Dr. Önder Halisdemir, the CEO of the Ağaoğlu Group of Companies, writes:
The most important requirement for the realization of the private and public sector projects, which will provide employment and food for our country, is the availability of suitable financing. Is it not our intention, when wishing for interest rates to fall, that the cost of financing falls, and the hurdles in front of investment are removed?
Today, the public and private sector projects, which will increase the appeal of our country, are able to be realized to a certain extent, with the direct and indirect mechanisms of public financing and the facilities of our banks, which are being drained away due to capital sufficiency requirements. However, in order not to fall into the middle income trap and to increase employment among the young, in line with our targets for 2023 and 2035, we need more than this. The need for a center which will attract the wealth and financing facilities of other countries, on top of the equity and savings, and financing facilities of our own country, are increasing every day.
A fall in interest rates on its own is not enough; an international Finance Center is a must for Istanbul.
This need was foreseen back in 2009, when work regarding the establishment of a finance center was eagerly commences, with legislation and the assignment of land in Ataşehir. Today, the ‘Istanbul International Finance Center’ (IIFC) is in front of us as an unutilized capacity – at a time when the need for such a center has become crucial. However, today in 2016, when the buildings have started going up, this matter is still being dealt with from the perspective as a ‘need for training’, and whoever speaks in the public / private sector is saying that a ‘finance center’ is a must. On the other hand, we see that the steps required to ensure that the center in Ataşehir is of an ‘International’ nature, have still not been taken. What I am afraid of is that if it carries on like this, our international finance center in Ataşehir will not go beyond a nice office region, with just our own organizations, which have already been announced. The buildings will be filled with local organizations by the time this correctly thought out project is brought to life, and we will have wasted this potential.
Why is a fall in interest rates not enough?
There is a need for new capital, new players and new instruments, which will park in the economy of the country.
Should interest rates fall even further? Definitely, yes. However, will the expected impact come with lowered interest rates? There is a fine point here. With the falling capital sufficiency ratios of the banks, and the amount of deposits exceeding the amount of loans in the system, there is not enough left for the large projects to be able to survive. This is the reason why the capabilities of banks to give additional credit have fallen. They are able to revolve the existing size. At the moment they are operating by altering their existing credit compositions. Our banks no longer have the ability of acting as a lever for the growth of our country. Additional areas can be created through regulation, but this may require compromise from financial strength. On the other hand, the returns on equity of the banks have fallen to around 10 percent a year, which means that the banks need to issue new loans of 30 liras for each 1 lira of non-performing loans. This makes them extremely cautious when dealing with new projects. This is the current capability of the conventional system. Therefore, even if interest rates fall, it is difficult for us to see the previous lever effect, due both to the reduced capital sufficiency and their reduced profitability. They are only able to provide a window of one year. And they will want to be extremely cautious. We need fresh money, new organizations and a variety of instruments. Some of this money may come from within the country, by triggering the money which has yet to flow into the banks, through the capital markets. However, the possibilities here are limited. This will have more of an impact on the improvement of the composition of the funding.
What we really need is to bring in fresh money, using capital and international levers. This can only be achieved in a manner which is sustainable by creating the appeal to attract the craftsmen of finance to our country. It will only happen when the global players, who have taken their place in our Istanbul international finance center, begin to get to know the companies of our country and to work. In this way, our companies will meet with the diversity and facilities of the global finance cuisine, rather than the just the limited experiences and diversity of the Turkish finance cuisine, and their financial literacy will increase. However, the result expected from this combination will be achieved. As supply will have increased and become more diversified, costs will fall, and the hurdles in front of investments will be lifted. For instance, IFC and EBRD have opened offices in Turkey. They got to know Turkish companies, and are allowing their facilities to be used in an extensive manner. And while our companies are funding their projects in a relatively cheaper way, through international funds and instruments, they are also expanding their business culture. They are becoming more institutional and their financial literacy is increasing. The IIFC in Ataşehir can play host to 1500 foreign finance and capital markets companies and intermediary organizations. With the momentum created by this, the hurdles to many enterprises and investments awaiting interest in our country, will be eliminated.
Why do we still not have an International Finance Center?
Istanbul was the capital to a strong empire throughout its history. Due to this and its location, where it was the transit point of important commercial routes, it became a strong enter of commerce. However, it never got the finance center that it deserved. Forget about the bankers of Galata, the financial instruments of the foundations, etc. and Ziraat Bank. Throughout history our relationship with finance was an instrument which provided a single direction relationship, which the state accessed whenever it needed a loan. Many reasons can be cited as the cause of this – for example, the lack of encouragement for the development of the private sector, the draining away of all of the resources by the empire / republic whenever it needed to, etc.. Whatever the reasons are, the result is that Istanbul was not able to become one of the centers of capital. Our people did not deal in money and finance. Therefore, it was not possible for artisans of finance to emerge in these lands. Our financial literacy is still at the level of deposits and loans. That is to say beans and rice. For years our bankers have been preparing the same meal, and we have known and eaten that for years, without ever getting tired of it. And we do not even know how to calculate either of those. Interest and credit calculations are only taught in the relevant departments of our universities. However, these need to be learnt by everyone in primary school, or at the latest, secondary school. That is because, the knowledge of how to use money is a basic skill. There are only a few bits of information that everyone will need throughout their whole life – and one of these is financial mathematics. We are not taught or tested on how to evaluate our pocket money or salaries in the best possible way, or how to meet our loan payments in the best possible way, when we need credit, or the dynamics of how profit is created when we become business owners. However, these are all information we will need throughout our lives, irrespective of what work we do.
What I am trying to say is that our deficiency in the matter of financial literacy is also present when it comes to understanding the functions of a finance center, why it is so important and how it is going to be created. This is the main reason why we do not have a finance center. Our limited capital savings are not the cause of it, but rather, in a sense, the result.
What is a Finance Center?
In the simplest sense, a finance center is the place where money is accessed. Its more comprehensive meaning is that it is a place where the artisans of finance are together under one roof, where all types of financial products are offered, where the businesses which need financing meet these needs, and where they do business with each other, under special laws. That is to say, there are 3 elements to a finance center. 1) There are financial institutions and all types of organizations which act as intermediaries to financial transactions in this center. 2) The financial transact with each other as well as with companies. 3) These transactions are regulated with special laws.
The old market place mentality, which we know, is valid here. The relevant artisans are all together in that market place. The market place has its own management and special rules it needs to abide by.
What is an International Finance Center?
This is a finance center where international finance and brokerage brands are also present, and where international transactions are also performed. In other words, it does not just address the needs of the local market. Money parks here at international level, and is distributed from here. The rules of international financial law are valid. Current examples of International Finance Centers are London, New York, Singapore, Frankfurt, Dubai and various financial free trade zones.
The finance ecosystem of our country is comprised almost entirely of banks. However, we cannot constitute the habitat in the sea of finance with just a single species. We need numerous different ones. The seeds of the tomato only came to our country later, and it became our product only after being blended with our soil. In the same way, we also need to attract foreign financial institutions and their employees here, and bring this wealth to our country. The young people of our country can work here, learn, and establish their own institutions and solutions.
Where are we with the International Finance Center project?
The decision entitled the Strategy and Action Plan for the Istanbul International Finance Center, came into effect on 2 October 2009, on being published in the Official Gazette. According to this, an area the size of 2,5 million square meters in Ataşehir was declared as an International Finance Center, with a decision of the Council of Ministers. There were two legs to this project – the first being the establishment of the physical area (that is the constitution of the hardware) and the second was the putting into place of the regulations which would ensure its functionality and appeal (that is the software). The design of the hardware part of it was prepared by benefiting from international organizations, and expert organizations were given the role of coordination and realization. That was performed and the buildings began to rise. However, there is still no clarity concerning the organization / functionality of this center, and there is a muddle. If we think of this as a financial shopping center, as per the international examples, the shopping center is about to be completed but the international artisans are not there, and no appeal has been created direct any of the locals there either, apart from the ones which have already been announced. The management of our financial shopping center is yet to be determined. In fact the responsibility for the failure to complete the software related work rests mostly with the failure to determine the management. That is to say, no one has taken on ownership of the job of managing the IIFC Ataşehir project.
Is Turkey going to be a Finance Center? In Ataşehir?
What is drawing things out, and even making it impossible, is behaving as if the whole of our country is going to become a finance center. That was not how it began. We need to return to the default settings in this respect. There are cities and countries where the whole country is able to be a finance center. These are countries and cities which are the size of one of our districts. Making the whole of a huge country a finance center is not something anyone has even thought about succeeding. And there is no need for it either. When you look at it, it can be seen that the plan of action for the whole country to be a finance center is progressing slowly, or even has almost come to a standstill. And the appearance is that IIFC is the code name for this. That is to say, our country will become a finance center, and everyone who wants to will be able to follow the ones already announced as being the first to go to Ataşehir. We need to go back to the beginning here, and think of it specifically in terms of Ataşehir. In the examples throughout the world, these institutions have been collected together within a certain area, thus creating a synergy, and special laws and incentives have been defined, in order to establish the finance centers. There is no need to make thousands of changes in all of the laws, create other gigantic organization and wait for them to mature, as if the whole country is to become a finance center. There will be special laws and incentives in the IIFC area in Ataşehir, and as with Dubai – the latest example – a finance center can be established in 3 years. Otherwise, this cannot be achieved in even 30 years. We should also not wait for the whole city and the whole country to increase its appeal. The necessary steps in this respect can be taken separately, if desired. In fact, Ataşehir can be seen as a pilot region. The atmosphere in Ataşehir is ready. It is now time to score on behalf of our country without moving the ball around anymore.
What needs to be done for the Istanbul Finance Center – Ataşehir?
The owner of this important matter finds us as the most significant shortcoming and action needing to be performed. There is a need for a manager, who will be able to manage the opportunities and the risks of the IIFC, who has experience in similar matters, will ensure the benchmarks for success and be responsible for its performance. This manager should, in the beginning, be a foreign manager, who has worked as a manager in these types of centers in the world. This full-time manager will focus on the creation of the finance center and the development of its international share, together with a board of directors from the management of organizations within the sector, such as Borsa Istanbul (Istanbul Stock Exchange), and the public sector. What needs to be done after this management has been instated is clear. We are not setting up the first finance center in the world. What is needed is to achieve the elements required to compete with the other international finance centers, attract as many of the international players here in order to make it shine and establish the environment needed for the organizations of our country and their growth. All of these are in effect the creation of the software for this project.
Once the management of IIFC Ataşehir is established, the system which we can call the written or operating system of it needs to have 4 components. In any case, the CEO of the IIFC will want this so that finance and capital markets from other centers can come, and so that it can compete with the other centers and attract these players.
- Not taxing the profits from transactions for a certain period. This will pave the way for the organizations which manage balance sheets to move their headquarters to Ataşehir, or if they are going to open new headquarters in the region, to ensure that this is in Turkey. Even if it does appear to cause a loss in taxes, this is not actually the case. As it paves the way for new investments and business, the companies will create new fields of work and taxation with the cheap funds they have acquired from here. The newly employed or new business owners of our country will pay their own taxes. All that is needed is for new fields of business to be created. In other words, while there will be no direct taxation, there will be indirect tax revenues.
- The employees at IIFC being paid their gross salaries as net salaries. This will pave the way for persuading the qualified personnel of foreign organizations to go to another country without any actual increases in their salaries, due to the increase in their income as it is not taxed. Most of the expats in Dubai live in that difficult country because they can save money, for this reason. Even Britain still implements different taxation regimes in order to turn various of its cities into appealing areas.
- The validity of special finance legislation. The special legislation at IIFC Ataşehir needs to be taken as the reference point for any disputes in the transactions here. Special provisions of law – which we can call the law of the city of London – are valid in many of the other international finance centers. This means there is no need to make thousands of changes in the laws which have an impact on the country as a whole. What happens in the finance center stays in the finance center, and disputes are resolved there, according to the international norms and precedents. A large section of the disputes in many of the finance centers are resolved within 3 weeks. Money requires clarity and speed. There will be a 500 square meter court inside the finance center. If there is a dispute and a need for justice, that is where you go. They work like shops, selling a legal service. Some will begin with a majority of foreign judges who have knowledge of the transaction types and the uniform international rules. As local judges are trained, they will be replaced. Many fields of sport – including taekwondo for which we have won international medals – have started in this way, with foreign teams, in our country. There is nothing strange about this. In any case, we have only very few financial professionals who have tasted the products of the global finance cuisine – so we will have difficulty to find one to actually cook the meal. And when you are talking in terms of a judge, he or she will need to have tasted those meals many times over to be able to realize that there is something wrong in it. Local judges can only become prepared for this role by observing the foreign ones and working with them. The confidence of the foreign financial institutions, which are to carry out transactions here, in the justice system, needs to be one hundred percent.
- The finance companies here must be able to employ as many foreign nationals as they wish, and these personnel should be given residency permits with ease.,
We currently implement similar points to those set out above, in order to ensure that our techno-cities can develop. The aim here is to encourage capital and new vehicles of funding. We need money that will park here, not money that will just come and then go.
If the regulations and arrangements are not finalized in time, there will be a very nice office region, which has been very well thought out, and which contains some domestic players, in a very valuable area of Istanbul. As we cannot be an international finance center by ourselves, our finance center needs to be urgently appropriated, gain an ‘International’ identity like its name, and begin to serve our country and its organizations.
The setting up and putting into operation of the IIFC is neither a demand nor the job of the bankers. The financial sector outside the banks in the world, is bigger than banking. Moreover, we do not have banks which work on different instruments and offer different meals, but banks of various different sizes, which offer pretty much the same services as each other. The sponsors and followers of the Istanbul International Finance Center Ataşehir project need to be organizations, whose members want diversity in financing and costs – such as the Turkish Union of Chambers and Commodity Exchanges, the Istanbul Chamber of Industry and the Istanbul Chamber of Commerce.
I am certain that when the management is appointed and the above points announced, the finance center will begin to be a driving force for our economy and money will start to come in within 3 years. And in 5 years, with around 1500 global players which it will play host to, we will have a sustainable resource for our economic targets.