Having emerged relatively unscathed from 2008’s global financial crisis, Turkey is now fast becoming a new international finance centre for the Middle East. Here, CIHAT TAKUNYACI discusses the ramifications of the country’s re-emergence as a global player because of its domestic banking sector
All eyes are now on Turkey. The country has been growing at above eight per cent for several years and its exports are booming. Yet this good news is encouraging a new question – could Turkey (and in particular Istanbul) become a financing hub for the wider region, including the Middle East?
Unquestionably, one of Turkey’s key – and much discussed – strengths is its location. Situated between Europe and the Middle East, it also offers ease of access to the Central Asian economies. This means that it is a gateway to a possible consumer base of around 774.2 million, with 2011 statistics from the World Bank putting the populations of neighbouring Europe (excluding Western Europe) and Central Asia, and the Middle East and North Africa as 407.6 million and 336.6 million respectively2.
Yet, Turkey’s position as “the bridge” between Europe and Asia is not solely due to its geography. It is now what may be deemed a capability bridge, facilitating the trade ambitions of the entire region – and beyond – through the combination of sophisticated infrastructure and a business-friendly regulatory regime.
This is no mere coincidence. In order to bring the Istanbul Financial Centre Project – an initiative to transform Istanbul into a regional financial centre within 10 years and a global centre within a few decades – to fruition, the Turkish government is working to improve the country’s tax system, legal and fiscal environment, political and economic stability and regulatory framework in order to attract financial investments. A recent example of its efforts in this respect is the July 2012 implementation of The New Turkish Commercial Code, which is designed to inspire confidence in Turkey as a business hub as well as cope with change in the local and global business environment.
The continuing advance of the Turkish economy is having a three-fold effect. First, it is attracting more foreign companies to the country, which is also indicative of how Turkey has now distanced itself from previous concerns over the internal and external political climate. Such influx of overseas companies coincides with domestic corporates increasingly seeking to broaden their horizons – indeed, many are looking east in line with ongoing economic woes in the west and the subsequent geographic shift in purchasing power.
Of course, this shift brings with it the challenges inherent to dealing with new, unfamiliar markets: navigating new regulatory regimes, establishing new trade connections, dealing with new currencies, and so forth. These are all hurdles that indigenous corporates – and by extension their banks – must address if they are to capitalise on the benefits presented by Turkey’s growing economic strength and standing throughout Europe and the Middle East, and, indeed, globally.
Navigating a changing environment
Retrospectively, trade in the Middle East has always been a conservative, paper-based practice, with documentary forms of trade – such as letters of credit (LCs) – being the settlement method of choice. This is chiefly because LCs (if followed to the letter) are the most secure means of payment for sellers. Recent (on-going) socio-political turbulence in the region means that not only is such an emphasis on risk-mitigation well-founded, it is also likely to remain the top priority for all trade entities when conducting business within and beyond regional borders.
And this in itself is not a problem. LCs are the foundation of all banks’ trade finance offerings, present good and important work for local banks (the majority of exporters prefer to use local banks for the issuance of documents, in order to ensure that the consigned LC is valid) and are widely available across both developed and developing markets. However, they are often costly and labour-intensive, which means that – despite their risk-mitigating properties – they can seem counterproductive in comparison to more flexible open-account trade settlement methods and automated banking platforms.
What is needed, therefore, are more integrated trade solutions that strike the optimal balance between risk mitigation and efficiency gains – and such solutions are available, though are currently chiefly the domain of specialist global trade finance providers.
If Turkish banks are to compete and remain the key providers as Turkey cements its role in regional and international trade – unlike other regional hubs, such as Dubai, which are dominated by the international players – they will need similar trade offerings, supported by equally sophisticated cash management solutions.
Indeed, one of the major challenges associated with trade expansion is the need to support multiple – and in some instances new – currencies. This calls for currency processing capabilities that are capable of clearing both established and rising currencies – the Chinese RMB being vital in the latter respect.
As trade ties between the Middle East and China strengthen, corporates could find the ability to settle in RMB a major competitive advantage. This is because it would make all trades with Chinese counterparties single currency transactions, thereby increasing efficiency and removing FX risk and cost.
Home and away
However, stepping up to the plate on the home front is only half the battle won. Yes, the ability to offer solutions to rival global counterparts will cement Turkish banks’ position as the leading institutions in their home market as it continues to evolve, and allow them to better compete at regional level, thereby attracting incoming business. So far, so good.
But supporting their domestic clients’ international expansion – this being the preference of local corporates, who value the trust and understanding nurtured through historical relationships with their house bank(s) – presents additional challenges.
First, it would require Turkish banks to be able to offer connections into new markets, and second to replicate the solutions offered in their domestic market(s) at a wider regional and global level. This is a huge hurdle for them – and indeed all local banks – to overcome independently.
Certainly, significant investment in technology would be required, and the developed solutions would need to be flexible enough to meet both differing compliance requirements and the varying levels of operational sophistication between geographies. And then there is the issue of global understanding and consistency of service quality across borders.
Despite advances and growing distances between counterparties, trade remains known as a face-to-face business, which means it relies on shared knowledge, trust and open counterparty communication – all of which Turkish banks may struggle to build and maintain on their clients’ behalf in unfamiliar markets without support.
Such support could come in the form of a collaborative partnership with a specialist global provider of trade finance and cash management services. Partnerships of this type – in being strategic in nature – are equally beneficial for both parties. While international providers may be able to offer reach, access to a global correspondent bank network and best-in-class capabilities, they cannot match local banks in terms of domestic market and client understanding. Marrying the two could, therefore, allow Turkish banks to think and operate as truly global players, and provide clients – established and new – with the services they require on a domestic and international basis at minimal cost and risk, and maximum efficiency.
As a result, it could allow Turkish banks to capitalise on Turkey’s evolution into a regional – and, later, global – trade hub by catering to the needs of incoming foreign corporates, and facilitating domestic corporates’ international expansion. This will not only strengthen their existing client relationships, but will also help establish new connections with companies – domestic and foreign – looking to explore Turkey’s bright trade and investment future, especially in the neighbouring region of the Middle East.
Cihat Takunyaci is currently managing director and senior representative of The Bank of New York Mellon’s Istanbul Representative Office in Turkey.
Before joining BNY Mellon, he spent a good part of his career in investment banking and capital markets activities, including corporate finance, asset management and M&As.
Material contained in this article is intended for the purposes of general information only. It is not intended to be a comprehensive study of the subject matter, nor provide any treasury services advice, or any other business or legal advice, and it should not be relied upon as such. The views expressed herein are those of the author only and may or may not reflect the views of BNY Mellon.