Banking and finance
Following a series of economic crises in the 1990s and 2000s, Turkey moved to a consolidated regulatory system for banks. The BRSA, the main regulator of the banking industry, monitors and supervises the establishment, change of control, management and activities of financial institutions.
The Central Bank also regulates banks with regard to foreign currency operations, reserve requirements and capital adequacy rules. In order to protect the savings of individuals and further the goal of financial stability, the Savings Deposit Insurance Fund insures up to 100,000 Turkish Lira per depositor. Deposits in participation funds at banks that base their activities on interest-free banking are also covered. There are also sectoral associations, such as the Banks Association of Turkey and the Participation Banks Association of Turkey, that establish standards and promote cooperation among banks.
Banking regulations allow for the establishment of three types of banks: (i) deposit banks (mevduat bankaları), (ii) development and investment banks (kalkınma ve yatırım bankaları) which assist individuals and corporations finance investments and (iii) participation banks (katılım bankaları) which base their activities on interest-free banking in line with globally accepted Islamic finance principles. All banks are regulated by the BRSA under the Banking Law and applicable secondary regulations. Deposit banks, which collect deposits, and participation banks, which collect participation funds, utilize collected funds in the extension of corporate and retail credits. However, the structures under which deposit banks and participation banks collect and utilize such funds differ. Although the minimum share capital requirement for a bank is 30m Turkish Lira, the BRSA has required newly-incorporated banks to have share capitals as high as US$300m.
Under the Banking Law, banks may accept deposits or in the case of participation banks accept participation funds, grant cash and/or non-cash loans, carry out any type of payment and collection transaction, transact in commercial bills, provide safe-keeping services, issue payment instruments, carry out foreign exchange transactions, trade in money market instruments, precious metals and stones, trade and intermediate capital market instruments, trade and intermediate contracts of derivative instruments, undertake guarantees, provide investment counseling services, manage portfolios, facilitate primary market dealing for purchase-sale transactions, carry out factoring transactions, intermediate fund purchase-sale transactions in the inter-bank market, provide financial leasing services (except for deposit banks) and provide insurance agency and individual pension fund services.
Provided that they meet the requirements under the Banking Law and related regulations, foreign individuals or corporations may establish and operate banks in Turkey. Foreign banks may also, with the approval of the BRSA, have branches, or representative offices in Turkey to coordinate their operations. Although representative offices in Turkey are not allowed to carry out banking or other commercial activities, they may advertise the foreign bank, its services and conduct market research.
Financing activities are regulated differently depending upon whether individuals and legal entities are resident in or out of Turkey. A “resident” individual is defined as a person who, regardless of nationality, resides in Turkey. In the case of a legal entity, the entity must be headquartered in Turkey.
Pursuant to the Currency Protection Decree, foreign bank loans granted to Turkish residents must be processed through Turkish banks or financial institutions. There are two main exceptions to this rule: (i) loans provided or guaranteed by export credit agencies and utilized in making overseas payments to foreign exporters selling goods or services to Turkey and (ii) loans for offshore businesses.
In 2019, to reduce the domestic foreign exchange exposure of Turkish corporations and individuals, certain amendments were introduced to the legislation. Under the amended rules, individuals may no longer obtain foreign currency indexed loans or foreign currency denominated loans. Legal entities are prohibited from accessing foreign currency indexed loans and the ability to obtain foreign currency denominated loans, as a general rule, is limited to those legal entities with only foreign currency income. Legal entities with no foreign currency income may borrow in foreign currency only under certain, limited circumstances including the borrower's being a public authority or a financial institution, its having a minimum foreign currency loan balance of US$ 15 million (or its equivalent in another foreign currency) or the borrowing's being extended for a PPP project.
The tax regime applicable to loans differs depending on whether the lender is a foreign bank or a bank established in Turkey. Please see Section V, Sub-section G for further details on the taxation of loans.
The restrictions on cash loans explained above are not applicable to non-cash loans. Therefore, persons resident in Turkey may obtain foreign non-cash loans (letters of credit and similar instruments), guarantees and sureties and may also provide non-cash loans, guarantees and sureties to persons resident outside of Turkey. Beneficiaries of such non-cash loans may be individuals or entities resident in or out of Turkey.
Banks may issue performance bonds, non-cash loans, guarantees and sureties in foreign-currency. Such non-cash loans may be issued to persons resident in Turkey for the benefit of persons resident out of Turkey. They may also be issued in relation to tenders in Turkey.
Currently, in Turkey, there are six participation banks, including three state-owned participation banks, conducting interest-free operations in line with globally accepted Islamic finance principles. According to BRSA data, participation banks account for roughly five point six percent of the banking sector in terms of total deposits.
In contrast to conventional banks that collect deposits and pay interest, participation banks collect participation funds and allocate, depending on the type of account opened at a participation bank, part of the profit or loss generated from the investment of such funds to the participation fund owners.
Security and collateral
- Third parties are generally permitted to pledge their assets to secure the debts of another party. Security interests may also be created over assets which are partially owned by third parties. Please see “Property Rights” for further details relating to partial ownership.
- Under Turkish law, as a general rule, a pledge created later in time is subordinate to a prior pledge granted over the same property although exception to this rule may arise from the “fixed ranks system” in mortgages or optional ranking system in pledges on movable property as outlined below. A pledge may be subordinated to claims having preference by operation of law, such as tax claims, severance payments, etc., in bankruptcy situations.
- Negative pledge covenants constitute contractual undertakings under Turkish law and specific performance may not be imposed on a pledgor breaching such a covenant.
A mortgage may be created as security for any present, future or contingent debt. The mortgage must be registered at the same title deed registry where the subject real property is registered. As a rule, the amount of security covered by the mortgage must be expressed in Turkish Lira terms and may either be a specific amount or a maximum capped amount. As an exception, immovable property may be pledged for a value determined in foreign currency terms when pledged to secure a credit denominated in or indexed in a foreign currency by a credit institution.
The Civil Code uses a “fixed ranks system” for the ranking of secured creditors (mortgagees) among themselves. If there are multiple mortgagees who possess security interests on the same property, the Civil Code designates the use of this system among the creditors. During foreclosure, the creditor with the highest rank is paid prior to those ranked lower regardless of whether the security interest was granted at a later date. It is possible for a debtor to keep a higher rank reserved and grant a security interest at a lower rank. In the event that a higher-rank mortgage is canceled by consent of the creditor or because the debt is fully paid, that rank becomes vacant. Lower rank mortgages do not automatically move upwards, but it is possible to move to the vacant rank if the mortgage agreement so provides.
The debtor may divide the value of its property into “fictional” portions at the land title registry and may create security rights on each portion independently.
As a general rule, movable property may only be pledged by transferring possession of the property to the pledgee. Possession is defined as having the means of control over the movable property. For example, transfer of control over a pledged inventory of goods or a selection of precious stones may be realized by provision of the key and/or passcode granting access to the warehouse or safe where the pledged movable property is stored.
As an exception, movable property that is required to be recorded on an official registry (such as motor vehicles) may be pledged without the transfer of possession as long as the pledge is recorded at the relevant official registry. Another exception is that movable property constituting part of a commercial enterprise may be pledged without the transfer of possession. The rules applicable to commercial enterprise pledges, previously under the Commercial Enterprise Pledge Law, are now contained in the Movable Pledge Law with changes (e.g. scope of pledge, types of pledgee etc.). This law aims to extend the type of movable property that may be pledged without transferring possession, increase transparency by establishing a centralized moveable property registry, and ease access (particularly by small-to-medium sized enterprises) to financing.
Among the types of movable property that may be pledged under the Movable Pledge Law are receivables, intellectual property rights, raw materials, all types of revenues and incomes, licenses which do not qualify as administrative permits and are not registered with another registry, lease payments, tenancy rights, machinery, tools, equipment, work tools, construction equipment, electronic equipment and commercial titles and/or trade names.
The Movable Pledge Law is not applicable to capital markets instruments, pledge agreements concerning derivative products, account pledges or movables registered with a land title registry.
Merchants and/or small traders as well as financial institutions may be the secured creditor of a commercial enterprise pledge transaction.
There is an optional ranking system. If used, the pledge with a prior ranking would have priority over pledges with lower rankings. If not used, the priority of the pledges depends on the dates thereof.
Perfection of a pledge under the Movable Pledge Law is achieved after registration with the electronic Registry of Pledged Movables (“TARES”). The TARES registry, which is maintained by the Union of Turkish Public Notaries, is also be notified of any pledge on movable property that is required to be registered at another official registry.
Establishment of a share pledge requires a written pledge agreement and depends on the type of the share and whether the shares are printed or recorded.
If no shares are printed, then a written pledge agreement is sufficient to establish the pledge.
Bearer share certificates are pledged by transferring possession of the certificates to the pledgee. Non-bearer shares must be endorsed with a pledge annotation or must be transferred to the pledgee with a written declaration of transfer. Unless otherwise agreed by the parties, the pledgor retains the voting rights of the shares pledged in favor of the pledgee.
Shares that are not printed but rather recorded in an electronic book-entry system may only be pledged by notifying the Central Registry Agency. The Central Registry Agency records information regarding shares and pledges in accordance with capital markets legislation. Please see Section II for general information on shares and Section VI for further details on dematerialization of shares.
Bank account pledge
Bank accounts opened by the recipient of cash or non-cash financing may be pledged to secure such financing. The pledging of a debtor’s bank account for the financing of debt is subject to rules regulating the pledge of receivables. The pledge is deemed to be established when the relevant bank is notified of the pledge.
Rights arising from a receivable may be assigned to a third party as security. Absent an assignment prohibition under the contract concerned, the assignor of the receivable is not required to have the debtor’s consent in order to assign the receivable to the third party. Receivables may only be assigned to a third party with a written agreement.
Enforcement of security interests
Enforcement of security interests in the event of non-payment is initiated and overseen by the Execution Offices. Generally, enforcement is achieved by way of sale of the property through public auction. In such public auctions, the sale price of the property must equal at least 50 percent of the estimated value of the property set by the Execution Offices. Parties may object to the estimated value before the Courts of Execution.
The underlying principle for the requirement to use a public auction to enforce a security interest is that the debtor and creditor are not allowed agree in advance that the creditor automatically acquires title to the secured asset upon default by the debtor. The public policy goal of this principle, known as lex commissoria, is to protect the debtor, who is considered to be at a financial disadvantage vis-à-vis the creditor – i.e. as the value of collateral frequently exceeds the secured claim, the creditor should not be able to take advantage of its dominant position to acquire title to the collateral. However, once the debt becomes due and payable, it is accepted that the debtor may agree with the creditor on the transfer of title to the collateral.
In addition, under the Movable Pledge Law, upon default, the first degree pledgee may request the transfer of pledged assets by direct application to the Execution Office. This is a significant exception to the lex commissoria prohibition. Upon the transfer of title, if the value of the asset is bigger than the amount of debt owed to the first degree pledgee, the first degree pledgee becomes jointly and severally liable together with the pledgor, up to the amount equal to the difference between the value of the asset and the debt owed to the first degree pledgee, to subsequent pledgees.
Transfers of Turkish currency and foreign exchange from Turkish accounts to offshore accounts, or from offshore accounts to Turkish accounts, are permitted. Transferring banks must notify the competent government authorities of foreign exchange transfers (other than import, export and invisible trade related transfers) exceeding US$50,000 or any transfer of Turkish currency corresponding to that amount within 30 days of such transfer.
The Code of Obligations adopts freedom of contract as its overarching principle. This principle and parties’ freedom to offset any reciprocal outstanding obligations before or after bankruptcy constitute the legal framework for derivative transactions in Turkish law. Accordingly, the ISDA 1992 and 2002 Master Agreements and relevant schedules are valid and applicable documents under Turkish law. Companies and funds may execute short selling transactions to hedge security risks.
The legal framework that enables the establishment of hedge funds is laid out by the Capital Markets Board. Hedge funds that are characterized as engaging in high-risk and high-leverage transactions benefit from an increased flexibility of financial products, including short-sale, leverage and utilization of derivative transactions. Such funds are, however, subject to certain rules including restrictions on investment in such funds to qualified investors and the establishment of risk-management mechanisms.
The taxes and duties applicable to executing financing transactions are as follows
Stamp tax: Generally, stamp tax is imposed upon the execution of a wide range of documents including contracts, letters of credit and letters of guarantee. The rate of stamp tax, which varies depending on the type of document, ranges between 0.189 percent and 0.948 percent of the monetary amount stated in the document subject to capped amounts determined each year. For instance, in 2019, the maximum amount for stamp tax per document is 2,642,810 Turkish Lira. For documents that do not have a monetary value or for specific documents listed in the applicable legislation, the stamp tax is a fixed amount denominated in Turkish Lira. Documents relating to loans provided by banks, foreign credit institutions and international organizations, security documents and documents relating to the repayment thereunder and transfer and assignment thereof, as well as share transfers and company incorporation documents are exempt from stamp tax.
Resource Utilization Support Fund (RUSF) contribution: RUSF is a special fund applicable to imports conducted on credit (i.e., if the payment is not made before the import) and to certain credits obtained by Turkish individuals or legal entities (except for financial institutions) from foreign institutions. Credits from foreign institutions are subject to a RUSF contribution requirement at varying rates, up to a maximum of 3 percent, depending on the term and currency of the credit. Domestic credits are not subject to RUSF.
Banking and Insurance Transaction Tax (BITT): Domestic credits including credits granted by foreign branches of Turkish banks where the credits are transferred to the foreign branch from the Turkish bank’s head office, are subject to BITT of 5 percent. Foreign credits are not subject to BITT.