Some Capital Ideas

What are the most important aspects and regulatory changes from the new Capital Markets Law?

The previous Capital Markets Law dates back to 1982, meaning the new capital markets law brings us up to date with all the changes we have seen both in the global and local capital markets over the last 30 years. The new law also harmonizes our regulations almost 100% with those of the EU. Furthermore, during the preparation of the new law we took into account the lessons learnt from the 2008 global financial crises. Another reason is that while the last decade saw huge growth in the Turkish banking sector, the capital markets lagged quite a ways behind. This new law adjusts our capital markets to the times, as it were. Some of the new changes and novelties brought in by the law include: In line with the 2023 Istanbul Finance Center Project, the legal framework regarding markets has been restructured to enable markets to operate within the one-stop-shop financial supermarket concept, allowing all financial instruments to be traded on a single exchange; investment services and activities have been redefined, enabling intermediary institutions to perform higher value-added activities; the Capital Markets Board (CMB) has been authorized to establish rules regarding corporate governance principles; regulations regarding squeeze out and sell out have been introduced and the legal framework regarding mergers and acquisitions has been updated with global standards; to enhance competition, return performance, and investor trust in the institutional investment sector and to increase the weight of institutional investors in our markets, the establishment and management of mutual funds have been designed as separate areas of activity; the Investor Compensation Center was established in order to secure investors’ capital market instruments and cash assets of up to TL100,000.

The law has been in effect since early 2013. What changes have you seen in terms of asset management?

The new Capital Markets Law brings in a new regime—fully aligned with EU regulations—for collective investment schemes. Immediately after the law came into force, we commenced work on the enactment of sub-regulations, in other words “communiqués.” However, all the secondary regulations that will lay the groundwork come into effect as of July 1, 2014. Regarding institutional investors and collective investment schemes, the three most crucial regulations are those that set the rules for the investment funds, the portfolio management companies, and the depositories. As for mutual funds, assets under management (AUM) are valued at, as of September 2, 2013, approximately $15.6 billion. Generally speaking, money market funds have been dominating the Turkish mutual funds industry. However, due to the recent limitations we imposed on the total expense ratios of mutual funds, there has been a decline in the proportion of money market funds’ portfolio size since 2012. With their growing number in the market, hedge funds are becoming an attractive investment alternative.

With the new law in effect, how would you evaluate the state of investor confidence in Turkey?

During six of the past 10 years we were undergoing a global financial crisis; yet, not a single bank or company in Turkey required government intervention or subsidies to stay in business. This has also had a positive effect on foreign investor confidence in the Turkish economy. Be it FDI or portfolio investments, I don’t think you will find a single foreign investor who was unhappy with their investments in Turkey over the past decade. Our government’s approach to investor protection is similar to its attitude toward protecting Turkish citizens’ rights. With respect to international investors’ confidence in our markets, there is draft legislation on international arbitration currently being considered by the Turkish Parliament. In addition to this, we are working on courts that will solely be dedicated to capital markets issues and financial disputes, aiming to shorten the time period of judicial processes.

What are your predictions with regard to sharia-compliant investment products in Turkey?

Currently, on a global scale, there are $274 billion worth of outstanding unredeemed sukuk issues, of which Turkey has a share of 2%. We believe that Turkey has huge potential to become one of the most dynamic Islamic finance markets in the world. Turkey is very well positioned both geographically and culturally in this respect. For this reason, one of the pillars of our Vision 2023 is dedicated to becoming a center of Islamic finance. We have made the necessary amendments to the Capital Markets Law to be able to introduce new Islamic finance instruments, which the Turkish public has generally shied away from until now. From the beginning of 2013, we have introduced five new kinds of sukuks, or Islamic bonds. With the introduction of these new investment opportunities, the real sector issued $3 billion worth of sukuk products, and the Turkish Treasury also issued $3 billion worth. Furthermore, we have introduced a new private pension fund scheme whereby the Turkish government matches 25% of every TL100 invested in this scheme. This has caused a huge leap in private pension investments; the number of investors has increased substantially with this new scheme coming into effect. There are currently 4 million accounts, of which 1 million were added less than one year after this new government scheme was introduced. We believe we have one of the best private pension schemes in the world in terms of standards, customer protection, and transparency.

What effects do you see this new pension fund scheme having on the overall economy once it reaches maturity?

Turkey’s savings rate is far below the OECD average. It’s at around 12% of GDP, which is a problem for Turkey that shows up in our annual current account as a deficit of around 6%-7% of GDP. One of the reasons the savings rate is so low is that Turkey has a young population; the average age is 28 compared to 42 in the EU. That means that there is a large tendency to spend, especially considering that spending was suppressed over the past decade. Furthermore, the political and economic stability of the past 11 years has led to a tendency to invest, rather than save. Keeping these trends in mind, certain measures are being implemented regarding credit card spending and consumer credits. From now on, our target is to increase savings, particularly via the capital markets.

What are your expectations for 2014 and beyond in terms of increased savings?

In the first 10 months of 2013, 1 million people joined the new private pension scheme, and we expect public interest to further this momentum. By 2023, our target is to have reached 10 million participants. We aim to have a GDP of $2.5 trillion by 2023 and for the AUM in pension schemes to comprise 5% to 10% of GDP, hence between $125 billion and $250 billion. We believe that these mid- to long-term targets are reasonable and attainable when our current status is compared with other emerging market economies.

What remains to be accomplished to make Istanbul a regional and global financial center?

This is a 10-year project, branching off to 60 sub-projects in diverse fields such as banking, insurance, capital markets, Islamic finance, technology, legal infrastructure, and financial literacy issues, to name a few. The legal basis for 38 of those 60 sub-projects has been completed, while some have yet to be implemented. The remaining 22 will be finished over the next couple of years. And as markets evolve, we will be responding to new needs as an ongoing process. This being said, we don’t envision Istanbul merely being a financial center, but also a cultural and trade center, with a population of 18 million, making it bigger than many European countries. We have strong cultural ties with countries and people from the Balkans to Central Asia. Istanbul’s proximity and central position in Eurasia provides us a unique advantage when compared to most other cities. Geographically, I would position Istanbul as one of the most strategic trade gateways in the world. And I would go so far as to say that between Frankfurt and Singapore, there really is no city to rival Istanbul.

© The Business Year – January 2014