Turkey's small businesses finally get the credit they're due

By bne IntelliNews December 16, 2006

Nicholas Birch in Istanbul -

They make up all but a handful of Turkish companies, employ about seven out of 10 Turkish workers, but until recently received only 5% of total bank credits. That is about to change as small and medium-sized enterprises, or SMEs, start getting more attention from the banking industry that could have far-reaching consequences for the Turkish economy

For years, Turkey's SMEs were crowded out of funding sources by banks happy to make easy money funding the government's massive borrowing needs.

That all began to change following the 2001 crisis as interest rates began their slide from near triple- towards single-digit figures. Like retail lending, which has grown by an annual 87% over the last three years, SME loans have begun to boom too.

"It's the most profitable part of the banking business today," says Murat Sari, head of Akbank's Small Business Credits department. "Profits on corporate loans are less than 1% these days; loans to medium-sized business get between 2% and 5%; an overdraft loan to a small business can bring you more than 10%."

Like Isbank and Halkbank, Akbank's interest in the SME sector dates back a long way. But it's only since 2002 that it has begun to give smaller companies anything like the attention they deserve.

Islamic credit

SMEs' share of the bank's total loans has risen from 7% in 2002 to 40% today. Worth a paltry €513m in 2003, Akbank's SME loans stood at €3bn in the third quarter of 2006.

The sector has been attracting other banks' attention too. Traditionally stronger in blue-chip and corporate lending, Garanti handed over €1.47bn in SME loans by October 2006, up 71% on last year. Expanding aggressively since BNP Paribas bought into it last February, Turk Ekonomi Bankasi launched itself onto the SME market last August and handed out €630m in the first three quarters of this year.

But the most striking recent evidence of the potential of the SME sector is probably to be found at the Islamic end of Turkey's banking sector. While the market collapse in May and June reduced margins, particularly in the retail sector, Bank Asya, the second biggest of Turkey's four interest-free banks, surpassed its budgets, posting a quarter-on-quarter increase of 43% at the bottom line.

"It is a strong justification for the management's claim that SME loan demand would remain strong despite the turbulence," says the brokerage Raymond James, noting an 8% growth in loans in the third quarter.

Turkey continues to lack a standard definition of what an SME is, and every bank has a different way of distinguishing between corporate, medium, small and micro business clients. It's a conceptual haziness that makes judging the size of the loan market near impossible. Most analysts guess SMEs now receive 20-30% of all loans, leaving the sector plenty of space for growth, in the medium-term at least.

"I think next year may be a little quiet because of elections," says Akbank's Sari. "Most small companies have made the investments they needed and will be sitting it out now to see what happens."

Turning black to white

There are a whole host of reasons – and not all of them purely financial – why Turkey stands to benefit from more banks getting into the small business sector once the political coast is clear next autumn.

For a start, it's vital if the country's economy is to wean itself off its dependence on a few giant corporations. "There are nearly 2m companies in Turkey, but at the moment over 75% of the economy is concentrated in the hands of less than 500," says Nurhan Toguc, chief economist at Ata Invest.

No less significantly, some think it could turn out to be a key part of efforts to reduce Turkey's enormous unregistered economy.

Believed to be anywhere between 20% and 40% of GDP, the black economy remains a major headache for Turkey's government. Indirect taxation already accounts for a massive 70% of total tax revenues, and with corporate tax reduced from 30% to 20% earlier this year, that dependence could temporarily go up further.

"We have been unable to make any progress at all over the past four years against the grey economy," Turkish Finance Minister Ali Babacan ruefully admitted at the World Economic Forum in Istanbul on November 28.

Like many developing countries, Turkey is a two-tiered economy, says Melsa Ararat, professor of management at Sabanci University. Big companies base their competitiveness on innovation and pay (most of) their taxes. Caught in a cycle of low investment and low productivity, the smaller ones have traditionally stayed afloat by breaking the rules.

"The existence of banks willing to lend changes all that", she says. "If SMEs want credits, they need good financial statements. They can't stay black."

The heart of the ongoing transformation is the Revised International Capital Framework, or Basel II, which Turkey has pledged to implement by the end of 2008. As part of its brave new world of improved risk management, Basel requires banks to give credit ratings to all corporate clients, large and small.

Managing director of Finar D&B, the Turkish representative of international corporate rating agency Dun & Bradstreet, Selim Seval has rated 40,000 Turkish companies since he set up shop in 1989. He's convinced Basel II will help to increase the spread of a registered economy in Turkey, although not so much because of the credit rating itself.

"When you rate a company for credit-worthiness, you're not too concerned at what's declared and undeclared", he explains. "But the amount of credit a company receives depends on its declared income. If you only declare half, you only get half."

While Turkey's banks are well prepared for Basel, that's less true of the smaller boardrooms of Turkey's corporate sector, bankers and analysts say.

"Most SME owners are not aware of what Basel will bring," says Levent Topcu, a banking expert with HSBC Securities. An assistant manager in Akbank's small business marketing department, Osman Ozel jokes that, "there's a long tradition of leaving things until the last moment in this country."

The government and local business organisations are doing their best to make sure the message gets through. Banks too have been very active. Some hand out accounting software, while others, like Akbank, have arranged seminars on Basel for 1000s of its clients.

"This is a period of transition, so I suppose it's natural people should be afraid," says Akbank's Sari.

However, he thinks such fears are largely ungrounded. The success of a bank's SME loan programme depends on good branch distribution and in-depth knowledge of clients, he says, and that's not something that Basel II will change dramatically.

For him, and others in Akbank's SME department, the immediate future lies in the micro sector, businesses with sales of between €50.000 and €250,000.

"They're still largely un-banked", he says. "Bank them and you're extending the registered economy a step further, as well as bringing a certain discipline to the way they do business."

Send comments to Nicholas Birch

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