2.4 Financial Stability Developments and Activities

2.4.1 Financial Stability Developments

The household debt-to-GDP ratio in Türkiye was 9.30% as of November 2024, significantly below that of peer countries and its historical average. The rise in borrowing was contained by the existing macroprudential measures such as loan-to-value ratios and maturity limitations for retail loans as well as by tight financial conditions. In the recent period, the shares of personal credit cards and overdraft accounts in the debt composition have increased. While the weight of Turkish lira assets in household financial assets is increasing, that of FX-protected products continues to decline. Households tend to diversify their savings with alternative Turkish lira financial instruments such as mutual funds, money market funds in particular, and the private pension system. As of the last quarter of 2024, the ratio of household debt to financial assets was 24%, well below its long-term average of 45%.

The ratio of the corporate sector’s total financial debts to GDP has been declining. Over the period from end-2023 to October 2024, the total financial debt-to-GDP ratio decreased by 7 percentage points, while the Turkish lira debt-to-GDP and foreign currency debt-to-GDP ratios fell by 4.50 and 2.60 percentage points, respectively. The fall in the corporate sector’s Turkish lira debt-to-GDP ratio was driven by the weakened credit demand due to rising Turkish lira financing costs as well as by the restrictions on Turkish lira loan growth. On the other hand, the relatively flat course of the foreign currency debt-to-GDP ratio was driven by the comparatively low foreign currency loan costs and the improving exchange rate expectations. The corporate sector’s open FX position assumed an upward trend starting from the last quarter of 2023 due to the rise in foreign currency loans obtained by firms from domestic banks and the decline in foreign currency deposits at domestic banks. Firms’ total domestic and external foreign currency loans decreased to USD 206 billion in September 2023 from USD 274 billion in 2018, before picking up again and reaching USD 252 billion as of October 2024. On the other hand, firm-based analyses indicate that firms’ capacity to cover their foreign currency debt with export proceeds continues to improve despite the increase in foreign currency debt and the number of firms using foreign currency loans. In the upcoming period, corporate’s open FX position is expected to follow a more moderate course with the contribution of measures addressing foreign currency loan growth. The six-month and 12-month cumulative external debt rollover ratios of corporate sector firms remained above 100%, indicating a sustained access to external financing.

Having remained elevated in the first quarter of 2024, loan growth was on a mild path for the rest of the year on the back of the tight monetary policy stance and supportive macroprudential policies. Annual Turkish lira loan growth decreased from 80% at the end of 2022 to 54% and 28.5% at end-2023 and end-2024, respectively. Turkish lira commercial loan growth dropped from 45.3% in 2023 to 20.8% in 2024 as a result of the policies implemented, coming down to levels supportive of disinflation. Meanwhile, the expected cost difference between Turkish lira and FX loans widened as exchange rate expectations improved, which played a role in the strengthened demand for FX loans and the increase in FX loan growth. To counterbalance this trend, the CBRT imposed a monthly growth limit of 2% on FX loans, and reduced this limit first to 1.50% in July and then to 1% as of January 2025. Thanks to strong liquidity positions of firms, the tightening in financial conditions had a limited impact on their credit risk. In 2024, selective credit policies continued to be used effectively to stabilize domestic demand and support exports, investments and production. In this scope, besides the FX loan growth limit, the monthly growth limit of 2% imposed on Turkish lira commercial loans was differentiated to be 2.50% for SME loans and 1.50% for other commercial loans as of January 2025.

The banking sector’s asset quality outlook broadly remained strong, with the non-performing loan (NPL) ratio slightly increasing from 1.60% at end-2023 to 1.80% at end-2024. The increase in the NPL ratio in 2024 was largely driven by retail loans. Accordingly, a restructuring facility was introduced for non-performing personal credit card debt and general-purpose loans. During the same period, interest rates for personal credit cards started to be differentiated based on term debt. The aim of this interest-rate differentiation is to slow the accumulation of credit card debt, while the restructuring facility is intended to ease the cash flow of individuals with payment difficulties. The ratio of Stage 2 loans to gross loans rose to 8.10% in November 2024 from 7.60% at the end of 2023. As of November 2024, the provision ratios for Stage 2 loans and NPLs were 17.50% and 75.70%, respectively. Banks retain their policy of earmarking provisions at high ratios against possible loan losses.

The banking sector maintained its adequate liquidity buffers in 2024. Liquidity coverage ratios (LCRs), a major risk indicator for the liquidity outlook, continued to hover well above the regulatory limits¹ . Total and FX LCRs stood at 167% and 224%, respectively, at the end of 2024. Improved expectations and the accompanying decline in the risk premium led to a decrease in costs in 2024, and banks obtained net USD 29.60 billion worth of external financing in the first 11 months of 2024. Against this background, banks’ external debt rollover ratio stood at 115%.

Excess Turkish lira liquidity in the system increased due to depositors’ deposit preferences over the year, the CBRT’s FX transactions and movements in the Treasury account. The management of this excess Turkish lira liquidity was carried out effectively through reserve requirements, deposit auctions, and the CBRT’s additional measures. In order to strengthen the monetary transmission mechanism, increase the share of Turkish lira deposits, and support the transition from FX-protected deposits (KKM) to Turkish lira deposits, the reserve requirements that eligible banks maintained for their Turkish lira deposit and KKM accounts started to be remunerated in 2024. Starting from the second quarter of the year, depositors’ preference for Turkish lira deposits was further reinforced while the downward course in foreign currency deposit and KKM accounts remained strong. To contribute to the sterilization of excess Turkish lira liquidity in the system accumulated due to depositors’ transition from FX deposits to Turkish lira deposits, reserve requirement ratios for Turkish lira deposit and KKM accounts were raised in May. To support the monetary transmission mechanism and the TRY deposit share in the system, the CBRT increased the upper limit for the remuneration of required reserves maintained for TRY deposits in August. In September, reserve requirement ratios for Turkish lira deposits were raised whereas the ratios for TRY-denominated required reserves maintained for foreign currency deposits were reduced. In November, reserve requirement ratios for short-term Turkish lira deposits were increased, and the ratios for TRY-denominated required reserves that should be maintained for foreign currency deposits were lowered. In December, the maximum interest rate applicable to KKM accounts was reduced, while the remuneration of reserve requirements maintained for these accounts was terminated. Turkish lira deposits increased by approximately TRY 4.9 trillion in 2024, whereas KKM accounts decreased by around TRY 1.5 trillion. During the same period, foreign currency deposits declined by USD 15 billion in nominal terms. Thus, the share of TRY deposits in total deposits reached 59%, while that of KKM and foreign currency deposits fell below 6% and to 35%, respectively.

The banking sector’s return on equity declined to 27.5% by November 2024 from 35.5% at end-2023. Interest rate hikes in the first quarter of 2024 as well as the subsequent tight stance and macroprudential policy framework curbed the net interest margin, while fees, commissions and revenues from banking activities as well as the remuneration of required reserves bolstered the sector’s profitability in 2024.

The banking sector’s strong capital adequacy outlook was maintained, and the capital adequacy ratio remained above the regulatory threshold, standing at 18.30% as of November 2024. Internal capital generation and subordinated borrowing supported regulatory capital. Amid the improvement in external financing conditions and the growing foreign investor interest, banks turned again to subordinated debt instruments that could be included in additional principal capital or secondary capital in 2024. On the other hand, credit risk weights, which are applied more prudently in Türkiye, were lowered to Basel standards in the last quarter of the year, supporting capital adequacy.

¹ Statutory minimums are 100% for total LCR and 80% for FX LCR.

2.4.2 Financial Stability Activities in the International Area

The CBRT continued to take part in the studies, meetings and surveys of international financial platforms that endeavor to strengthen financial systems and enhance the stability of international finance markets. In 2024, meetings were held in physical, hybrid, and virtual formats.

The Financial Stability Board (FSB), of which the CBRT has been a member since 2009, supports global financial stability by coordinating the work of national financial authorities and international standard-setting bodies that put effort into developing effective policies regarding the financial sector. The CBRT participated at a senior level in the meetings of the Plenary and Standing Committees of the FSB. The CBRT also contributed to the work and attended the meetings of the FSB’s technical working groups as a member.

Meetings of the FSB’s Regional Consultative Group for Middle East and North Africa (MENA), one of its six regional consultative groups established in 2011 to expand the FSB’s activities over non-member jurisdictions, took place on February 6 and November 6, 2024. The CBRT was represented at the Deputy Governor level in these meetings. Vulnerabilities of the MENA region, lessons learnt from the banking crisis in 2023, impact of artificial intelligence on the financial system, and cyber risks were the main topics discussed in the meetings.

Another international financial platform, of which the CBRT has been a member since 2009, is the Basel Committee on Banking Supervision (BCBS). The BCBS is entrusted with the task of setting global standards for prudential regulation of banks, and also serves as a forum for continued cooperation in banking supervision. Represented at a senior level at the meetings of the BCBS, the CBRT also participated in and contributed to various working groups at the technical level.

The main agenda items of international financial institutions in 2024 were: supporting global cooperation for financial stability, promoting full implementation of effective resolutions for financial institutions, increasing the resilience of non-bank financial intermediation, enhancing cross-border payments, monitoring the effects of digital innovations (developments in crypto asset markets, digital securitization, and artificial intelligence) on financial stability, enhancing cyber and operational resilience, analyzing climate-related financial risks, monitoring existing standards, and the implementation of Basel III in member jurisdictions. The CBRT actively cooperated with relevant authorities in Türkiye to maximize the contribution to these efforts.

In Türkiye, potential risk factors for financial stability are discussed in various platforms, particularly the Economy Coordination Board (EKK) and the Financial Stability Committee (FSC) and the necessary measures are implemented promptly. Accordingly, in collaboration and coordination with relevant authorities, the CBRT continues its studies including regulatory recommendations and impact analyses. In 2024, the CBRT also provided secretarial services for the Systemic Risk Monitoring Working Group under the FSC, and took an active role in work geared towards the early identification of systemic risks.

2.4.3 Activities in Participation Finance

The Participation Finance Division functioning under the Banking and Financial Institutions Department aims to coordinate work regarding participation finance, contribute to related legal studies and conduct analyses of the sector’s risks. The division continued its operations in close communication and cooperation with domestic and international stakeholders, within its remit specified by the CBRT legislation.

In 2024, the CBRT’s relevant units took part in studies carried out in response to participation banks’ requests and emerging regulatory needs. Participation Finance Division contributed to studies for the adaptation of regulatory amendments regarding reserve requirements and remuneration to cover participation banking and participation finance principles. The CBRT also participated in the meetings of the Implementation and Monitoring Groups for Institutional Transformation and Supportive Mechanisms Action Plan established to achieve the strategic objectives and targets in the Participation Finance Strategy Document published by the Presidential Circular in 2022. Additionally, the CBRT contributed to the studies conducted by the Participation Finance Legislation Working Group coordinated by the Republic of Türkiye Ministry of Treasury and Finance, as well as to the drafts of the participation finance law.

Keeping a close track of international developments and meetings organized by international organizations of which the CBRT is a shareholder or member, the CBRT contributed to regulatory and reporting activities, and made recommendations. Accordingly, throughout the year, the CBRT participated at various levels in the meetings of the International Islamic Liquidity Management Corporation’s (IILM’s) Governing Board, the Board Executive Committee, the Board Risk Management Committee, and the Board Audit Committee, which are the managerial and administrative organs. In addition, as a full member of the Islamic Financial Services Board (IFSB), the CBRT actively participated in the meetings of the Council, the highest decision-making body of the IFSB, as well as the Technical Committee meetings and meetings of other working subgroups throughout the year, and expressed its views on the issues discussed.

Chaired by Governor Fatih Karahan, Ph.D., the CBRT hosted meetings attended by the general managers of participation banks and the General Secretary of the Participation Banks Association of Türkiye (TKBB) in August and December, 2024. At these meetings, participation banks’ sector-related requests and evaluations were discussed in light of the CBRT’s monetary policy and macroprudential policy framework. On the other hand, a workshop was organized for digital banks established based on the Regulation on the Operating Principles of Digital Banks and Banking as a Service Model. The workshop was attended by representatives from the CBRT, the Banks Association of Türkiye (BAT) and the TKBB as well as by digital bank managers, and focused on discussions of digital banking practices and the sector’s requests shaped by their needs and expectations.

In line with its objective to enhance bilateral relations, the CBRT responded to training requests from abroad in the field of participation finance. Accordingly, the CBRT delivered a number of presentations on the legal and regulatory framework of participation banking, fundamental agreement types used, and the participation finance liquidity facilities, addressing the central banks of Uzbekistan, Tajikistan, Kyrgyzstan, and Afghanistan as well as the Banking and Finance Academy of the Republic of Uzbekistan (BFA). To share its experience with and provide guidance to the central banks that were preparing for regulation in the field of participation finance, the CBRT briefed and exchanged views on the definitions used in the participation finance sector in Türkiye, product names and practices, standards of related international bodies such as the IFSB in particular, and the special regulatory perspective for participation banks.