TCMB President Karahan: Share of Turkish Lira-Based Deposits Rises to 45%

Fatih Karahan, President of the Central Bank of the Republic of Turkey (CBRT), addressed the International Arab Banking Summit, discussing the current global economic outlook, monetary policy in Turkey, its effects on the banking sector, and recent developments in Islamic banking and financial technologies.

Karahan stated that at the peak of the global tightening cycle, inflation in Turkey declined throughout 2023 but remained above the Central Bank’s targets.

“More central banks in emerging markets are adopting explicit inflation targeting” Karahan noted that significant progress in developing monetary policies has made central banks in emerging markets much more capable of reducing global risks. “Firstly, more central banks are adopting explicit inflation targeting. Therefore, they tightened policy significantly in response to rising inflation after the pandemic. Secondly, improvements in the global financial architecture and domestic policy frameworks have reduced exposure to fluctuations in capital flows,” he said.

“We need to continue improving regional cooperation” Referring to a recent OECD report, Karahan mentioned that the share of foreign currency-denominated debt issuances of emerging market treasuries decreased from 15% in 2005 to 4% in 2022. “This doesn’t mean our job is done to enhance the resilience of financial markets in emerging economies. For instance, the use of local currencies in bilateral trade remains limited. Increasing this will further strengthen domestic economies’ resilience to global shocks. Therefore, given the interconnectedness of our economies and financial sectors, we need to continue improving regional cooperation,” he added.

Regarding inflation expectations in Turkey, Karahan stated:

“According to the latest data for April, inflation was at 69.8%, and due to base effects, we expect inflation to reach around 75% in May. To restore price stability, we began the tightening process last June, and we are currently seeing significant improvements in our current account balance, foreign exchange reserves, signs of slowing domestic demand, and an increased preference for Turkish lira financial assets. From June onwards, we expect to see a sustained decrease in headline inflation. This decline will be partly due to base effects during the summer months, but it will be permanent with the continued improvement in the underlying trend of monthly inflation. Our annual inflation forecasts, which also serve as intermediate targets in our monetary policy, are 38% for the end of 2024, 14% for 2025, and 9% for 2026. We will need to maintain a tight monetary policy until we observe a significant and persistent decrease in the underlying trend of monthly inflation and approach our inflation expectations range. If there is a significant and persistent deterioration in the inflation outlook, the monetary policy stance will be tightened.”

“We observe an increased appetite among foreign investors for Turkish banking sector debt instruments” Fatih Karahan mentioned that the robust stance of the CBRT’s monetary policy will lower the underlying trend of monthly inflation with the balancing of domestic demand, real appreciation of the Turkish lira, and improved inflation expectations.

Karahan pointed out that banks will be among the primary beneficiaries of the decline in inflation in Turkey, stating, “With price stability and increased confidence in the Turkish lira, low borrowing costs will open up significant growth opportunities for the banking sector.”

Emphasizing the resilience of the banking sector to shocks in Turkey, Karahan noted that this resilience dates back to before the 2001 crisis and has strengthened further in the post-global financial crisis period.

Karahan reported that as of the end of March 2024, the total size of the banking sector exceeded 25 trillion lira (approximately $804 billion), with loans accounting for 50% of total assets. He added, “The asset quality is high, and the non-performing loan ratio stood at around 1.5% as of March 2024, which is historically the lowest level. Recently, the rising interest rate cycle and increased global confidence in our fight against inflation have also improved the outlook for external financing. With the normalization of policies and the downward trend in Turkey’s risk premium, we observe an increased appetite among foreign investors for debt instruments in the Turkish banking sector.”

“Despite the high inflation environment, the banking sector continues to maintain strong profitability” TCMB President Karahan stated that as of March 2024, Turkish lira-based deposits accounted for 66% of total liabilities. He continued, “According to our latest data, the share of Turkish lira-based deposits has risen from the lowest level in August 2023, at 31%, to 45%. Additionally, despite the high inflation environment, the banking sector continues to maintain strong profitability, supporting banks’ core capital. Although profitability has decreased somewhat during the interest rate tightening cycle, the sector remains robust in terms of return on equity and asset profitability.”

Karahan stressed that the sector has never had significant problems accessing global financial markets, partly due to the diversity in lenders, debt instruments, and maturity structures.

“We have renewed syndicated loans on favorable terms” Fatih Karahan reported that banks have renewed syndicated loans on favorable terms.

Karahan stated, “Our approach to monetary policy will continue to support the growth of the banking sector. We have so far readjusted macroprudential regulations to complement monetary tightening. These adjustments aim to sterilize excess Turkish lira liquidity, support the transition to Turkish lira deposits, and prevent excessive credit growth.”

However, he acknowledged that they are in a transition phase and are aware of the costs imposed on banks due to the disruptive nature of macroprudential regulations. Karahan said, “Therefore, besides increases in policy rates, simplification of the macroprudential policy framework will also be a forward-looking policy goal. To this end, we have recently removed all securities maintenance requirements that hinder healthy price formation and market functioning in the Turkish lira bond market.”

“The market share of participation finance is increasing in Turkey” Central Bank President Karahan also touched upon recent developments in Islamic finance and financial technologies, saying, “The market share of participation finance is increasing in Turkey and stood at 8.7% as of March 2024. However, there is still much room for growth. Indeed, the recent data from the Islamic Financial Services Board (IFSB) shows that Turkey has only a 2.8% share of global Islamic banking assets. According to a recent report by the IFSB, the global market size is expected to reach $3.7 trillion by the end of 2024.”

Karahan emphasized that the growth of participation finance will contribute significantly to the Turkish economy, stating that diversification of financial assets in Turkish lira and deepening of capital markets are fundamental goals to support future financial stability.

Karahan concluded by saying, “We want to ensure that Islamic finance is a market accessible to Turkish banks and companies. Therefore, we continue to support the establishment of necessary financial and regulatory infrastructure to further the growth of participation banks. For example, by tailoring our regulations specifically to participation finance institutions, we are striving to provide equal terms between participation banks and conventional banks. We also provide technical assistance and support to other regulatory authorities for fine-tuning the financial architecture to better accommodate participation banks.”

He also acknowledged the risks posed by financial technologies to payment systems and financial stability, stating that they will need to continue monitoring financial technologies as a regulatory authority in the future.

Karahan emphasized that the financial sector is innovative and quick to embrace all forms of innovation, implying that regulators should adopt a similar approach to creating security measures.

source: prepared by Melisa Beğiç

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