Financial & Private Sector Development

Financial Inclusion in Turkey Alper Oguz, Senior Financial Sector Specialist WORLD BANK

Agenda

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Demand

Supply

Demand Side

1. Account penetration is relatively advanced in Turkey but there are significant variation across sub-categories: gender, income level, education with gender gap standing out

2. Account usage patterns indicate that important amount of the population is under banked: formal savings and borrowing patterns are very low

3. Financial capability and financial literacy levels are low and need to be improved

4. Access of Turkish enterprises depends mostly on bank financing and access to finance continues to be the most important challenge

1- Account penetration :The level of financial inclusion in Turkey is relatively higher than the BRICS and Europe and Central Asia (ECA) country averages - 58 percent of Turkish adults have an account at a formal financial institution. Account penetration in

Turkey is higher than the average among BRICS or other Eastern European - Most adults access the financial system through a bank rather than other forms of financial institutions

such as credit unions, cooperatives, or microfinance institutions. - This is consistent with data from other demand-side surveys: the 2010 EBRD Life in Transition Survey

finds that 61 percent of Turkish adults live in a household with a bank account.

Account Penetration: Adults with an account at a formal financial institution (%)

Source: Global Findex, 2011

1- Account penetration: There are wide variations in account penetration across income, education, and age categories Education: Ninety-nine percent of adults with a tertiary education or more are banked but only 51 percent of adults with a primary education or less own an account. Income Level: 46 percent of adults in the poorest 20 percent of income earners in Turkey have a formal account, while 72 percent of those in the richest 20 percent have an account. Regional: 2011 Findex data does not indicate a significant regional variation among unbanked population through out the country

Account Penetration by Individual Characteristics: Adults with an account at a formal financial institution (%)

Source: Global Findex, 2011

1- Account penetration :Most significant variation in account penetration is in gender-The 23 million unbanked Turkish adults are disproportionately women

- 82 percent of men are banked compared to 33 percent of women in Turkey - This gender gap is among the widest in world and significantly larger than that in BRICS or

other ECA countries - When measured as men’s account penetration as a percentage of women’s, the gender gap

in is 148 percent, the fifth largest among 148 economies behind Afghanistan, Yemen, Pakistan, Saudi Arabia, and West Bank and Gaza

- The gender gap is particularly large among adults in the bottom 40 percent of the income distribution: among this subpopulation, account penetration among women is 26 percent, far below the 39 percent of women in the top 60% with an account.

Account Penetration by Gender: Adults with an account at a formal financial institution (%)

Source: Global Findex, 2011

1- Account penetration: Among unbanked Turkish adults, the most commonly reported reason for not having an account was a lack of money followed by lack of trust, high costs, and the absence of necessary documentation as barriers to account ownership.

- 47 percent of adults without an account listed lack of money as one of the reasons and 15 percent of unbanked adults said this was the only reason they did not have an account

- Lack of trust (26 percent) and another family member having an access to a formal account (20 percent) are much higher for Turkey than the rest of the developing world

- Within the unbanked Turkish population approximately 30 percent of unbanked respondents do not report that any of the listed reasons are important reasons why they personally do not have access to a bank account – far more than in ECA or other developing economies - suggesting that other factors may play a considerable role in financial exclusion.

Self-reported Barriers to Formal Account Use: Non-account holders reporting of reasons behind not having an account (%)

Source: Global Findex, 2011

2- Account usage: Most common use of account is to receive wages or money from selling goods

- 56 percent of Turkish account holders report using their account to receive wages or money from selling goods. This is generally in line with patterns across the rest of Europe and Central Asia (ECA) , though substantially higher than the BRICS countries

- 32 percent of Turkish account holders report using their account to receive government payments, consistent with widespread use of electronic channels to transmit government-to-person payments (pensions, social benefits, etc.) in Turkey. This is generally in line with patterns across the rest of Europe and Central Asia (ECA) , though substantially higher than the BRICS countries

- 34 percent of Turkish account holders reporting using their account to send money to or receive money from family members living elsewhere: 27 percent to receive payments and 14 percent to send payments (7 percent do both). This use of accounts is significantly less common in the rest of the ECA region, where 11 percent of account holders use their accounts to send or receive remittances, and in the BRICS countries, where 17 percent do so

2- Account usage: The vast majority of Turkish account owners deposit and withdraw from their accounts only once or twice a month, consistent with common use of accounts to receive wages - 90 percent of account holders make 1-2 times deposits a

month, with only 9 percent making three or more deposits in a typical month.

- 77 percent of account holders report making 1-2 withdrawals, and 21 percent report making three or more withdrawals in a typical month.

- Compared to other ECA countries, there are relatively few “dormant” accounts in Turkey, defined as account holders who report neither withdrawing or depositing into their account in a typical month.

2- Account usage: Debit and ATM cards and ATMs are widely used in Turkey, more in line with patterns in high-income than developing countries

- Ownership of a debit/ATM card is nearly universal among Turkish account holders (98

percent). In contrast, 76 percent of account owners in other ECA economies and 55 percent of account holders in BRICS economies report owning a debit/ATM card

- 89 percent of Turkish account holders report using an ATM when they needed to get cash (paper or coins) out of their account. The corresponding proportion of account holders that use an ATM to withdraw money is 34 percent in BRICS countries and 63 percent in other ECA countries .

Ownership of Debit/ATM Card (% of adult population)

Source: Global Findex, 2011

2- Account usage: The overall prevalence of savings behavior is low, with only 10 percent of adults reporting having saved or set aside money in the past 12 months.

Formal and Informal Savings: Adults who reported saving any money in the past year (%)

- Among account holders, saving prevalence rises only slightly, to 13 percent. 8 percent of these adults report saving using informal methods while 2 percent report having saved using both formal and informal means and 6 percent of all account holders used informal means as their only mode of saving

Source: Global Findex, 2011

2- Account usage: 66 percent of Turkish adults report having borrowed from a formal institution, retail store, family member, friend, employer, or another private lender in the past 12 months

- Retail credit and borrowing from family and friends are the most commonly reported sources of borrowing among Turkish adults. Only 5 percent of Turkish adults report having borrowed from a bank, credit union or MFI in the past year

- Relatively few adults in Turkey report borrowing to purchase a home, pay school fees, pay health or emergency costs, or for funerals or weddings. Less than five percent of adults report currently having a loan for each of the reasons listed which suggests that the majority of borrowing is done for other purposes (consumer goods, car or vehicle loans, etc.) Formal and Informal Borrowing: Adults who reported borrowing from source in the past year (%)

Source: Global Findex, 2011

3- Financial Capabilities: According to the 2012 Financial Capabilities Survey, less than half of Turkish adults correctly answered questions on compound interest, simple interest, and inflation

- While 84 percent of adults correctly answered a question on simple division, just 46 percent correctly answered a question on the concept of inflation. For the questions on simple interest and compound interest, these values drop to 28 percent and 18 percent, respectively. This suggests that Turkish people may lack specific knowledge required to make sensible savings, borrowing and investment decisions.

- 42 percent of Turkish adults under the age of 60 report that they have no strategy for or have not thought about meeting their household expenses in their old age. An equal proportion of adults report that they will rely on a pension (government, employer, family member, or other). 17 percent of Turkish adults under the age of 60 report that they will always work.

Planning for Old Age: Adults under 60 who report using strategy to plan for expenses in old age (%)

Source: Financial Capability Survey, 2012

3- Financial Capabilities: 66 percent of Turkish adults report that they have run short of money for food or other necessary items in the past

- 21 percent of adults report that running short of money happens regularly, while 79 percent report that it happens only sometimes

- Of those who regularly run short of money for food or other items 92 percent report that such occasions arise due to insufficient or low income, 27 percent report that it is due to increased cost of food and other necessary items, and 18 report that it is due to unexpected expenses or events

- Under these circumstances, adults most often borrow or receive cash gifts from family or friends (reported by 70 percent of adults who regularly run short of money for food etc.)

- Just 31 percent of Turkish adults report that they would be able to cover an unexpected expense equal to their household’s monthly earnings without borrowing money

Running Short of Money :Adults who report reason for why they regularly run short of money for food etc. (%)

Source: Financial Capability Survey, 2012

3- Financial Capabilities: Less than half (42 percent) agree that “The information available on financial products is reliable”

- Three quarters of Turkish adults agree with the statement “I am very disciplined when it comes to managing money” and 59 percent agree with the statement “I always get information or advice when I have an important decision to make”

- Less than half (42 percent) agree that “The information available on financial products is reliable”, and even less (36 percent) agree with the more specific statement that “The information available on financial products is clear and easy for me to understand.”

Views on Financial Information : Adults who agree with each statement (%)

Source: Financial Capability Survey, 2012

4- Access of Turkish enterprises: Access to finance is the biggest obstacle for Turkish firms

Financial Inclusion for Firms : Firms who reported having financial tool or barrier (%)

- 91 percent of the formal Turkish firms report having a checking or savings account - More than half of Turkish firms (57 percent) report having a loan or line of credit,

though there is considerable variation across sectors and firm size - The vast majority (85 percent) of firms with a loan or line of credit report having

acquired it from a private commercial bank. - On average, Turkish firms report that approximately 38 percent of their investments are

financed by banks. This is significantly higher than the proportion reported by other firms in ECA (22 percent).

- Data from firms that were interviewed in both 2005 and 2008 suggests that bank financing has become an increasingly important source of funding in Turkey

- Access to finance is reported as the biggest obstacle by 26 percent of Turkish firms, higher than ECA average of 16 percent

Source: Enterprise Surveys, 2008

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Supply Side

1. Availability and provision of financial services is aligned and in some cases above average of countries of similar income levels.

2. Banks are dominant players in the market but they have their constraints.

3. NBFI sector, is underdeveloped, in particular leasing and factoring; microfinance is almost non-existent.

4. Need for further capital market development to increase maturity and sources of funding.

1- Availability and provision of financial services: ATM penetration compares well above peer (upper-middle income) countries, as well as the use of cashless payments…

Source: IMF Financial Access Survey 2012

1- Availability and provision of financial services : … in line with countries of similar income level, but below most OECD countries…

Source: IMF Financial Access Survey 2012

2- Banks are dominant players : The financial sector is disproportionately dominated by banks and lacks the depth typically associated with an economy of its size

Assets Size/GDP (%)

Source: BRSA, Stock Exchange, Capital Markets Board

2- Banks are dominant players : The country performs well in terms of bank concentration compared to benchmark countries…

Source: Global Financial Development Indicators 2011

2- Banks are dominant players : Banks rely heavily on short term deposits (less than 1 year) as their main source of funding…

Source: BRSA

2- Banks are dominant players : There is high dependence on deposit accounts with more than TRY 1 million…

Source: BRSA

2- Banks are dominant players : Average loan maturity has been increasing in the past decade.

Source: BRSA

3- NBFI sector, is underdeveloped : Non-bank finance to enterprises is relatively low. Leasing is significantly underdeveloped.

Source: Global Financial Development Indicators 2011

4- Need for further capital market development. Development of capital markets will be key for availability of long term finance for corporates and open more space for SMEs in the banking sector

Source: World Development Indicators 2012

Financial Market Development Indicators - 2012