Turkish President Recep Tayyip Erdogan this week launched a fresh barrage of criticism and warnings at banks, charging that they are making unfairly large profits during a time of economic strain. Addressing the Chamber of Commerce and Industry in the northern city of Trabzon Aug. 8, Erdogan said, “Banks are not behaving themselves. We keep saying that interest rates must come down, but banks are using the citizens’ deposits almost as a means of fleecing them.”
Pointing to a significant increase in bank profits, Erdogan said, “Last year, after all the distress we went through, banks had a profit growth of 40%, which means there is a problem here. … Moreover, banks have almost doubled their profits this year. This is a disaster.” In a thinly veiled call to discipline the sector, Erdogan said, “I believe our central bank and public banks will take firms steps on this issue and pull this thing down.”
Banking, interest rates and the profitability of banks have long been major targets for criticism in political Islam. Yet, Erdogan’s Justice and Development Party (AKP), in power since 2002, owes much to Turkey's increased integration in Western capitalism, through which it ensured economic growth and boosted its popular support. The AKP government, however, has failed to fully come to terms with the inevitable cost of this process — the reality of interest rates — and has instead continued to grumble about banks and an “interest rate lobby” to its conservative base, often demonizing the sector. Erdogan’s latest outburst is just another episode of the same old story.
In the past two years, the AKP regime actively encouraged banks to turn on the lending taps as it scrambled to pull the economy from the brink of crisis. As a result, the business volume of banks expanded and their profits shot up. Now, Ankara is trying to obscure its role in this outcome by mounting a fresh attack on banks and interest rates.
That the Turkish economy relies heavily on external funds to grow is a well-known fact. Banks are the intermediary in the provision of those funds. Drawing on the liquidity expansion spawned by the global financial crisis, Turkish banks have been borrowing from abroad and then using the money to lend to consumers and companies at home. In some years, the process has been relatively easy, in others more difficult. In any case, Turkish banks abide by the law and split hairs when issuing loans, with the big economic crisis of 2001 serving as a grim shadow. Since that crisis — fueled in part by poor scrutiny of the banking sector — Turkish banks have been under tight control, imposed mostly by the Banking Regulation and Supervision Agency.
Until mid-2016, the banks had to make do with low profits, with return on equity falling below 10%. As a result, the loan supply shrank. Turkey’s political jitters and geopolitical strains worsened the crunch, as major international credit rating agencies cut the country’s grades. All this resulted in an economic slowdown.
The year 2015 was especially hard for the banks, leading authorities to cut the requirement for reserves they must hold. The move increased the cash available for use and thus paved the way for bigger profits. In other words, the 40% increase in bank profits that Erdogan is now slamming became possible thanks to Ankara’s support in the wake of a bad year and the state’s decision to prop up the banks....MORE