Mutual Funds: Mutual Funds are financial intermediaries that pool the resources of many small investors by selling them shares and using the proceeds to by securities. Through the asset transformation process of issuing shares in small denominations and buying large blocks of securities, mutual funds can take advantage of volume discounts on brokerage commissions and purchase diversified holdings (portfolios) of securities. Mutual funds allow the small investors to obtain the benefits of lower transaction costs in purchasing securities and to take advantage of the reduction of risk by diversifying the portfolio of securities held. Many mutual funds are run by brokerage firms, but others are run by banks, or independent investment advisers.
Mutual funds have seen a large increase in their market share due primarily to the booming stock market. Another source of growth was the specialization of mutual funds in dept instruments.
Funds that purchase common stocks may specialize even further and invest solely in foreign securities or in specialized industries, such as energy or high technology. Funds that purchase debt instruments may specialize further in corporate, government, or tax- exempt bonds, or in long-term or short-term securities.
Mutual Funds are primarily held by households (around 80%) with the rest hold by other financial institutions and non financial businesses.
Depository institutions, or simply banks are the most important of all financial intermediaries and are generally the first place we go when we decide to borrow money to buy a car, or go to holiday.
Bank strategy simply is collecting small deposits and making big loans, and as all economic units pursues the goal to maximize their profits. Generally banks and Turkish banks as well have four primary concerns: the first is to make sure that the bank has enough ready cash to pay its depositors when there are deposit outflows, that is, when deposits are lost because depositors make withdrawals and demand payment. To keep enough cash on hand, the bank must engage liquidity management, the acquiring assets to meet the banks obligation to depositors.
Second, the bank must pursue the acceptably low level of risk by acquiring assets that have a low rate of default and by diversifying asset holdings. The third concern is to acquire funds at low cost, and finally they must decide the amount of capital they should maintain and then acquire the needed capital.
The banking sector constitutes a great part of the Turkish financial system. Many of the transactions and activities taking place in both money and capital markets are carried out by banks. Turkey's financial system and its banking sector are virtually synonymous as a consequence of the country's economic and historical development.
There are a number of factors that give banking its prominent role in the Turkish economy. These are:
-The economic structure peculiar to Turkey,
-The choice to turn resources into long-term investments through the banks for the objectives targeted in the development plans and annual programs, and the establishment of banks by the state to finance certain sectors,
-Extensive application of continental European banking practices as a model in the legal structure of the banking system and
-The lack of a full-fledged capital market.
The development of the Turkish banking sector can be analyzed within six separate periods, which differ as to policy and method:
The Period of the Money-changers and the Galata bankers (pre-1847):
During this period, all quasi-banking activities were carried out by money-changers. The Galata bankers consisted mostly of the ethnic-minorities in Istanbul.
The Period of Foreign Banks (1847-1908):
Since the financial situation of the Ottoman Empire deteriorated after the Crimean war, the Empire faced the need for external financial support. Representatives of several foreign banks came to Istanbul with the purpose of extending credits to the Empire at high interest rates. The Ottoman Bank (Osmanlı Bankası) was established in 1856. Its head office was in London and served as the Central Bank until the 1930s.
Development of National Banking and Implementation of Etatism (1909-1944)
The years following the proclamation of the Second Constitution (1908) gave rise to the national banking movement, which was a reaction to foreign banking.
Twenty-four national banks were established in Istanbul and Anatolia between the years 1908 and 1923. However, foreign banks continued to dominate banking activities due to the consecutive wars (1911-1922), capitulations granted to foreigners and scarcity of national capital.
In 1923, the first National Economic Congress held in Izmir dealt with a large number of economic problems that the country would have to solve. The Congress took the decision that banks would be established to finance the main sectors of the economy. T. İş Bankası (1924), Sanayi ve Maadin Bankası (1925), and Emlak ve Eytam Bankası (1927) were established to provide commercial, industrial and housing credits, respectively.
However, the adverse effects of the Great Depression on the balance of payments and the lack of domestic capital called for a government-supported economic development policy in subsequent years. As a result of this policy, six state banks were established in the 1930s, including the Central Bank of the Turkish Republic.
Development of Private Banks (1945-1960)
Despite the adverse effects of the Second World War, a significant rate of growth and industrialization was achieved with the support of the newly established state banks, which created a tremendous increase in capital stock of the private sector.
Beginning in the early 1950s, etatism weakened because of positive developments in the private sector, expansion of international cooperation and transition to a multi-party political system. A more liberal and private sector oriented policy was adopted in the following years, and as a result, more than 30 private banks were established by 1960.
Planned Development Period (1961-1979)
A new "planned development" policy was adopted in the beginning of the 1960s. According to this system, the state would administer the economy and issue recommendations to the private sector through five-year plans prepared by the government to cover all sectors.
As recommended in the plans, several development and investment banks were established to finance various sectors in the 1960s and 1970s such as the Tourism Bank (Turizm Bankası) in 1960, Industrial Investment Bank (Sinai Yatırım Bankası A.Ş.) in 1963, State Investment Bank (Devlet Yatırım Bankası) in 1964, and the State Industry and Worker's Investment Bank (Devlet Sanayi ve İşi Yatırım Bankası) in 1975.
Liberalization and Internationalization in Banking (post-1980)
A new liberal economic policy began to be implemented in January 1980, which aimed at integration with world markets by establishing a free market economy. As a reflection of this policy, the 1980s witnessed continuous legal, structural and institutional changes and developments in the Turkish banking sector. During these years, a series of reforms were adopted to promote financial market development. The main aim of these reforms was to increase the efficiency of the financial system by fostering competition among banks.
In this context, interest and foreign exchange rates were liberalized, new entrants to the banking system were permitted and foreign banks were encouraged to operate in Turkey. Turkish banks intensified their business relations abroad either by purchasing banks in foreign countries or by opening branches and representative offices. The liberalization of foreign exchange regulations increased the foreign exchange transactions in the banks. Beginning in 1984, the special finance institutions, operating according to Islamic banking principles, also became part of the financial system.
The Interbank Money Market, which is administrated by the Central Bank, was established in 1986 with the purpose of regulating liquidity in the banking system.
A uniform accounting plan and accounting principles as well as a standard reporting system were adopted in the same year. In 1987, the application of external auditing of the banks in accordance with internationally accepted accounting principles was started.
In addition, legal and institutional arrangements were introduced to foster the development of the capital market. As a result, banks began to provide additional services such as consultancy and trading in securities, underwriting fund management, establishing mutual funds and financial consultation.
Besides diversifying their services, banks improved their technological infrastructure by extensive use of computer systems; began employing more qualified human resources; and at the same time put an emphasis on training programs.
LEGAL FRAMEWORK AND SUPERVISION OF THE BANKING SYSTEM
Banks are institutions by which funds accumulating in the economy are collected and channeled to investors. This makes the public supervision of banks essential.
All banks in Turkey are subject to the Banks Act and to the provisions of other laws pertaining to banks. The new Banks Act No.4389, which brought substantial differences, was issued on June 23rd, 1999. Prior to the changes in the Banks Act, the Undersecretariat of the Treasury and the Central Bank had been the two main regulatory and supervisory bodies in the banking sector. With the new Act, the Banking Regulation and Supervision Agency (BRSA) were formed, which had financial and administrative autonomy. The mission of the Agency is to safeguard the rights and benefits of depositors and create the proper environment in which banks and financial institutions can operate with market discipline, in a healthy, efficient and globally competitive manner, thus contributing to the achievement of long-run economic growth and stability of the country.