Banking on Turkey.

• Author: Nazli, H. Kaan
• Position: Business & Economics

BARRING A LAST-minute crisis, the Council of Ministers of the European Union appears likely to invite Turkey to begin membership negotiations in 2005 after its summit meeting this December. The European Commission's explicit positive recommendation and the acknowledgement in an annual progress report that Turkey has achieved the required threshold to meet the 1993 Copenhagen political criteria reduces the ability of the more reluctant EU members to base their opposition to the launch of talks on technical grounds.

There should be no illusions, however. Turkey's accession negotiations are expected to be long, nonlinear and open-ended, due to continued fears across Europe about admitting a poor, populous, Muslim country. This process will nonetheless provide an anchor for Turkey to stabilize its economy and attract much-needed foreign investment. (1)

The development of a robust and modern banking sector is essential for Turkey to ensure capital formation to create the basis for sustainable financial stability and long-term economic growth-all necessary preconditions for Turkish membership in the EU. This will help reduce systemic risks in the financial sector and prevent a repeat of the 2001 financial crisis, the trigger of which was the fragility of the banking system. The 2001 crisis resulted in a 7.5 percent contraction of the economy, the worst economic crisis in the nation's history. A robust banking sector will also improve access to a wide range of modern financial products and services, including supply

capital and credit, for the manufacturing sector as well as small and medium enterprises and low-income earners.

The opening of talks with the EU will be a significant opportunity for Turkey's banking sector in the next few years, as the prospect of EU membership negotiations has increased European interest in Turkey's banks. Although no deals have gone through so far, the accession process will raise European interest in the Turkish banking sector and may lead to major mergers and acquisitions. If talks begin as expected, the next three years will bring significant changes in both the ownership and asset structures of the banks as Turkey stabilizes its economy and continues its path toward converging with EU standards. The Justice and Development Party (AKP) government is currently in negotiations with the International Monetary. Fund (IMF) on a new economic program, which would also serve as an economic recipe to bring Turkey's economy into closer compliance with the Maastricht criteria. (2)

The AKP government's commitment to increasing regulation in the banking sector and implementing the current IMF-backed economic program--to be replaced by a new three-year stand-by agreement by the end of 2004--has benefited the Turkish banking sector. The market's confidence in the...