The effects of financial liberalization on the Turkish banking system.

The phenomenon of financial liberalization in Turkey has taken placeas a subprocess of the policies applied within the framework of the nationaleconomy?s adjustment to the principles of the free market system.Therefore,the financial reforms applied have been formed according to thefinancial liberalization policy cited above.From the year 1980 onwards,thereare three primary processes which have determined the development of thefinancial system.One of them is that most of the financial instrumentsconstructed according to the financial liberalization policy have been thestate? s bonds and securities in order for financing the public sectordeficit.The second one is the substitution of foreign exchanges for theTurkish Liras.The third and the last one is the instability in the domesticfinancial markets and also in the real economy caused by the speculativeand short term capital flows.The Turkish experience of the post-1980 period in which especiallythe exchange rate regime has been changed consists of almost all of thecommon problems usuallly faced by the developing countries almost whollyliberalizing their financial systems inwards and outwards under thecircumstances with chronically high inflation.The foreign capital?s threats forrunning out of the country have been the main component in the policyformation,have given rise to dependence upon high real interest rates whichwere in fact not sustainable at all,and have fed expectations for cheaperforeign exchanges. In the meantime,the traditionally strong liasionsinterconnecting the financial and real sectors to each other have broken to amuch greater extent.Following the so-called structural adjustment and stability programdated as January 24th,1980, the Turkish banking has been exposed torevolutionary changes in its operations. Having understood the incapability toovercome the structural capital scarcity problem of the overall economy withits own internal dynamics,the Turkish banking system,which was under aregime of managed freedom until the 1990?s,has then resorted to foreignmarkets in the post-1990 period and extended loans,which have been takenin foreign exchange terms,to the public and private sector as loans againafter converting them first into the TL much as the foreign capital hasdone.This sort of banking practice,generally accepted as a shortcut to fastand easy profit making,has pushed the banks,on the one hand, towardsholding significant amounts of foreign exchanges in open accounts,and onthe other hand has left them in great difficulties whenever a financial crisisbroke out.The state?s choice for solving the budget deficit problem by borrowingthe banks? funds attainable for lending has made the proceeds of stocks andbonds the major component of the profit/loss account.The fund-owners flocking to the service sector due to the diminishingrelative profitability of the industry capital,have had a significant dominanceover the industry after a while.The gigantic holding organizations and groupshave decided to have a bank in order to diversify the overall risk of theiractivities having falling profit margins and to attract huge amounts of interestrevenues for their own usage.As a result of this phenomenon,it has beenobserved that the level of integration between the finance and industry capitaland essentially the degree of dependence of the industry capital upon thefinance capital have increased.In the period between 1998 and 2001,after the successive fluctuationstaken place in the whole economy and the financial system in private,thebanking system has experienced a serious elimination process, and both forthe purpose of preventing this tendency and of pushing forward the bankingsystem a much healthier state a so-called restructring program has been putinto application.Apart from all above,it has been thought that in such a low-depthsystem,the competetive strength of the banks in comparison to theirequivalents in Europe and the world is rather weak,and if the objective is toincrease this weakening competetive strength a new market structurefollowing a series of mergers and acquisitions just like those in themonopolization process of the period between 1998 and 2000 will have to bemade up necessarily in a very near future.