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PROJECT INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB1550
Project Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Environment Category
Date PID Prepared
Estimated Date of
Appraisal Authorization
Estimated Date of Board
Approval
Access to Finance for SMEs
EUROPE AND CENTRAL ASIA
Micro- and SME finance (70%);General finance sector
(15%);General industry and trade sector (15%)
P082822
GOVERNMENT OF TURKEY
Turkiye Sinai Kalkinma Bankasi (TSKB), Treasury
[ ] A [ ] B [ ] C [X ] FI [ ] TBD (to be determined)
April 13, 2005
June 20, 2005
February 14, 2006
1. Key development issues and rationale for Bank involvement
Key conditions for keeping Turkey on a path of steady growth and ensuring compliance
with EU accession requirements include maintaining macroeconomic stability, and
broadening structural reforms to improve the business environment and increase
employment. Turkey’s economic stability has significantly improved since the 2001 financial
crisis, as indicated by a marked reduction in inflation (down from 65% in 1999 to single-digit
rates in mid-2004) and by initial improvements in public finance, including reductions of the
fiscal deficit and the public debt stock to GDP ratio. Macroeconomic changes have been coupled
with first structural reforms, including liberalization of key industries, initial reform of the
banking sector, and autonomy for institutions such as the Central Bank and the Supervision
Agency.1 Despite recent improvements, Turkey’s macroeconomic balance remains fragile, a
number of structural reforms still need to be finalized, and other reforms are yet to be initiated.
Permanently lowering inflation to single digit levels, reducing the fiscal deficit and the public
debt stock to GDP ratio toward EU averages, completing the restructuring of the banking sector
and reforming the public sector are some of Turkey’s current challenges. Increasing employment
and improving the country’s business environment by increasing firms’ access to finance,
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. While acknowledging the importance of macroeconomic factors, this project proposal
focuses on creating better conditions to improve the business environment, with a specific focus
on increasing access to finance for SMEs.
1.2
Development of SMEs could be an important factor in sustaining Turkey’s growth,
creating employment, maintaining social stability, and integrating the Turkish productive
sector with the EU and the global economy. However, Turkish SMEs’ current value added,
See: Republic of Turkey, November 2004, “Pre-Accession Economic Programme, 2004” and Commission of the
European Communities, October 2004, “Regular Report on Turkey’s progress towards accession.”
1
productivity and exports are very limited. Many small firms also prefer to remain
informal. Turkish SMEs — roughly defined as firms with fewer than 250 employees2 —
constitute 61 percent of total employment in Turkey but contribute only 26.5 percent to the
economy’s value added, significantly less than SMEs in comparator countries (see Table 1).3
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 example.4 Anecdotal evidence also suggests that the productivity
of Turkish 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 2003).5 This has significant impacts on the
Government’s fiscal revenues, on competition levels, 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 to improve the productivity
and growth of the Turkish real sector, reduce informality and increase employment.
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.
1.3. One of the key reasons for SMEs’ limited value added and productivity is
insufficient access to credit, which is heavily concentrated in large firms. Responding to the
macroeconomic stabilization and the associated reduction in the profitability of holding
Government securities, credit to the private sector has been growing at a rapid pace in Turkey.
However, the credit is mainly directed to consumers — in the past two years, consumer credit
has grown three times faster than commercial credit (see Table 2). In the commercial loan
segment, SMEs have been particularly underserved — at the end of 2004, more than 50 percent
of the total commercial credit was directed to just 418 large firms. Turkish Government agencies,
banks and chambers of commerce confirm that Turkish SMEs receive a disproportionately small
share of bank lending — estimates vary between 3.5 and 20 percent depending on the definition
2
For an overview of current definition of SMEs in Turkey, see The Turkish State Planning Organization (SPO),
2004 SME Strategy and Action Plan, page 26.
3
The Turkish State Planning Organization (SPO), 2004, reports that Turkish SMEs constitute 99.8 percent of total
enterprises and 76.7 percent of total employment (SME Strategy and Action Plan, page 8). Differences in data
depend on different definitions of SMEs and of formal employment, and on the different years of the analysis.
4
YASED, 2003. Mimeo.
5
OECD, Economic Survey of Turkey, Paris, 2004.
Table 2: Credit to Non-Financial Private Sector
Credit,
billion
One year real growth
Two years real growth
Type of loan
YTL
(2003-2004)
(2002- 2004)
Consumer loans
26.2
105%
206%
Commercial loans
48.5
31%
53%
Other
3.5
-7%
-8%
Total
78.2
46%
77%
Source: Central Bank of the Republic of Turkey, November 2004.
Note: “Other” includes agricultural coops, non-profits and others.
of SMEs.6 According to the Turkish Foreign Investor Association, for example, Turkish SMEs’
share of bank lending is 3.5 percent, versus 47 percent in South Korea. 7 Finally, credit provision
is concentrated in the country’s main urban centers: Istanbul and, to some extent, Izmir and
Ankara. In 2004, firms located outside these cities received only one-third as much credit as
firms located in Istanbul, while contributing three times as much as Istanbul’s firms to the
country’s GDP (Table 3).
Table 3: Regional Distribution of Credit and GDP
Share of Credit
Share of GDP
(percentage)
(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 shares tend to be stable
over time.
1.4
Relevant causes of SMEs’ limited access to credit are underdevelopment of the
Turkish financial sector and the lack of a sound financial information infrastructure. With
domestic credit reaching 18 percent of GDP in 2004,8 Turkey’s financial sector ranks below
those of most EU members and candidate countries, among which the average domestic credit to
GDP ratio is 2-10 times larger than in Turkey. Moreover, the major private banks in Turkey are
affiliated with large industrial and financial groups, to which much of their lending is directed.
6
Some banks define SMEs according to their volume of sales as well as overall borrowing in the banking sector. It
is difficult to estimate the share of SME lending because some SME owners may be receiving consumer loans for
their businesses.
7
YASED, 2003. Mimeo.
8
Based on November 2004 credit data.
Credit to related parties continues to be a major issue. There is no corporate bond market, and the
leasing and factoring sectors’ combined assets account for less than 2 percent of GDP.9
Key reasons for underdevelopment of the Turkish financial sector include:
 Turkish banks hold unusually large portions of their assets in Government securities (40
percent of bank assets as of December 2004). This is due to past macroeconomic instability,
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’ CAR.
 Still very high real interest rates deter borrowers from requesting loans. At end of 2004, the
nominal interest rate had declined to 21 percent, and the real interest rate was 12 percent.10
Nominal interest rates for unsubsidized loans to SMEs were still as high as 35 percent.
 High taxes on financial intermediation increase spreads and lending rates. Furthermore, the
current taxation system favors investment in Government securities over loans to firms.
 There is a maturity mismatch between assets and liabilities. With the exception of the few
banks that are able to secure long-run term syndication deals, most Turkish banks hold shortterm deposits and liabilities, and thus cannot offer long-term loans without taking significant
maturity mismatch risks.
 Limited instruments to hedge against exchange rate risks reduce banks’ ability to lend in
local currency. With 47 percent of liabilities denominated in foreign currency,11 banks need
to manage foreign exchange risks to lend to non-exporting firms, especially SMEs, in local
currency.
 Use of credit rating systems for SMEs, and more broadly for corporate borrowers, is limited
but growing. Although Turkish banks have started using modern SME scoring tools in the
past few years, this practice is not widespread.
Key reasons for deficiencies in the existing financial information infrastructure include:
 Lenders have access to limited and fragmented information about the repayment behavior of
SMEs. Although Turkey has two credit information registries, one managed by the Central
Bank and another managed by the private sector, lenders can only get limited information
about the repayment history of SMEs or their owners. In fact, the private bureau has only
recently started to systematically collect information about firms.
 The collateral regime is inadequate. The only movable asset registries that exist in Turkey are
for vehicles, boats, intellectual property and trademarks. As a result, SMEs cannot easily
pledge most of their assets, such as equipment, livestock and other movables. In addition,
few Cadastres have automated their processes and computerized their records, making it
costly to use land as collateral.
 SME lending is considered riskier and more costly than lending to large firms due to SMEs’
lack of adequate financial statements. SMEs’ financial statements are often unreliable, do not
comply with accounting standards and are not subject to auditing reviews. SMEs also often
9
Based on data from the Turkish Treasury website.
Interest rate data are based on the yield on the 1 year T-bill and expected 1 year inflation according to a survey by
the Central Bank of Turkey.
11
Based on BRSA data as of year-end 2004.
10
do not make use of key accounting tools — such as cash flow statements and cost accounting
systems — to inform their decisions.
1.5
The rationale for the World Bank’s involvement in increasing access to credit for
Turkish SMEs is to provide financial support and technical assistance in order to reduce
the constraints that the Turkish financial sector faces when targeting SMEs. The World
Bank can help the Government of Turkey (GOT) increase SMEs’ access to credit by providing
financial institutions with long-term finance and by offering technical assistance and investment
(as needed) to improve the country’s financial information infrastructure. The Bank’s support to
the GOT stems from its broad knowledge in both of these areas, based on extensive research —
particularly recent research in the financial information infrastructure field — and on world wide
experience with financing credit lines.
1.6
The Government of Turkey is committed to increasing access to credit for SMEs
and has expressed interest in borrowing for the proposed project. SME development is one
of the key pillars of the Government’s policies to improve 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; and it is a key element of the
EU Program for Turkey’s accession.12 Both the Government’s strategic documents and the EU
accession paper indicate that insufficient access to long-term finance is a key constraint on SME
development in Turkey.13 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’ current
financial structures, strengthening guarantee schemes for SMEs and improving state aid for SME
investments.14 Consistent with its overall strategic framework on SME development, the
Treasury has welcomed the proposed WB Project and confirmed that it is ready to borrow for
it.15 The WB team is currently in the process of selecting the best-suited implementing agency
(or agencies) in collaboration with the Treasury and other institutions that are involved in project
design (including private and public development banks, bankers’ associations and chambers of
commerce).
1.7
The project is consistent with the World Bank Turkey Country Assistance Strategy
(CAS), the overall WB program supporting reform of the Turkish financial sector and
overall improvement of the real sector. The project is included as a FY06 deliverable in the
CAS and it is a key element of the WB’s broad 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
12
See: Republic of Turkey, 2003: Preliminary National Development Plan (2004-2006), pages 101-108; SPO, 2004:
SME Strategy and Action Plan; and Commission of the European Communities, 2004: Regular Report on Turkey’s
Progress towards Accession, pages 119-122.
13
Other key areas included in the Government’s strategy to increase SME productivity and growth in Turkey
include reforms to improve the overall business environment, development of technological and innovation capacity
at the firm level, and education and training to promote entrepreneurship.
14
SPO, 2004: SME Strategy and Action Plan, pages 64-68.
15
See comments on the December Aide Memoire received by the Treasury in February 2005 — including feedback
from TKB, TSKB, the Central Bank, KGF, HalkBank, TOBB, KOSGEB and Yapi Kredi.
focus on removing finance constraints affecting SMEs. Complementary WB financial sector
initiatives currently under development include: (a) the Programmatic Financial and Public
Sector Adjustment Loan (PFPSAL III), focused on improving the corporate insolvency regime
and strengthening banking supervision, privatization and restructuring strategies for state-owned
banks; (b) an additional forthcoming adjustment operation that would complement PFPSAL III;
and (d) two ongoing/upcoming credit lines targeting export companies (EFIL II and EFIL III,
respectively).16 The main WB complementary initiative to evaluate and improve the productivity
of the Turkish real sector is the forthcoming Investment Climate Assessment (ICA).
2. Proposed objective(s)
2.1
The project’s main objective is to increase SMEs’ access to credit, both in the short
term and in the medium term, in turn improving their productivity and value added.

In the short term, the project will provide a credit line that will grant immediate access to
credit for SMEs that currently have limited access to the financial system. The project will
target all SMEs, without any sector restrictions. Credit to SMEs located in particularly
underserved Regions (i.e., outside of the main urban centers — see Table 3) will be strongly
encouraged.

In the medium term, the project will initiate improvements to the Turkish financial
information infrastructure, i.e., the country’s credit information systems and collateral
regime, as well as financial transparency and auditing requirements for SMEs.
By improving SMEs’ access to credit, the project will help increase their value added. This, in
turn, will help to reduce the gap between SMEs and large firms, ultimately increasing
employment and helping Turkey move toward sustainable, regionally balanced and equitable
economic growth.
2.2
The project’s secondary objective is to improve financial institutions’ capacity to
develop lending to SMEs. Besides providing immediate access to credit for SMEs, it is hoped
that the proposed project will: (a) help banks and other financial intermediaries acquire better
knowledge of the SME market and develop lower-cost lending instruments and technology,
leading to further lending in the future; (b) be a pilot for defining credit conditions to SMEs; and
(c) demonstrate — to the Government, international organizations and the financial sector — the
feasibility and sustainability of lending to SMEs.
3. Preliminary description
3.1
The proposed project will finance the following two components: (1) a credit line
targeting SMEs and (2) initiatives aimed at improving the financial information
infrastructure to structurally increase access to credit for SMEs. For both components, it
will also finance monitoring and evaluation activities.
16
The World Bank is also considering preparation of a Financial Sector Adjustment Program (FSAP) in
collaboration with the IMF.
3.2. Credit line targeting SMEs (about US$100 million). The project will provide a
medium-term credit line channeled through an Apex institution, which will in turn on-lend to
commercial banks, leasing and factoring companies and state banks that have agreed on a
restructuring or privatization plan with the World Bank. The design of the credit line will
incorporate lessons learned in previous operations in Turkey and elsewhere with respect to
selection of the Apex institution, pricing, project evaluation and targeting of end-clients. Turkey
Sinai Kalkinma Bank (TSKB), a private development Bank that currently intermediates other
WB credit lines (EFIL II and the upcoming EFIL III), is proposed as the sole Apex institution for
the implementation of this project component. 17 As Apex, TSKB will directly assume the credit
risk of the loan that it intermediates, if borrowing financial institutions were to fail to repay their
loans. The final beneficiaries will be SMEs — roughly defined here as firms employing fewer
than 250 people and having total assets and annual sales of less than US$10 million.18 There will
be no sector restrictions. Outreach to underserved Regions will be strongly encouraged, possibly
by dedicating part of the credit line (e.g., up to US$15 million) to specific areas through a pilot
program. The credit line will finance medium- and long-term working capital and investment
loans. Average and maximum loan sizes will be approximately US$500,000 and US$1 million,
respectively. The pricing of the credit will be based on the World Bank’s funds’ costs plus
TSKB’s on-lending margin, plus the financial intermediaries’ on-lending margins, plus the
Government’s guarantee fee, plus any other applicable fees. The team is considering the
possibility of lending to the GOT in both local and foreign currencies in order to better meet the
needs of both non-exporting and exporting SMEs.19 The conditions will be finalized during the
appraisal mission.
3.3. The proposed line will complement existing credit facilities provided by
international financial institutions. Credit lines currently provided by international
organizations total about US$1 billion.20 Most of these lines primarily target medium-to-large
exporting firms, with average loan size per firm of about €2-3 million and maximum loan
amounts of about €10-20 million. A few institutions, including KFW, TOBB 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 approximately
US$500,000 and US$1 million, respectively.
17
After a recent evaluation, which is available upon request, the team decided against including other proposed
institutions as Apexes.
18
This definition will be adapted to ensure inclusion of SMEs in various sectors. For background on the definitions
of SMEs currently in use in Turkey, refer to SPO, 2004: SME Strategy and Action Plan, page 26. For the World
Bank’s definitions of SMEs, see: http://ifcnet2.ifc.org/sme/metrics/html/data.html. For the European Commission’s
definition of SMEs, see: Commission of the European Communities, 2004: Working Paper SEC (2005) 170, page 6.
19
See World Bank (2000). “Proposal to Introduce Local Currency Financial Products” (R2000-232) and the website: www.worldbank.org/fps/hedging.htm
20
Treasury, 2004. A list of existing credit lines, including the donors, the local Apex institution, final beneficiary
financial institutions, average loan size and amount disbursed to date is available upon request.
3.4. Initiatives aimed at improving the financial information infrastructure (about
US$10 million). Possible initiatives to be financed under this project component include
improvements of:21
a.
Credit information systems (about US$1.5 million);
b.
The collateral regime (about US$5 million); and
c.
Auditing and financial statements requirements and financial transparency of SMEs
(about US$3.5 million).
This component is aimed at identifying key issues in the Turkish financial information
infrastructure and supporting a few selected initiatives, which could be complemented as needed
by the upcoming adjustment operation (see paragraph 1.7).
To improve credit information systems, this project would finance:
 Technical assistance to develop a new legal and regulatory framework for credit information.
The current framework — as defined by Article 9 of the Banking Law — is very vague and
is likely to become untenable in the future because: (a) it is inconsistent with the EU Data
Protection Directive; (b) it does not provide protection against the threat of lawsuits, which
are likely to increase, particularly on the part of firms; and (c) it is not suited to addressing
increasing consumer pressure. Specific current policies limiting distribution of the Central
Bank’s data — particularly bad checks and protested documents — to regulated financial
institutions only should also be reviewed.
 Review and modernization of the credit bureau operated by the Central Bank, combined with
support to ensure better integration between the Central Bank’s credit bureau, the private
bureau and the information system operated by the Supervisory Authority. First, the project
proposes to evaluate the potential for complementing the information collected by existing
bureaus, to avoid overlap and duplication. Second, the project would provide specific support
to improve the Central Bank’s bureau, which has clear limits with regards to provision of
timely access to historical data, quality of data analysis, and information on the status of
loans as they evolve over time. The project could finance a review of the current systems,
data and procedures; modifications to the reporting format; and adoption of new technologies
to improve the existing database and facilitate secure access for supervisors.
 Evaluation of the potential to provide open access to data from the courts, including the
enforcement court (Icra Tetkik Mercii), as well as information on unpaid obligations with the
Government, including taxes. The project would convene a task force to evaluate
international experiences with making some of this data public and to suggest next steps for
reforming the legal and court’s system for sharing data.
 Review of and, if necessary, support for the computerization of TOBB’s corporate registry
data, which is much needed to complete the databases of both the Central Bank’s credit
bureau and the private credit bureau.22
To improve the collateral regime, this project would finance:
 Review of the legal and regulatory frameworks on collateral (both for movable assets and for
real estate).
A more detailed diagnostic of the current status of Turkey’s financial infrastructure is available upon request.
Note that Finar, a business reporting firm, is already computerizing the TOBB gazettes. Its work should be
analyzed to learn from Finar’s experiences before developing this project sub-component.
21
22

Modernization of collateral registries, including possible development of moveable collateral
registries. First, this component would finance a consulting study to identify priorities for
reform. Second, it could finance computerization of records and connection of existing land
registries, as well as the creation of a moveable collateral registry.
To improve auditing and financial statement requirements and the financial transparency of
SMEs, the project would finance:

Modernization of the regulatory regime regarding SME financial reporting, in line with the
requirements of EU Company Law directives; enhancement of the institutional framework to
ensure adequate implementation of the financial reporting requirements; and development of
market incentives to ensure SMEs’ compliance with the new requirements.

Technical assistance (TA) to help SMEs improve their capacity to prepare sound financial
statements. The TA would be provided in collaboration with local banks and chambers of
commerce.
The project will also finance a baseline study and development of a monitoring system to
assess the impact of both components throughout the life of the project.
4. Safeguard policies that might apply
Environmental Assessment Policies (OP/BP 4.01) will apply to the first project component
(credit line for SMEs). TSKB will be responsible for ensuring that the sub-projects financed
under this operation are consistent with Turkish environmental laws and with World Bank
environmental policies (as defined by OP/BP 4.01). TSKB is already performing this function
for the two complementary loans EFIL II and EFIL III.
5. Tentative financing
Source:
BORROWER
INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT
($m.)
0
110
Total
6. Contact point
Contact: Marialisa Motta
Title: Senior Private Sector Development Spec.
Tel: (202) 458-7563
Fax: (202) 522-3687
Email: [email protected]
110