EBRD commends Turkish banks maintaining robust capital structure
Francis Malige, managing director of Financial Institutions at the EBRD, speaks during an interview, Istanbul, Türkiye, Sept. 27, 2024. (AA Photo)


The Turkish banking sector continues to preserve its strong capital base, despite some fluctuations in profitability, according to a senior official at the European Bank for Reconstruction and Development (EBRD).

Francis Malige, managing director of Financial Institutions at the EBRD, said he is not concerned about these fluctuations, reflecting confidence in the sector’s resilience.

Malige emphasized that Türkiye is emerging from a period of high inflation and is on a path to recovery, with the banking sector demonstrating strong performance throughout this period.

Authorities have been pursuing more than a yearlong policy-tightening effort to rein in inflation, rebuild foreign exchange reserves and address some of Türkiye's chronic problems, like the current account deficit.

To counter inflation, the Central Bank of the Republic of Türkiye (CBRT) has lifted its key policy rate by 4,150 basis points since June 2023. It has held its key policy rate steady at 50% since this March but said it remained highly attentive to inflation risks.

Annual inflation dipped below 52% in August, compared to its peak of 75% this May. The sharp drop is expected to continue as monetary and fiscal tightening campaign brings price relief.

Having observed Turkish banking for nearly two decades, Malige commended its robust capital and liquidity buffers. He acknowledged that challenges remain, particularly the instability caused by high interest rates, but he believes these issues are being mitigated by more stable macroeconomic policies.

"The Turkish banking sector has strong capital and liquidity buffers. However, this doesn't mean there are no challenges. Currently, the biggest challenge in the sector is the instability created by the high interest rate environment. Nevertheless, with a more stable macroeconomic policy in place, banks are beginning to emerge from this uncertainty," he told Anadolu Agency (AA).

On the other hand, profitability in the sector is somewhat volatile, but Malige said they still observe healthy levels of profitability continuing.

"I am not concerned about the profitability of banks. Turkish banks are well-capitalized," he noted.

Malige stressed the importance of maintaining orthodox macroeconomic policies, noting that the past year has seen a return to these approaches in Turkey.

"The continuation of orthodox economic policies is crucial. Foreign investors and credit rating agencies welcome this shift, trusting that these policies are here to stay," he stated.

Speaking about the EBRD's long-standing collaboration with Turkish lenders, Malige noted an increase in the number of financing agreements signed in recent years.

"As of this period in the year, our investments in the Turkish banking and financial sector amount to 600 million euros ($671.57 million), and we will continue until year-end," he said.

He added that 1.2 billion euros of the EBRD's total 2.5 billion euro investment in Türkiye last year was in the financial sector.

Malige also highlighted the EBRD's efforts to promote green and digital transformation in Türkiye, particularly among small and medium-sized enterprises (SMEs).

The bank has launched a 750 million euro green economy program to encourage investment in digitalization and sustainability through Turkish financial institutions.

Malige underscored the significance of green transformation, particularly due to new applications like the European Union’s Carbon Border Adjustment Mechanism.

Turkish companies that fail to adopt clean energy practices could face taxes on their exports to the EU, which is Türkiye's largest export market.

"We are working closely with banks, regulators and our clients to minimize the impact of this mechanism," Malige said.

He also referred to the efforts to help rebuild Türkiye's southeastern region, which was struck by devastating earthquakes last year. Malige said the EBRD had mobilized 600 million euros to provide financing to businesses in the affected areas through Turkish banks.

Nearly all of this funding has been distributed, said Malige, and noted that the EBRD is now working with banks to assess the ongoing needs of these businesses for the next phase of support.