Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 36238-TR
PROJECT APPRAISAL DOCUMENT
Public Disclosure Authorized ON
A PROPOSED LOAN
IN THE AMOUNT OF Euro 50 MILLION TO HALKBANKASI
AND A PROPOSED LOAN IN THE AMOUNT OF Euro 100 MILLION TO TURKIYE SINAI KALKINMA BANKASI (TSKB)
WITH THE GUARANTEE OF THE REPUBLIC OF TURKEY
FOR AN Public Disclosure Authorized ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISES PROJECT
May 12,2006
Private and Financial Sector Development Unit ECCUG Europe and Central Asia Region
Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS
(Exchange Rate Effective March 3 1st, 2006)
Currency Unit = New Turkish Lira (TRY) TRY 1.345 = US$1 US$1.441 = SDR1
FISCAL YEAR January 1 - December 31
ABBREVIATIONS AND ACRONYMS
BAT Banks Association of Turkey IFRS International Financial Reporting BEEPS Business Environment and Standards Enterprise Performance Survey ISA International Standards ofAuditing BRSA Banking Regulation and ISDS Integrated Safeguards Data Sheet Supervision Agency MoEF Ministry ofEnvironment and Forests CAS Country Assistance Strategy NPL Non-Performing Loan CBT Central Bank ofTurkey OECD Organization for Economic ECA Europe and Central Asia Cooperation and Development EFIL Export Finance Intermediation PA Privatization Administration Loan PDO Project Development Objectives EL4 Environmental Impact PFI Participating Financial Intermediary Assessment PFPSAL Programmatic Financial and Public EIB European Investment Bank Sector Adjustment Loan EMU European Monetary Union PIU Project Implementation Unit EU European Union SDIF Savings Deposit Insurance Fund EUR Euros SIS State Institute of Statistics in Turkey FDI Foreign Direct Investment SME Small and Medium Enterprises FI Financial Intermediaries SOE State Owned Enterprises FIDER Turkish Leasing Association SPO State Planning Organization FIL Financial Intermediary Loan TKB Turkish Development Bank FSL Fixed Spread Loan TRY New Turkish Lira ICA Investment Climate Assessment TSKB Turkish Sinai Kalkinma Bankasi ICB International Competitive Bidding
Vice President: Shigeo Katsu Country ManagerlDirector: Andrew Vorkink Sector Director: Fernando Montes-Negret Sector Manager: Gerard0 Corrochano Task Team Leader: Marialisa Motta TURKEY Access to Finance for Small and Medium Enterprises
CONTENTS
Page STRATEGIC CONTEXT AND RATIONALE ...... 1 Country and sector issues...... 1 Rationale for Bank involvement ...... 9 Higher level objectives to which the project contributes ...... 9 PROJECT DESCRIPTION ...... 10 Lending instrument ...... 10 Project development objective and key indicators ...... 10 Project components ...... 11 Lessons learned and reflected in the project design...... 13 Alternatives considered and reasons for rejection ...... 14
IMPLEMENTATION ...... 14 Institutional and implementation arrangements ...... 14 Monitoring and evaluation of outcomeslresults ...... 15 * .* Sustainability...... 15 Critical risks and possible controversial aspects...... 16 Loadcredit conditions.. and covenants...... 17
APPRAISAL SUMMARY ...... 17 Economic and financial analyses ...... 17 Technical ...... 17 Fiduciary ...... 18 Social...... 18 Environment ...... 18 Safeguard policies ...... 19 Policy Exceptions and Readiness...... 19
Annex 1: Country and Sector or Program Background...... 20 Annex 2: Major Related Projects Financed by the Bank andlor other Agencies ...... 29 Annex 3: Result Framework and Monitoring Indicators ...... 30 Annex 4: Detailed Project Description...... 35 Annex 5: Project Costs ...... 45 Annex 6: Implementation Arrangements ...... 46 Annex 7: Financial Management and Disbursement Arrangements...... 63 Annex 8: Procurement Arrangements ...... 72 Annex 9: Economic and Financial Analysis ...... 75 Annex 10: Safeguard Policy Issues ...... 76 Annex 11: Project Preparation and Supervision ...... 78 Annex 12: Documents in the Project File ...... 79 Annex 13: Statement of Loans and Credits ...... 80 Annex 14: Country at a Glance ...... 83 Annex 15: Maps (IBRD 33501) ...... 85 TURKEY
ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISES
PROJECT APPRAISAL DOCUMENT
EUROPE AND CENTRAL ASIA
ECSPF
Date: May 11,2006 Team Leader: Marialisa Motta Country Director: Andrew N. Vorkink Sectors: Micro- and SME finance (70%); Sector ManagerlDirector: Fernando Montes- General finance sector (15%); General Negret industry and trade sector (15%) Themes: Small and medium enterprise support (PI Project ID: PO82822 Environmental screening category: Financial Intermediary Assessment Lending Instrument: Financial Intermediary Loan Project Financing Data [XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ ] Other:
For LoanslCreditslOthers:
RECONSTRUCTION AND DEVELOPMENT Total: 0.00 150.00 150.00
Borrower: Turkiye Sinai Kalkinma Bankasi (TSKB) and Halk Bankasi (Halkbank); Guarantor: Republic of Turkey
Responsible Agency: Turkiye Sinai Kalkinma Bankasi (TSKB) and Turkiye Halk Bankasi (Halkbank) Turkey lAnnual 1 30.00 I 50.00 1 50.00 I 20.00 I 0.00 1 0.00 I 0.00 I 0.00 I 0.00 ’Cumulative] 30,OO I 80.00 I 130.00 I 150.00 1 0.00 I 0.00 I 0.00 1 0.00 I 0.00 Project implementation period: Start July 30,2006 End: August 20,2010 I Expected effectiveness date: July 30,2006 (for Halkbank) and November 1,2006 (for TSKB) 1 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Re$ PAD A.3 Does the project require any exceptions from Bank policies? Re$ PAD D. 7 [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [XINO Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 The project’s main development objective is to increase Turkish SMEs’ access to medium and long-term finance.
Project description [one-sentence summary of each component] Re$ PAL) B.3.a, Technical Annex 4 The project will finance two credit lines targeting SMEs. The first component is a Euro 100 million equivalent wholesale credit line to TSKB to be intermediated through retail banks to SMEs in Turkey. The second component is a Euro 50 million equivalent credit line to be intermediated through Halkbank as a retail bank directly to SMEs in regions in Turkey where credit is less developed.
Which safeguard policies are triggered, if any? Re$ PAD D.6, Technical Annex 10 Environmental Assessment (OPIBPIGP 4.01). The project has been assigned category “FI”.
Significant, non-standard conditions, if any, for: Re$ PAD C.7 Board presentation: For both Halkbank and TSD: submission ofthe Operational Manuals for the SME project to the WB and approval ofthe Manuals by the Bank’s boards.
Loanlcredit effectiveness: For TSKB: signing of at least two subsidiary loan agreements with two PFIs satisfactory to the WB. Satisfactory legal opinions on the Loan and Guarantee Agreements for both TSKB and Halkbank and satisfactory legal opinions on the two subsidiary loan agreements between TSD and the PFIs have been received.
Covenants applicable to project implementation: TSKB and Halkbank to maintain satisfactory financial management systems for the project, including records and accounts, and prepare financial statements satisfactory to the WB. Annual project accounts and an IFRS audit ofTSKB’s and Halkbank’s financial statements to be provided within six months ofeach year-end during the implementation period (audits to be carried out by independent external auditors in accordance with International Auditing Standards and International Financial Reporting Standards, under terms ofreference satisfactory to the wB)* TSKB and Halkbank to maintain a PIU with satisfactory staffing and other resources as required for effective project implementation. TSKB and Halkbank to monitor project performance in accordance with the agreed performance monitoring indicators. Compliance by Halkbank and TSKB (including PFIs) to applicable prudential regulations set out by BRSA. TSKB and Halkbank to submit to the World Bank for orior review the first two sub-loans,
STRATEGIC CONTEXT AND RATIONALE
Country and sector issues
To stay on a path of steady growth and ensure compliance with EU accession requirements, Turkey needs to maintain macroeconomic stability and broaden structural reforms to improve the business environment. Turkey’s economic stability has significantly improved since the 2001 financial crisis, as indicated by a marked reduction in inflation, strong growth, and improvements in public finance (refer to Annex 1 for fbrther details about Turkey’s economic background). These macroeconomic changes have been coupled with a variety of structural reforms, including reforms in the financial sector. As it embarks on the path toward EU accession and strives for steady economic growth and increased employment, Turkey needs to further improve its macroeconomic stability and continue structural reforms to improve the business environment and the growth of the private sector, particularly small and medium enterprises (SMEs). While acknowledging the importance of macroeconomic factors for sustainable growth and employment, this project proposal specifically focuses on improving Turkey’s business environment by increasing access to finance for SMEs.
Turkish SMEs could be a powerful engine for sustaining Turkey’s growth, creating employment, maintaining social stability, and integrating the Turkish productive sector with the EU and the global economy. However, their value added, productivity and exports are very limited. Many small firms also prefer to remain informal. Turkish SMEs (roughly defined here as firms with fewer than 250 employees’) constitute 61 percent oftotal employment but contribute only 26.5 percent to the economy’s value added, significantly less than SMEs in comparator countries (see Table 1).2 Figures from the Turkish Foreign Investor Association indicate that Turkish SMEs’ contributions to investment and exports are about 7 percent and 8 percent respectively, versus 36 percent and 20 percent in South Korea, for e~ample.~Anecdotal evidence confirms that the productivity ofTurkish SMEs (e.g., in the food processing, textile and retail industries) is lower than the productivity of SMEs in similar income comparator countries. Finally, informality is very high in Turkey (51 percent of total employment in 2004).4 This has significant impacts on the Government’s fiscal revenues, on competition, and on the overall productivity of the Turkish private sector. Measures to alleviate constraints on SME growth, coupled with measures to improve the country’s overall business environment would help improve the productivity and growth of the Turkish real sector, reduce informality, and increase employment.
‘For an overview ofdefinitions ofSMEs in Turkey, see The Turkish State Planning Organization (SPO), 2004 SME Strategy and Action Plan, page 26. The Regulation on the Definition, Qual~cationand Classification of Small and Medium Sized Enterprises, November 2005, Ministry ofIndustry and Trade defines SMEs as enterprises with less than 250 employees and net sales less ofthan 25 million TRY. The Turkish State Planning Organization (SPO), 2004, reports that Turkish SMEs constitute 99.8 percent oftotal enterprises and 76.7 percent oftotal employment (SME Strategy and Action Plan, page 8). Differences in data depend on different definitions ofSMEs and offormal employment, and on the different years ofthe analysis. YASED (International Investors Association ofTurkey), 2003. Mimeo. Turkey: Labor Market Study (2006), The World Bank.
1 Table 1: SMEs’ employment and GDP share: Cross country comparison SME sector-share of SME sector- Country formal employment contribution to GDP Turkey 61 27 Bulgaria 50 39 Romania 37 34 Poland 63 49 Slovak Republic 57 37 Italy 80 59 Source: Ayyagari, Beck & Demirguc-Kunt, 2003. Note: SMEs are defined as firms with fewer than 250 employees.
One of the key reasons for SMEs’ limited value added and productivity is insufficient access to credit. Credit to firms remains at a low level, although it has been increasing in the past three years. In addition, the credit to firms remains concentrated with large firms rather than SMEs, but similarly the trend of the past few years has been more growth in SME credit than in large firm credit. Turkish Government agencies, banks and chambers of commerce confirm that Turkish SMEs receive a disproportionately small share ofbank lending-estimates vary between 3.5 and 20 percent depending on the definition of SMEs’ (versus 47 percent in South Korea, for example). The low level of development of credit to SMEs is due to four main factors. First, the overall level ofcredit to the private sector remains small; although it has been growing rapidly in the past three years (see Figure 1). With credit to the private sector reaching 24 percent of Gross Domestic Product (GDP) in November 2005, Turkey’s financial sector ranks below those of most EU members and candidate countries, among which the average credit to the private sector to GDP ratio is 2-8 times higher than in Turkey. The low credit level is mainly due to Turkish banks holding unusually large portions oftheir assets in Government securities, and credit to the public sector amounted to 37 percent of total bank assets in December 2005 (see Figure 1 for a comparison of credit to the public and private sectors). Second, following the recent macroeconomic stabilization, banks have been aggressively growing their consumer credit portfolios (consumer loans and credit cards-see Table 2), which have yielded higher spreads than commercial credit. Third, credit to firms has traditionally concentrated on large firms. At the end of 2004, more than 50 percent of the total commercial credit in Turkey was directed to just 418 large firms. However, as mentioned above, the trend during the past few years has been towards less concentration with the large firms. Fourth, access to credit to SMEs is constrained by the Turkish financial information infrastructure. Information on SMEs collected by the Public Credit Bureau is not sufficient to help financial institutions assess SMEs’ credit worthiness, while the country’s private credit bureau is not yet providing information on SMEs. Financial institutions’ difficulties in evaluating SMEs are compounded by shortcomings in the collateral regime, which make it difficult for SMEs to borrow by pledging movable assets. The improvement in credit to SMEs in the past few years is largely a result of more conducive fiscal
Some banks define SMEs according to their volume ofsales as well as overall borrowing in the banking sector. Moreover, it is difficult to estimate the share of SME lending because some SME owners may be receiving consumer loans for their businesses.
2 and monetary policies resulting in less Government borrowing, lower inflation, and lower real interest rates.
Figure 1 : Credit to private and public sectors Table 2: Growth rate ofprivate sector loans, 2003-2005 (real) Credit billion US$, 2003 real 2004 real 2005 real Nov. 2005 growth growth growth Consumer loans 31.7 74% 86% 60% Housing loans 9.1 63% 147% 255% Credit cards 12.1 44% 78% 15% Other 10.5 155% 82% 57% Non-consumer loans 53.9 23% 26% 29% Total 85.6 33% 41% 39% Source. Central Bank ofthe Republic of Turkey and staff calculations.
%gG22z6z%zZ%gz2883 ------99S5SFJSSSSSSSSSSS Source: Central Bank of Turkey
Low access to credit is coupled with unfavorable credit conditions-high interest rates and short loan maturities. Nominal interest rates are among the highest in the region (see Figure 2), reflecting in part inflation and in part high risk associated with SME lending. In addition, lending to SMEs in Turkey is very short term, with the average loan maturity at 1.2 years being the lowest among all countries in the ECA region (see Figure 3).
Figure 2: Average nominal interest rates paid on loans by SMEs (<250 employees) 25 20 + 15 10 az 5 0
3 Figure 3: Average loan maturity for SMEs (<250 employees)
"~__^ ",__.-"- -7 T------I
Source: BEEPS,200.5.
Banks are increasingly shifting their focus towards SMEs, which they view as the market segment with the best growth potential. Several banks and leasing companies interviewed during project preparation confirmed that SMEs are a strategic market niche in which they plan to expand their portfolios. Recent development of credit scoring models and mass marketing of standardized credit products have contributed to the growth of lending to smaller firms. Figure 4 shows that the number of credits given to firms has grown rapidly since 2002. As discussed above, overall credit to firms has been growing, but at the same time the average loan size has been decreasing implying that the credit to the SME segment is growing faster than loans to the large corporations. The data confirms that banks and leasing companies view the SMEs as an important strategic segment.
Figure 4: Number of firm credits Figure 5: Average loan size
400,ocKI 600
350,Mx) 500 300,000 ,ep. /o - 250,000 2 400 p N L0 B :200,ooo 300 2 d 150,MX) 2 J z 5 200 100,~ 9
50,ooO 100
0 0 2002 2003 October 2004 2002 2003 October 2004
Source: Central Bank ofTurkey. Source: Central Bank ofTurkey.
Leasing, another key source of credit for SMEs, is also underdeveloped in Turkey, but growing quickly. Many leasing companies offer small size leases with short term maturity, targeting mainly SMEs. Although Turkey's leasing sector is very small, it has been growing quickly since 2001 (refer to Annex 1 for further background details about Turkey's leasing sector). With the average lease from the fifteen largest leasing companies ranging between
4 US$52,000 and US$162,000,6 the Turkish leasing industry is an important source of finance for SMEs. For some companies, leases below US$50,000 account for the majority of contracts. Based on interviews with selected leasing companies, leases are offered with maturities ranging from 6 to 36 months, and the shorter maturities are more c~mmon.~With the exception of one company that provides mainly leases in local currency, leases in foreign currency (mainly US$ and Euros) account for 75 to 97 percent of new leasing volumes of the interviewed companies, For the leasing companies in aggregate, 76 percent of their leasing receivables are in foreign currency.* The local currency portfolio is expected to increase due to reductions in New Turkish Lira (TRY) interest rates. The country’s major leasing companies also project further growth, particularly in the SME segment, where most oftheir business is concentrated.
While lending to SMEs is increasing, SMEs still have minimal access to medium term credit in foreign currency and in TRY. As indicated in Figure 3, loans to SMEs in Turkey are mostly short term. Banks report an average maturity of less than one year for local currency loans and less than two years for foreign exchange loans (in US$ and Euros). Maximum maturities are 2 years for local currency loans and up to 5 years (in limited volumes) for loans in US$ or Euros. Leasing companies also extend mainly short term leases. Supplier and trade credits are prevalent in Turkey as an alternative to bank lending and leasing. While these fimding mechanisms help SMEs manage their short term cash flows, they do not provide an effective substitute for bank loans with longer maturities.
Banks’ and leasing companies’ ability to extend medium term credit is constrained by their own lack of access to medium and long term funding. Most Turkish banks hold short term deposits and liabilities, and thus cannot offer long term loans without taking significant maturity mismatch risks. The banks take liquidity risk as only 9 percent of bank liabilities had more than one year maturity in September 2005, while 30 percent of loans had more than one year maturity (see Table 3). Similarly, banks take interest rate risk as only 3 percent of banks’ liabilities had a repricing maturity of 1 year or more, compared to 25 percent of loans. The associated interest rate risk hinders banks’ ability to provide further medium term financing to SMEs. Leasing companies face similar constraints, resulting in financial leasing receivables being at most a few years. Thus, despite lower inflation and improved economic conditions, medium term loans to SMEs are still very scarce. Medium term financing in TRY is even more limited. As shown in Table 4, 31 percent of loans are currently in foreign currency, making it very difficult for banks to lend to non-exporting SMEs, whose earnings are mainly in TRY. In several interviews during project preparation, both banks and leasing companies showed a strong interest in access to medium term financing in both foreign and local currency.
FIDER. ’Based on interviews with Deniz Leasing, Dis Leasing, Seker Leasing, TEB Leasing, Alternatif Leasing, Finans Leasing, and Garanti Leasing, June 2005. ’According to 200441 data on the Turkish Treasury’s website. The data reflect only leasing companies and not banks that provide leasing.
5 Table 3: Maturity distribution and interest rate Table 4: Share of foreign currency repricing assets, loans, and liabilities, 2002-2005
Interest rate Maturity distribution repricing 2002 2003 2004 2005 Assets 43 38 36 Dec Dec Dec Sep 32 Sep 05 02 03 04 05 Loans 59 45 35 28 Loans (percent of loans) Liabilities 57 50 47 41 c 6 months 50 47 50 52 63 Source: BRSA and staff calculations. 6-12 Months 14 17 16 18 12 1 Yearandover 35 35 34 30 25 Liabilities (percent of liabilities) e 6 months 82 76 72 85 93 6-12 Months 5 7 6 7 4 1 Yearandover 12 14 8 9 3 Source: Banks Association of Turkey and staff calculations.
The new TRY currency swap market is not a complete solution to increase access to medium term local currency. The recently developed currency swap market (started in early 2005) provides an opportunity for some banks to lock in medium term TRY interest rates. Fixed coupon bonds worth several billion TRY have been issued by international issuers, and the swap market has developed in tandem. However, the swap market is only attractive to a small segment of the Turkish banking system and is not yet widely used. It is costly, requires management’s time, and is not attractive to banks that do not find themselves in the wholesale market.
While the scarcity of credit for SMEs affects the whole country, it is particularly acute in the East and Center. Credit in Turkey is concentrated in the country’s main urban centers: Istanbul, Izmir and Ankara. In 2004, firms outside these cities received only one-third as much credit as firms in Istanbul, while contributing three times as much as Istanbul’s firms to the country’s GDP (see Table 5). A study by the World Bankg shows that financial depth and outreach indicators vary widely across Turkish regions. As shown in Table 6, credit depth in the East and South East is one-sixth of credit depth in the Marmara region. Similarly, the East and South East regions have the fewest bank branches per 100,000 people (3.9 and 3.6 respectively), less than one third the number ofbranches in the Marmara and Aegean regions.
Table 5: Regional distribution of credit and GDP Share of Credit (percentage) Share of GDP (percentage) Istanbul 62.0 21.3 Ankara 9.8 7.6 Izmir 5.3 7.3
Other...... ” ~ ~ 22.9. ”.”...... 63.8” ...... ,..,.....,.,,., Total 100.0 100.0 Sources: State Institute of Statistics, Credit Bureau at the Central Bank of Turkey. Note: Credit data are from 2004. GDP data are from 2001, but the proportions tend to be stable over time.
World Bank (June 2005), “Financial Sector Depth and Outreach across Turkey.”
6 Table 6: Regional indicators ofbanking services
Central Black East Marmara Aegean Mediterranean Anatolia Anatolia Sea AnatoliaEast Anatolia Financial depth, 2003 Percent CreditlGDP 55 23 20 30 21 14 9 DepositlGDP 128 62 52 136 46 29 36 Banking outreach, 2003 Number Number of branches per 100,000 people 13.7 10.3 6.7 8.6 6.7 3.6 3.9 Branches per 1,000 sq km 33.1 10.3 6.5 5.4 4.9 3.1 1.7 Percent Distribution of Deposits, 2004 5 1.4 10.6 7.5 22.8 4.5 1.6 1.6 ~istributionof Credits, 2004 58.1 10.4 7.8 13.9 5.7 2.6 1.6 Source: Banks Association of Turkey.
State-owned banks, particularly Halkbank, serve firms in less developed regions more than private banks do. Public banks have more branches and extend more credit in the Southeast and East Anatolia regions than do private banks. About 14 percent of state-owned bank branches are located in the South East and East Anatolia regions, compared to 8 percent of all banks. While only 3 percent ofthe total portfolio of Turkish banks reaches the South East and East Anatolia regions, public banks dedicate 6 percent of their portfolio to these areas, and Halkbank alone allocates 10 percent of its total credit to these regions (see Table 7). Halkbank also has the most branches in the regions where credit is less developed. Private banks and leasing companies interviewed during project preparation indicated that they plan to grow mainly in more advanced areas (i.e,, the Marmara, Aegean and Mediterranean regions). These banks consider the East side of the country a potentially interesting market for the longer term, Halkbank, on the other hand, has short term plans to grow its portfolio in the East and South East, to take fill advantage of its branches and its knowledge ofits clients in these regions.
7 Table 7: The role of state banks in the East and South East regions, 2003
Central Black south East Marmara Aegean Mediterranean Anatolia East Anatolia Sea Anatolia Regional dis~ibuti~~-~llbanks % Credit 59% 11% 7% 14% 6% 2% 1Yo % Deposit 51% 11% 7% 24% 5% 2% 2% % Branches 40% 15% 10% 17% 9% 4% 4% Regional distr~butio~-state-owned banks % Credit 28% 15% 11% 21% 19% 3% 3% % Deposit 31% 12% 8% 38% 7% 2% 3% % Branches 25% 16% 10% 20% 15% 6% 8% Regional distribution-~alkbank % Credit 30% 16% 13% 16% 15% 5% 5% % Deposit 32% 15% 9% 33% 7% 2% 3% % Branches 29% 19% 11% 18% 14% 5% 5% Source: Banks Association ofTurkey.
The Government of Turkey is committed to increasing access to credit for SMEs throughout the country. SME development is one ofthe pillars ofthe Government’s policies to improve the productivity of the private sector and enhance the country’s competitiveness.” It is at the forefront of the Turkish Government’s SME Strategy to ensure sustainable economic growth and social stability.” It is also a significant element of the EU Program for Turkey’s accession. l2 Both the Government’s strategic documents and the EU accession paper indicate that insufficient access to long term finance is a critical constraint on SME development in Turkey.I3 Since the 2001 crisis, the Government has taken measures to promote the stability and soundness of Turkey’s financial sector, and it is now committed to improving access to credit for the private sector. The Government’s plans include increasing SMEs’ access to finance, providing seed capital for new enterprises, improving assessment of SMEs’ financial structures, strengthening guarantee schemes for SMEs and improving state aid for SME investment^.'^ The Government also has specific regional development plans for increasing growth in the more remote areas of the country (the East and South East) to prevent wider regional disparities. Consistent with its overall strategic framework on SME development, the Treasury has welcomed the proposed World Bank financed project to increase access to finance for Turkish SMEs.”
loRepublic ofTurkey, 2003: Preliminary ~ationalDevelopment Plan (2004-20061, pages 101-108 SPO, 2004: SME Strategy and Action Plan ‘*Commission ofthe European Communities, 2005: Regular Report on Turkey’s Progress towards Accession. l3The Government’s strategy to increase SME productivity and growth in Turkey also includes reforms to improve the overall business environment, development of technological and innovation capacity at the firm level, and education and training to promote entrepreneurship. l4SPO, 2004: SME Strategy and Action Plan, pages 64-68. l5See comments on the December Aide Memoire received by the Treasury in February 2005 (including feedback from TKB, TSKB, the Central Bank, KGF, Halkbank, The Union ofChambers Commodity Exchanges in Turkey, KOSGEB and Yapi ve Kredi Bankasi) and the Aide Memoire ofthe World Bank team’s June mission to Turkey.
8 2. Rationale for Bank involvement
The World Bank is uniquely positioned to provide access to medium to long term credit in both local and foreign currency to Turkish banks, which could in turn on-lend to SMEs. This would address existing market failures currently facing SMEs when borrowing from the local financial market. The rationale for World Bank involvement stems from its access to long term funds at favorable terms and from its in-depth world wide experience in credit line financing. This additional option fbrther strengthens the rationale for World Bank involvement in the proposed project, which will meet banks’, leasing companies’ and SMEs’ need for medium term loans in TRY. The proposed operation will allow the World Bank to reduce existing market failures that are currently preventing local banks from providing long term finance to SMEs in foreign and local currency. It is expected that, in the medium term, the World Bank project will contribute to the development of the local financial market by helping Turkish financial institutions to raise long term funds and to realize the feasibility of increasing their lending to SMEs.
The proposed World Bank credit line will complement existing credit facilities provided by international organizations. Credit lines currently provided by international organizations total about US$2.9billion (see hex2). Most of these lines primarily target medium-to-large exporting firms, with an average loan size per firm of about €2-3 million and maximum loan amounts of about €10-20 million. A few institutions, including KFW, TOBB16 and KOSGEB (through Halkbank), target very small firms, with maximum loans per firm of about €100,000. The proposed project will help fill the existing gap by targeting underserved small and medium firms (including non-exporting firms) with average and maximum loan sizes of €700,000 (approximately) and €2.5 million, respectively. The €2.5 million cap ensures that firms with adequate access to finance do not crowd out those in need. According to a recent survey of manufacturing firms in T~rkey,’~only 1.7 percent of firms got their last loan in excess of €2.5 million, and for those who borrowed in local currency, only 7 percent exceeded €2.5 million
3. Higher level objectives to which the project contributes
The project’s main objective is to increase SMEs’ access to credit, in turn contributing to improvements in their growth. By providing SMEs with access to credit, the project will help increase their sales and productivity, in turn helping reduce the gap between SMEs and large firms. The project will also provide credit to regions with low credit activities (i.e., the East and South East; see the project description), ensuring that these areas are not left behind and that the credit and productivity gaps between more and less advanced regions do not widen.
The project is consistent with the World Bank Turkey Country Assistance Strategy (CAS), the overall World Bank program supporting reform of the Turkish financial sector and improvement of the real sector. Several ongoing and upcoming World Bank operations will complement the proposed project, ensuring broad impact on private sector development. The project is included as a FY06 deliverable-in the CAS and is a key element of the World
The Union of Chambers Commodity Exchanges in Turkey. Investment Climate Assessment survey conducted jointly by the World Bank and TOBB (The Union of Chambers Commodity Exchanges in Turkey).
9 Bank’s program aimed at improving Turkey’s financial sector and business environment. More specifically, the project is designed to help Turkey achieve the objective of the third CAS pillar (improving the business climate) with a specific focus on removing finance constraints affecting SMEs. complementary World Bank financial sector initiatives currently under development include: (a) the Programmatic Financial and Public Sector Adjustment Loan (PFPSAL 111), focused on improving the corporate insolvency regime and strengthening banking supervision, privatization and restructuring strategies for state-owned banks; and (b) two ongoing credit lines targeting export companies (EFIL I1 and EFIL 111). Complementary World Bank initiatives currently under development to improve the overall business environment and private sector productivity include: (a) the forthcoming Investment Climate Assessment and (b) the planned Employment Generation Development Policy Loan, an operation aimed at increasing employment and growth that will include initiatives covering the following four areas: investment climate reforms, labor market reforms, reforms to improve the financial sector (follow up to PFPSAL 111), and reforms to improve productivity at the firm level (including innovation, technology absorption and skills development).
PROJECT DESCRIPTION
Lending instrument
The proposed lending instrument is a Financial Intermediary Loan (FIL), using IBRD funds, with TSKB and Halkbank as financial intermediaries and implementation agencies. The World Bank will enter into two separate legal agreements with TSKB and Halkbank. The FIL will be a Fixed Spread Loan (FSL) in Euro with an embedded conversion option for swapping into TRY. Both TSKB and Halkbank indicated their intention to convert part of the loan amount into TRY during project implementation. TSKB will act as wholesaler, lending to other financial intermediaries, while Halkbank will act as retailer, lending directly to SMEs. Each of the loans will be backed by a Government guarantee. Section 3 below provides a more detailed description ofthe proposed dual currency lending instrument.
Project development objective and key indicators
The project’s main development objective is to increase Turkish SMEs’ access to medium term finance. Key proposed indicators to measure project outcomes include (see Annex 3 for a complete list): (a) Number of SMEs and SME portfolios financed under the project; (b) Share of medium term-financing (more than 12 months) in the total SME loan portfolio financed under the project; (c) Non-performing loan ratios for the project; (d) Share of credit line disbursed in local currency under the project; and (e) Number ofprovinces with active SME clients financed under the project.
To assess project implementation progress, the World Bank will also monitor on a quarterly basis the amount ofcredit disbursed over the originally planned disbursement.
In addition to the indicators included above and in Annex 3, the project will monitor basic indicators providing an overview of (a) the profile of SMEs financed under the project (e.g.,
10 amount of sales, number of workers, economic sector) and (b) the lending technologies used by PFIs and Halkbank (e.g., number of PFIs using credit scoring models or the information provided by the credit bureau to grant loans to SMEs); and (c) overall increase in access to finance for the SME sector in Turkey. These indicators will be monitored for analytical purposes only and serve as useful inputs to define policies and projects aimed at further improving access to credit for SMEs in Turkey.
Project components
The project will finance two credit lines targeting SMEs. The total project amount will be €150 million. The project will include two components: (i)a wholesale credit line of €100 million to be intermediated by TSKB, which in turn will intermediate through retail banks and leasing companies, and (ii)a retail credit line of €50 million to be intermediated by Halkbank. SMEs will be the final beneficiaries of both credit lines. For the purpose of this project, SMEs will be defined as firms employing fewer than 250 people and having annual sales of less than US$20 million.” TSKB will on-lend the World Bank funds to private banks and leasing companies, which in tum will lend to SMEs. Halkbank will provide credit directly to SMEs. To ensure covering underserved regions, Halkbank will lend funds under the proposed credit line only to SMEs located in the North, East, South East and the center ofthe country. TSKB and the PFIs that receive credit by TSKB will target the rest of the country. (See Appendix 4.A for a detailed description of the geographical areas covered by the two banks.) The Treasury, Halkbank and TSKB have agreed with the World Bank team on the proposed geographical division. Both credit lines will finance medium term working capital (e.g., raw materials) and investment loans (e&, vehicles, machinery or equipment, or civil works) and leases. There will be no sector restrictions. However, a cap of about 30 percent of the total lending amount will be applied to the tourism sector. SMEs operating in the tourism sector include “hotels, motels, resorts, pensions, holiday villages and camping sites.” Concerns have been raised that demand from this sector is high, and the cap will ensure sectoral diversification of the program. The compliance ofTSISB and Halkbank with the 30 percent cap requirement for the tourism industry will be monitored during project supervision on the basis of a specific financial management report.
Under the first project component, the World Bank will provide a €100 million credit line to TSKB, which will be the borrower and implementing agency for this component. The Turkish Government will issue a guarantee to the World Bank. TSKB is a private development bank. It was one of the financial intermediaries in the World Bank’s EFIL Iproject and is the borrower and implementing agency for the EFIL I1 and I11 projects (see a detailed description of TSKB in Section C and Annex Cl). TSKB will on-lend the World Bank funds to private banks and leasing companies (Project Financial Intermediaries, PFIs), which will be selected pursuant to criteria agreed between the borrower and the World Bank (see Appendix 2B). The PFIs will in turn make working capital and investment sub-loans and leases to private
l8See footnote 1. For the European Commission’s definition of SMEs, see: Commission of the European Communities, 2004: Working Paper SEC (2005) 170, page 6.
11 SMEs. The on-lending banks and leasing companies will assume the credit risk of the sub loans. As the Apex institution, TSKB will assume the credit risk ofthe loan that it intermediates.
Under the second component, the World Bank will provide a €50 million credit line to Halkbank, which will be the borrower and implementing agency for this second component. The Turkish Government will issue a guarantee to the World Bank. As mentioned above, to ensure coverage of underserved regions (the North, East, South East and part of the Center) the project includes a second credit line targeting these areas, which will be intermediated by Halkbank. Halkbank was selected after evaluations of all potential candidates among public banks in Turkey and discussions with the two most promising candidates. Halkbank has a unique advantage in offering credit to the Eastern regions of the country due to its strong branch presence in the targeted region (see Section 1) combined with its focus on the SME segment and its plans to further grow its SME portfolio. Additional criteria for selecting Halkbank were its financial soundness, the recent good performance of its credit portfolio, and the size of its current credit portfolio in the targeted region, creating confidence that the bank will be able to disburse the loans in a sound manner (see Appendix 6A).I9 As with TSKB for Component 1, Halkbank will assume the credit risk for Component 2.
The World Bank’s loan to TSKB and Halkbank will start as a Euro Fixed Spread Loan (FSL) with the option to convert into TRY. The loans to both banks will start in Euros, Withdrawals can be converted into TRY at any time during the life of the loans, resulting in a local currency obligation for the converted portion of the loans. To re-denominate part of the loan obligation in TRY, the World Bank Treasury executes, with a market counterpart, a Euro- TRY swap. The World Bank passes to the borrower the terms ofthe swap it obtains in its market transaction. If the maturity of the conversion is shorter than the maturity of the loan, then at the maturity of the conversion, the borrower will have the option to roll over the conversion (if the swap market still exists at that time), or to revert the remaining obligation to Euros. If the borrower chooses to roll over the conversion, it will not be exposed to currency risk, but there will be interest rate risk because the loan will be converted at market interest rates at that time. Our survey of the market indicates that, at this point in time, it is possible to execute Euro-TRY swaps for up to 10 years. For conversion of disbursed amounts to TRY, a minimum amount of €3 million equivalent will be required in order for the World Bank Treasury to enter into a swap with the market counterpart to effect the transaction. The conversion date (which is the start of the conversion period) will always fall on the interest payment date next following the execution date of the conversion request. The FSL Conversion Guidelines will apply when requesting, accepting and effecting conversions on Fixed-Spread Loans. The guidelines are posted on the World Bank Treasury’s page at the web address: http://treasury. worldbank.orglSenrices/Financial+ProductslCu~ent~ProductslFixed+Spread+Loan~(FSL).html. Additional information on the structure of the loan will be included in the Operational Manuals ofTSKB and Halkbank.
Annex 4 includes a detailed description of the project components. The Annex provides (a) the exact geographic regions served by Halkbank and TSKB’s PFIs under this operation, (b) the terms and conditions ofthe World Bank loans to TSKB and Halkbank, (c) the eligibility criteria
The World Bank team’s summary evaluations of other banks that were considered as alternatives to Halkbank are available on request.
12 for the PFIs that will receive funds from TSKB, and (d) the eligibility criteria for the SMEs that will receive funds from the PFIs and Halkbank.
Lessons learned and reflected in the project design
The project reflects lessons learned from recent analytical work on SME development. Specific support to SMEs is justified by the fact that SMEs face market failures that need to be addressed to avoid increasing the gap between SMEs and larger firms. SMEs: (a) are more affected by regulation and transaction burdens than larger firms (business environment constraints), (b) have little access to credit @name constraints) and (c) have limited access to information, advisory services, technology and innovation (knowledge constraints).” On the basis of these lessons, the project proposes to reduce access to finance constraints by providing a credit line specifically targeting SMEs. The Government is undertaking complementary initiatives to reduce business environment and knowledge constraints (partly in collaboration with the World Bad-see Section 3 on World Bank complementary operations), ensuring that all constraints facing SMEs will be addressed.
The project also reflects lessons learned from recent analytical work on credit line financing and existing World Bank credit lines in Turkey and other countries. The project will benefit from lessons learned from credit line financing throughout the world (e.g., India, China, and Bosnia) as well as from the Turkey EFIL I,I1 and I11 projects. One concise statement of lessons learned from credit lines that the World Bank has provided to its client countries throughout the world is the following: “While past experience with financing of credit lines has been mixed, recent evaluations indicate that the problems have stemmed mainly from weak borrower accountability and management capacity, lack of clearly defined and transparent indicators for monitoring of the financial performance of the concerned financial intermediaries as well as poor monitoring of the overall project impact, inadequate demand from ultimate beneficiaries and lack of bankable sub-projects, and inflexibilities in project design that make it difficult to adjust design to reflect changing ground realities” (SME India Project, based on, among other papers, Yaron, J., 2003). Existing World Bank credit lines in Turkey have not experienced these problems. However, these lessons have been taken as a reference and incorporated in the design of the proposed operation as follows: (a) both TSKB and Halkbank have been assigned clear responsibilities for project implementation, (b) the management capacity of both banks has been evaluated, and both banks have excellent capacity and are fully able to implement the operation (see Annex 6), (c) the team has defined clear project indicators (see section B.2), and (d) both PFIs and SMEs have expressed strong demand for medium term creditz1. The World Bank team has specifically asked TSKB to meet and discuss its experience with Halkbank, to facilitate transfening lessons learned to the other institution involved in the project. Lessons learned fiom the Turkey EFIL projects, two ofwhich (EFIL I1and EFIL 111) are intermediated by TSKT3, include sound knowledge of criteria for selection and evaluation of PFIs, credit evaluation, implementation procedures, and environmental requirements. These are particularly relevant because they have been internalized both by the World Bank team and by
2o For an overview of constraints facing SMEs, see IFC, 2004. “SME Strategy”. 21 With respect to demand, during project pre-appraisal, the World Bank team estimated that the total financing needs under the proposed credit line would be significantly above US$300 million-the estimate is based on interviews with Halkbank and with six PFIs that would borrow from TSD.
13 TSKB. EFIL Iand I1 have successfully disbursed the allocated funds in a few years and have resulted in reduction of the average loan size, thus reaching more and smaller borrowers. Participating borrowers have increased both employment and exports during the life of the project.
Alternatives considered and reasons for rejection
The proposed design was chosen based on the Government’s and the banks’ proposals and on a World Bank’s internal assessment of the best possible solutions to increase access to finance for SMEs. The proposed design stems from several discussions that the World Bank team had with the Turkish Treasury, the State Planning Organization, TSKB, Halkbank and other public banks, as well as commercial banks and leasing companies.
Alternatives considered at various stages of project preparation included (a) a broader operation, financing initiatives to remove business environment and knowledge constraints for SMEs, (b) the addition of a specific technical assistance component to improve Turkey’s financial information infrastructure, and (c) the inclusion of a second public bank (in addition to Halkbank) as an intermediary for the proposed operation. During a pre- identification mission, the World Bank team suggested to the Turkish Government the possibility of designing a broad SME operation, including initiatives to remove business environment and knowledge constraints that SMEs are currently facing. The Treasury and the SPO clarified to the World Bank team that the Govemment had specific ongoing initiatives aimed at reducing business environment and knowledge constraints and suggested that the World Bank focus on access to finance only. Following the Government’s suggestion, the World Bank team proposed financing an operation including both a credit line and a specific technical assistance component to improve Turkey’s financial information infrastructure. (See the Project Concept Document.) During the pre-appraisal mission, the Treasury and the SPO asked that the project finance only a credit line. They suggested including the initiatives originally proposed under the financial information infrastructure component in a separate development policy loan operation on employment and sustainable growth that the World Bank is currently preparing. The Treasury clarified that the Govemment does not need to borrow from the World Bank to implement the initiatives proposed under the proposed financial infrastructure component because most institutions involved with these initiatives (e.g., the Central Bank, BRSA, the private credit bureau and The Union of Chambers Commodity Exchanges in Turkey) have sufficient resources to implement the improvements suggested by the World Bank. Finally, the Government suggested that the World Bank team evaluate other Turkish public banks as possible intermediaries of the proposed credit line. After conducting an evaluation of other public banks, the World Bank team decided not to include a third institution (or replace Halkbank with another public bank). More information on the team’s evaluation process is available to the Board members on request.
IMPLEMENTATION
Institutional and implementation arrangements
The implementation agencies for the proposed project will be TSKB (Component 1) and Halkbank (Component 2). Each bank will establish a Project Implementation Unit (PIU),
14 which will be fully funded and staffed by each bank and will operate under the overall supervision of an Executive Vice President. The PIUs will include experienced management and staff, including representatives of the financial analysis, financial control, credit, administrative, and operational departments. TSKB’s PIU has already been established and comprises the team implementing EFIL I1 and EFIL 111. Halkbank has also established its PIU. The managers and staff that have been proposed for the PIU are well known to the World Bank team, and the same team proposed for staffing the PIU is currently working on the PFPSAL I11 operation. Annex 6 provides a summary evaluation ofboth TSKB and Halkbank, including an analysis ofthe banks’ financial soundness, their implementation capacity (which is also assessed in Annexes 7 and 8) and specific considerations on the banks’ ability to meet the World Bank requirements included in OP 8.30 on Financial Intermediation.
Monitoring and evaluation of outcomeslresults
The World Bank will evaluate progress on the proposed indicators through regular reporting by TSKB and Halkbank and through supervision missions. TSKB and Halkbank have agreed to submit yearly reports including output and outcome indicators (see Annex 3) and semi-annual financial management reports to the World Bank. The financial monitoring reports (FMRs) will be included in the Operational Manuals, The data will come from internal TSI(B and Halkbank reports, as well as (for Component 1) reports provided by the PFIs. The PIUs have sufficient capacity to ensure provision ofthe monitoring data.
Sustainability
Project sustainability will be ensured by Government commitment to increase access to finance to SMEs, Turkish banks’ increasing focus on the SMEs segment, and TSKB’s and Halkbank’s increasing capacity to intermediate international credit lines for SMEs. First, the project’s sustainability will be supported by the Government’s plans to foster SME development (see SPO SME Strategy, 2004). As discussed in previous sections, the Government has taken several steps toward improving SMEs access to finance (as well as overall business environment conditions). This will help ensure that increasing access to finance for SMEs will remain at the center of the Government’s agenda. Second, during the past few years, Turkish banks have been significantly shifting their credit portfolios towards smaller firms. This trend is likely to continue, as confirmed by interviews with PFIs during the pre-appraisal mission. While the World Bank can play an important catalytic role at this stage by providing banks with medium term financing that is currently very scarce, it is expected that, in the future, banks will be able to secure this funding directly. This will lead to full sustainability of the operation. Should the market develop more slowly than expected, the World Bank could provide a second credit line to ensure that banks continue to have access to medium term funds that they can in turn on-lend to SMEs.
15 Critical risks and possible controversial aspects
Risk Risk Rating Mitigating Measures
Generic Risk (To Project Development Objective) Macroeconomic risk M Reforms to reduce the country's macroeconomic risks are underway. The medium term financing in local currency provided through the proposed project will mitigate the impact of potential macroeconomic risks on SMEs and on the involved participating financial intermediaries (PFIs). 4 Government commitment to reforms in M Many financial reforms and reforms to improve overall the financial sector or to overall conditions for SME development are already underway. reforms supporting SME development Ongoing and upcoming technical and financial support from (e.g., business environment reforms) is the World Bank in both areas (e.g., PFPSAL 111, new not sustained, or Government priorities development policy loan operation on employment and change growth) will help the Government maintain its reform focus and efforts. __..... " ..... " ...... - - " "... ~ _ ._ ...... " ...... ", ," ...... " ...... Project-Specific Risks (To Component Result) ...... ",.." " ...... For Both..._.... Components 1-1 .. " -- ...... _. ....". e Markedly improved financing M The local currency financing provides an interesting option for conditions for Turkish banks could TSKB and Halkbank that is not readily available in the market. render the credit line un-competitive, The team is working to ensure that fiduciary and safeguard considering the need to comply with requirements of the credit lines are streamlined and place a fiduciary and safeguard requirements minimum burden on the participating banks, based on under the proposed World Bank experience from the EFIL projects.
Component 1 Lower than expected demand of PFIs N The World Bank team has directly assessed PFIs' needs for for medium term credit for SMEs funds. The World Bank team's main mitigation measure against possible low demand has been establishing a total credit line that is only a fraction (i.e., about 50 percent) of the total amount that PFIs stated they could disburse during the life of the project. A second operation could be prepared in case PFIs' demand turns out to be as strong as predicted during
...... " ...... I ...... " 1"" "...... ".... "11 .... I FoJ.ect-.preparationl " "" ...... Component 2 4 Higher credit risk and lower than N The World Bank team has directly assessed Halkbank's needs expected demand for medium term for funds based on its current portfolio, aggregate credit growth credit for SMEs located in the targeted to firms, and Halkbank's growth plans in the targeted regions regions where credit is less developed (see Annex 6A). The World Bank team's main mitigation measure against possible low demand has been establishing a total credit line that is only about 50 percent of the total amount that Halkbank stated it could disburse during the life of the project and only about 25 percent of its current portfolio extended on commercial terms in the region. A second operation could be prepared in case Halkbank's demand turns out to be as strong as predicted during project preparation...... "...... "" ...... " .... " ...... " e Implementation delays due to the fact M In-depth evaluation of Halkbank's financial, procurement and that some implementation arrangements environmental capacity during project preparation (see (e.g., environmental safeguards) are Annexes 6A, 7,8 and 10). being introduced for the first time at Meetings between Halkbank and TSKB to facilitate exchange Halkbank. of experience between the two institutions, particularly on requirements to ensure that Halkbank meets environmental ...... _...... "...... safeguards. "...... " 4 Government influence on Halkbank N Halkbank is in the process ofbeing privatized and is lending decisions. increasingly operating on a commercial basis. As the privatization process moves forward, the Government's influence over the operation of the bank through its governance is expected to be continually reduced. Overall risk rating N
16 Risk Rating: H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)
Loadcredit conditions and covenants
Board Conditions:
For both Halkbank and TSKB: submission of the Operational Manuals for the SME project to the World Bank and approval ofthe manuals by the banks’ boards.
Effectiveness Conditions:
For TSKB: signing of at least two subsidiary loan agreements with two PFIs satisfactory to the World Bank. e Satisfactory legal opinions on the Loan and Guarantee Agreements for both TSKB and Halkbank as well as satisfactory legal opinions on the two subsidiary loan agreements between TSKB and the PFIs have been received.
General Covenants:
TSKB and Halkbank to maintain satisfactory financial management systems for the project, including records and accounts, and prepare financial statements satisfactory to the World Bank. Annual project accounts and an IFRS audit of TSKB’s and Halkbank’s financial statements to be provided within six months of each year-end during the implementation period (audits to be carried out by independent external auditors in accordance with International Auditing Standards and International Financial Reporting Standards, under terms ofreference satisfactory to the World Bank).
TSKB and Halkbank to maintain a PIU with satisfactory staffing and other resources as required for effective project implementation.
TSICB and Halkbank to monitor project performance in accordance with the agreed performance monitoring indicators.
Compliance by Halkbank and TSKB (including PFIs) to applicable prudential regulations set out by BRSA.
TSKB and Halkbank to submit to the World Bank for prior review the first two sub-loans.
APPRAISAL SUMMARY
Economic and financial analyses
NA
Technical
17 NA
Fiduciary
The project financial management systems at TSKB and Halkbank have been assessed by the task team. The current financial management arrangements for the project are satisfactory at both banks. All ofthe subcategories offinancial management are rated satisfactory for both banks. To assess the continued soundness of TSKB and Halkbank, their compliance with domestic prudential regulations will be monitored through (a) prudential regulation compliance certificate and (b) annual audit reports. TSKB and Halkbank will each maintain records and will ensure appropriate accounting for the funds provided. FMRs will be prepared semi-annually and will be submitted to the World Bank no later than 45 days after the end ofthe period. The formats ofthe FMRs have been agreed with both TSKB and Halkbank.
Procurement will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Local private sector commercial practices will be followed for procurement of goods and works worth less than €2.5 million.23 Procurement capacity at TSKB and Halkbank has been assessed, and the procurement risk at TSKB is rated low, and at Halkbank it is rated average. The procurement arrangement at each bank will be reviewed annually.
Social
NA-During the Project Concept Review Meeting, it was agreed that the project does not have any potentially negative social implications. By increasing access to fmance and growth of SMEs, it is expected that the operation will have a positive impact on employment.
Environment
The project has been assigned Category “FI” in accordance with World Bank safeguard policy OPiBPlGP 4.01 (Environmental Assessment). TSKB and Halkbank have each prepared Environmental Assessment Framework documents acceptable to the World Bank. The fi-ameworks define environmental assessment procedures to be used in sub-proj ect evaluation. These Framework documents have been posted on the banks’ websites and will be included as separate chapters in the banks’ respective Operations Manuals. Both banks have decided to include the possibility of financing sub-projects that may, by Turkish environmental regulations, require an Environmental Impact Assessment (EM) report. The environmental procedures defined by both banks are consistent with Government of Turkey Environmental Assessment requirements, World Bank Environmental Assessment policies, and procedures utilized in previous Financial Intermediary operations in Turkey. A detailed environmental assessment is included in Annex 10.
22 Dated May 2004
23 In accordance with paragraph 3.12 of the World Bank procurement guidelines.
18 Safeguard policies
Environmental Assessment Policies will apply to the proposed project. TSKl3, Halkbank and sub-borrowers (PFIs and SMEs) will have to comply with these policies. (See description in section D5 above.) No other policy is expected to be triggered by the project-see table below. The possibility of other policies being triggered by specific sub-loans made to SMEs will be assessed when conducting the loans’ environmental assessments.
~ Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPIBPIGP 4.01) [XI [I Natural Habitats (OPIBP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) El [XI Involuntary Resettlement (OPIBP 4.12) [I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OPIBP 4.36) [I [XI Safety ofDams (OPIBP 4.37) El EX1 Projects in Disputed Areas (OPIBPIGP 7.60)* [I [XI Projects on International Waterways (OPIBPIGP 7.50) [I [XI
Policy Exceptions and Readiness
The project complies with all applicable World Bank policies. There isno specific policy exception.
The project is ready for implementation. Specific conditions that have been met and that are sufficient to start with project implementation include:
P Fiduciary (financial management and procurement) arrangements are in place-see Annexes 7 and 8.
> Both borrowers have established Project Implementation Units-see Annex 6.
P Outcome and output indicators and monitoring and evaluation procedures have been agreed upon with the counterparts and are in place (see Annex 3).
* By supporiing theproposedproject, the Bank does not intend to prejudice thefinal determination of the parties’ claims on the disputed areas
19 Annex 1: Country and Sector or Program Background TURKEY: Access to Finance for SMEs
1. Country background Economic performance in Turkey has improved significantly in recent years, but the current account deficit and non-FDI capital inflows create vulnerabilities. AAer contracting following the financial crisis in 2001, the economy grew on average 7.5 percent in the period 2002 to 2005 (Figure 5). Interest rates on Government securities fell below 20 percent by March 2005 and to less than 15 percent in early 2006 - substantially lower than the rates during the immediate post-crisis period (Figure 6). Monetary and fiscal policies have produced financial and economic stabilization and disinflation by successfully maintaining investor confidence and market access. Inflation has fallen from 69 percent in 2001 to 7.7 percent in 2005 and is targeted to decline to 5 percent this year under the Central Bank of Turkey’s inflation targeting program. Stability of interest and exchange rates is an important underpinning for the development of credit and thus for the success of this operation (see section on critical risks and possible controversial aspects above). The current levels of TRY interest rates are based on ample international investor appetite for emerging market debt and the market view that Turkey remains committed to the economic and structural reforms in the IMF program and the EU accession process. Turkey’s current account deficit, which is in excess of 6 percent of GDP, continues to be funded largely with strong n0n-FD1~~capital inflows, exacerbating vulnerabilities arising from changes in international liquidity or investor sentiment, although the floating exchange rate regime provides some cushion against TRY liquidity problems, because the Central Bank can let the currency depreciate and isthus more free to provide liquidity.
Figure 5: Turkey’s GDP growth, 1988-2005 Figure 6: Inflation and interest rates, 1988-2005
10 1 120 , I -Interest rate 8 1 - Inflation 6 -
4
.-22 2
-2
-4
--NNNF.mm -8 J ,...... , 00000000888333~ NNNNN3333R838RS00000 -5g228Eigg2gpzgE c- Source: Central Bank ofTurkey and staff estimate. Source: Bloomberg, CBT, and staff calculations. Note: Inflation measures change in consumer price index, and interest rates reflect bond equivalent yield of3 month t-bills.
24 The distinction between FDI and non-FDI flows is based on whether the investment represents a lasting interest. Increased FDI mitigates the risk from the current account deficit. Although FDI into Turkey (net) increased from less than 1 percent ofGDP in 2004 to 2.6 percent ofGDP in 2005, portfolio and other investments into Turkey increased from 6.8 to 8.4 percent ofGDP.
20 Structural reforms and trade integration will help solidify economic improvements. Trade integration increased significantly, with exports growing on average by 25 percent25 since 2003 to US$73 billion in 2005. Initial structural reforms include liberalization of key industries, reforms in the financial sector, and increased autonomy for institutions such as the Central Bank and the banking sector supervisory agency. The three-year IMF stand-by credit facility for 2005-08 as well as existing and planned World Bank development policy loans support important reforms and help reassure investors of the Government’s commitment to continued reform. In the area of fiscal policy, the Government needs to continue structural reforms in the social security system, tax administration, and tax simplification. Furthermore, it needs to complete the restructuring of the banking sector-some priorities include addressing shortcomings of state-owned banks, further strengthening bank supervision, as well as efforts to improve the financial information infi-astructure, including the credit information systems, auditing and accounting systems and collateral regimes. Increasing employment and improving the country’s business environment by increasing firms’ technology, information and efficient services are equally challenging tasks awaiting Turkey as it embarks on the path toward EU accession and strives for steady economic growth and improved welfare.
2. The Turkish real sector
The industrial and service sectors have been the key drivers of growth in the past few years, while agriculture has been shrinking. Services make up 63 percent of the country’s GDP, followed by the industrial sector with 27 percent (see Table 9). In addition to manufacturing, which grew on average 4.5 percent over the past ten years, service sectors such as wholesale and retail trade and transportation and communications have been important drivers of growth. Hotels and restaurants, which remains a small share of the economy, is becoming increasingly important, pointing to the significant potential of the tourism industry. The largest manufacturing sub-sectors are apparel and textiles (which combined account to 25 percent of total exports) and motor vehicles and the communication apparatus industry (e.g., telecorn equipment), followed by manufacturing ofbasic metals such as gold, steel and silver (see Table 10).
’’ Compounded annual growth rate.
21 Table 9. GDP by sector, Turkey: 2005 distribution and growth rates. 2005 value, 2005 distribution, Growth, percent il bill. US$ percent 1996-05 2003-05 Farming 33.9 9.8 1.5 3.8 Forestry 1.3 0.4 -1.2 3.3 Fishing 1.5 0.4 2.2 5.1 Agriculture Total 36.8 10.7 1.4 3.8 Mining and Quarrying 5.2 1.5 0.5 7.6 Manufacturing 75.5 21.9 4.5 8.1 Electricity Gas Water 11.5 3.3 5.2 6.8 Industrial Total 92.2 26.7 4.4 7.9 Construction Industry 15.7 4.5 0.6 12.8 Wholesale Retail 61.1 17.7 5.6 10.6 Services ofHotel and Restaurant 13.0 3.8 4.7 6.7 Commerce Total 74.1 21.5 5.5 10.1 Transportation and Communications 52.8 15.3 4.7 7.8 Financial Institutions 16.0 4.6 -0.4 0.4 Ownership ofDwellings 16.7 4.8 1.7 1.7 Professions and Services 12.5 3.6 3.8 7.7 (Less) Relative Banking Services 9.3 2.7 -1.2 1.4 Sectors Total 307.5 89.1 3.9 7.7 Government Services 35.6 10.3 1.5 1.o Non-profit private services 2.2 0.6 0.7 0.0 Total 345.3 100.0 3.8 7.4 Source: SIS. I1Compounded annual growth rates.
Table 10. Manufacturing industry: export by sector. Turkey, 2005
Value, bill. US$ Distribution Growth I1 Percent 2005 2005 1996-05 2003-05 Agriculture and Forestry 3.3 4.5 4.9 25.1 Food products and beverages 4.3 5.8 6.3 26.7 Wearing apparel 9.9 13.5 8.3 10.3 Textiles 8.7 11.9 9.6 13.0 Motor vehicles and trailers 10.2 13.9 29.8 36.9 Manufacture ofbasic metals 6.9 9.4 13.3 33.0 Communication and apparatus 3.1 4.3 29.1 27.2 Manufacture ofmachinery and equipment 4.9 6.6 21.7 24.7 Chemicals and chemical products 2.8 3.8 9.5 20.8 Other 26.8 36.6 17.2 28.6 Total 73.3 100.0 13.6 24.5 Source: SIS. I1 Compound annual growth rates in nominal US$ values.
Several features of the Turkish economy indicate that the real sector has potential to further increase its investment, productivity and growth levels and that SMEs have an important role to play. These features include:
22 (a) High unemployment despite significant growth. Despite significant growth and trade integration, Turkey’s employment rate remains low.26 “In the period 1981-2003, the Turkish working-age population grew by 2 1 million, but only 5 millionjobs were created. As a result, the employment rate (the percentage ofthe adult population that is employed) was 43 percent in 2005 (Figure 8), one of the lowest in the world. Most countries, with the exception of the Middle East, have employment rates above 50 percent” (Verghis M., 2004). In the past few years, Turkey has also experienced high unemployment rates-well above 8 percent since 2002 and at 10.3 percent in 2005 (Figure 7). Increasing employment is one of Turkey’s most important challenges, and SMEs have a key role to play, since they already employ more than 60 percent of the labor force in the country and have the potential to hrther increase their labor force if they improve their growth.
(b) High informality. By some estimates, the informal sector in Turkey produces 31 percent of GNI, more than in most comparator countries, and absorbs as much as 5 1 percent ofthe labor force.27 High informality has a significant impact on the Government’s fiscal revenues, competition levels, and the overall productivity of the Turkish private sector. Improving benefits for SMEs-including access to finance-would improve the incentives for informal firms to register and become part ofthe formal sector.
(c) The dual structure of the Turkish economy, which comprises a few modern and dynamic firms together with several laggards. While some Turkish sectors are highly modern and productive (labor productivity ofthe apparel and automotive industries are estimated at more than 80 percent of US levels, for example2*) others (such as the electricity, retail and dairy sectors) have strikingly low productivity, hampered by lack of competition and presence of traditional players which are often SMEs-see Figure 9, Increasing access to finance will give SMEs the opportunity to grow, in turn reducing productivity gaps within and among sectors.
(d) Low but recovering FDI (see Figure lo). In addition to macroeconomic instability, various factors have limited FDI in Turkey, including investment climate conditions and specific legal and institutional issues. Some of these constraints have been mitigated, and FDI is now growing. In 2005, FDI amounted to 2.6 percent of GDP, in part driven by the Government speeding up privatization efforts. On the one hand, FDI can play an important role in increasing productivity and growth of local firms-including SMEs-by increasing competition, and generating spill-over effects through development of supply chains involving local firms. On the other hand, a vibrant local SME sector is an essential stimulus to attract FDI. As cheap labor becomes less relevant to attracting FDI, availability of dynamic local SMEs with a highly skilled labor force become more important for influencing the location decisions of multinational companies. Thus, supporting development of local SMEs will also contribute to increasing FDI and overall economic growth and employment levels.
26 For a detailed discussion of the Turkish labor market, World Bank (2006), “Turkey: Labor Market Study”, ’’ OECD, Economic Survey of Turkey (Paris, 2004).
28 Productivity is defined as output per worker (McKinsey).
23 Figure 7: Unemployment rate, Turkey. Figure 8: Employment rate, Turkey
47
46
45
4- 44 E 43
42
2000 2001 2002 2003 2004 200s 41 2000 2001 2002 2003 2004 2005
SourceTurkstar. Source: Turkstat.
Figure 9: Labor productivity by sector Figure 10: Foreign direct investmentlGDP
Autopa-Apparrl 5!
steel =+- i TcleconWircline 7 Tel-WuelasCement i Dary :- csrdential commcnon -1 Retail banking Elechlciiy generation = Confectionery retad tad Ekcmcity transin and disu
0- 20 40 60 80 IW 120 .Actual Labor Productivity 2001 2002 2003 2004 2005
Note: McKinsey Global Institute (2004). Source: Central Bank of Turkey.
3. The Turkish banking sector2’ Low concentration and increasing foreign ownership are distinctive features of the Turkish banking sector. In 2005, the Turkish banking sector had US$295 billion in assets (more than a quarter larger than that of Mexico, but only about half the size of the Brazilian banking sector). Until recently, the Turkish banking sector was almost entirely domestically owned, and most banks are affiliated with large industrial groups, Since late 2004, however, there has been a strong interest in Turkish banks among international investors-in particular European banks. The three largest Turkish banks held 45 percent of banking assets in September 2005, substantially lower than in the Czech Republic (70 percent), Estonia (98 percent) and Hungary (54 percent).30 Finally, state-owned banks play an important role, accounting for 34 percent of
29 This section borrows from the background paper “Financial sector depth and outreach across Turkey” prepared by Soledad Martinez Peria (DECRG).
30 As reported in the Financial Structure Database ofthe World Bank.
24 the assets in the system (see Table 11) compared to, for instance, those in Mexico (23 percent) and Poland (20.5 percent).
Table 11 : The structure ofthe Turkish banking sector Billion YTL Share ofsystemipercent September 2005 Assets Deposits Loans Capital Assets Deposits Loans Capital State banks 122.5 87.0 33.1 15.8 33.6 37.7 24.2 36.6 Private Turkish banks with foreign strategic interest 74.0 46.6 32.9 5.2 20.3 20.2 24.1 11.9 Other Turkish private banks 141.0 85.1 58.6 17.0 38.7 36.9 43.0 39.2 Foreign banks 20.4 12.2 10.2 2.9 5.6 5.3 7.5 6.7 Other banks /l 6.3 0.1 1.7 2.4 1.7 0.0 1.2 5.6 Total 364.3 231.0 136.4 43.3 100.0 100.0 100.0 100.0 Source: Banks Association of Turkey. /lIncludes banks under the SDIF, investment and development banks.
As a result of the 2001 crisis, the financial sector started a process of consolidation and strengthening of financial sector supervision. The number oftotal banks contracted from 62 in 1999 to 4731in 2006, largely due to activities to deal with troubled banks. The SDIF took over the administration of 21 banks during 1997-2003, of which 20 have been merged, sold to domestic and foreign investors, or closed. The authorities initiated a program to strengthen private banks and restructure state-owned banks, while also strengthening the regulatory and supervisory framework. As a result, financial risks in the banking sector have been reduced and the performance of both private banks and state-owned banks has also improved. For example, the share of non-performing loans (NPLs) decreased to 4.8 percent by the end of 2005 from almost 11.5 percent at the end of 2003. At the same time, return on assets increased to 2.8 percent from 0.5 percent, and banks are well capitalized with a capital adequacy ratio of 23.3 percent.
4. The Turkish leasing sector Compared to other countries in Europe, the leasing industry is underdeveloped in Turkey. As shown in Figure 11, with 0.9 percent of leases to GDP, Turkey ranks below most European countries (with the exception of Austria, Finland, and the Netherlands), including Estonia, the Czech Republic, Slovenia, Poland and Romania. In fact, for Estonia and Slovenia, the lease to GDP ratio is 5 and 10 times larger, respectively, than that of Turkey. The leasing industry in Turkey has developed as a vehicle for investment financing in the form of financial leases only, while operational leases have not been introduced.
31 In addition, there are four participation banks.
25 Figure 11: Leasing assets in Europe, 2003 Figure 12: Leasing volume in Turkey, 1998-2005
10 9 8 87 126 25 ;4 23 2 1 0
1998 1999 2000 2001 2m 2003 m 2om* Developed Europe Emerging Europe Source: Leaseurope and WDI. * Estimate Source: Turlush Association ofLeasing Companies.
Although Turkey’s leasing sector is very small, it has been growing strongly since 2001. As of 2004, Turkey’s leasing sector had US$3.6 billion in assets (about 1.6 percent of banking sector assets), up from US$0.7 billion in 2001.32 There are almost 100 leasing companies registered in Turkey, but the fifteen largest leasing companies accounted for 86 percent of new lease volume and 83 percent of contracts in 2004. The largest leasing companies are subsidiaries of banks, marketing their services through the branch networks of their parent companies.33 As shown in Figure 12, the leasing industry shows strong growth, reaching U$2.9 billion in new leases in 2004 from US$0.7 billion in 2001, reflecting in part the strong GDP and in part the improved conditions for financial intermediation with improved financial stability and lower inflation. The leasing industry finances approximately 7 percent of total fixed capital investments. The manufacturing sector accounted for 48 percent of new leases, while services received 43 percent. Textiles (13 percent) and construction (16 percent) were the main sub- sectors in the manufacturing and service sectors, re~pectively.~~
5. Financial depth Trends in financial sector depth indicators are mixed. As shown in Figure 13, the share of liquid liabilities to GDP grew almost uninterrupted since the mid-1980s, with some reversals during the 1994 and 2001 crises. Stock market capitalization also grew considerably during this period, although both the 1994 crisis and, in particular, the 2001 crisis brought about large declines. However, the evolution of the private sector credit to GDP ratio has been rather disappointing. During the late 1980s and early 1990s, credit depth did not increase. After the 1994 crisis, domestic credit depth improved until the 2001 crisis, after which it went down to pre-1994 levels. Not surprisingly, the ratio of private credit to GDP for Turkey (24 percent) is below most other EU accession countries, such as the Czech Republic (30 percent), Poland (28
32 Based on data from the Turkish Leasing Association (FIDER)
33 Deposit-taking banks are not allowed to directly engage in leasing activities. As result, most banks have established leasing companies.
34 Leasing volume generally fluctuates with GDP growth.
35 Based on 0443-0541 data from FIDER.
26 percent), and Hungary (38 percent).36Nevertheless, Turkey fares favorably in terms of the ratio of stock market capitalization to GDP.
Figure 13: Financial sector depth indicators for Turkey, 1987-2005
70 1
mF28Z82Z886%%8Z8383m EEEEeE2222EEsssgas - - Mz incl FX depositslGDP -Credit to non-financial private sectoriGDP -Stock market capitalizationiGDP Source: Central Bank of Turkey, Istanbul Stock Exchange.
Credit to the private sector is growing from a small base, reflecting the improved macroeconomic environment and shifting profit opportunities. Lending to the private sector has been depressed since the late 1990s in part by heavy Government demand for funds (which crowded out lending to the private sector) and the zero weight risk assigned to Government securities for computing the banks’ capital adequacy ratio. As shown Figure 14, lending to the public sector, which includes lending to state-owned enterprises, has been growing much faster than loans to firms or consumers. Lending has been complicated by the volatile financial environment, with a high inflation rate and erratic interest rates. However, because of reductions in interest rates and inflation, banks have started to change part of their Government securities holdings into loans to the private sector, resulting in gains in lending to private firms and consumers. Banks are growing their loan portfolios aggressively into areas with higher spreads, especially consumer credit (consumer loans and credit card receivables, and recently mortgage loans), which have been growing faster than corporate commercial loans (see Table 12). Finally, lending to firms may be affected by some aspects of the business and institutional environment, such as the legal rights of borrowers and creditors, where Turkey fares worse than comparator countries. For example, both the cost to create collateral as a percentage ofper capita income and the cost of enforcing contracts as a percentage of debt values are higher than in some EU accession countries, such as the Czech Republic, Poland, and Ukraine.
36 Data from the World Bank Financial Structure Database.
27 Figure 14: Credit to private and public sectors (in Table 12: Growth rate of private sector loans, real terns) 2003-2005
Credit~ ~~ billionUS$, 2003 real 2004 real 2005 real Claims on Public Sector Nov.2005 growth growth growtht'l \ Consumer loans 31.7 74% 86% 52% Housing loans 8.7 63% 147% 240% I If Credit cards 12.1 44% 78% 12% Other 10.9 155% 82% 45% 26% 29% .: Non-consumei' loans 53.9 23% Total 85.6 33% 41% 36% Source: Central Bank of the Republic of Turkqv and siafjcnlculations. E November 2005 .-e /I Bawl on data. 3 25 * Does not include credit to other financial institutions.
0
Source: Central Bank of Turkey
28 Annex 2: Major Related Projects Financed by the Bank andlor other Agencies TURKEY: Access to Finance for SMEs
Table 13: Related projects Targeted Name of ProjectKOan Organization sector Total amount Export Finance Intermediation Loan I1 World Bank Exporters $303M Export Finance Intermediation Loan I11 World Bank Exporters $300M Renewable Energy Loan World Bank Energy fm $202 M Industrial Pollution Prevention Loan EIB SMEs €70M TERRA Earthquake Loan 2A EIB Finns €75M TERRA Earthquake Loan 2B EIB Firms €75M SME Global Loan I1 EIB SMEs €50M Industry Global Loan I1 EIB SMEs €125M Industry Global Loan I11 EIB SMEs €200M SME Global Loan IV E13 SMEs €250M SME Global Loan V EIB SMEs €250M Autoproductor and Energy Project EIB Finns €40M TSI(B APEX Loan EIB SME f150M AFD Credit line Agence Franqaise de Dkveloppement SMEs €50M AFD Credit line Agence Franqaise de Dkveloppement SMEs €20M JSIC SME Credit JBIC SMEs JPY27BN CEB Credit Council of Europe Development Bank SMEs €200M Islamic Development Bank Islamic Development Bank SMEs $50M KfW Industrial Pollution Prevention Loan Kreditanstalt fur Wiederaufbau SMEs €9,7M KfW Credit Kreditanstalt fur Wiederaufbau SMEs €21,3M Spanish SME SME credit Line SMEs €30M Total - US$2,857M Source: Turkish Trensuty.
29 May 18,2006
Annex 3: Result Framework and Monitoring Indicators
PDO Project Outcome Indicators Use of Project Outcome Information Improve Turkish SMEs’ access Number ofSMEs and SME portfolio financed by YR2-3: determine if project to medium term finance. TSKB’s PFIs and Halkbank under the project. design or strategy needs to be changed (see specific elements that could be modified below). Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring
Outcome 1: Loans’ Maturity Share ofmedium term financing (more than 12 YR2-3: determine if loan Provide medium term loans to months) in total SME loan portfolio financed maturities need to be revised. SMEs fmanced under the under the project by Halkbank and TSKB. project.
Outcome 2: Local currency lending Provide local currency loans to Share ofcredit line disbursed in local currency. YE-3: determine if the structure SMEs fmanced under the ofthe local currency option needs project. Share ofmedium term financing (more than 12 to be revised. months) disbursed in local currency. Outcome 3: Geographical coverage Number ofprovinces with active SME clients YR2-3: determine if the financed under the project- throughout the geographical targeted areas need Provide loans to SMEs located country and in Hulkbunk Regions (see Annex 2). to be changed. in the east and the center of the country under the project. Number ofloans financed by the project in Hulkbank Regions. Disbursed amount financed by the project in Halkbank Regions.
Outcome 4: Quality ofthe For both Halkbank and TSKB, percentage of non- YR2-3: determine if criteria to portfolio under the proposed perfonning SME loans3’ extended under the select PFIs and SMEs need to be project project is below 5% ofthe total project portfolio. changed.
37 Non-performing loans are defined as category 111, IV and V loans according to the BRSA definition.
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May 18,2006
Annex 4: Detailed Project Description TURKEY: Access to Finance for SMEs
The appendices below describe in detail: Appendix 4A. Geographical division
' Appendix 4B. Terms and conditions that apply to TSKB 4B.1. Loan terms and conditions between the World Bank and TSKB 4B.2. Eligibility criteria for the PFIs that will be financed by TSKB 4B.3. Terms and conditions of subsidiary loans between TSKB and PFIs 4B.4. Eligibility criteria for SMEs 4B.5. Terms and conditions between PFIs and SMEs.
Appendix 4C. Terms and conditions that apply to Halkbank 4C. 1. Loan terms and conditions between the World Bank and Halkbank 4C.2, Eligibility criteria for SMEs 4C.3. Terms and conditions between Halkbank and SMEs.
35 May 18,2006
Appendix 4A: Geographical division
Halkbank’s lending under the proposed credit line will be restricted to the following regions ~Halk~ankRegions):
South East Anatolia, all provinces: Adiyaman, Batman, Diyarbakir, Gaziantep, Kilis, Mardin, Siirt, Sanliurfa, and Sirnak.
East Anatolia, all provinces: Agri, Ardahan, Bingol, Bitlis, Elazig, Erzincan, Erzurum, Hakkari, Igdir, Kars, Malatya, Mug, Tunceli, and Van.
Central Anatolia, selected provinces: Sivas, Kayseri and Yozgat.
Black Sea, selected provinces: Corum, Amasya, Samsun, Ordu, Giresun, Rize, Trabzon, Bayburt, Artvin, Giimiishane and Tokat.
Mediterranean, selected provinces: Kahraman Maras, Hatay and Osmaniye.
Halkbank Regions will not include Adana.
TSKB’s lending under the proposed credit line will be restricted to the regions and cities not included in the list above. These geographical areas will be defined as TSKB Regions.
The following criterion must be used to identify the location ofa sub-loan:
e The proceeds of the loan must be applied by the sub-borrower in the eligible region. If a loan is for an investment or a project, the location ofthe investment or project determines the region. If proceeds are used for working capital, the location in which the materials and other inputs are used determines the region.
36 May 18,2006
Appendix 4B: Summary of Terms and Conditions for TSKB
4B.1. Loan terms and conditions between the World Bank and TSKB
TSKB will draw the loan’s credit line hnds in Euros and be able to convert all or portions ofthe outstanding amount into TRY. The loan will be a Fixed Spread Loan (FSL), with level repayments, a five year grace period and a 15 year total repayment term. The front-end fee will be paid from the loan proceeds.
Ifa currency conversion into TRY is requested:
e The lending rate for a EUR FSL is currently EUR LIBOR + 0.52% less any applicable waiver. To effect the conversion, the World Bank enters into a swap with a market counterpart, and the pricing will be based directly on the terms achieved on the swap between the World Bank and the market counterpart plus a transaction fee of0.02% annually.
e The pricing of the converted portion of the loan will be based on a market transaction that the World Bank undertakes with a swap counterpart and would be the TRY equivalent of the EUR LIBOR + fixed spread for the maturity of the conversion. Borrowers may refer to internationally recognized swap screen quotes for indicative rates. However, it should be noted that the actual pricing would be based on the swap transaction undertaken by the World Bank with the swap counterpart.
TSKB will pay the World Bank a front-end fee of 1 percent, less any waiver, and an annual commitment fee of 0.85%, less any waiver, on undisbursed balances for the first four years, and 0.75%, less any waiver, thereafter; the commitment fee will be payable with effect from 60 days after loan signing.
TSKB will on-lend the funds to PFIs using subsidiary loan agreements that will define the loan conditions. All subsidiary loan agreements are subject to prior review and acceptance by the World Bank,
TSKB must maintain, for the duration ofthe project implementation period, a Project Implementation Unit (PIU) staffed with qualified personnel and capable of satisfactorily implementing all aspects ofthe project.
For the duration ofthe project implementation period, beginning with year-end 2006, TSKB must annually submit an audit report, that: (i)is prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii)has an unqualified audit opinion, except as the World Bank shall otherwise agree.
TSKB will be subject to monitoring of the outcome and output indicators in Annex 3 “Results Framework and Monitoring” on a yearly basis.
37 May 18,2006
TSKB will be subject to monitoring of the indicators in the Financial Management Reports in the Operational Manuals on a semi-annual basis, and must submit semi- annual financial management progress reports to the World Bank.
0 TSKB will make its best effort possible to utilize all payments made by PFIs under Subsidiary Loan Agreements to finance additional development projects to further the development of SMEs.
4B.2. Eligibility Criteria for PFIs that will be financed by TSKB
TSKB will on-lend to participating banks and leasing companies (PFIs). PFIs will be selected on the basis ofthe following criteria:
For both banks and leasing companies Before final selection of the PFIs, TSKB will send the World Bank the financials of the proposed intermediaries together with a request to include the PFIs in the project. The World Bank will review and clear TSEI=_B’s assessment by conveying “no objection” for each PFI’s participation for the requested amount. The no objection will be based on the criteria included in this section. TSKB will send the financials of the proposed intermediaries to the World Bank every year to ensure that the selected PFIs continue to meet the required criteria throughout the life of the project. However, “No objection” is not required for the continued participation ofthe PFIs.
Banks and leasing companies must annually provide IFRS financial statements audited in accordance with International Standards of Auditing (ISA).
Additional conditions for the banks
The following criterion applies only at the time the banks enter into the project:
Total assets must exceed US$300 million equivalent at the end of2005.
The following criterion applies throughout the period in which the banks participate in the project:
0 The banks must be and remain in compliance with applicable laws and regulations issued by the Turkish authorities, including the prudential and regulatory norms set forth and enforced by the Banking Supervisory and Regulatory Authority of Turkey (BRSA), as certified by independent external auditors on an annual basis. In case the initial eligibility ofthe banks falls to such a date that their year-end audits have been already completed and do not cover this requirement, then the banks would be required to submit a management letter in a format acceptable to the World Bank confirming their compliance with applicable laws and regulations issued by the Turkish Authority.
38 May 18,2006
Additional conditions for the leasing companies The following criteria apply at the time the leasing companies enter into the project: e Total lease receivables during the last two years (for which data are available) must exceed a minimum ofUS$30 million equivalent on average. e New lease volume during the last two years (for which data are available) must exceed a minimum ofUS$20 million equivalent on average. The following criterion applies throughout the period during which leasing companies participate in the project: e Leasing companies must be in general compliance with legal and regulatory requirements applicable to the leasing industry, including but not limited to such regulations as those imposed by the leasing industry regulator and as certified by the leasing companies’ external auditors on an annual basis. In case the initial eligibility of the leasing companies falls to such a date that their year-end audits have been already completed and do not cover this requirement, then the leasing companies would be required to submit a management letter in a format acceptable to the World Bank confirming their compliance with applicable laws and regulations issued by the Turkish Authority.
4B.3. Terms and Conditions of Subsidiary Loans between TSKB and PFIs
PFIs must start and remain in compliance with the eligibility criteria for PFIs, except for criteria that apply only at the time banks and leasing companies enter the project (see specifications in section above).
The loan denomination may be in Euros or TRY
The funds available to PFIs will depend upon the availability of funds to TSKB from the World Bank.
The cost of subsidiary loans will include, at a minimum, the cost of World Bank funds to TSKB plus an on-lending margin reflecting (a) TSKB’s administrative costs; and (b) a credit risk margin.
PFIs will be responsible for ensuring that sub-borrowers comply with the World Bank’s procurement rules for the procurement of goods and works under sub-loans and leases, applicable Turkish environmental legislation and regulations, and the World Bank policy on environmental assessment.
PFIs will provide TSKB with a set of documentation for all sub-loans and leases, in order to enable TSKB to maintain all project records and make them available for ex- post review by the World Bank or by external auditors as necessary.
SMEs will be required to keep copies of invoices for all expenses financed with working capital and investment loans received under the proposed project. SMEs will
39 May 18,2006
be required to send to their respective PFIs copies of invoices for expenses financed with investment loans. Invoices for expenses financed with working capital loans may be kept by the SMEs.
4B.4. Eligibility Criteria for SMEs For the purpose of this project, SMEs are defined as firms with less than US$20 million in sales and fewer than 250 employees. All private small and medium enterprises (private ownership more than 50 percent), irrespective of their sector, will be eligible for participation as sub-borrowers on a commercial basis. The maximum lending amount for the tourism sector should not exceed 30 percent ofthe total amount lent to TSKB by the World Bank (i.e., €30 million). SMEs operating in the tourism sector are defined as: hotels, motels, resorts, pensions, holiday villages and camping sites.
4B.5. Terms and Conditions of Subsidiary Loans between PFIs and SMEs
SMEs must meet the eligibility criteria identified in the section above. e Sub-loans and leases must be given in the eligible region-see Annex 4B. 1. e Sub-loans and leases may be made for both working capital and investment purposes.
Sub-loans and leases can be denominated in any currency, e Sub-loans and leases will be evaluated in accordance with the PFI's normal project and credit evaluation guidelines. The following minimum requirements will apply:
+ Sub-borrowers may have a maximum debu'equity ratio of 80:20 after receipt of the sub-loadlease.
+ For all loans exceeding €750,000 (or the equivalent in other currencies), sub- borrowers must submit a cash flow statement following a format agreed upon with TSKB.
+ For all loans, sub-borrowers, after receipt of the sub-loadlease, should be projected to generate enough cash during the pay-back period of the sub- loadlease to maintain a minimum debt service coverage ratio ofat least 1: 1.
Except as the Bank shall otherwise agree, the aggregate amount ofoutstanding Sub- loans and the aggregate amount of outstanding Lease Financing to any one SME from all PFIs shall not exceed the equivalent of€2,500,000.
For the first two sub-loans or leases, irrespective of size, prior review by the World Bank will be required.
All sub-loans and leases not subject to prior review can be subject to ex-post review by TSKB or the World Bank in order to verify compliance with the subsidiary and sub-loan and lease agreement terms.
40 May 18,2006
0 The relevant authorities must certify that the SMEs (sub-borrowers) and sub-projects meet environmental laws and standards in force in Turkey. The World Bank policy on environmental assessment will also be complied with.
0 Goods and works on the World Bank’s negative list will not be eligible for financing.
0 Sub-borrowers must comply with the World Bank’s procurement procedures for the procurement of goods and works to be financed under project sub-loans (see Annex 8).
41 May 18,2006
Appendix 4C: Summary of Terms and Conditions for Halkbank
4C.l Conditions between Halkbank and the World Bank e Halkbank will draw the loan’s credit line funds in Euros and will be able to convert all or portions of the outstanding EUR obligation into TRY. The loan will be a Fixed Spread Loan (FSL) with level repayments, a five year grace period, and a 15 year total repayment term. The front-end fee will be paid from the loan proceeds.
Ifa currency conversion into TRY is requested:
+ The lending rate for a EUR FSL is currently EUR LIBOR + 0.52% less any applicable waiver. To effect the conversion, the World Bank enters into a swap with a market counterpart, and the pricing will be based directly on the terms achieved on the swap between the World Bank and the market counterpart plus a transaction fee of 0.02% annually.
+ The pricing of the converted portion of the loan will be based on a market transaction that the World Bank undertakes with a swap counterpart and would be the TRY equivalent of the EUR LIBOR + fixed spread for the maturity of the conversion. Borrowers may refer to internationally recognized swap screen quotes for indicative rates. However, it should be noted that the actual pricing would be based on the swap transaction undertaken by the World Bank with the swap counterpart.
Halkbank will pay the World Bank a front-end fee of 1 percent, less any waiver, and an annual commitment fee of 0.85%, less any waiver, on undisbursed balances for the first four years, and 0.75%, less any waiver, thereafter; the commitment fee will be payable with effect from 60 days after loan signing.
Halkbank must create and maintain, for the duration of the project implementation period, a Project Implementation Unit (PIU) staffed with qualified personnel and capable ofsatisfactorily implementing all aspects ofthe project.
For the duration of the project implementation period, beginning with year-end 2006, Halkbank must annually submit an audit report that (i)is prepared in accordance with International Auditing Standards and International Financial Reporting Standards; and (ii)has an unqualified audit opinion, except as the World Bank shall otherwise agree.
Halkbank will be subject to monitoring of the outcome and output indicators in Annex 3 “Results Framework and Monitoring” on a yearly basis.
42 May 18,2006
Halkbank will be subject to monitoring of the indicators in the Financial Management Reports in the Operational Manuals on a semi-annual basis, and must submit semi- annual financial management progress reports to the World Bank.
Halkbank will maintain a set of documentation for all sub-loans at headquarters and make them.available for ex-post review by the World Bank or by external auditors as necessary.
SMEs will be required to keep copies of invoices for all expenses financed with working capital and investment loans received under the proposed project. SMEs will be required to send to Halkbank headquarters copies of invoices for expenses financed with investment loans. Invoices for expenses financed with working capital loans may be kept by the SMEs.
Halkbank will make its best effort possible to utilize all payments made by SMEs under the Sub-loans to finance additional development projects to further the development ofSMEs.
4C.2 Eligibility Criteria for SMEs For the purpose of this project, SMEs are defined as firms with less than US$20 million in sales and fewer than 250 employees. All private small and medium enterprises (private ownership more than 50 percent), irrespective of their sector, will be eligible for participation as sub-borrowers on a commercial basis. The maximum lending amount for the tourism sector should not exceed 30 percent of the total amount lent to Halkbank by the World Bank @e., €15 million). SMEs operating in the tourism sector are defined as: hotels, motels, resorts, pensions, holiday villages and camping sites.
4C.3 Terms and Conditions between Halkbank and the Sub-Borrower SMEs a SMEs must meet the eligibility criteria identified in the section above. a Sub-loans must be given in the eligible regions-see Annex 4B. 1. a Sub-loans may be made for both working capital and investment purposes. a Sub-loans can be denominated in any currency. a Investment loans under the operation will be assessed using Halkbank’s investment loan evaluation framework, and working capital loans will be assessed using Halkbank’s working capital loan assessment framework, including its credit scoring system.40 The two systems are slated to be merged, and Halkbank will inform IBRD
40 At appraisal, the World Bank team conducted a detailed review of Halkbank’s evaluation system, which it deemed advanced and sound. The system includes a detailed assessment ofboth the SME’s and the owner’s financial statements (including cash flow statements), collection and evaluation of all information available at the local credit bureaus, and an evaluation ofthe SME’s soundness on the basis of several
43 May 18,2006
of any changes to the system. In addition to the information already required to the sub-borrowers by Halkbank (including cash flow statements for all loans), minimum requirements for loans extended under the proposed project include:
+ Sub-borrowers may have a maximum debtlequity ratio of 80:20 after receipt ofthe sub-loan.
+ Sub-borrowers, after receipt ofthe sub-loan, should be projected to generate enough cash during the pay-back period ofthe sub-loan to maintain a minimum debt service coverage ratio ofat least 1: 1.
The credit assessment files will be kept at the PIU or with the SME loan department, both located at Halkbank headquarters. Information on the share ofpublic ownership in the SME as well as on the geographical location where the hnds will be applied (see conditions above) will also be maintained for each SME at Halkbank headquarters.
Sub-loan pricing and maturity will be determined by Halkbank based on the needs of the particular sub-borrower and sub-project being financed, with the proviso that the lending interest rate must, at a minimum, cover the cost of World Bank funds, credit risk and operational costs.
Except as the Bank shall otherwise agree, the aggregate amount of outstanding Sub- loans to any one SME shall not exceed the equivalent of€2,500,000.
For the first two sub-loans, irrespective of size, prior review by the World Bank will be required.
All sub-loans not subject to prior review can be subject to ex-post review by the World Bank in order to verify compliance with sub-loan agreement terms.
The relevant authorities must certify that the sub-borrowers and sub-projects meet environmental laws and standards in force in Turkey. The World Bank policy on environmental assessment will also be complied with.
Goods and works on the World Bank’s negative list will not be eligible for financing.
Sub-borrowers must comply with the World Bank’s procurement procedures for the procurement of goods and works to be financed under project sub-loans (see Annex 8.
financial ratios and a credit scoring system. Further documentation on Halkbank’s credit assessment is available upon request.
44 May 18,2006
Annex 5: Project Costs TURKEY: Access to Finance for SMEs
Project Cost By Component andlor Local Foreign Total Activity (In Euros) (Euros) (Euros) Halkbank TSKB Credit line 49,875,000 99,750,000 149,625,000 Front end fee la 125,000 250,000 375,000 Unallocated ------Premia for interest rate caps and ------collars Total Baseline Cost 50,000,000 100,000,000 150,000,000
Physical Contingencies ------Price Contingencies ------Total Project Costs 50,000,000 100,000,000 150,000,000 Interest during construction Front-end Fee Total Financing Required 50,000,000 100,000,000 150,000,000 /a The borrowers will pay the front end fee from the loan proceeds.
45 May 18,2006
Annex 6: Implementation Arrangements TURKEY: Access to Finance for SMEs
The implementation agencies for the proposed project will be TSKB (Component 1) and Halkbank (Component 2). Appendices 6A and 6B provide summary evaluations of TSKB and Halkbank respectively, including an analysis ofthe banks’ financial soundness and specific considerations on the banks’ ability to meet the World Bank requirements included in OP 8.30 on Financial Intermediaries. Annexes 7, 8 and 10 provide a more detailed analysis of Halkbank’s and TSKB’s financial management, procurement and environmental procedures. Below is a brief summary of TSKB’s and Halkbank’s overall implementation capacity.
TSKB has proven through previous operations that it is very capable of intermediating credit lines from international development banks, including the IBRD. The bank already has a Project Implementation Unit in place, with significant experience in selection and supervision of PFIs, overall monitoring and evaluation of project implementation, and compliance with required fiduciary responsibilities. The PIU’s experience and success have been clearly demonstrated by EFIL I1 record-time disbursement. The PIU will be supervised by the bank’s Executive Vice President ofTechnical Services, who will act as Program Manager. The PIU staff will comprise the Executive Vice President of Technical Services, the Head ofthe Financial Analysis and Engineering Departments, the Head of the Economic Department, the Head of the Head Office Operations Department, the Head of the Corporate Marketing Department, and the Head of the Financial Control Department. The proposed project will not require hiring ofany additional staff,
Halkbank has adequate staffing to carry out the proposed project and for supervising sub-project implementation. The bank’s core business is provision of credit to SMEs. Halkbank’s staff is fully adequate to ensure satisfactory implementation of the proposed project, including supervision of sub-projects, overall monitoring and evaluation of project implementation and compliance with required fiduciary responsibilities. Halkbank has also specific experience implementing World Bank projects, including the Second Small and Medium Scale Industry Project (L3067) and the Agro Industry Project (L3077). A first evaluation of Halkbank’s capacity to carry out environmental assessment of sub-projects is included in Annex 10. The Project Implementation Unit will be supervised by one of Halkbank’s Executive Vice Presidents. A First Vice President will act as Program Manager. The PIU staff will comprise four Financial Specialists, an Environmental Specialist and a Procurement Expert. Halkbank’s Credit Department will carry out the loan evaluations. The proposed project will not require hiring of additional staff, although one person may need to receive some training to ensure compliance with World Bank environmental policies and Turkish laws.
46 May 18,2006
Appendix 6A: Tiirkiye Sinai Kalhnma Bankasi (TSKB) Assessrnent4l
6A.1 Overview of TSKB
TSKB is the largest private investment and development bank in Turkey and accounts for 1.5 percent of bank loans in Turkey (see Table 6A.1 for key indicators on the bank). TSKB often takes credit risk with banks, and assessing the creditworthiness ofbanks is at the core of TSKBs business. It was one of the PFIs in the EFIL Iproject and currently is the borrower of the EFIL I1 and EFIL 111 Loans. As such, it is well known to the World Bank team through a regular exchange of views on the implementation of the EFILs, and through reviews of TSKB’s audited reports and other financial reporting required under the projects. TSKB maintains an overall sound financial and operational structure, and is fit to undertake the financial liability of the Loan’s Component 1 and operational commitments to act as the PIU for the project.
Table 6A. 1: TSKB key indicators Million Share of Svsteml December 2005 US$ Perceni 11 Assets 2,460 0.8 Deposits 0 0.0 Loans 12 1,302 1.o Securities 823 0.7 Branches (number) 1 0.0 Source: Banks Association of Turkey and stfl~cfllculations. I1 Shares of system reflect September 2005 data. 12 Includes leasing assets worth US$ 177 million.
TSKB’s main business is to extend medium and long term loans. About three quarters of its loans are in foreign currency. Trade credit and financial leases are also important products for the bank. Finally, TSKB provides a wide range of investment banking services, including public offerings, private equity fhd management, mutual fimd management, and investment advisory services. These services, however, represent a small part of the bank’s activities, with net fees and commission amounting to just 6 percent of net interest income in 2005. As an investment and development bank, TSKB does not accept retail deposits, and it has only three locations42including recently opened branches in Izmir and Ankara. Table 6A.2 includes the bank’s summary balance sheet and income statement.
41 Unless otherwise noted, data in this section reflect 2005 and are based on audited financial statements.
42 TSKB has an off-shore branch in Bahrain.
47 May 18,2006
Table 6A.2: Summary balance sheet and income statement for TSKB and the banking system TSKB Turkish Banking System Million US$, December 2005 (September 2005 for system) YTL FX Total YTL FX Total ASSETS CASH AND BALANCES WITH THE CBT 0004,080 3,436 7,515 TRADING SECURITIES (Net) 0006,423 7,389 13,812 Of which public sector securities 0006,279 7,357 13,636 BANKS AND OTHER FINANCIAL INSTITUTIONS 30 63 94 4,883 11,873 16,757 Of whichforeign banks 0 28 28 1,678 10,528 12,207 INVESTMENT SECURITIES AVAILABLE FOR SALE (Net) 594 229 823 35,909 18,621 54,531 LOANS I1 226 1,036 1,302 69,946 31,331 101,277 Short term 3 32 750 39,534 13,000 52,534 Medium and long term 249 1,011 1,260 29,866 18,310 48,176 Loans under follow-up 26 7 33 5,301 160 5,461 Specific provisions (-) 26 7 33 4,755 139 4,894 INVESTMENT SECURITIES HELD TO MATURITY (Net) 00029,078 8,012 37,089 Of which public sector securities 00025,993 6,768 32,761 RESERVE DEPOSITS 0 19 19 3,795 6,760 10,555 PROPERTY AND EQUIPMENT (Net) 28 0 28 6,841 12 6,853 OTHER ASSETS 170 25 195 18,307 3,722 22,029 TOTAL ASSETS 1,088 1,372 2,460 179,261 91,156 270,417 LIABILITIES DEPOSITS 00 0 104,137 67,358 171,495 Of which savings deposits 00 0 58,201 0 58,201 Of which public sector deposits 00 0 6,317 0 6,3 17 Of whichforeign currency deposits 00 0 0 63,991 63,99 1 INTERBANK MONEY MARKET 290 62 352 9,573 3,118 12,691 FUNDS BORROWED 21 1,554 1,576 2,574 26,096 28,670 Of whichforeign banks 8 1,401 1,409 1,861 24,904 26,765 FUNDS 000 3,939 5 3,944 PROVISIONS 32 5 38 5,004 309 5,3 12 OTHER LIABILITIES 6 79 85 9,874 3,227 13,101 SHAREHOLDERS’ EQUITY 409 1 410 34,840 365 35,205 TOTAL LIABILITIES 759 1,701 2,460 169,941 100,477 270,417 INCOME STATEMENT INTEREST INCOME 181 30,910 Of which interest on loans 61 14,979 Of which interest on securities 109 14,009 INTEREST EXPENSE 80 17,245 NET INTEREST INCOME 100 13,665 NET FEES AND COMMISSIONS INCOME 6 3,562 NET TRADING INCOME 7 1,654 OTHER OPERATING INCOME 21 1,944 TOTAL OPERATING INCOME 135 20,865 PROVISION FOR LOAN LOSSES OR OTHER RECEIVABLES (-) 7 4,153 OTHER OPERATING EXPENSES (-) 37 10,471 NET OPERATING INCOME 91 6,241 PROFITiLOSSES FROM ASSOCIATES AND SUBSIDIARIES 1 290 NET MONETORY POSITION GAINiLOSS 0 0 INCOME BEFORE TAXES 93 6,53 1 PROVISION FOR TAXES ON INCOME -19 -2,503 NET OPERATING INCOMEEXPENSE AFTER TAXES 74 4,029 EXTRAORDINARY INCOMEiEXPENSE AFTER TAXES 0 0 NET PROFITiLOSSES 74 4,028 Source: BAT and st~~calculations. Note: Income statement data are annualized. /IFor TSKB, lease receivables are included under loans.
48 May 18,2006
TSKB is owned by Turkey’s largest private bank, Isbank, it has a minority stake from the state controlled bank, Vakif Bank, and 41 percent of its stock is held by non-strategic investors and is traded on the Istanbul Stock Exchange (see Figure 6A.1). As of December 2005, TSKB had a staff of 286, with an average length of service in the bank of 10 years, and an average age of 36 years. TSKB has transactions with its owners and related parties amounting to US$85 million in loans and US$23 in non-cash loans.
Figure 6A. 1: Ownership ofTSKB
Isbank (Turkey’s largest Vakifoank (Large state owned private bank), 50% deposit taking bank), 8%
Stock Exchange, 42%
Source: TSKB website.
6A.2 Suitability of TSKB as Counterpart for Component 1
TSKB is the proposed borrower and Project Implementation Unit (PIU) for Component 1. With more than half of its credit portfolio reflecting credit risk to other banks or loans covered by a bank guarantee, TSKB has good experience assessing bank credit risk, which will be a main responsibility under Component 1. Furthermore, TSKB has extensive experience with intermediation of funds from international organizations, including the European Investment Bank, Japan Bank for International Cooperation, Kreditun~taZtfiir Wiederauflau, Council of European Development Bank, IFC, and Agence Franpise de Dkveloppement. TSKB enjoys a special status, which allows it to receive Government guarantees on its borrowings.
6A.3 Financial Soundness and Risk Exposures
TSKB is a profitable and solvent bank with a sound liquidity position and moderate market risk exposures. It has a large credit portfolio mostly in foreign currency, exposing the bank to indirect exchange rate risk and shocks to the real sector. The risks are mitigated by extensive use of bank guarantees, collateral taking, and lending to firms with foreign currency earnings. On balance, TSKB is viewed as a sound bank.
TSKB is rated by both Fitch Ratings and Moody’s and receives ratings in line with the largest and best rated banks in the country-see Tables 6A.3 and 6A.4. Strong capitalization, improved asset quality and profitability, stable funding, and the bank’s niche position as the key positives are cited in the ratings, together with the key risks are
49 May 18,2006 related to low fee and commission income and the volatile economic environment in Turkey.
Table 6A.3: Ratings by Fitch Ratings TSKB Akbank Isbank GarantiBank Long Term Rating BB- BB- BB- BB- Short Term Rating B B B B Local Currency Long Term Rating BB- BB+ BB- BB- Local Currency Short Term Rating B B B B Source: Fitch Ratings. Note: Ratings as of December 9,2005.
Table 6A.4: Ratings by Moodys Ratings TSKB Akbank Isbank Garanti Bank Financial Strength Rating D+ D+ D D+ Foreign Currency Long Term Rating B1 B1 B1 B1 Source: Moody s Ratings. Note: Ratings as of December 14,2005.
Solvency. TSKB has increased its capital, which now amounts to US410 million or 13.9 percent of assets, in line with the Turkish banking system. (See Table 6A.5.) On a risk weighted basis, the capital adequacy ratio of 36.8 is very high, reflecting the frequent use of bank guarantees, which lead to a 20 percent risk weighting of loans. The bank is, indeed, well capitalized.
Table 6A.5: Solvency Banking System TSKB Percent 2005 2005 2004 Tier llrisk weighted assets 24.1 34.9 40.5 Capital adequacy ratio 23.3 36.8 42.8 Capitalitotal assets 11.9 16.7 15.8 Source: Banh Association of Turkey and staff cahlations. Note: The banking system reflects September data, and TSKB reflects December data.
Credit risk and loan portfolio performance. TSKB’s loan portfolio is large and amounts to US$1,302 million (including USD 173 million in lease receivables), or 53 percent of its assets. It has a low risk profile, as illustrated by the low risk weights applied under the regulatory rules (see Figure 6A.2) with only 36 percent of loans receiving a 100 percent risk weight. The majority of its loans (52 percent) are to banks or with a bank guarantee, which allows the 20 percent risk weight. An additional 11 percent of its loans are risk weighted at 50 percent, reflecting the increasingly popular use ofmortgage collateral.
50 May 18,2006
Figure 6A.2: Risk weighting ofloans, December 2005 nt risk weight, (1%)
Source: Banks Association of Turkey and staff calculations.
The bank’s gross NpL ratio, at 2.3 percent, is below those ofthe Turkish banking system (see Table 6A.6) and has been reduced by more than half since 2003. The reduction in NpLs reflects mostly collections on existing NPLs, while write offs were about a third of collections. Gross additions to NPLs in 2004 and 2005 and were just US$2.2 million or less than a quarter of a percent of net loans. Thus, the performance of TSKB’s loan portfolio is very good. TSKB provisions its NPLs 100 percent, which is a conservative provisioning policy.
Table 6A.6: Credit risk
Banking-_1 Svstern TSKB Percent 2005 2005 2004 Gross NPLslgross loans I1 4.6 2.3 3.7 Gross NPLs (incl. substandard)igross loans 1’1 5.1 2.5 4.1 Gross NPLsicapital 15.2 9.6 15.0 Loan provisionslNPLs (incl. substandard) 89.6 100.0 100.0 Loan provisionsicapital 15.2 9.6 16.4 Source: Bank Association of Turkey and sta~calculations. Note: The banking system reflects September data, and TSKB reflect December data. il Including financial lease receivables.
TSKB’s outstanding loans are about three quarters in foreign currency. In case of a depreciation of the Turkish Lira, this creates credit risk for the bank as the value of the loan in Lira terms increases. This risk is mitigated for borrowers that are naturally hedged, for instance by being price takers in export markets. However, even exporters are not perfectly hedged, collateral value will typically depreciate, and this indirect exposure to exchange rate shocks therefore remains a concern. On balance, TSKBs loan portfolio has a moderate credit risk profile.
Profitability. TSI(B’s profitability is in line with the Turkish banking system (see Table 6A.7) as well as with international standards, with ROA of 3.6 percent and ROE of 21.4 percent. The low operating expenses reflect in part that the bank does not engage in costly retail operations and in part that the bank is efficiently run.
51 May 18,2006
Table 6A.7: Profitability Banking System TSKB Percent 2005 2005 2004 Real return on average assets 1.6 3.6 2.3 Real return on average equity 11.6 21.4 13.3 Net interest income less provisionslaverage assets 3.8 4.5 3.9 Net interest income less provisionslgross income 45.6 69.4 51.5 Other operating expenseslgross income 50.2 27.3 21.1 Net trading incomelgross income 7.9 4.8 1.4 Source: Banks Association of Turkey and staff calculations. Note: The banking system reflects September data, and TSKB reflect December data,
Liquidity. Because TSKB does not take deposits, its liability side is very stable and well protected from liquidity shocks, as confirmed by the very high liquid assetslshort term liabilities ratio in Table 6A.8. As shown in Table 6A.2, liabilities are almost entirely borrowings, while interbank money market liabilities are small. This leaves TSKB very resilient to liquidity shocks.
Table 6A.8: Liquidity Banking System TSKB Percent 2005 2005 2004 Liquid assetsltotal assets 39.1 38.1 31.1 Liquid assetslshort term liabilities 280 2,484 2,503 Source: Banks Association of Turkey and sta~caIcu~ations. Note: The banking system reflects September data, and TSKB reflect December data.
Market risk expusures. TSKB’s direct market risk exposures are very moderate because it does not collect deposits and has a long term funding base and therefore is able to extend medium and long loans without the maturity mismatches that banks normally have to carry. Moreover, since its balance sheet is dominated by foreign currency (see Table 6A.9), the bank is not very exposed to fluctuations in local currency interest rates. TSKB has manageable short net foreign position amounting to 2.2 percent ofits capital as ofthe end of 2005.
Table 6A.9: Exchange rate risk Banking System TSKB Percent 2005 2005 2004 Net foreign exchange position on bslcapital -5.8 -17.6 -5.4 Net foreign exchange position on and off bslcapital -1.5 -2.2 -5.5 Foreign currency denominated loansltotal loans 30.9 76.4 91.2 Foreign currency denominated assetsltotal assets 33.7 55.8 68.8 Foreign currency denominated liabilitiesltotal liabilities 37.2 69.1 74.8 Source: Banks Association of Turkey and staff calcuI~tions. Note: The banking system reflects September data, and TSKB reflect December data.
52 May 18,2006
6A.4 Operational Policy 8.30 (OP 8.30) Considerations
OP 8.30 applies to TSKB for the proposed operation. In summary, the conditions are viewed as being met for TSKB as an APEX institution. Regarding the specific issues under OP 8.30:
(a) Adequate profitabili~,capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank
TSKB is a well capitalized, profitable bank with a sound loan portfolio. The bank prepares financial statements in accordance with Turkish regulations, as well as in accordance with IFRS and the statements are viewed as adequate.
(b) Acceptable levels of loan collections
Gross NPL levels are below those of the Turkish banking sector as a whole, and collections on NPLs are strong, while new NpLs are a small fraction of the bank’s loan book. Thus, the performance ofTSKB’s loan portfolio is very good-see also section on credit risk and loan portfolio performance above.
(c) Appropriate capacity, including staffing, for carrying out sub-project appraisal (including environmental assessment) and for supervising sub-project implementation
The World Bank has extensive and recent experience working with TSKB, and it has proved its ability to fulfill the requirements of the World Bank. Under this operation, TSKB will be lending to banks, which is a common activity for TSKB. (See also Section 6A.4 on this.)
(d) Capacity to mobilize domestic resources
TSKB is not allowed to collect deposits, and borrows limited amounts in the domestic interbank money market through rep0 operations (US$352 million). Most of its borrowings are fi-om foreign banks (US$1,409 million). Rather than an inability to mobilize domestic resources, the predominance of foreign bank liabilities reflects TSKB’s ability to attract them at more favorable terms,
(e) Adequate managerial autonomy and commercially oriented governance
TSKB is a publicly traded privately owned and profitable bank that makes decisions on a commercial basis. fl Appropriate prudential policies, administrative structure, and business procedures
TSKB is subject to bank regulations and follows a prudent approach to risk management. IFC recently extended a US$50 million subordinated loan to TSKB confirming that institution’s trust in TSKB’s procedures. A separate assessment of financial management is being conducted and is attached in Annex 7.
53 May 18,2006
Appendix 6B: Halkbank Assessment43
6B.1 Overview of Halkbank
Halkbank is a large deposit-taking state bank primarily serving SME customers throughout Turkey. It is the gfhlargest bank in Turkey by assets and has the fourth largest branch network44(see Table 6B.1 for key indicators). The bank currently has the Turkish Government as its sole shareholder, but the bank is slated for privatization, and the Privatization Administration has hired a financial advisor (investment bank) to bring Halkbank to the market. In preparation for privatization, the bank has been operationally restructured through the closing of branches and substantial reduction of staff, while expanding its loan portfolio to increase profitability in line with its strategy. In order to ensure successfkl privatization and maximize the value to the Government as the bank’s shares are sold, strategic and operational decisions are increasingly made on a commercial basis.
Substantial financial and operational restructuring over the past few years have contributed to the bank now being financially sound as well as profitable. Until recently, the bank had ajoint board of directors with another major state bank, Ziraat Bank, but in preparation for the privatization, Halkbank now has its own board. The board approves policies, strategies, and principles for the bank. In line with industry practice, the bank has a risk management unit reporting directly to the board. An organizational chart for the bank is included in Figure 6B. 1 at the end of this Appendix.
Table 6B. 1: Halkbank key indicators Billion Share of System/ December 2005 percent Assets 20.2 6.8 Deposits 15.6 8.6 Loans 4.6 4.1 Securities 12.7 11.9 Branches (number) 584 9.4 Source: BRSA and sta~calculat~~ns.
6B.2 Suitability of Halkbank as Counterpart for Component 2
Halkbank has been selected as counterpart for Component 2, which will provide credit to SMEs in underserved areas in the East and Center ofthe country. One ofHalkbank’s key strategic objectives is to grow its SME business. Halk’s vision reads, “Becoming the leading SME bank of the country.. ..” In fact, Halkbank’s portfolio is already dominated by commercial credit (with a significant share of SMEs), while the bank extends very little consumer credit (14 percent ofloans).
43 Unless otherwise noted, data in this section reflect 2005 and are from the Banking Regulation and Supervision Agency.
44 By December 2005, Halkbank had reduced its number of branches to 584 in part as a result ofbranch consolidation after the merger with Pamukbank.
54 May 18,2006
Halkbank has a relatively strong presence in the East and Center of the Country where credit is less developed. While the Turkish banking system only has 7.6 percent of its loan portfolio in the targeted regionp5 (as defined in Appendix 44, Halkbank has 26 percent of its loan portfolio (or US$693 million) in this area.46 Details on the loans in the two relevant parts ofthe country are provided in Table 6B.2.
Table 6B.2: Halkbank loan portfolio by region Million US$ Western Targeted Total end-April, 2005 region region Total credits 1,980 693 2,673 Net NPLs 51 0 51 Gross NPLs 802 61 863 Source: Halk~ank.
Halkbank’s participation in the project is thus WE-- aligned with its strategy. I-ilkbank is seeking to strengthen its position as an SME bank by increasing its product range and growing its portfolio to that segment. As its large portfolio of non-tradable investment securities mature, the portfolio will shift towards tradable securities and loans. Halkbank has the lowest loans-to-deposit ratio in Turkey, at 30 percent, compared to an average loans-to-deposit ratio of 62 percent in the banking system. This suggests that Halkbank has a large customer base that is currently not exploited in terms ofextending credit.
6B.3 Financial Soundness and Risk Exposures
Halkbank is a well-capitalized and profitable bank with relatively small market risk exposures. The bank’s assets are not very liquid, but the liability side does not appear to be risky from a liquidity perspective. The loan portfolio has performed well in the past two years, and the bank appears to be run in a sound manner. Table 6B.3 includes Halkbank’s financial statements compared with those ofthe Turkish banking system. The section below includes a detailed evaluation of Halkbank’s financial and operational performance.
‘’ As of December 2003, based on the most recent available data. Figures calculated on the basis of the Regional distribution included in Annex 4.A.
46 As ofApril 2005.
55 May 18,2006
Table 6B.3: Summary balance sheet and income statement for Halkbank and the banking system HaIkhk T~h~~ Mllimrs!&LkadJer#w)s YILmmAL YIL FxmAL
68 135 6.672 4.499 11.171 237 1.302 5.678 7.270 12.948 456 562 9.131 14.612 23.743 176 1.321 39.397 18.808 58.205 514 4,644 80.656 31.842 112.548 898 5.450 149 5.599 883 4.896 131 5.m 723 10.055 28.937 6.717 35.654 243 808 4.013 6.845 10.858 532 5.564 10 5.514
lIAmmEs YILFxmAL YII, mmAL CmXl-Is 12265 3.342 15.607 115.437 66.132 181.569 30 30 10.846 2422 13.268 165 180 345 7.230 33.354 40.584 760 5 765 4.067 4 4.071 497 14 511 5.751 337 6.088 408 151 559 1.522 3.231 10.753 -m 2387 - 2387 39.710 418 40.128 mAL- 16512 3.a 20.m l90.563 105m 296.461
738 15.324 1.936 14.072 2.086 1790 690 13.668 116 4.103 160 1.582 201 2.248 1.167 21 .a1 86 4.840 522 10.291 559 6.4x) 9 287
568 6.757 171 2.492 397 4.265 ~~Y~.~T~ NFT- 397 4.265 Source: Banking Regulation and Supervision Agency and Staff Calculations.
56 May 18,2006
Solvency, With a capital adequacy ratio of 50 percent (see Table 6B.4), the bank is highly solvent when measured against risk-weighted assets, The much lower capital-to-assets ratio of 12 percent reflects the bank’s large holding ofGovernment debt securities with 0 percent risk weighting.
Table 6B.4: Solvency Banking System Halkbank SeP Dec Sep Dec Percent 2005 2005 2005 2004 Tier llrisk weighted assets 24.1 49.9 57.4 60.7
Cauital adeauacv*- ratio 23.3 49.6 56.2 58.9 Capitalhotal assets 11.9 11.8 11.2 11.4 Source: BAT and sta~calculat~ons.
Credit risk and loan portfolio performance. The bank’s gross NPL-to-total loans ratio is high at 19 percent47 (see Table 6B.5). However, it largely reflects old non-performing loans that have been fully provisioned for but not written off. Current portfolio performance is sound. A substantial portion of the NPLs are carried over from Emlak Bank, which failed during the crisis and was merged with Halkbank. Specific provisions are made for 98 percent of gross NPLs4*, and no loans have been written off in the past three years. New non-performing loans (including sub-standard) net of collections during the period 2003 to 2005 amounted to less than 1.5 percent of the bank’s current loan portfolio. The recent performance of Halk’s loan portfolio is thus sound. Halkbank’s borrowers are widely dispersed, and concentrations are not a concern. In contrast to private banks, Halkbank extends 89 percent of loans in local currency and therefore does not expose itself to indirect currency depreciation risk4’ such as is otherwise common in Turkey.
Table 6B.5: Credit risk Banking System Halkbank SeP Sep Dec Percent 2005 2005 2004 Gross NPLsJgross loans 4.6 18.7 21.0 Gross NPLs (incl. substandard)Jgross loans 5.1 20.0 22.1 Gross NPLslcapital 15.2 38.5 39.7 Loan provisionsJNPLs (incl. substandard) 89.6 98.2 96.5 Loan provisionslcapital 15.2 40.4 40.3 Source: BAT and sta~calculati~ns~
47 NPL ratio is 14 percent as of the end of March, 2006 in part as a result of improved collections and in part as a result of loan growth. 48 Halkbank has a policy to provision 100 percent for non-performing loans. The difference between provisioning levels and 100 percent reflect loans guaranteed by the Turkish Treasury for which the provisioning policy does not apply.
49 Indirect currency depreciation risk refers to the credit risk associated with lending in foreign currency. In Lira terns, depreciation will increase the value of the loan, while the borrower’s financials as well as the value of the collateral is likely to remain constant.
57 May 18,2006
ProfitabiZity. The bank is highly profitable by both Turkish and international standards, with real ROA of 2.1 and real ROE of 17.5 (see Table 6B.6). As the Turkish banking market evolves, new sources of profits must be developed. Halkbank’s non-marketable securities are currently being remunerated above would-be-market prices, and as they mature they will be partially replaced with lower yielding assets. Halkbank has a greater portion of its assets invested in Government securities than private Turkish banks, and return on this position is likely to decline in the future. Halkbank’s ability to sustain its current high level of profitability will depend on its ability to shift its portfolio in response to changing profit opportunities. However, even a lower level of profitability would not endanger Halkbank’s financial soundness.
Table 6B.6: Profitability Banking System Halkbank Dec Dec Dec Percent 2005 2005 2004 Return on average assets 1.7 2.1 2.9 Return on average equity 11.8 17.5 23.7 Net interest income less provisionslaverage assets 3.5 3.1 6.7 Net interest income less provisionslgross income 40.9 51.8 73.3 Other operating expenseslgross income 47.6 44.7 32.0 Source: BAT and sta~calculations.
Liquidity. Halkbank’s liquidity ratios are below the rest of the banking system (see Table 6B.7), because 79 percent of its securities are investment securities held to maturity. Most of these are non-tradable Government securities issued to recapitalize the bank after the 2001 crisis, and as they mature they will be partially replaced by marketable securities, thus improving the liquidity of the bank over the medium term. The improved liquidity position is evident from the change between 2004 and 2005. Even in the near term, the liquidity position does not appear risky. In part, short term liabilities are only slightly higher than short term assets, and in part the bank enjoys an implicit guarantee on its liabilities from its Government ownership, thus reducing the risk of a run on deposits and other short term liabilities.
Table 6B.7: Liquidity Banking System Halkbank Dec Dec Dec Percent 2005 2005 2004 Liquid assetsitotal assets 39.4 20.4 9.6 Liquid assetsishort term liabilities I1 280 93.2 88.7 Source: 3AT and sta~calculations. 11 2005 data reflect September
Market risk exposures. Halkbank’s market risk exposures are very moderate. The bank maintains almost balanced foreign currency positions both on and off balance sheet (see Table 6B.8). The securities held by Halkbank, although they have long maturities, carry little interest rate risk because they are repriced frequently,
58 May 18,2006
Table 6B.8: Exchange rate risk Banking System Halkbank Dec Dec Dec Percent 2005 2005 2004 Net foreign exchange position on bslcapital I1 -5.8 0.8 0.6 Net foreign exchange position on and off bsicapital1’1 -1.5 0.0 0.6 Foreign currency denominated loansltotal loans 28.3 11.1 10.9 Foreign currency denominated assetsltotal assets 31.7 12.3 17.7 Foreign currency denominated liabilitiesltotal liabilities 35.7 18.3 24.6 Source: BAT and s~a~calcula~~o~s. 11 2005 data reflect September
6B.4 Subsidized Credits
Halkbank extends two types of subsidized credits, “find credits” and “cooperative credits,” that account for 38 percent of total loans5’ (see Table 6B.9 for an overview of loans by type and region). The subsidy elements are hlly financed by sponsors outside Halkbank, and the subsidized credits are structured in a way that does not distort Halkbank’s credit decision or interest rate setting for other loans.
Table 6B.9: Halkbank loan portfolio by loan type and region, end-April 2005 Western Targeted Total Million US$ region region
Coop credits 712 285 998 Fund loans 392 219 610 Other loans 826 189 1,014 Total credits 1,980 693 2,673 Source: Halkbank.
Directly subsidized “cooperative credits” Cooperative credits are extended to small individual borrowers under credit cooperatives, and only borrowers organized under these credit cooperatives are eligible. The borrowers are small, and the scheme is akin to microfinance schemes seen in many other places. Halkbank receives a 6 percent subsidy from the Government in order to reduce interest on the loans. Credit risk is reduced by the joint liability of the cooperative and the borrower. When payment from a borrower is late, the amount is charged directly from the cooperative’s account. This program is only offered by Halkbank, and it is expected to be phased out over time. The loans are carried on Halkbank’s balance sheet.
Indirectly subsidized ‘ffund loans ’’ Fund loans are financed by below market rate liabilities provided in the form of loans from, for instance, Turkish EXMbank and IFIs including EIB. Halkbank is required to lend the funds according to certain criteria, such as location in specific industrial zones or to special groups of borrowers such as SMEs. The proposed World Bank credit line will also fall in this category. The loans are priced fairly close to market prices, and Halkbank earns a normal spread, carries the credit risk for these loans, and has the loans recorded
50 As of December 2005.
59 May 18,2006 on its balance sheet. Some of the fund loans are available to other banks in the market, including private banks, and Halkbank does not enjoy a favorable position vis-&vis other banks with respect to these loans.
6B.5 Operational Policy 8.30 (OP 8.30) Considerations
OP 8.30 applies to Halkbank for the proposed operation. In summary, the conditions are viewed as being met for Halkbank as an intermediary. Regarding the specific issues for financial intermediaries under OP 8.30:
(a) Adequate profitabili~, capital, and portfolio quality, as confirmed by financial statements prepared and audited in accordance with accounting and auditing principles acceptable to the Bank
Halkbank is profitable, well capitalized, and its loan portfolio has performed well over the past two years-see the section on financial soundness and risk exposures. Halkbank prepares statements in accordance with regulations, and the statements are viewed as adequate.
(b) Acceptable levels of loan collections
Although Halkbank carries a large stock of old non-performing loans, current loan collections are good-see the section on credit risk and loan portfolio performance under the section on financial soundness and risk exposures.
(c) Appropriate capacity, including staffing, for carrying out sub-project appraisal (including environmental assessment) and for supervising sub-project implementation
On appropriate capacity, including staffing, see section 6.B.5 (Implementation Capacity).
Halkbank has US$669 million worth of loans to SMEs in the targeted region, equaling more than 10 times the amount of credit to be extended to Halkbank under the proposed operation. Some ofthe loans are extended with subsidies and may therefore not be a good indicator for the potential size of the market. However, Halkbank still lends US$332 million, or 6 times the proposed credit line, in the targeted region excluding the cooperative loans. NPLs in the targeted region are small-both net and gross NPL levels are less in the targeted region than for the bank as a whole. This evidence suggests that Halkbank is able to extend sound credit in the targeted region.
(d) Capacity to mobilize domestic resources
Halkbank has US$12.3 billion worth of domestic deposits, proving its ability to mobilize domestic resources.
(e) Adequate managerial autonomy and commercially oriented governance
Halkbank is owned by the Government and about to be privatized, possibly through an IPO. In case of an IPO, the Government will retain control until a private sector partner
60 May 18,2006 takes a majority stake in the bank. In preparation for privatization, business objectives have shifted to a commercial basis in order to maximize the value of the bank when the shares are sold. Since the Government still owns and controls the bank, it is clearly not totally autonomous and commercially oriented in its decision making. However, the team’s assessment indicates that decisions are made sufficiently autonomously and that they are commercially oriented, as also evidenced by the sound financials ofthe bank. fl Appropriate prudential policies, administrative structure, and business procedures.
Halkbank complies with the regulations, and its balance sheet has a low risk profile. Credit decisions are made on a commercial basis (see section on subsidized credits for details), and the bank has a risk management unit reporting to the bank’s board of directors, according to international practice. Separate procurement and financial management assessments are included in Annexes 7 and 8.
61 (v W May 18,2006
Annex 7: Financial Management and Disbursement Arrangements TURKEY: Access to Finance for SMEs
A. Summary of Financial Management Arrangements
The task team has conducted an assessment ofthe adequacy of the project financial management systems at TSKB and Halkbank. The current financial management arrangements for the project are satisfactory at both banks. A summary of the conclusions for both banks is as follows:
TSKB HALKBANK
RATING RATING COMMENTS
1. Implementing Entity Satisfactory Satisfactory 2. Funds flow Satisfactory Satisfactory 3. Staffing Satisfactory Satisfactory 4.Accounting Policies and procedures Satisfactory Satisfactory 5. Internal Audit Satisfactory Satisfactory 6. External Audit Satisfactory Satisfactory 7. Reporting and Monitoring Satisfactory Satisfactory 8. Information systems Satisfactory Satisfactory OVERALL FINANCIAL MANAGEMENT RATING Satisfactory Satisfactory
Country Issues.
Until 2001-02, public financial management in Turkey was based on an outdated legal framework. Enactment of the Public Financial Management and Control Law in 2003 was a defining moment for public financial management in Turkey. The law articulates a modem view of performance-oriented public sector management. It clarifies the nature of ministers’ and officials’ accountability to the public by strengthening public expenditure and financial management processes in line with EU practice. The results of the implementation of the law, however, still need to be evaluated. Turkey has also implemented a state-of-the-art accounting system, adopted accrual-basis of accounting, established a Government Accounting Standards Board as the general government’s sole standard-setting authority, several extra budgetary funds have been closed down, and a new law has been drafted for the Turkish Court of Accounts to strengthen the audit function.
The Banking Regulation and Supervision Agency (BRSA) issued a new comprehensive regulation on accounting standards for banks in July 2002, which brings these standards in line with International Financial Reporting Standards (IFRS). However, the BRSA regulation does not require full application of IFRS 27 (consolidation of subsidiaries), as banks only have to consolidate their financial subsidiaries, while for non-financial subsidiaries separate financial statement disclosure is mandated. The statements of such non-financial subsidiaries are not IFRS-based,” however, and thus their disclosure will not allow the user to consolidate these with
Only if all non-financial subsidiaries of a bank are listed or publicly held, and only if the Capital Markets Board of Turkey requires the use of full IFRS for all listed or publicly held entities, will the financial statements for such non-financial subsidiaries
63 May 18,2006
the IFRS-based consolidated statements ofthe parent bank and its financial subsidiaries. Also, as the IFRS are subject to change, any such change will necessitate an adjustment of the BRSA regulation.
The BRSA also issues rules governing the external audit of bank financial statements, and only auditors approved by the BRSA may carry out such audits. The “Regulation on Principles for Independent Auditing” and the “Regulation on Authorization of the Auditing Institutions and Permanent or Temporary Withdrawal oftheir Authorities”, both published in the Official Gazette’ Nr. 24657 on January 3 1,2002 are broadly in line with ISA.
TSKB and Halkbank have been assessed for compliance with BRSA prudential regulations by the project team and found to be in compliance. The participating financial institutions are not yet determined. Their compliance with BRSA prudential regulations is a conditionality for initial and continued eligibility.
Risk Analysis
A summary of the risk assessment for the project is as follows
Comments Risk
~
INHERENT~SK
1. Country Financial Management Risk Moderate 2. Project Financial Management Issues Negligible Overall Inherent Risk Moderate CONTROLRISK
Risk Mitigation Strategy
Country financial management risk-the project team’s assessment of the banks‘ compliance with the BRSA prudential regulations showed that both banks are in compliance. Since the accounting standards applicable to the banks differ with respect to consolidation from IFRS,
be IFRS-based and allow full consolidation with the IFRS-based financial statements of the parent bank and its financial subsidiaries.
64 May 18,2006
TSKB and Halkbank will submit their IFRS-based audited financial statements to the Bank in addition to their audited financial statements prepared in accordance with the BRSA accounting standards.
I~~le~entingEntig
The largest component of the project will be implemented by TSKB (€100 million), which will act as an Apex. Halkbank (€50 million Euro) will act as a retailer and lend directly to eligible SMEs. The Treasury will be the guarantor ofthe loan.
Assessments for TSKB and Halkbank are available in Appendix 6A and 6B of the Project Appraisal Document respectively. Criteria for selection ofthe PFIs are included in Appendix 4B.
Compliance with the prudential regulations set out by Banking Regulatory Supervisory Authority (BRSA) is required for the continuing eligibility of Halkbank, TSKB and the PFIs. This will be monitored through (a) prudential regulation compliance certificates and (b) annual audit reports.
The risk associated with both implementing entities is assessed as negligible.
Funds Flow
Funds from the TSKB portion of the loan will be made available to PFIs following certification of eligibility by the PFIs. PFIs will send a list and a copy of invoices for eligible expenditures submitted by the SMEs for investment loans extended. When a working capital loan is extended to the SMEs, the PFIs will obtain and retain financial statements ofthe SMEs on an annual basis. The submission ofinvoices for working capital loans is not required.
Halkbank will apply its usual lending procedures for loans given from the World Bank. A potential beneficiary enterprise will make its application to a Halkbank branch, which will prepare a pre-appraisal file and send it to the RegionallGeneral Directorate. The investigation department will collect the first information from the market and, based on the firm’s good standing, will give their report to the branch, which in turn will make the evaluation and prepare the loan proposal for the Loans Department. The loan will then be submitted to the General ManagerlDeputy General Manager, to the Credit Committee, and to Halkbank’s Board of Directors. After the approval ofthe board, the branch will prepare the loan contract and send it to the loan customer. Management of the special account will be the responsibility of the Loans Department. The branches will be responsible for controlling the already paid or to be paid invoices. They will be checking for mathematical correctness as well as compliance with the project framework. Upon their approval, the Loans Department will make fimds available to the beneficiary enterprises. A list and copies of the invoices for the eligible expenditures financed through investment loans will be available at Halkbank’s head office. These documents will be reviewed by designated staff at the head office before the funds are made available to the SMEs. Halkbank branches will obtain six monthly financial statements from SMEs where working capital loans have been extended, and a copy of these financial statements will be made available at the head office, The changes in the working capital requirements of the companies will be
65 May 18,2006 monitored through these financial statements. The submission of invoices for working capital loans is not required.
The risk associated withfundsflow is assessed as negligible
TSKB and Halkbank have qualified financial management staff, and project related transactions will be executed as part oftheir regular work.
The risk associated with stafing is assessed as negligible.
Accounting Policies and Procedures
The accounting and financial management capacities at both TSKB and Halkbank are satisfactory. They both have qualified personnel, adequate manuals and guidelines to conduct efficient financial management. The accounting and reporting systems at both banks are geared toward producing statements and information as required by Turkish law and regulations. TSKB also has accounting and reporting systems geared toward producing financial statements in accordance with IFRS.
Considering that both banks have adequate accounting and reporting systems, the main transactions, (i.e., movements in the special account, credit lines made available to the beneficiary enterprises and uses from these credit lines) will be in TSKB’s and Halkbank’s main accounting systems. The main accounting system will be supported by a sub-system for project reporting purposes.
TSKB has developed a web based application, approval and monitoring system for the loans where it acts as an APEX bank. The system is accessible to the PFIs fiom the web. The PFIs make their initial application as well as their applications for withdrawals from the project loans by using the system and are able to monitor the status of each application on a real time basis from the web. The system has adequate security levels and is fully integrated into the management information system of the bank. Semi-annual FMRs for the project loans are generated automatically by the system; the agreed-upon FMR templates for the SME project will also be generated by the system automatically. The system is very efficient and has contributed to the rapid implementation of the EFIL I1 and EFIL I11 projects. The same system will also be used for the SME project.
TSKB has a manual that explains the work flow for EFIL 11, and the same manual will be used as a basis for the SME project. TSKB has provided training to EFIL I1PFIs on the use ofthe web based system and has distributed copies ofthe manual. The same procedures will be followed for new PFIs in the SME project.
The risk associated with accounting policies and procedures in TSKB is assessed as negligible,
66 May 18,2006
Halkbank will be using its own accounting system and accounting department for project accounting purposes. Semi-annual FMRs will be produced by the Project Evaluation Department through the use of Excel worksheets, in the format agreed upon with the Bank. The operations manual for the project will include the work flows for the SME project.
The risk associated with accounting policies and procedures in Halkbank is assessed us negligible.
Internal Audit
Both Halkbank and TSKB have internal audit departments staffed with qualified audit professionals. Transactions under the loan will be subject to internal audit as a part ofthe banks’ credit portfolio audits.
In Halkbank, the internal audit department refers to the “General Letter” for the audit of loans granted from foreign funds and ensures that branches are in compliance with the loan covenants set forth in the General Letter. In order to make sure that the necessary documentation for the use of funds in line with project objectives is made, details of World Bank requirements as to the investment and working capital loans will be set out in the General Letter.
The risk associated with internal audit is assessed as negligible.
Reporting and Monitoring
TSKB and Halkbank will maintain records and will ensure appropriate accounting for the funds provided. The FMRs will be prepared semi-annually and will be submitted to the World Bank no later than 45 days after the end of the period. The formats of the FMRs have been agreed upon with both TSKB and Halkbank.
Reporting will include the number of employees of the sub-borrower, its annual turnover, the province in which the sub-borrower is located, and the sector to which the borrower belongs.
The loans that will be extended to SMEs will be investment and working capital loans. Documentation that is currently received by both banks for the investment and working capital loans from their customers (by the PFIs in case of TSKB) will be relied upon for the purposes of this project, and this information will be submitted to the World Bank on a summary basis as a part ofthe FMRs.
The risk associated with reporting and monitoring is assessed as negligible.
Information Systems
The main transactions @e., movements of the special account, credit lines made available to the beneficiary enterprises, and withdrawals from the credit lines) will be in TSKB’s and Halkbank’s main accounting systems.
67 May 18,2006
Details of TSKB’s information system are provided in the Accounting Policies and Procedures section above.
Halkbank will be using its own accounting system and accounting department for project accounting purposes. The semi-annual FMRs will be produced by the Project Evaluation Department through the use of Excel worksheets.
The risk associated with information systems is negligible for both banks.
Strengths and Weaknesses
The significant strengths that provide the basis for reliance on the project financial management system include: (a) hnds will be disbursed through TSD(which will act as an APEX bank) and Halkbank, which have been selected for their financial strength, their capacity to appraise potential beneficiaries, and their capacity to supervise project implementation, (b) both banks are experienced at implementing World Bank projects and projects funded by other international organizations, and (c) funds in the TSKB portion of the loan will be disbursed through PFIs that will be selected for their financial strength and capacity to appraise and supervise credit lines. The banks will also have a right to ask for audited financial statements of the beneficiary enterprises if deemed necessary.
There are no significant weaknesses in the project.
Action Plan
It is concluded that the financial management arrangements for the project satisfy the Bank’s minimum requirements and no action plan is proposed.
Supervision Plan
During project implementation, the World Bank will supervise the project’s financial management arrangements in two main ways: (i)reviewing the project’s semi-annual financial management reports as well as the implementing banks‘ and project’s annual audited financial statements and auditor’s management letter; and (ii)during the World Bank’s supervision missions, reviewing the project’s financial management and disbursement arrangements (including a review of a sample of SOEs and movements on the special account) to ensure compliance with the World Bank’s minimum requirements. Spot audits will be carried out on lending limits and SME eligibility criteria as outlined in Annex 4, as well as review of the credit approval process applied for individual loans. As required, a World Bank-accredited Financial Management Specialist will assist in the supervision process.
B. External Audit
TSKB and Halkbank will prepare separate project financial statements for the portions of the project they will implement.
68 May 18,2006
Annual and six-monthly (limited review) audits of TSKB are undertaken on an International Financial Reporting Standards (IFRS) basis in accordance with International Standards of Auditing (ISA) by a reputed international auditing firm. The current auditors of TSKB are Deloitte and Touche’s member firm in Turkey. The last three years’ audit reports (in accordance with IFRS and ISA) were reviewed and all had clean audit opinions. Audit of the SME project financial statements (project balance sheet, sources and uses of funds and special account statement) will also be included in the auditors’ terms ofreference. TSKB has been engaging the services of international auditors for several years, and the engagement of an auditor will therefore not be a specific Board condition.
The PFIs will also submit annual audited accounts to TSKB. It is common practice for the expected PFIs to have their accounts prepared in accordance with International Financial Reporting Standards (IFRS) and audited in accordance with ISA, As the PFIs under the SME project are not known at this stage, the engagement of auditors for them will not be a specific Board condition.
Annual and six-monthly (limited review) audits of Halkbank are undertaken on an International Financial Reporting Standards (IFRS) basis in accordance with International Standards of Auditing by a reputed international auditing firm. The current auditors of Halkbank are Deloitte and Touche. 2003 financial statements were audited by Ernst&Young. The last three years’ audit reports (in accordance with IFRS and ISA) were reviewed. Financial statements for the years- ended December 3 1,2002 and 2003 were unqualified, while there was a qualified opinion for the year-ended December 3 1, 2004, the qualification being “the methodology used to calculate the actuarial deficit on the funds acquired with the transfer of insolvent Pamukbank’s pension fund may differ from the methodology required by revised IAS 19.”
Audit of the SME project financial statements (project balance sheet, sources and uses of funds and special account statement) will also be included in the auditors’ terms ofreference.
The risk associated with external audit is assessed as negligible.
C. Disbursement Arrangements
As mentioned in the main document and in other sections of this Annex, the proposed loan will be allocated to TSKB for the amount of €100 million and Halkbank for €50 million under separate loan agreements, which will be on-lent to SMEs. A ceiling of about 30% of the loan amounts can be allocated to the tourism sector. The two tables below include a summary allocation of loan proceeds.
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1. Sub-loans and sub-loans leases to SMEs
I I
2. Front end fee 250y000 ~ I I I 3. Premia for caps 0 and collars
Total 100,000,000
HALKBANK Total (e) 49,875,000 I 100% of eligible 1. Sub-loans to sub-loans SMEs
2. Front end fee 125,000 1 I I
3. Premia for caps and collars OI
Total I 509000y000I
Special account arrangements-In order to facilitate prompt disbursements for this operation, TSKB and Halkbank will each have one designated (or special) account. The account will be maintained at the institutions themselves under terms and conditions acceptable to the World Bank. The authorized allocation will be established as follows: for TSKB, €20 million and for Halkbank, €10 million. These amounts are based on an estimated implementation period of 4 years.
Disbursement methods-Traditional disbursements will be used for TSKB and Halkbank. Traditional disbursements require that, when requesting a disbursement, the borrower submits Form 1903, statements ofexpenditures (SOEs) and summary sheets (samples ofthese documents will be attached to the Operational Manual).
Applications for replenishment-Withdrawal applications will be submitted to the World Bank at regular intervals and will be accompanied by detailed statements of expenditures and
70 May 18,2006 reconciled bank statements. Statement of expenditure procedures will apply regardless of the currency of expenditure for payments against sub-loans that are valued at less than €2.5 million equivalent (which is also the maximum amount of a sub-loan). TSKB and Halkbank will retain supporting documentation in accordance with normal commercial practices on all sub-loans and make these available for project supervision by World Bank staff and for external audit purposes.
Minimum withdrawal application size-Withdrawal of loan proceeds will be subject to a minimum application size of €2million equivalent for TSKB and € 1million equivalent for Halkbank -10% of the authorized allocation of the designated account. These limits apply to applications for reimbursements and for replenishment ofthe designated account.
Retroactive financing-Provisions have been made to allow for retroactive financing under the project. Up of €20 million equivalent for TSK_B and €10 million equivalent for Halkbank has been set aside to cover payments made 12 months prior to signing. The sub-loans for which TSD and Halkbank request reimbursement must have been made in accordance with criteria and procedures set forth in the Loan Agreement and Operational Manual including that for Halkbank such loans must have been made on or after July 31St, 2005, and for TKSB such loans must have been made on or after September 30th, 2005.
Submission of withdrawal applications-To accommodate the special needs of this project, withdrawal requests in a format to be agreed with the borrower will be submitted to the World Bank’s Country Office for action. These requests will be accompanied by form 1903, SOEs and summary sheets.
Conversion procedure: The World Bank’s loan to TSKB and Halkbank will start as a Euro Fixed Spread Loan (FSL) with the option to convert into TRY. The loans to both banks will start in Euros. Withdrawals can be converted into TRY at any time during the life of the loans, resulting in a local currency obligation for the converted portion of the loans. To re-denominate part of the loan obligation in TRY, the World Bank Treasury executes, with a market counterpart, a Euro-TRY swap. The World Bank passes to the borrower the terms of the swap it obtains in its market transaction. If the maturity of the conversion is shorter than the maturity of the loan, then at the maturity ofthe conversion, the borrower will have the option to roll over the conversion (ifthe swap market still exists at that time), or to revert the remaining obligation to Euros. Ifthe borrower chooses to roll over the conversion, it will not be exposed to currency risk, but there will be interest rate risk because the loan will be converted at market interest rates at that time. Our survey of the market indicates that, at this point in time, it is possible to execute Euro-TRY swaps for up to 10 years. For conversion of disbursed amounts to TRY, a minimum amount of €3 million equivalent will be required in order for the World Bank Treasury to enter into a swap with the market counterpart to effect the transaction. The Conversion Date (which is the start of the Conversion Period) will always fall on the Interest Payment Date next following the Execution Date ofthe Conversion Request. The FSL Conversion Guidelines will apply when requesting, accepting and effecting conversions on Fixed-Spread Loans. The guidelines are posted on the World Bank Treasury’s page at the web address: http://treasury. worldbank.orgiSen/icesiFinancial+ProductslC~ent+Products~ixed+Spread+Loan+( FSL).html. Additional information on the structure of the loan will be included in the Operational Manuals of TSKB and Halkbank.
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Annex 8: Procurement Arrangements TURKEY: Access to Finance for SMEs
A. General
The procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits’’ dated May 2004 and provisions stipulated in the Loan Agreement. The procurement arrangements are described below.
Procurement of Goods: Procurement of goods and related services (installation and maintenance) financed under the proposed project will be according to the World Bank Procurement Guidelines. For contracts below €2.5 million equivalent, established local private sector commercial practices will be followed in accordance with paragraph 3.12 of the Procurement Guidelines. Care has to be taken of other relevant factors such as time of delivery, efficiency and reliability of the goods, availability of maintenance facilities and spare parts thereof, and in case of non-consultant services, of the quality and competence of the parties rendering them. Advertising in the local and international press will not be mandatory. However, International Competitive Bidding (ICB) may be the most appropriate procurement method for the purchase of large single items. The procurement of goods and related services under all ICB contracts will be subject to the World Bank’s prior review. Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out of the loan. The procurement ofsecond hand goods is not eligible for financing out ofthe loan.
Procurement of Works. Procurement of works financed under the proposed project will be according to the World Bank Procurement Guidelines. For civil works estimated to cost less than €2.5 million equivalent per contract, established local private sector commercial practices will be followed in accordance with paragraph 3.12 of the Procurement Guidelines. Contracts placed by sub-borrowers on their subsidiary or affiliated companies will not be eligible for financing out of the loan.
B. Assessment of the Agency’s Capacity to Implement Procurement and Private Sector Procurement Practice in Turkey
Procurement Capacity Assessment: In case of procurement under sub-loans and leases, the Participating Financial Intermediaries (PFIs) and Halkbank branches will be responsible for ensuring that the procurement rules for sub-loans and leases specified below are followed by the sub-borrowers. TSKB and Halkbank will be responsible for reviewing and monitoring the compliance with the procurement rules by the intermediary banks, regional branches of Halkbank and leasing companies, and their sub-borrowers (beneficiary enterprises). Specialists assigned for the procurement arrangements within the TSKB and Halkbank Project Implementation Units (PIU) will be responsible for all procurement oversight for the management ofthe project. The PNs will keep the records of the procurements handled through the intermediary banks and leasing companies, or Halkbank’s branches, respectively. The documents related to the working capital expenditures will be kept by the SMEs, and these documents will be provided to the Bank whenever requested. The World Bank will conduct
72 May 18,2006 regular post reviews of the sub-projects not requiring a prior review. The PIUs will be responsible for assembling the documentation related to specific procurement transactions from the PFIs, sub-bon-owers and Halkbank branches in order to facilitate the Bank’s reviews.
TSKB was responsible for the implementation ofthe similar EFIL-I and EFIL-I1projects, and no procurement problem was encountered in these projects. The EFIL-I11 project was approved by the Bank’s Board in FY06. An assessment of the capacity of TSKB to implement procurement actions for the project was carried out by the procurement specialist on March 22, 2005. The assessment reviewed the organizational structure for implementing the project and the interaction among the project staff responsible for the procurement activities. The overall project risk for procurement is low.
Halkbank is a public Bank and has implemented two World Bank financed loans in the past: the Second Small and Medium Scale Industry Project (L3067) and the Agro Industry Project (L3077). Halkbank has very wide experience in similar transactions as the principal objective of its establishment. An assessment ofthe procurement capacity ofHalkbank was carried out by the Salih Kemal Kalyoncu on July 18,2005. The overall risk for procurement is average.
Private Sector Procurement Practice in Turkey: In the Country Procurement Assessment Report dated June 2001, it was determined that there are well established commercial practices for the procurement of goods, works and services by private sector enterprises, autonomous commercial enterprises and individuals. In case of goods, the local practice is to prepare the technical specifications and solicit quotations from the local andlor international market, In case of medium and large works, the technical specifications are usually prepared by consulting companies, and bids are collected from qualified contractors. Minor works are generally tendered on a lump sum basis by collecting bids from a number of local contractors. When equipment and machinery is needed for expansion ofexisting facilities, the purchasers usually prefer proprietary goods from a single source for the sake of standardization and minimization of operational and maintenance costs. Therefore, local private sector or commercial practices can be considered to be consistent with the World Bank’s criteria with respect to economy and efficiency. The general rule in the sector is to procure the least cost goods, works and services consistent with minimum quality requirements.
All SMEs financed under this loan should have private ownership.
C. Procurement Plan and General Procurement Notice
At the appraisal stage or during the implementation of the project, it is not possible to estimate either the sub-borrowers or their procurement requirements. Therefore, it is not possible for the borrower to develop a Procurement Plan which provides the basis for the procurement methods. Similarly, since the contract sizes and the methods cannot be estimated, it is not possible to prepare and publish a General Procurement Notice. It is expected that each sub-borrower will provide a list of procurements planned under the sub-loan. In case any sub-project includes ICB, a special procurement notice will be published in accordance with the Procurement Guidelines.
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D. Frequency of Procurement Supervision and Review Procedures
The Bank will review the procurement arrangements proposedperformed by TSKB and Halkbank in every year, including contract packaging, applicable procedures, and the scheduling of the procurement processes, for their conformity with Bank Procurement Guidelines and the proposed implementation program and disbursement schedule.
(a) Prior Review: The following procurement action and documentation would be subject to Prior Review by the Bank in accordance with the procedures set forth in paragraphs 2 and 3 of Appendix 1 to the Procurement Guidelines.
For Contracts awarded through ICB: prior review of all Bidding Documents, Bid Evaluation Reports, Recommendations of Contract Award and drafi Contracts will be conducted.
For Contracts awarded through Commercial Practices: prior review of first two contracts will be conducted for TSKB and Halkbank.
(b) Post Review: The procurement documents for all other contracts shall be subject to the Bank’s post review in accordance with the procedures set forth in paragraph 5 of Appendix 1 to the Procurement Guidelines on a random basis, one in five contracts. Post review of the procurement documents will normally be undertaken during the annual Bank supervision mission or as the Bank may request to review any particular contracts at any time. In such cases, TSKB and Halkbank shall provide the Bank with the relevant documentation for its review. The post review shall be conducted by the Bank’s Procurement Specialist.
Table 8.1 : Thresholds for procurement methods and prior review (in Euro million)
Expenditure Category Procurement Method Thresholds ICB Commercial Practice 1. Sub-loans and leases
Goods No threshold (Apply 12.5 when needed)
Works 12.5
Prior Review All contracts First two contracts from Halkbank and fust two contracts from TSKB
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Annex 9: Economic and Financial Analysis TURKEY: Access to Finance for SMEs
NA
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Annex 10: Safeguard Policy Issues TURKEY: Access to Finance for SMEs Environmental Assessment, OPlBPlGP 4.01
In accordance with World Bank safeguard policy OPIBPIGP 4.0 1 (Environmental Assessment), the project has been assigned Category “FI”. Under this assignment, TSKB and Halkbank each prepared an Environmental Assessment Framework document acceptable to the World Bank that defines environmental assessment procedures to be used in sub-project evaluation. These Framework documents will be included as separate chapters in the banks’ respective Operations Manuals. Both TSKB and Halkbank wish to include the possibility of sub-projects that may, by Turkish environmental regulations, require an Environmental Impact Assessment Report. The procedures defined for each bank are consistent with both Government ofTurkey Environmental Assessment requirements and World Bank Environmental Assessment policies and procedures utilized in previous Financial Intermediary operations in Turkey.
Both Framework documents identify institutional responsibilities for each of the following elements :
Sub-proiect Loan Preparation 0 0 Environmental assessment documentation 0 Public consultation (TSKBhIalkbank: EIA required) 0 Review and approval 0 Disclosure (TSKBiHalkbank: EIA required) 0 Loan conditionality
Su b-uroiect Implementation 0 Arrangements for environmental management (mitigation and monitoring) 0 Reporting
A brief description ofarrangements to be utilized is presented below:
For sub-projects that do not require an EIA, the PFIs in the case of TSKB (Halkbank branches in the case of Halkbank), in cooperation with the sub-project sponsor, will prepare an environmental screening form to define the environmental issues associated with the sub-proj ect and how they will be mitigated and monitored. The sub-borrower will also be responsible for
52 Specific projects identified in Turkish environmental assessment regulations (Regulations on Environmental Impact Assessment, Official Gazette, dated 16 December 2003, Number 253 18 from the Ministry of Environment and Forests-MoEF) Annex Irequire an EIA, and those identified in Annex I1 require information (Project Introduction File). For Annex I1projects, after further evaluation by MoEF, there is a decision that either an EIA is required or no further environmental documentation is necessary. Projects not identified in either Annex Ior 11 require no environmental documentation. The Annex Ilist is consistent with World Bank classifications of “Category A” projects, and the Annex I1list is consistent with World Bank screening procedures (“Category A” or “Category B,depending on specific project circumstances).
76 May 18,2006 ensuring that all Government environmental approvals, permits and licenses are secured.53 Demonstration of this due diligence would be provided to the PFIs (Halkbank branches) who will review this information as an element of their sub-project appraisal process. TSKB (Halkbank) andlor the World Bank will monitor PFIs’ (Halkbank branches’) performance in implementing these procedures and, if appropriate, examine selected sub-projects at their discretion.
For sub-projects that do require an EIA, the sub-project sponsor would be required to submit to the PFIs (Halkbank branches): (a) the MoEF EIA approval statement (Environmental Impact Assessment Positive Decision), (b) the MoEF approved EIA together with an Addendum that would include any supplemental information required by World Bank for “Category A” EIA projects. The EIA and “World Bank Addendum” would be reviewed and approved by the World Bank, and disclosed in Turkey (Turkish language version) and the World Bank InfoShop (English language version). The PFIs ~~alkbankbranches) would not be permitted to continue processing the sub-project until World Bank approval of the EIA and Addendum is oHered and disclosure in Turkey and the World Bank Infoshop has been completed. The World Bank will have the authority to review and post review all sub-projects. The review of evaluations will ensure that: screening was performed consistently and accurately, the work was of satisfactory quality, recommendations specified by the granting of the approvals were followed, all documentation was properly filed and recorded, and the conditions of approval by the Provincial Directorate of MoEF or any other Government institutions and post review were met. During the project implementation, World Bank missions will supervise the overall screening process and implementation of environmental recommendations for the selected enterprise. The World Bank supervision team will also review, ad hoc, environmental documentation.
53 Sub-projects involving working capital (purchase ofmaterials) andlor purchase ofequipmendmachinery are not subject to Turkish or World Bank EIA requirements. The sub-project sponsor must demonstrate that any hazardous materials or risky equipment (as defined by Turkish regulations) purchased has all necessary Government documentation for environment and worker health and safety.
77 May 18,2006
Annex 11: Project Preparation and Supervision TURKEY: Access to Finance for SMEs
Planned Actual PCN review 0412012005 0412012005 Initial PID to PIC 0412 5 12 005 Initial ISDS to PIC 04/25/2005 Appraisal 03/05/2006 04/06/2006 Negotiations 04/25/2006 04/25/2006 BoardlRVP approval 06/08/2006 Planned date of effectiveness for Halkbank 713012006 Planned date of effectiveness for TSKB 11/1/2006 Planned date ofmid-term review 0612012008 Planned closing date 0812012010
Key institutions responsible for preparation ofthe project: Halkbank, TSKB, The Turkish Treasury (guarantor).
Bank staff and consultants who worked on the project included:
Name Title Unit Halil Agah Senior Rural Development Specialist, Environmental Advisor ECSSD Andrina Ambrose Senior Finance Officer LOAGl Seda Aroymak Sr. Financial Management Specialist ECSPF Dilek Barlas Sr. Legal Counsel LEGEC Furuzan Bilk Operations Officer, Disbursement Specialist ECCU6 Steen Byskov Consultant, Financial Economist ECSPF Marie-Helene Bricknell Country Manager ECCU6 Rodrigo Chaves Lead Economist ECSPR Roy Gooi Principal Financial Officer BCFAL Salih Kalyoncu Procurement Specialist ECSPS Selma Karaman Program Assistant ECCU6 Hala Khattar Sr. Financial Officer BCFBD Aarre Laakso Consultant, Editor ECSPF Weenarin Lulitanonda Young Professional BCFBD Zeynep Lalik Mete Consultant, Financial Management Specialist ECSPF Marialisa Motta Sr. Private Sector Development Specialist, Task Team Leader ECSPF Jaap van Opstal Lead Counselor LEGFI Gurhan Ozdora Sr. Operations Officer ECSPF Susana Sanchez Sr. Financial Economist LCSFF Carlo Segni Consultant, Financial Specialist ECSPF Hannah Thomas Program Assistant ECSPF Steven Weisbrod Consultant, Financial Advisor LCSFF
78 May 18,2006
Annex 12: Documents in the Project File TURKEY: Access to Finance for SMEs
Commission ofthe European Communities, 2004. “Working Paper SEC,”
Commission ofthe European Communities, 2004. “Regular Report on Turkey’s Progress towards Accession.”
International Monetary Fund. 2005, “Turkey Article N Consultation.”
OECD, 2004 ‘‘Economic Survey of Turkey,” Paris.
Turkish Ministry ofEnvironment and Forests. December 16,2003. “Regulations on Environmental Impact Assessment, Official Gazette” Number 253 18.
Turkish Treasury, 2004. “List of Credit Lines” (Internal Document).
Turkish State Planning Organization (SPO), November 2004. “Pre-Accession Economic Program.”
Turkish State Planning Organization (SPO), 2003. “Preliminary National Development Plan” (2004-2006).
Turkish State Planning Organization (SPO), 2004. “SME Strategy and Action Plan.”
World Bank, January 2005. “Aide Memoire ofthe December Identification Mission for the SME Project and related comments from the Treasury.”
World Bank, May 2005. “Aide Memoire ofthe June Pre-appraisal Mission for the SME Project.”
World Bank, Soledad Martinez Peria, June 2005. “Financial Sector Depth and Outreach across Turkey.”
World Bank, International Finance Corporation, 2004. “SME Strategy.”
World Bank, Motta, M. and Byskov, S., April 2005. (Internal Document) “Private Sector Development in Turkey”, background note prepared for the World Bank meeting with the Foreign Advisory Council.
World Bank, Verghis, M., 2006. “Turkey: Labor Market Study.”
79 May 18,2006
Annex 13: Statement of Loans and Credits TURKEY: Access to Finance for SMEs
Difference between expected and actual Original Amount in US$ Millions disbursements
Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO66149 2005 SEC EDUC 104.00 0.00 0.00 0.00 0.00 96.49 0.00 0.00 PO77328 2005 RAIL RESTRUCT 184.70 0.00 0.00 0.00 0.00 173.32 0.00 0.00 PO78359 2005 SEISMIC RISK MITIGATION 400.00 0.00 0.00 0.00 0.00 373.91 0.00 0.00 PO81880 2005 MUNICIPAL SERVICES 275.00 0.00 0.00 0.00 . 0.00 256.79 0.00 0.00 PO93568 2005 EFIL 3 (CRL) 305.00 0.00 0.00 0.00 0.00 298.04 0.00 0.00 PO94167 2005 PSSP 2 465.40 0.00 0.00 0.00 0.00 434.2 1 0.00 0.00 PO94176 2005 ECSEE APL #2 (TURKEY) (CRL) 66.00 0.00 0.00 0.00 0.00 61.03 0.00 0.00 PO82801 2004 EFIL 2 303.10 0.00 0.00 0.00 0.00 75.00 -155.10 0.00 PO82996 2004 PFPSAL 3 1,000.00 0.00 0.00 0.00 0.00 500.00 0.00 0.00 PO75094 2004 WATERSHED REHAB (GEF) 0.00 0.00 0.00 7.00 0.00 6.75 0.25 0.00 PO74053 2004 HEALTH TRANSIT (APL #1) 60.61 0.00 0.00 0.00 0.30 56.34 7.22 0.00 PO70950 2004 ANATOLIA WATERSHED REHAB 20.00 0.00 0.00 0.00 0.10 19.55 0.15 0.00 PO72480 2004 RENEW ENERGY 202.03 0.00 0.00 0.00 1.01 196.33 7.31 0.00 PO59872 2003 BASIC ED 2 (APL #2) 300.00 0.00 0.00 0.00 0.00 291.46 283.05 80.46 PO74408 2002 SRMP 500.00 0.00 0.00 0.00 0.00 223.31 187.94 -13.89 PO70286 2002 ARIP 600.00 0.00 0.00 0.00 0.00 268.71 268.71 66.01 PO69894 2001 PRIV SOC SUPPRT 250.00 0.00 0.00 0.00 0.00 7.21 7.21 -28.79 PO68368 2000 MARMARA EARTHQUAKE EMG 505.00 0.00 0.00 0.00 0.00 281.59 281.59 37.37 RECON PO44175 2000 BIODIVINTRL RES MGMT (GEF) 0.00 0.00 0.00 8.19 0.00 4.12 3.52 0.18 PO09073 1999 INDUSTRIAL TECH 155.00 0.00 0.00 0.00 0.00 13.37 13.37 0.00 PO48852 1998 NAT’L TRNSM GRID 270.00 0.00 0.00 0.00 34.48 116.60 151.08 78.76 Total: 5,965.84 0.00 0.00 15.19 35.89 3,754.13 1,056.30 220.10
TURKEY STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars
Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 Acibadem 20.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 Altematif Bank 0.50 0.00 0.00 0.00 0.50 0.00 0.00 0.00 1996/01103105 Arcelik 103.36 0.00 0.00 103.36 103.36 0.00 0.00 103.36 2000 Arcelik LG Klima 8.29 0.00 0.00 0.00 8.29 0.00 0.00 0.00 2002 Assan 22.50 0.00 0.00 0.00 22.50 0.00 0.00 0.00 2002 Atilim 6.50 0.00 0.00 0.00 6.50 0.00 0.00 0.00 2000 Banvit 8.33 5.00 0.00 0.00 8.33 5.00 0.00 0.00 May 18,2006
Bayindirbank AS 1SO 0.00 0.00 0.00 1.so 0.00 0.00 0.00 2002 Beko 32.75 0.00 0.00 28.07 32.75 0.00 0.00 28.07 2001 Bilgi 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 1994196197 Borcelik 8.18 3.21 0.00 0.00 8.18 3.21 0.00 0.00 2004 Borusan Holding 30.00 0.00 10.00 0.00 30.00 0.00 10.00 0.00 1994 CBS Holding 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1990102 Conrad 3.15 0.00 0.00 0.00 3.15 0.00 0.00 0.00 2002 EKS 10.96 0.00 0.00 0.00 10.96 0.00 0.00 0.00 2004 Ege 10.00 0.00 0.00 8.00 10.00 0.00 0.00 8.00 1995 Entek 19.00 0.00 0.00 9.94 19.00 0.00 0.00 9.94 1999 Finansbank 2.22 0.00 0.00 0.00 2.22 0.00 0.00 0.00 2004 Garanti Leasing 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1999 Gumussuyu Kap 4.00 0.00 3.66 0.00 4.00 0.00 3.66 0.00 2001 Gunkol 4.53 0.00 0.3 1 0.00 4.53 0.00 0.31 0.00 1998 Indorama Iplik 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 2005 Intercity 15.00 5.00 0.00 27.75 4.44 5.00 0.00 8.21 1998100102 Ipek Paper 10.85 0.00 0.00 0.00 10.85 0.00 0.00 0.00 1990 Kepez Elekhik 2.43 0.00 0.00 0.00 2.43 0.00 0.00 0.00 1988190 Kirk 11.33 0.00 0.00 0.00 11.33 0.00 0.00 0.00 2004 Koclease 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1991 Kula 5.20 0.00 0.00 0.00 5.20 0.00 0.00 0.00 2003 MESA Group 11.00 0.00 0.00 0.00 11.00 0.00 0.00 0.00 2004 Meteksan Sistem 0.00 0.00 8.50 0.00 0.00 0.00 8.50 0.00 2002 Milli Re 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998102 Modem Karton 8.33 0.00 0.00 0.00 8.33 0.00 0.00 0.00 1991 NASCO 10.18 0.00 0.00 3.55 10.18 0.00 0.00 3.55 2004 OPET 25.00 0.00 0.00 40.00 8.33 0.00 0.00 25.00 2004 Oyak Bank 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 2002 Pasabahce 3.75 0.00 0.00 0.00 3.75 0.00 0.00 0.00 1998 Pinar ET 3.14 0.00 0.00 0.00 3.14 0.00 0.00 0.00 2000 Pinar SUT 11.45 0.00 0.00 0.00 7.77 0.00 0.00 0.00 1999 SAKoSa 9.91 0.00 6.61 6.64 9.91 0.00 6.61 6.64 1990 Silkar Turizm 1.89 0.00 0.00 2.15 1.89 0.00 0.00 2.15 2002103 Sise ve Cam 43.93 0.00 18.18 36.56 43.93 0.00 18.18 36.56 2002 Soktas 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 2005 TSKB 0.00 0.00 50.00 0.00 0.00 0.00 50.00 0.00 1982183189191196199 Trakya Cam 0.00 0.36 0.00 0.00 0.00 0.36 0.00 0.00 2002 Turk Ekon Bank 11.1 1 0.00 15.00 0.00 11.11 0.00 15.00 0.00 2001 Turkish PEF 0.00 9.59 0.00 0.00 0.00 2.17 0.00 0.00 1999 Unye Cement 8.22 0.00 0.00 0.00 8.22 0.00 0.00 0.00 1999 Uzel 8.40 0.00 0.00 4.95 8.40 0.00 0.00 4.95 1998 Viking 7.62 0.00 0.00 0.00 7.62 0.00 0.00 0.00 Total portfolio: 662.39 23.16 112.26 270.97 571.48 15.74 112.26 236.43
81 May 18,2006
Approvals Pending Commitment
FY Approval Company Loan Equity Quasi Partic. 2001 Akbank 0.03 0.00 0.00 0.00 2004 Akbank BLoan Inc 0.00 0.00 0.00 0.02 2005 Avea 0.12 0.00 0.00 0.30 2005 Bandirma Dogalga 0.00 0.00 0.00 0.00 2005 Gemlik Dogalgaz 0.00 0.00 0.00 0.00 2002 Milli Reasurans 0.00 0.01 0.00 0.00 2005 PALEN 0.00 0.00 0.00 0.00 2005 Palgaz 0.01 0.00 0.00 0.00 2005 Sivas Dogalgaz 0.00 0.00 0.00 0.00 2002 TEB I11 0.00 0.00 0.00 0.05 2005 YUCE 0.00 0.00 0.00 0.00 Total pending commitment: 0.16 0.01 0.00 0.37
82 May 18,2006
Annex 14: Country at a Glance TUFNEY: Access to Finance for SMEs
Europe 8 Lower- POVERTY and SOCIAL Central middle- Turkey Asia income Development diamond* 2003 Population, mid-year (millions) 70.7 473 2,655 Lffe expectancy GNI per capita (Atlas method, US$) 2,aoo 2,570 1480 GN I(Atlas method, US$ billions) 87.8 121 3,934 - Average annual growth, 1997-03 Population (%) 17 0.0 0.9 Labor force (%) 2.3 0.2 12 GN I Gmss per primary Most recent estimate (latest year available, 1997-03) capita enrollment Poverty (%of population below natio nal PO vertyline) Urban population (%of totalpopulation) 66 63 50 Life expectancyat birth (years) 70 69 69 - Infant mortality(per ?,OOOlive births) 35 31 32 Child malnutrition (%ofchildren under5) a n Access to improved water source Access to an improved water source (%ofpopulation) a2 91 a1 Hliteracy (% of population age 69 14 3 8 Gross primary enrollment 94 83 it? -Turkey Male 98 84 113 ___ Lo wer-middle-income group Female 91 82 in
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 Economic ratios* GDP (US$ billions) 615 l79.4 183.9 240.4 I Gross domestic investmentlGDP 15.3 27.6 213 22.8 Trade Exports of goods and serviceslGDP P.5 13.7 29.2 27 4 Gross domestic savingslGDP P2 219 8.8 8.5 Gross national savingslGDP 8.3 24.8 20.8 8 .5
Current account balancelGD P -3.1 -3.6 -0.8 -2.8 Domestic Interest paymentslGDP 2.9 2.2 3.8 3.2 savings Total debtlGDP 33.0 38.2 7 13 6t2 Total debt servicelexports 39.2 316 50.7 40.3 Present value of debtlGDP 73.1 Present value of debtlexports 234.2 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annualgrowth) -Turkey GD P 5.0 2.7 7.9 5.8 5.6 GDP *.oer caDita 2.8 0.9 6.2 4.2 4.1 -io wr-middle-incom e or0 uo 7.-...
STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth of investment and GDP (X) (%of GDP) Agriculture 214 15.2 13.0 13 .4 50 I Industry 25.0 29.8 23.7 219 Manufacturing 15.8 18.3 14.0 13.3 Services 53.6 54.0 63.3 64.7 Private consumption 78.4 65.0 66.2 66.9 General government consumption 9.4 13.0 14.0 13.6 Imports of goods and services 6.6 8.3 30.7 30.7 -GDI +GDP ______1983-93 1993-03 2002 2003 Growth of exports and Imports (%) (average annual growth) Agriculture 25 10 7.4 -2.4 40 - I Industry 6.7 2.2 5.6 5 .O Manufacturing 6.9 3.0 8.2 8.4 Services 4.3 3.0 7.3 6.4 Private consumption 4.7 19 2.2 6.7 General government consumption 4 .O 3.9 5.4 -2.4 -40 - Gross domestic investment 7.7 10 35.9 20.4 -Expolls -o-lnports Imports of goods and services 114 7.8 5.8 27.1 ~~ - -
83 May 18,2006
Turkev ~ PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (X) Domestic prices 1 (77 change) Consumer prices 314 66.4 44.8 252 bnplicit GDP deflator 26 3 67.8 44.1 22.5 Government finance 25 - (%of GDP, includes current grants) Current revenue 8.0 3t2 30 A 98 99 00 01 02 03 Current budget balance -3.1 -5.1 -5.3 -GDPdeflaor -CFI Overall sumlusldeficit -EO -129 -6.1 I TRADE 1983 1993 2002 2003 Export and import levels (US$ mill.) (US$ millions) I Total exports (fob) 5,905 15,345 40.t24 51206 80.000 - Agricultural and livestock 1032 1044 2,089 2,545 I Mining and quarry products 88 233 387 543 Manufactures 4,685 44,068 33,565 43,9P Total imports (cif) 9235 29,428 51554 69,340 Food P3 969 2245 2,006 Fuel and energy 3,851 3,903 9,82 ll.568 Capital goods 29n 7,499 9,n3 ll.792 97 98 99 00 01 Export price index (S95=%JO) 89 92 75 82 Import price index (S95=00) uo 85 73 83 EXPOrtS rn InportsO2 O3 Terms of trade (S95=%JO) 89 TI9 102 99 I
BALANCE of PAYMENTS 1993 1983 2002 2003 Current account balance to GDP (X) (US$ millions) Exports of goods and services 7,865 26,264 54,907 70331 Imports of goods and Services u,is 33,721 55,365 73,760 I Resource balance -2253 -7,457 -458 -3,529 Net income -1430 -2,744 -4,554 -5,427 Net current transfers 1760 3,768 3,490 2,TI6 Current account beiance -2923 -6,433 -1522 -6,850
Financing items (net) 2,075 6,741 7,675 6,897 Changes in net reserves -252 -308 -6,153 -4,047 Memo: Reserves including gold (US$ mi//iOflS) 2,253 V,762 38,051 44,957 Conversion rate (DEC, /ocaVUS$) 226.0 11046.7 1509,471 2496,668
EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 Composition of debt (US$ (US$ millions) 2003 mill.: Total debt outstanding and disbursed 20,324 68,605 13 2058 447,035 iBRD 2,336 5,285 5,367 A:5244 5214 B: a3 IDA 84 I42 89 83
Total debt service 3x58 a,664 29,092 29,V2 IBRD 274 183 708 728 ID A 4 7 7 7 Composition of net resoumeflows Official grants 98 403 Official creditors 327 -740 224 -22V Private creditors 139 6,64 6,901 -5 n Foreign direct investment 48 622 863 1063 Portfolio equity 0 89 -1183 2,250 F World Bank program 86,624
Commitments 675 207 1650 0 A - IBRD E ~ Bilatetal
Disbursements 486 354 1031 276 ~ 8 - IDA D -Other mltilaterai F ~ PriMte Principal repayments 125 753 443 502 IC-IMF G- Shart-tm
84 May 18,2006
Annex 15: Maps TUFWEY: Access to Finance for SMEs
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JANUARY 2005