Does the Turkish Economy Really Need So Many Banks?

This article draws its inspiration from a topic that dominated the agenda during a meeting with central bank officials of a country some time ago: the excessive number of banks in the country and the concentration in the sector. Officials were complaining that a small number of banks dominated the sector, leaving the remaining banks to struggle with competition, profitability and growth. Rather than allowing new banks to enter the sector, they believed that merging existing small banks could help them compete with larger banks and improve efficiency.

As the number of licenses issued by the Banking Regulation and Supervision Agency (BDDK) for the establishment of new banks increases, I recall this discussion. I find myself asking: “Does the Turkish economy really need so many small-scale banks and new banks that will probably remain small in the coming years?”

Over the past decade, the number of banks in the Turkish banking sector increased from 50 to 66. While the number of banks remained stable at around 50 until 2018, it began to rise rapidly after that year. Breaking it down by bank categories, the highest increase was seen in Development and Investment Banks, which grew from 13 to 20. This was followed by Participation Banks, which added four new institutions. Among deposit and participation banks, five institutions are operating digitally. These figures do not include banks that have received establishment license but are still preparing for operational licenses and a bank under the Savings Deposit Insurance Fund (TMSF). The numbers indicate a significant shift in the Banking Regulation and Supervision Agency's licensing policy starting from 2018.

In the latter half of the past decade—particularly after 2020—while the number of banks in Turkey surged by32%, the sector's key financial indicators as a percentage of GDP experienced a significant structural downturn.

The ratio of sector assets to GDP peaked at 127% in 2021, while the ratio of cash loans to GDP reached its highest level at 70.84% in 2020. However, both indicators have since experienced a rapid decline. By the end of 2024, these ratios had dropped to 75.23% and 36.98%, respectively. This sharp deceleration in two critical metrics signals that the banking sector's importance in the national economy and its role in resource allocation have significantly weakened.

The right vertical axis of the chart above reflects the share of the banking sector's equity in GDP. This ratio, after peaking at 11.88% in 2020, has declined to a notably low level of 6.68% by the end of 2024. Equity is the most important indicator of banks' lending capacity and growth potential. The sharp decline in this ratio signals a weakening in banks' ability to extend credit. The key factor behind this negative trend appears to be thenegative real return on equity that the sector has faced since 2018, particularly during and after 2021, when inflation accelerated rapidly. During this period, the sector's nominal return on equity lagged far behind inflation, meaning sector was unable to preserve the real value of their equity.

 

An indicator of the banking sector's ability to fulfill its intermediary role in resource allocation within the economy is the share of loans in total sector assets. This ratio stood at 63% in 2015, peaked at 64.41% in 2017, and has since declined to 49.15% by 2024 - the lowest level observed in the past decade. This trend reveals that the sector is allocating an increasingly smaller portion of its managed assets to lending activities, which should ideally constitute its core business function.

 As noted earlier, the increase in the number of Development and Investment Banks over the past decade has been particularly notable. While there were only 13 such banks at the end of 2019, this number grew by 54% to reach 20 by the end of 2024. However, despite this expansion, these 20 banks collectively accounted for just 5.76% of total sector assets in 2024. Interestingly, while the number of banks in this category grew after 2019, their share of total sector assets initially declined before stabilizing at a relatively constant level in subsequent years. This pattern suggests that the addition of new Development and Investment Banks has not translated into a proportionally larger presence within the banking sector's asset base.

A notable feature of the growing number of Development and Investment Banks is the disproportionate dominance of state-owned institutions within this already small sector segment. While these banks collectively account for just 5.76% of total banking assets, public banks (namely İller Bankası, Takasbank, Türk Eximbank, and Türkiye Kalkınma ve Yatırım Bankası) control 76% of this share. This leaves the remaining 16 private Development and Investment Banks with only 24% of the group's assets, meaning they represent a mere 1.38% of the entire banking sector's total assets. Privately-owned Development and Investment Banks are numerous in quantity but extremely small in scale. At this minimal size, both their competitive power is expected to remain weak and their economic contribution is likely to stay very limited.

The Turkish Banking Law No. 5411 does not adequately define Development and Investment Banks. These two types of banks, which should have different functions, are defined together in Article 3 of the Law as: "Institutions that operate primarily by extending credit - without accepting deposits or participation funds - under this Law, and/or fulfill duties assigned by special laws, as well as branches of such institutions established abroad operating in Turkey." The emphasis is mainly placed on "not accepting deposits or participation funds." In connection with this emphasis and considering that they do not collect deposits and are not subject to deposit insurance, Article 77 of the Law exempts these banks from many restrictions compared to deposit banks. Furthermore, the minimum capital requirement for new banks to be established in this group is also kept low for the same reasons.

However, in developed economies, investment banks primarily engage in capital market transactions. Within this framework, they conduct securities issuances for corporate firms and governments, manage mergers and acquisitions, provide financial advisory services, and engage in large-scale corporate lending while abstaining from individual, retail, and SME banking services. Development banks, on the other hand, are typically publicly-funded institutions focused on financing investments that support economic development, social welfare, and the progress of underdeveloped regions.

The definition in Turkey being based solely on not accepting deposits - without specifying the concrete nature and boundaries of operations, while providing various exemptions and facilities - encourages groups with a "let's have our own bank too" mentality to establish investment banks. The result is numerous small banks with weak competitive power, whose activities are largely limited to intra-group transactions.

Another noteworthy issue in the banking sector, where the number of banks has increased, is concentration. As of the end of 2024, the top five banks accounted for 61% of total sector assets and 60% of loans. For the top ten banks, these ratios were 90% and 92%, respectively. In other words, a small number of banks dominate the sector. Conversely, the remaining 53 banks manage only 10% of the sector's assets.The fact that three of the top five banks are state-owned, which tend to operate with lower efficiency and productivity compared to private and foreign banks, raises concerns about the potential negative impact on the sector's competitive structure.

Ultimately, despite the recent rapid increase in the number of banks in Turkey, this expansion has not translated into tangible improvements in the efficiency or effectiveness of financial intermediation, nor has it significantly contributed to the financing of the real sector or the enhancement of market competitiveness. Rather than prioritizing the proliferation of banking institutions, policymakers and regulators should focus on structural reforms and policy measures aimed at improving sectoral efficiency and strengthening the banking system’s capacity to support sustainable economic growth.

Note: (1) Banking sector data in this article were sourced from the BDDK (Banking Regulation and Supervision Agency) and TBB (Banks Association of Turkey), while national account data were obtained from TÜİK (Turkish Statistical Institute). 

(2) Participation banks and digital banks in the sector will be addressed in a separate article.