www.bne.eu - News that Turkey's banking regulator BDDK has drafted regulations that
will allow banks to sell all kinds of gold has been greeted with anger
by Turkey's jewellers, who have until now held a near monopoly on the
trade, and with surprise by those unfamiliar with the "unorthodox"
monetary policy being implemented by the Turkish central bank.
While the draft regulation allowing banks to sell gold is new, it
is a natural extension of existing regulations brought in last year that
allow banks to buy gold. This sudden move to allow Turkish banks to
trade in what many would regard as a luxury item having no relation to
the business of banking reflects the twin realities of Turkey's still
developing financial services sector and the central bank's ongoing
"unorthodox" monetary policy.
(source)
On the one hand, it recognises that despite legal changes obliging
employers to pay employees salaries into bank accounts, the irregular
nature of much of the Turkish economy means that many are still paid in
cash – leaving Turkey as a country that those within the industry
readily describe as "under banked". And, thanks in no small part to
Turkey's recent history of runaway inflation, many Turks who are
financially secure prefer to save their money in "under the pillow"
physical gold, rather than trust it to interest bearing savings
accounts, even though inflation has been brought below 10%.
On the other, it reflects the central bank's monetary policy, which
has seen it seeking to control inflation, stabilise the Turkish lira
and stem inflows of "hot money" by means of an unorthodox mix of
variable interest rates and strict controls on the reserve requirement
ratios (RRR) of Turkish banks. More specifically, in the central bank's
decision last year to increase the level of RRR banks can hold in gold
from 10% to 20% and then again more recently to 25% while at the same
time allowing them to take "under the pillow" gold direct from
customers.
The new policy has seen banks launch special gold promotion days
when customers can deposit physical gold in the bank in exchange for
investments in a range of gold-based banking products: including gold
deposits, gold funds and gold-linked capital-protected funds.
The success of these promotions has been unprecedented with around
170 tonnes of physical gold collected in little over a year, causing the
value of gold deposits held collectively in Turkish banks to jump by
over 500% over the same period from TRY2.4bn ($1.3bn) to around
TL14.4bn.
With many of those holding substantial amounts of physical gold
belonging to the conservative segments of Turkish society, Turkey's
participation banks – ie. banks which operate on strict Islamic
principles and don't charge or pay interest – have been reporting
particular success in attracting gold investments. Two of these, Kuveyt
Turk and Bank Asya both collected around 2 1/2 tonnes of gold over the
first half of this year alone.
The benefits of such schemes are clear. On the one hand, they offer
the owners of the gold the opportunity to keep their investments in a
safer location than "under the pillow," while at the same time earning a
return on the investment which is not based solely on fluctuating gold
prices. On the other, they offer the banks an easy route to making a
substantial part of their RRR without having to dip into the Turkish
lira reserves they need to maintain their loan books. It also aids the
slowing Turkish economy by making liquid a huge reserve of moribund
capital, putting it to work in the economy.
Current estimates put the amount of gold held "under the pillow" by
Turkish households at as much as 5,000 tonnes, which valued at around
$240bn at current prices is not far off two and a half times Turkey's
total foreign exchange reserves.
And with less than 300,000 of Turkey's estimated 75m population
thought to have opened gold accounts, clearly there still exists both
huge potential for getting more liquidity back into the Turkish economy
and righting one of its long-term imbalances, namely the low level of
bank savings which has left Turkey's banks disproportionately dependent
on foreign loans to fund their domestic loan books.
According to World Bank data, the level of bank savings held by
Turks fell from around 23.5% of GDP in the mid-1990s to around 12.7% by
2010, way below that of other high growth countries such as China where
savings peaked at 46% of GDP in 2008.
Ironically, this fall has come about as a direct result of the
country's strong economic performance over the past decade. While
younger earners have preferred to spend and enjoy higher lifestyles,
older and more conservative Turks with money to save have preferred
traditional "under the pillow" gold.
Attracting more of that gold back into the real economy, will both
benefit the economy and the banks – providing domestic resources for
funding loan growth, not to say benefit consumers guaranteeing them an
income on investments beyond possible growth in the gold price.
Source: http://www.bne.eu/story3958/Gold_under_the_mattress - Sept 5, 2012
