Throughout the second half of 2019, the Turkish government has introduced various changes to the country's banking legislation. In this section, our aim is to focus on the key amendments and provisions brought by these changes.
II. What Has Been Changed?
1. Limitation on the Monetary Transaction Amounts of Swaps, Forwards and Other Derivatives
On December 18, 2019, the Banking Regulation and Supervision Authority ("BRSA") announced certain limits regarding monetary amounts of foreign-exchange swaps, forwards and other derivatives, conducted between Turkish banks and transaction counterparts residing outside of Turkey. Accordingly, such swap, forward, option and other derivative transactions in which Turkish Lira is sold and which have a maturity of seven days or less, should not exceed 10% of the banks' equity. This 10% limit will be calculated daily on a solo and consolidated basis. The announcement also specifies that this limitation excludes transactions that are carried out between Turkish banks and their foreign subsidiaries, which are credit or financial institutions, subject to consolidation. By restricting the amounts of such foreign- exchange swaps, forwards and other derivatives, the BRSA aims to reduce the demand for foreign currency and maintain the strength of the Turkish Lira.
2. Writing-Off Non-Performing Loans
With the aim to clear creditors' books in order to boost the credit environment in Turkey, the BRSA has amended the Regulation on the Principles and Procedures Regarding the Classification of Loans and Provisions to be Set Aside ("Regulation"). This amendment came into effect with its publication in the Official Gazette No. 30961, dated November 27, 2019, retroactively effective as of July 19, 2019.
Pursuant to the Amendment on the Regulation, if recovery of any part of a loan, which is considered as a loss (with special reserves or credit loss reserves set aside as per the Regulation), cannot be expected due to the debtor's default, such part of the loan can be written off in line with TFRS 9 ("Turkish Financial Reporting Standards No. 9 on Financial Instruments'') as of the first reporting period following its classification as a loss. In order to protect the interests of the creditors, this amendment explicitly stipulates that the said write-off is merely an accounting procedure, and will not be construed as a waiver by the creditor from collecting its receivables.
3. Interest-Free Banking
The BRSA has published the Communiqué on Compliance with the Principles and Standards of Interest-Free Banking ("Communiqué on Interest-Free Banking"), which entered into force with its publication in the Official Gazette No. 30888, dated September 14, 2019. The purpose of the Communiqué on Interest-Free Banking is to regulate the principles and procedures of interest-free banking within the "participation banks", as well as development and investment banks. With this Communiqué, the BRSA aims to make Turkey a regional center for interest-free banking, taking into account the increasing demand for such interest-free banking services.
The most significant novelty introduced by the Communiqué on Interest-Free Banking is the establishment of an advisory committee within the banks in order to ensure compliance with the principles and standards of interest- free banking.
As per Article 9 of the Communiqué on Interest-Free Banking, the purpose of interest- free banking compliance activities is to ensure that the banks' current and planned activities, and any new products introduced by such banks, comply with the principles and standards of interest-free banking and the decisions taken by the advisory committee. In this respect, Article 10 of the Communiqué on Interest-Free Banking obliges the banks' internal audit departments to audit compliance with interest-free banking standards, in order to provide assurance to the banks' executives, shareholders and other stakeholders.
The Turkish banking sector is highly responsive to economic trends and developments, and thus, Turkey is amending its banking regulations in order to keep abreast of them. The recent major amendments summarized above indicate that Turkey aims to maintain strength of the Turkish Lira, boost its financial environment, secure the trust of investors and stakeholders in the Turkish economy, and make Turkey a regional hub for interest-free banking activities.
This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in March 2020. A link to the full Legal Insight Quarterly may be found here
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