Turkish Banking System and British Banking System, Research Proposal Example

Introduction

Over the last two decades, the banking industry has revolutionized in man ways. Its

Activities have been conventionalized. This has created a worldwide market both for bank services and deposits (River-Batiz & Luis A. River-Batiz, 2004). Both domestic and international banking systems and banking markets have been experiencing a lot of profound changes. A lot of new financial measures and techniques have been established, and existing ones have been changed; new financial markets have been established, and those in existence have been altered to meet new demands as well as new conditions. Meanwhile, with growing antagonism between all types of financial arbitrators, traditional demarcations, both functional and environmental, have washed-out (Swary & Topf, 2002).

Background

This topic is relevant and suitable to MBA since the innovation in new information technologies, especially digital computers and telecommunications, have transformed all aspects of banking around the world (Cavanna, 2010) which is the current trend in business.  This is because the key factors resulting in these worldwide changes are    inventions in new facts and technologies, increasing interdependence in the world economy, and the internationalization of finance and the resulting competition in banking and financial services (Broker, 2009). Unlike this background, changes in banking legislature and regulation have always led  to these trends and  sometimes modified to them. As a result of this, structural changes in world banking markets have led managers to reconsider traditional methodologies of supervision and regulation and to come up with new more flexible approaches to bank regulationsn (Norton, 2000).

Problem Statement: The Research Question

This research investigates whether Turkish banking system which followed a defensive approach and therefore stayed within a traditional banking system progressed better than the British banking system which attempted to cut out a traditional financial system to incorporate new, international prospects which were not matching with the traditional scheme. More specifically, this dissertation proposal seeks to enhance understanding of the answers to the following research questions:

How and why Turkish and British banking systems differed in an increasingly high-technology environment and Why banking liberalization (i.e. Internet banking) seems to have provoked two fundamentally different strategic reactions among the Turkish banking system and British banking system.

By answering these two research questions, this dissertation endeavor to identify whether there are national or periodic patterns in banking strategies. Besides theory building and offering an alternative explanation as to why banking liberalization remained slow in Turkey.

Aims and Objectives

This dissertation proposal aims to compare Turkish Banking System and British Banking System with the primary legislative aspects of the radical alterations in the world banking industry. Moreover, this thesis proposal mat also serves two additional purposes, which are of academic and real-world importance.

This thesis proposal is made up of four objectives. The first is to scrutinize in great detail banking governing changes (deregulation and reregulation) taken in two banking  systems, the British Banking System and Turkish Banking System, and to identify the economic influences that result to those changes. The type of the developments in these systems and connections between them are examined, since this is the effect of the world banking change. The second aim of this thesis proposal is to study the propositions for regulatory policy of the persistent dogmatic changes in these banking systems. Some of the issues of particular concern include: 1) whether the regulatory changes are making the banking systems more compatible with current global financial marketplace; and 2) whether the changes in the regulatory system are making them more vulnerable to a financial crisis. The third objective of this thesis proposal is to determine whether changes in these banking systems need to be made and if so,  it should show the changes. Finally, the fourth objective is to argue for new and appropriate regulatory responses — co-ordination and self-regulation — to the tasks that the economic forces will present in banking guideline into the Twenty-First Century (The Economist, 2002).

Literature Review

The advances of new information technologies, especially digital computers and telecommunications, have, in effect, shrunk the world and made possible a much greater integration of the banking market worldwide. Banks can communicate easily and cheaply with customers, with their own branches and sub-offices, and with other financial intermediaries domestically and across national borders (Cavanna, 2010). A distinction may be made between two broad areas of application: retail banking and wholesale banking. The main costs involved in retail banking derive from the need to deal with a considerable volume of traditional paperwork, the need to store a large amount of information, the need to handle sufficiently large numbers of standardized or routine transactions, and the need to access up to the minute information regularly and continually. For instance, the management of payments services normally involves the storage, retrieval, and regular updating of large amounts of data and requires almost no error processes. The use of computerized data entry and storage, automated cash dispensers (CDs), electronic fund transfer facilities at the point of sale (EFTPOS), automated teller machines (ATMs), and home banking facilities have tremendously reduced both the time as well as the cost associated with such activities within and across borders (Genberg & Swoboda, 2002).

Computer programs can easily determine a range of possible repayment allocated for proposed loans. Back-office book-keeping functions (e.g., checking process) are highly computerized and transactions processed overnight a few years ago can now be handled immediately (Genberg & Swoboda, 2002). Wholesale banking markets are short-term and over-the-telephone markets which involve interbank deposits in domestic and    foreign currencies (Eurocurrency market) as well as international foreign exchange transactions. As a matter of fact, the existence and development of wholesale banking markets depend on new information technologies. Modem telecommunication and computerized information systems provide simultaneously worldwide information on rates of interest and exchange rates and offer the capacity for rapid calculation of the value of many different transactions or series of transactions. Strategic applications help banks escape from government regulations by easily accessing offshore banking markets. Through computer networks, banks can communicate and transfer funds to form value-added worldwide networks, opening offshore markets from fixed geographical locations to worldwide participation (Genberg & Swoboda, 2002).

New information technologies also contribute to the scheme and pricing of new apparatuses and facilitate the identification, measurements, and monitoring of risks in portfolios containing complex instruments. They reduce trading cost in international markets and have the effect of expanding the market for new equipment to an international aspect. After constant improvement, today’s quotation system facilitates for computerized order execution, and electronic netting systems for confirmation and clearing have become fully integrated. Today there are over 60 major futures and options markets, dealing mostly with stocks, bonds, and currencies. All of which are interconnected (e.g., Turkey and England, and London and Chicago) with sophisticated electronic networks that allow traders in one country to trade on the other’s exchange with the right of offset (Khoury, 2000). These linkages between exchanges allow for a continuous market where trading can effectively take place around the clock. By reducing costs and encouraging the internationalization of finance, these new technologies have largely increased competition within the  banking industry. Traditional demarcations between types of financial intermediaries have ceased to be important.

Structure of the Turkish Banking System

The Turkish banking system was historically a closed system, heavily regulated, protected from external competition, conservative in terms of innovation, and controlled by the large state-owned banks. The Central Bank, commercial banks, investment and development banks, and special finance houses are the forms of banks in Turkey. Regarding ownership, banks can be grouped as state-owned, privately owned and foreign. Commercial banks are permitted to render universal banking services. As such, they can engage in merchant banking, investment banking, and brokerage activities; provide depository and lending services; underwrite and trade securities; establish and manage a mutual fund, and invest in other financial and non-financial institutions. However, commercial banks are not allowed to perform leasing and factoring activities. Investment and development banks are not allowed to collect deposits from residents or non-residents. They extend medium or long term credits to corporations through the funds coming from the government, securities underwriting, other financial institutions, and international banks and organizations. Other than depository services, they can provide other services that commercial banks render. Special finance houses, known as Islamic banks, are allowed to collect deposits from the public under a special account called “profit and loss participation account” whereby the SFHs do not pay predetermined interest on deposits; instead, the depositor accepts either profit or loss resulting from management of the total deposits by the SFH. They perform all commercial banking activities as well as leasing and commodity trading (Denizer et. al., 2000).

Before the finance sector underwent liberalization, the major players were mostly owned by the state or private banks under the governorship of industrial groups with country-wide branch network due to entry restrictions (Osman, 1995). Thus, there was stability in terms of parties that operated in the banking system around 1970 to 1980. The number of banks operating in Turkey has increased at a high rate. The number of banks has increased  from 43 to 66 between 1980 and 1990 and to 79 in 2000. This was mainly due to the elimination of some entry restrictions in line with economic and financial reforms. The Turkish banking system consisted of 43 banks in 1980: twelve state-owned commercial banks, 24 commercial banks which were under the ownership of the private sector, four foreign banks, and three investment and development banks. Between 1980 and 1990, four state-owned commercial banks were merged with other state-owned commercial banks and four privately-owned commercial banks were liquidated. While only five privately-owned commercial banks and seven development and investment banks entered in the 1980-1990 period, the number of foreign banks in the banking system jumped to 23 in 1990 from 4 in 1980. A reverse development was realized in the 1990-2000 period. While banks which were owned by private entities rose to 39in 2000, the number of banks that were under the ownership of the state declined to four, and foreign banks were now down to 18 because they either merged or were. There were also four investment and development bank entries into the banking system. By December, 2000, Turkey had 79 banks: four commercial banks owned by the federal government, 39 are commercial banks under private ownership (11 of which are under the management of Banking Regulation and Supervision Board), 18 foreign banks, and 14 investment and development banks (3 of which are state-owned). As a whole, there are 7837 branches in the country, and the industry has 170401 employees. Recently, as of September 2016, there is a decline in the entire sum of financial institutions to a total of 47 operating with 10, 985 branches within Turkey as shown in Table 1 below.

The increased investments of foreign banks in Turkey did not lead to an increase in assets, deposits or loans. Focusing on big cities and domestic wholesale market, foreign banks and other new domestic banks operated as wholesale banks with a small number of branches to capture of table niches created by the post-liberalization period. They provide sophisticated financial services with large companies in booming export sector, leasing, factoring, and forfeiting; and engage in treasury operations with their very few, 117, branches (compared to 7,837 total branches in Turkey). Thus, they realized higher profitability ratios than their counterparts in the sector.

Denizer (2000) claims that the decision by versees banks to invest in the banking system in Turkey boosts development of local banking system since it improves the quality of financial products which are offered and that of technology, human output and services, if one compares local banks with oversees banks with regards to the net interest margin, profits from assets, and overhead expenditure. The competition between local and foreign banks led to the computerization of the banking system in Turkey to boost the skills of staff members by training them and employing the right levels of skill-sets. Also, there was observed improvement in marketing, financial planning, credit evaluation and operational planning leading to improved efficiency (Ihsan & Hassan, 2002).

Banks from oversees that started trading in Turkish markets prefer branches and representative offices to subsidiaries as an organizational form. Out of these banks, only five were established in Turkey, while only two of oversees banks founded in Turkey engage in retail banking. The rest is either branch or representative offices of foreign banks. Kirman (2000) reports from his survey findings based on the questionnaire among foreign and local financial institutions found in Turkey that oversees banks’s unwillingness to enter into Turkish market via subsidiaries and to increase their presence in retail banking business are explained by heavy presence of state-owned banks in commercial banking; unstable legal infrastructure; lack of transparency, deterrence and accountability in Turkish tax system.

The large public banks were not privatized. Although the total share of the total assests of banks that are majorly owned by the federal government, loans and deposits have shown a decreasing trend after 1980, they have still a vital share of the market which is accomodated by the banking sector in Turkey, especially in the retail banking sector. State-owned banks with their nation-wide branches constituted 34% of entire holdings, 26% of entire credits, and 40% of entire payments as of 2000, while their share of total banking system profits was only 10%. They provide supported advances to farmers and SMEs. Property rights are not well defined in Turkey. Some clauses of the Turkish laws do not allow international arbitration. The legal environment in Turkey is rather unstable, especially if the taxation is concerned. The Turkish tax system lacks transparency, deterrence, and accountability. In practice, the universally accepted basic principle of taxation ‘certainty’ is not respected. Occasionally, there are practices of the post and supplementary tax imposition. The Turkish banking system is heavily taxed. Tax laws frequently change in Turkey. There could be extra and surprises taxes such as earthquake tax in 1999. That is why expected return from entering into Turkish market through subsidiaries is subject to change. This ambiguity in tax system leads foreign banks to enter into other developing countries with more stable legal infrastructure (Kirman, 2000).

Turkish banks do not practice internationally accepted accounting standards, and balance sheets of banks are not prepared according to the inflation accounting, which makes the accurate valuation of banks’ portfolio, the risk to be taken through mergers and acquisitions, expected a return and the cost of mergers and acquisitions not be soundly determined. This situation discourages foreign banks which are willing to enter the Turkish market through mergers and acquisitions (Akgay, 2001).

The government of Turkey has recently re-launched its IMF-backed program of  economic reforms including banking sector reform. The banking program includes regulatory reforms and privatization of public banks. In parallel to structural developments in the banking sector of Turkey, interests of overseas banks that have been established in Turkey’s retail banking zone has gone up. Unicredito Italiano SpA, one of the biggest banking groups in Europe, signed a 50:50 joint venture with Kocbank. BNP Paribas of France started joint venture talks with Finansbank. Novabank of Greece sent a letter of intent to the BRSB to buy one of the banks under the management of the BRSB (Akgay, et al., 2001).

Organization of British’s System of Banking

The system is regulated profoundly. The bank has been left to play a major role in this system due to their function as transformers; this means there is need to match the monetary excess and shortage units (Howells & Bain, 2002). The role that the bank plays in supplying the British economy with money and the responsibility of taking deposits puts some sense into their regulations in the banking sector.

During the nineteenth century, the market power of the British banks had been widely dispersed. The banking system comprised hundreds of small local banks with few if any branches. In 1825 there were more than 600 banks while by 1913 this number had contracted to 70 and by close of the First World British banking was concentrated in the “Big Five”: Midland, Lloyds, National Provincial, Barclays and Westminster (Capie & Collins, 1992). These five banks alone held four- fifths of aggregate deposits in England and Wales. This expansion had been pursuing through the opening of branches and the relentless amalgamation with other banks (Capie & Collins, 1992). The merger movement which started in the late nineteenth century involved both banks and industry as the industrial structure of the country moved towards large scale organizations. Whereas recent studies have shown the closeness of the relationship between local banks and businesses during nineteenth century’s last half in the second half of the nineteenth century (Newton, 1994), businessmen seeking loans before and after World was era had to negotiate loans with branch managers of national concern (Helten & Cassis, 1990).

Methodology & Justification

Problem Statement

This research investigates whether Turkish banking system that followed a protective plan and consequently remained with a traditional banking scheme progressed better than the British banking system that tried to abandone a traditional fiscal system so as to welcome novel, global prospects that may not have aligned with current traditional system.

Research question

This dissertation proposal seeks to enhance understanding of the answers to the following research questions:

1. In what way and for what reason Turkish and British systems of banking varied in an gradually high-technology environment and
2. Why banking liberalization (i.e. Internet banking) is likely to have provoked twin essentially dissimilar tactical responses between the Turkish banking system and British banking system.

Research Style

This research will follow the inductive methodology, which is often ascribed to a constructionist perspective (Easterby-Smith et al., 2002, p.30). This research pursues an empirical approach in the tradition of the positivist paradigm. As remarked by Easterby-Smith et al. it is rare for researchers to uphold a pure epistemological  approach; often a mixture of different viewpoints is used. In fact, the ontological concept of structuration implicitly recognizes the danger of methodological dogmatism and calls for “methodological anarchy” (Feyerabend, 1995).

Methods of Analysis

Consequently, this research will use an in-depth case study method of analysis, comparing the two banking systems.

Data Sources

Secondary data sources include books, periodicals and conference proceedings.

1. Books: Some books that are directly related to Turkish Banking System and British Banking System are to be listed in two sections: the Bibliography and Other References Consulted.
2. Periodicals: There are several periodicals that have published articles on Turkish Banking System and British Banking System in one or several issues. They are to be included in the Bibliography, and other References Consulted sections.
3. Conferences on Turkish Banking System and British Banking System: Many local, regional and international conferences were held for discussing and understanding banking and financial system. Proceedings were available from conferences held in London, U.K, and Turkey. These proceedings include excellent papers presented by distinguished scholars, professors, and executives who are involved in banking and financial systems within both western and Turkish economies (to be included in the Appendices). From all these sources previous studies were reviewed.
4. Investigation of Previous Studies

This investigation includes the Turkish Banking System and British Banking System management model concept, the Turkish banking system concept and practices, similarities to and differences from the British banking system, and prospective applications in Turkey.

Project Plan and timescale

Any foreseen Problems

Access to the secondary data mentioned above is a major foreseen problem.

References

Akgay, C. (2001). Fallacies of a fantasyland: The Turkish banking sector. Private View: Quarterly International Review of the Turkish Industrialists’ and Businessmen’s Association, No. 10.

Akgay, C., Erzan, R, & Yolalan, R. (2001). An overview of the Turkish banking sector. Bogazigi Journal: Review of Social, Economic and Administrative Studies, 15(1).

Broker, G. (2009). Competition in Banking.

Cavanna, H. (2002). Financial Innovation.

Collins, M & Capie, F.(1992) Have the banks failed British industry ?. London: Institute of Economic Affairs.

Denizer, C., Giiltekin, M., & Giiltekin, N. (2000). Distorted incentives and financial development in Turkey. World Bank Financial Structure and Economic Development Conference Papers.

Easterly-Smith, M., Thorpe, R, & Lowe, A. (2001). Management Research: An Intro duction. London: Sage Publications.

Feyerabend, P. (1995). Agianst Method: Outline of an Anarchistic Theory of Knowledge. London: New Left Books.

Genberg, H., Alexander, S. (2002). World Financial Market. Ihsan, I., & Hassan, A. (2002). Technical, scale and allocative efficiencies of Turkish banking industry. Journal of Banking and Finance, 26(4).

Khoury, S. (2000). The Deregulation of the World Financial Market.

Norton, J. (2000). Banking Regulation and Supervision in the 1990s.

Osman, Z. (1995). The effect of financial liberalization on the efficiency of Turkish commercial banks. Applied Financial Economics, 5(4).

River-Batiz, F. & River-Batiz, L. (2004). International Finance and Open Economy Macroeconomics.

Swary, I. & Topf, B. (2002). Global Financial Deregulation: Commercial Banking at the Crossroads. Cambridge: Blackwell. The Economist (2002). Gloves off in British banking-Lloyds and HSBC Holdings bat the for Midland. London: The Economist.