New amendments put Turkish bank and fund under Erdoğan’s personal control

Turkey’s State Industry and Labour Investment Bank was founded in 1975 to convert the savings of Turks working abroad into investments and finance labour companies.

The labour companies founded with contributions from tens of thousands of workers in Germany, Austria and France were defrauded, and they and the bank went bankrupt after being stripped of assets. After this, the bank was merged with another hollowed-out public bank, Turizm Bankasi, to become the Turkish Development Bank in 1988.

And now, a legal amendment proposed by the ruling Justice and Development Party (AKP) to change the laws regulating the Development Bank and establish a linked Turkish Development Fund has passed the necessary parliamentary commission and is expected to be implemented.

The difference is that the bank and fund will likely be assigned to the command of President Recep Tayyip Erdoğan and exempted from all legal and institutional oversight.

Despite drawing sharp criticism from the main opposition Republican People’s Party (CHP), pro-Kurdish Peoples’ Democratic Party and other opposition deputies, the amendment regarding the new Development Fund is scheduled for a plenary session this week.

The amendment puts the Development Bank beyond the oversight of the Capital Markets Board of Turkey and the Banking Regulation and Supervision Agency, and makes it exempt from the other regulations normally imposed on public banks and government business enterprises.

Once it and the Development Fund have been directly tied to Erdoğan, he alone will have the final say over how their funding sources are used.

The president too will be responsible for appointing the bank’s directors and other personnel, and will have the authority to change its constitution and internal regulations.

The Development Fund, which will be created with funds as laid out by Erdoğan, will be free from supervision of its borrowing on currency and capital markets, its activities related to securities, and all domestic or international transactions. It will also be exempt from income and corporate tax.

Neither the Treasury and Finance Ministry nor the Supreme Court of Public Accounts will have the authority to oversee the Development Fund’s activities.

These amendments put the bank and fund well outside the acceptable boundaries laid out in the Basel III international framework for banks, and allow them to be used arbitrarily by Erdoğan.

By removing them from the oversight of the Capital Markets Board of Turkey and the Banking Regulation and Supervision Agency, there is no way to check whether they are making appropriate use of funds, using credit pertinently, and whether credit has gone bad due to improper use.

A large part of the $20 billion held by Turkey’s Unemployment Insurance Fund will be transferred to the Development Bank and Development Fund by presidential decree, after the Unemployment Insurance Fund was recently called on to make a transfer of around $2 billion to state-owned Halkbank, Vakıfbank and Türk Eximbank.

The Unemployment Insurance Fund was established through deductions from workers and employers and designed to fund benefits for unemployed workers. It is administered by the Ministry of Labour and Social Security.

Yet the Unemployment Insurance Fund has been used by Erdoğan’s administration as a major source of funds for its political campaigning, including for the crucial April 2017 constitutional referendum that brought in the current executive presidential system.

Meanwhile, the removal of regulatory oversight from the Turkish Development Bank is completely contrary to international finance and banking criteria, and the lack of transparency together with the political direction of the bank will make it impossible for the bank to gain any meaningful trust from international investors.

In one sense, the amendment marks the Development Bank and Development Fund out as Erdoğan’s “personal vault.”

This is besides the Turkish Sovereign Wealth Fund, which Erdoğan in September appointed himself the chair of, with his son-in-law, Finance and Treasury Minister Berat Albayrak, as his deputy.

As chairman of the fund, Erdoğan has full authority over its assets, including public companies such as Turkish Airlines and public banks, as well as large swathes of publicly owned land, and it is he who will decide how it trades its shares or issues bonds, and with whom it strikes investment partnerships.

Shortly after taking control of the Sovereign Wealth Fund, Erdoğan placed Erişah Arıcan, an academic who supervised and allegedly helped write Albayrak’s doctoral thesis, and was also placed on the fund’s board of directors, at the head of the Istanbul Stock Exchange. She is joined there by two more of Erdoğan’s close allies: Sovereign Wealth Fund General Manager Zafer Sönmez, and Fahrettin Altun, the presidential communications director.

So, Erdoğan has also taken control of the Istanbul Stock Exchange, like the Sovereign Wealth Fund.

Once the legal amendment passes and he has the freedom to dispose of the funds of the Development Bank and Development Fund without oversight, Erdoğan’s next move will be to relaunch one of Turkey’s oldest banks, Emlakbank.

The bank was established by order of Turkish Republic founder Mustafa Kemal Atatürk in 1926, and designed to provide mortgages and finance for the country’s construction sector.

The bank played an important role in financing major construction projects around the country before it was liquidated in 2001 following crippling corruption scandals in the 1990s that saw its former general manager, Engin Civan, flee to the United States after serving time in prison.

When he announced his New Economic Model in August, Albayrak said Emlakbank would reopen and said the plans for which would be submitted to parliament in October.

During a period when more than 1,000 construction companies, including old and established firms, have been forced to seek bankruptcy protection, and with many firms close to the AKP close to bankruptcy, Emlakbank is regarded by many as a means to save these companies.

It is thought that, in order to achieve this, the bank will be granted similar exemptions from regulatory oversight to those enjoyed by the Turkish Development Bank.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.