularly important for small insurance companies. The most famous risk-sharing operation is Lloyd's of London, an association in which different insurance companies underwrite a fraction of an insurance policy. In Turkey the reinsurance activities also widely used, there is many companies that deal with other insurance companies by reinsurancing. As an example we could give Marsh Reinsurance that give reinsurance service and reinsure into the reinsurance companies abroad directly or through reinsurance brokers. There is also the Association of Insurance and Reinsurance Companies of Turkey located in Istanbul.
Pension Funds: in performing the financial intermediation function of asset transformation, pension funds provide the public with another kind of protection: income payments on retirement.
There is an important increase in share of pension funds due to tax policy, because employer contribution to an employee pension plans are tax-deductive. Furthermore, tax policy has also encouraged employee contribution to pension funds by making them tax-deductible as well as enabling self-employed individuals to open up their own tax-sheltered pension plans, Keogh plans, and individuals retirement accounts (IRAs). Because the benefits paid out of the pension fund each year are highly predictable, pension funds invest in long-term securities, with the bulk of their asset holdings in bonds, stocks, and long-term mortgages. The key management issues for pension funds revolve around asset management: Pension fund managers try to hold assets with high expected returns and lower risk through diversification.
The structure of pension funds in Turkey changed over time, affected by global changes in economic world. For example in the past, pension funds hold about 99% of their funds in government bonds and only 1% in stocks. But currently, when stock performs outstanding performance, pension funds hold about 25% of their funds in stocks. Pension funds are now the dominant players in the stock market.
Pension funds in Turkey are two types: private pension funds and public pension plans. Private pension funds are administrated by the banks, a life insurance companies, or a pension fund manager. Anadolu Emeklilik is live example for private pension funds. SSK, Emekli Sandigi are public pension plans, that are give services to public workers.
Beside this, pension funds are highly related with the trust. Households will not save their money in banks, pension funds, or other financial institutions if they have no trust to them. The government plays here an important role in protection household savings and regulating the structural work of financial institutions. The legal legislation, like FDIC increases the trust of people to the banks and others. As long as households trust to private pension funds they deal with them.
Many turkish banks also gives private pension fund services (Ak Bank- Ak Emeklilik), and outstanding increase in pension funds rate is also related to people trust to the turkish banking, as well as to the pension funds.
Finance Companies: Financial companies acquire funds by issuing commercial paper or stocks and bond or borrowing from banks, and they use the proceeds to make loans (often for small amounts) that are particularly well suited to consume and business needs. The financial intermediation process of finance companies can be described by saying that they borrow in large amounts, but often lend in small amounts- a process quite different from that of banking institutions, which collect deposits in small amounts and often make large loans. There are three types of financial companies in Turkey: sales, consumers, and business.
Sales Finance Companies are owned by a particular retailing or a manufacturing company and make loans to consumers to purchase items from that company. Sales finance companies compete directly with banks for consumer loans and are used by consumers because loans can frequently be obtained faster and more conveniently at the location where an item is purchased.
Consumer Finance Companies make loans to consumers to by particular items such as furniture or home appliance, to make home improvements, or to help refinance small debts. Consumer finance companies are separate corporations, or are owned by banks. Typically, these companies make loans to consumers who can not obtain credit from other sources and charge higher interest rates.
Business Finance Companies provide specialized forms of credit to businesses by making loans and purchasing accounts receivable at a discount; this provision of credit is called factoring. Besides factoring business finance companies also specialize in leasing equipment, which they purchase and then lease to businesses for a set number of years.