FACTORING TAKES OFF IN TURKEY [Secured Lender, The]

Sitting at the historic crossroads of Europe, Asia and the Middle East, Turkey has taken economic advantage of its strategic location. The country is the 18th largest economy and one of the fastest growing ones. The nation has insulated itself from the recent economic troubles in the Euro zone, and protests inside of Turkey, for the most part, have not shaken the resilience of the economy. Today, Turkey is taking advantage of the rapid growth in the developing markets and beginning to shift its focus to exports.

According to the World Bank, the country's GDP grew from $647 billion US in 2007 to $789.3 billion US in 2012, largely due to domestic consumption. Exports increased from $33 billion US in 2002 to $126 billion US in 2011. According to Bob Trojan, chief executive officer of the Commercial Finance Association, Turkish factors at The Receivables Finance International 2013 Convention in March indicated the country is making significant efforts to become an economy larger than Germany's by the year 2025. This swift economic growth in Turkey has translated into significant opportunities for the nation's factors. While the factoring industry in Turkey may only be two decades old, it has taken hold, due in large part to Turkish factors and the country's government working to publicize the industry.

According to data from the Turkish Factoring Industry, the industry's trade group, there were 79 factoring companies in the country as of December 2012 with $10.1 billion in total assets, $9.1 billion in factoring receivables, and $43 billion in total annual turnover. The bulk of transactions, totaling 64%, were with recourse, and the remainder was nonrecourse. Factoring volume was dominated by domestic business at 82% in 2012. However, Turkey's factors are expressing increasing interest in export business, following the economic trends in the country. Turkey's push to increase export volume to $500 billion by 2023 is also contributing to the potential for export factoring in the country. Currently, 60% of S150 billion of Turkish export volume is based on cash against goods (open account), where exporters need credit protection against bad debts and also financing before maturity.

The Market Breakdown

In 2012, Turkey continued to be a global leader in export factoring with 15% market share, second only to China with 34%, according to Factors Chain International (FCI). Çagatay Baydar, immediate past chairman of FCI and general manager of TEB Faktoring, says that all factors benefit from the growing focus on Turkish exports. In terms of volume, TEB Faktoring is the largest export factor in Turkey and the third largest in the world, after Bank of China and China Minsheng Banking Corporation. In 2012, TEB Faktoring achieved a 41% growth in net profits. The company witnessed a 17% jump in total turnover from 2011 to 2012.

TEB Faktoring was established in 1997, operating as a fully owned subsidiary of TEB AO, a joint venture of BNP Paribas. Today, the bulk of the factoring industry's market share is held by bank subsidiaries. Baydar notes that the access to capital, a network of branch offices, and an established reputation has certainly given bank-owned factors an advantage in the country. However, Baydar adds that factors, bank-owned and independent, serve a critical function, providing collection services and funding to small and medium-sized companies in need. Soon, factoring facilities in Turkey will collaborate with insurance companies and Türk Eximbank, a state-owned bank, making it possible for factoring to provide export credit protection to countries where FCI correspondents cannot.

According to Erkan Coplugil, executive vice president of Garanti Factoring, the environment for factors is certainly good. T. Garanti Bank is the main shareholder of Garanti Factoring. Examining the growth rates in asset size, Garanti Factoring experienced a 51% jump from 2011 to 2012. The company also recorded a 35% increase in factoring turnover during the same period. Garanti Factoring is the largest factoring company in Turkey based on asset size and factoring receivables and the second largest based on total turnover. Coplugil adds, "Parallel to the factoring applications in Turkey, our portfolio is heavily composed of domestic factoring practices, whereas there is an upward trend for international factoring transactions."

The History of Factoring

Filiz Ünal, secretary-general of the Turkish Factoring Association, says the country's factoring industry has grown dramatically and performed well since its recent beginnings. One of the nation's banks offered the first factoring product in 1988, and the first independent factoring company opened shop in 1990. Regulatory efforts were soon to follow, she says. "In 1994, the factoring industry had its first regulation under the treasury. But in 2006, the Turkish Treasury transferred regulation and supervision of factoring companies to the Banking Regulation and Supervision Agency (BRSA)." Additional legislative reforms followed, meant to regulate and make transparent the ever-growing factoring industry.

The oversight surely came at an opportune time. Garanti Factoring's Coplugil says that the industry weathered the economic crisis of 2008, rebounding well and with an increased understanding of the risks involved in factoring and the opportunities that came with it. As commercial banking contracted, Turkish factors gained in profile by picking up larger corporate clients. He adds, "This is why there is an increasing consciousness of factoring. The crisis really helped the factoring industry to develop a more corporate and bigger client base."

As the profile grew, so did the BRSA's focus on the industry. Ünal notes, "Between 2007 and 2011, the BRSA brought discipline to the factoring sector through the introduction of a series of legislative reforms relating to factoring, leasing, and financing companies." By 2010, the Turkish Factoring Association took a decidedly more corporate approach, increasing its educational efforts through publicity, seminars, and conferences across the country. "We worked to change the reputation of factoring products because SMEs were mostly using bank products more so than other financial instruments." The efforts included working with other stakeholders, including nongovernmental and semi-governmental organizations, as well as government authorities. Critical ties were made with the public authority for SMEs in the country, as well as the Turkish Exporters Assembly, the professional organization of firms involved in foreign trade.

Ünal also emphasized the importance of cooperation between national and international organizations, exchanging global know-how and information about how to develop the sector. In 2012, the Turkish Factoring Association hosted an industry conference, in cooperation with the FCI and the European Bank for Reconstruction and Development, a multilateral development bank. She also points to the recent collaboration between the Turkish Factoring Association, Türk Eximbank, and the Turkish Exporters Assembly. Ünal adds that there are only 72 countries where international factoring products are offered. She says, "However, Türk Eximbank gives credit protection service in 238 countries."

An Increasing Industry Profile

Factors still remain a small share of Turkey's financial system at 1.1%, according to the Turkish Factoring Association. But factoring companies have steadily increased their share among nonbank financial institutions. And while it's doubtful that most of the nation's factors are thrilled with additional regulation, industry insiders are accepting and hopeful that stiff new legislation passed in December will continue to shake out weak players and benefit the stronger factors that remain. The Turkish Parliament passed the Financial Leasing, Factoring, and Financing Companies Law at the end of 2012, which set increased capital requirements for the industry and called for increased transparency. It also established the "Association of Financial Leasing, Factoring and Financing Companies" for factors to join.

"Most of the factoring companies are capable of paying the minimum capital requirements," says Ünal. "Factoring companies will be stronger financially because of it. Everybody should understand that factoring, leasing and consumer finance is a clear-cut business, supported by the government. Every single company in this industry has to have permission and get the authority from the government to do business. The prestige and the image of the industry are increasing with the help of this law and the regulatory environment."

Coplugil agrees with Ünal's assessment of the regulatory environment. He says, "The new regulations have come into force to create a stronger capital structure in the sector and to force factoring companies to operate with a corporate governance and transparency principle " Erik Timmermans, secretary-general of International Factors Group, admits that regulation can be a double-edged sword. But he contends, "The market seems to be quite positive about regulation because they say it is a good opportunity to do some cleaning house, and today the market is growing again, very strongly, even with new regulation." He also credits the entrepreneurial spirit of Turkey's factors for evolving and rising to the challenges that additional regulation can bring.

A Look Ahead

With an increasing professionalism in the industry and Turkey's rising profile abroad, the nation's factors are optimistic about the growth potential for factoring in Turkey, even with the recent events in the country. Certainly, the road ahead is still not laid and the impact of new regulation has yet to take hold. Independent factors must also compete in an environment where bank-owned factors dominate the industry and benefit from the deep pockets of their parent.

Garanti Factoring's Coplugil believes the industry is sure to continue its growth, with new factors, banking and independent firms, entering the fray. He notes that new entrants are currently looking to come into the business. A Factors Chain International report also indicates a big opportunity exists in export volume, with only 5% of overall factoring volume devoted to export business in 2011. Turkey's exports increased 13% from June 2011 to June 2012.

Of course, continuing pressures in the EU are tempering some of the enthusiasm for export business. Industry insiders say there is reason to be hopeful though, with beginning signs of recovery in foreign markets throughout much of the EU and predictions for an easing of the recession by year's end. Says Coplugil, "We anticipate that the historical growth trend in the sector will continue to attract the attention of investors. In the coming days, we expect higher competition and an increasing number of clients in the sector " tsl

UNREST IN TURKEY & ITS IMPLICATIONS

This summer's public protests in Istanbul'sTaksim Square began over what appeared to be a relatively small event. Activists objected to the proposed replacement of a public park to make way for a shopping mall and the demonstrations grew across the country. The protests in Istanbul, Ankara and other parts of Turkey turned out to be public protests against the policies of Prime Minister RecepTayyip Erdogan. The Turkish stock market, which had been rallying, dropped in response. Turkey's Economic Minister Mehmet Simsek indicated that the country's economic foundation was strong nonetheless. Turkey's global economic importance and strategic geographic location has certainly made it resilient during prior economic hurdles and regional conflicts. But the long-term implications for the country's economy are certainly difficult to predict and much remains dependent on the continuing situation, as well as the possibility of a spillover of violence from Syria.

Myra Thomas is an award-winning editor and journalist with 19 years experience covering the banking and finance sector.