One result of the global crisis that began in 2008 has been the emergence of the G20 as the leading forum for economic and financial cooperation. However, a lasting recovery cannot be the work of policymakers alone. The banking and finance sectors have a key role to play in achieving sustained economic growth.
The financial crisis of 2008-2009 brought the global banking and financial services industry to the top of the agenda for policymakers and reminded the world in no uncertain terms of its importance to the functioning of the global economy.
If leaders needed more proof of the interdependence of global markets, and the ripple effects that financial crises can have from New York, London and Shanghai to markets across the globe, the financial meltdown made this emphatically clear.
What made this crisis unique, however, was the contagion that spread across developed and emerging markets, another challenge that highlighted the need for a new era of cooperation. No longer would a response by a small handful of countries be sufficient to foster recovery and reform a financial system that operates with increasing ease and rapidity from major financial centres to far-flung corners of the world.
One positive result of the crisis was the emergence of the G20 as the world’s preeminent forum for economic and financial cooperation. Coordinated action by central banks in key economies helped ensure the flow of money and credit into the economy, while laying the foundation for reforms that regulators hope will avert a repeat of the economic devastation the world saw in the ensuing years.
As the world’s largest economies move on to a new phase of development, policymakers and financial professionals in the G20 hope to carry these difficult lessons forward. Today, a new set of challenges lies ahead, including a tepid recovery in most major advanced economies, an unexpected economic slowdown in China, the impact of an expected interest rate hike in the United States and a steep drop in commodity prices.
In this environment, emerging markets are thought to be particularly vulnerable to commodity prices and capital outflows. Trade, and in particular exports, as well as public and private investments are all slowing and governments are facing constrained budgets. Investment will be key to overcoming this new spate of problems, with the banking and financial services industries playing a critical role, according to a consensus of G20 leaders.
“Most things are just too low,” says Christine Lagarde, Managing Director of the International Monetary Fund (IMF). “Growth is too low, productivity is too low, trade numbers are too low, investment is too low, infrastructure projects are too few and the only thing that is too high is unemployment.”
At meetings in Lima and Turkey, the G20 has sought to take collective actions to facilitate investment and continue with structural reforms of the global financial system. “The world’s biggest economies must step up reform efforts to boost growth in line with targets they set last year, using a mix of accommodative monetary policy, fiscal policy and structural reforms,” Ms. Lagarde emphasised. “A concerted policy effort is needed to address these challenges, including continued accommodative monetary policy in advanced economies, growth-friendly fiscal policies, and structural reforms to boost potential output and productivity.”
Ms. Lagarde was careful to point out, however, that central banks cannot solve these problems on their own. “Monetary policy alone will not cut it,” she continued. “It is necessary. It is recommended from our perspective, particularly in Europe and in Japan still, but it will not cut it on its own. Clearly, in the fiscal sphere as well as in the structural reforms sphere, more needs to be done, and it needs to accompany and eventually take the baton from the central bank governors. Some of the pipes are still clogged and the flow of credit has yet to pick up enough to facilitate investment.”
Tapping the financial sector and capital markets will be key to achieving the necessary level of strategic investment to carry the global economy forward. Ms. Lagarde points out that investing 1% of GDP in infrastructure in advanced economies increased output by 0.4% the same year and by 1.5% after four years. In developing and emerging economies that have significant infrastructure deficits, investment is even more critical for growth. The European Union recently launched a three-year investment program worth some $350 billion, along with schemes that aim to boost access to credit for small businesses, seen as an engine for employment. Still, the European Central Bank still expects growth in the 19 Eurozone countries to reach just 1.4% this year.
Turkey, which plays host to the G20 forum this year, has taken action on many of these fronts. Turkish President Tayyip Erdoganasked G20 member states to come up with investment strategies that target robust, balanced and sustainable global growth. Mr. Erdogan singled out infrastructure investment as the key to securing such growth, and encouraged member states to consider Islamic financing instruments as part of their investment strategies.
Turkey’s stock exchange, Borsa Istanbul, also aims to serve as a model for emerging G20 countries. Istanbul ranked 47th in the Global Financial Centres Index 2014, and envisages breaking into the top 10 of the most dynamic and active financial centers in the world by 2023. An essential part of this plan will be through strategic international partnerships.
“We’re looking to establish a strong network with exchanges in neighbouring countries, in addition to our links to the most prominent exchanges in the world,” says Borsa Istanbul CEO, Tuncay Dinç. “Borsa Istanbul has shares in the Kyrgyzstan Exchange, as well as Bosnia & Herzegovina and Montenegro. In Europe, we are also strengthening our presence through our partnership with the EDC n London and the London Metal Exchange. Also, as a strategic partner, NASDAQ owns 5% of Borsa Istanbul. In Europe, the Middle East, Central Asia, and finally to the major exchanges worldwide, Borsa Istanbul’s links to other exchanges will globalize the brand and streamline our network.”
“We place great importance on capital markets and believe that Borsa Istanbul will play an important role in positioning Istanbul as a finance centre,” adds Ali Fuat Taşkesenlioğlu, CEO of Halkbank Turkey. “Following our successful initial and secondary public offerings, we are now a part of Borsa Istanbul. Today, 48.9 % of our bank’s shares are traded on Borsa Istanbul and 24.98% of our shares were offered to the public in May 2007, when our shares were oversubscribed by eight times. This constituted the largest and most successful public offering in the history of Turkish capital markets and led Halkbank to receive the 2007 ‘Best Public Offering’ award by the Swedish investment company East Capital. At our secondary public offering in November 2012, 23.9% of the bank’s shares were offered to the public, raising our free float rate to 48.9%. Our secondary public offering was also one of the most successful in the country, just like the first one.”
Osman Çelik, Chairman of the Board of Directors of TKBB-Participation Banks Association of Turkey, and CEO of Turkiye Finans, agrees. “Istanbul aims to be the region’s premiere financial centre within 10 years, and is slated to be one of the world’s leading financial centres within 30 years, due to Istanbul’s advantageous position compared to its competitors in terms of skilled labour, revenue generation potential, social life and cost of doing business.
A solid regulatory framework underpins this global ambition, and has made possible the emergence of a vibrant investment culture, with comprehensive reforms in recent years that in many cases have exceed European Union standards. This has helped build confidence among investors in Turkey and abroad.
“One of the greatest successes of the Turkish economy in the last decade has been the reforms in the banking sector,” says Vahdettin Ertaş, Chairman of Turkey’s Capital Markets Board. “A more stable banking sector gives the economy its resilience. It is imperative to note here that, as a policy, no bank or non-bank financial institution was bailed out throughout the 2008 crisis, which promoted strong institutionalism in the sector. Having landed on solid ground, the banking industry was the primary source for the economic growth seen in the last decade.”
Indeed, regulators in Turkey made significant progress following a financial crisis in 2001 that helped it weather the 2008 meltdown better than many of its G20 peers.
“The financial crisis of Turkey in 2001, stemming from the balance sheet weaknesses of the banking system, exerted a cost of almost 25% of our GDP,” explains Cavit Dağdaş, Turkey’s Treasury Undersecretary. “After this crisis, we launched a radical structural reform agenda, especially in the financial sector. We established the Banking Regulation and Supervision Agency (BRSA). With the effective oversight of this institution, the resilience of the Turkish banking sector has increased immensely. Thanks to the robust structure of our banking sector, the impact of the global financial crisis of 2008 on Turkish financial markets has been limited.”
Mr. Dağdaş explains that a buffer against external shocks was created by the structural reforms and prudent policy approach that Turkey has been carrying out since 2003. “In retrospect, we have made significant efforts to restructure and rehabilitate the banking sector in the wake of the 2001 crisis. We increased the capital adequacy ratios and the liquidity requirements and we improved the regulatory and supervisory framework. Therefore, during the 2008 crisis, we did not have to bail out any bank; we did not transfer any state funds to any bank and we did not have to change our guarantee scheme.”
Mr. Ertas of the Capital Markets Board recalls that, after the Turkish government adipted a reform policy for the capital markets, “the Turkish Parliament enacted the new capital markets law at the end of 2012 and in two years, we completed all the secondary regulations. I am confident to say that all of our regulations are now fully compatible with the EU. Our current regulatory landscape reflects the lessons learned from the recent global financial crisis, and it’s one of the most sophisticated and developed regulatory structures in the world. Capital markets are coming into play as well as the banking sector to finance the economy.”
Mirroring the quantitative easing programmes instituted in the United States, the European Union, and elsewhere, Turkey also made effective use of monetary policy to steer its financial system toward renewed growth. Like other G20 countries, it took steps to stimulate the economy. Because of the decline in in the country’s GDP, the Central Bank cut the policy rate in 2008-2009. In the following two years, Turkey posted the second highest growth rates in the world, after China. New policies were also implemented to strengthen financial stability and deal with excessive capital inflows.
Pursuing a strategy that is critical to markets across the G20 countries, Turkey has made concerted efforts to provide access to credit for small-scale entrepreneurs. “The Turkish banking system developed a very good infrastructure which supports small and medium enterprises (SMEs),” says Hayrettin Kaplan, CEO of Türk Eximbank. “We even have some banks that are very much specialised in SME finance and two years ago the Central Bank and supervision agencies together with the government took some measures to cut retail finance.”
The result is that today, Turkish bankers are looking for a larger share of the SME finance market. The government’s policies are also pushing banks to finance new SMEs, prompting the banking system to become more specialised. In this sense, policymakers’ actions have led the way for the banking sector- This focus on entrepreeurship is shared by leaders in Turkey´s banking sector.
“We went far beyond what might be expected from a bank and opened TEB Startup House in İstanbul as part of our Startup Banking programme,” explains Umit Leblebici, CEO of Turkish Economy Bank. “Startups have access to training, consultancy and mentor support free of charge at the TEB Startup House, which is a business management consulting centre. The consultants of TEB Startup House not only provide the support for the startups during the idea process, but will also offer advice on selling, marketing, business planning and commercialising their projects.
Emerging economies provide numerous testaments to the importance of the banking and financial sectors to both the national and global economies. Helped by cheap international oil prices and steady implementation of its reforms programme, Pakistan’s economy has posted solid gains, with projected growth in the 4-5% range, according to the World Bank, which also credits the country’s “stellar implementation” of an IMF reform programme.
“The financial sector is growing with robust yearly earnings increasing by 52%,” says Sirajuddin Aziz, President of Habib Metro Bank. “[The] Bank’s role is to act as a financial intermediary to foster development and provide funds to the industries, but if you are collecting deposits and buying government securities, then you are not providing that investment flow. The sector is growing and needs to keep growing in order to provide financial options to the people and businesses.
Pakistan needs to provide an enabling environment and resolve issues such as energy shortage and security. Only then investors will be willing to bet on the country and banks will be more than happy to step in and support their initiatives.
That’s what I feel and think as a patriot and as a Pakistani. We need to focus in supporting this cycle.”
Ashraf Mahmood Wathra, Governor of the State Bank of Pakistan, points to a tendency among international banks to follow their customers.
“If you have 20 new American corporations in Pakistan, one of the US banks will perhaps think about coming here. If you see the history of U.S. banking in Pakistan, we used to have more, such as Citi, American Express bank and Chase. A lot of them came in the 60’s and there were a lot of U.S. government businesses that used to be in this region. But besides the business side, the perspective of global banks is changing because of the Basel conventions, which are changing standards and risk parameters. These aspects sometimes depend on the country as well, so there is a whole set of other factors.”
Mr. Wathra noted another tendency among global banks, which is that they are becoming smaller in size and are focusing their efforts more in areas of the world where they have a lot of strategic interests.
“These days, for a marginal interest rate, no new bank will go to a different market. We have seen that tendency with HSBC, Standard Chartered Bank, Barclays and several others, who have been shrining in the last four to five years,” he said.