Asset Backed Securities (“ASB”s) were a popular class of instruments in the Turkish economy between 1992 and 1997, but have been rarely used by non-bank private sector issuers in the domestic market since 1998. These may regain their popularity in the near future as the economic activity increases and assets gain value. According to the applicable legislation, issuance and offering must be carried out by an intermediary institution and under a bank guarantee. Receivables against which ASBs may be issued are:
- Consumer loans;
- Housing loans;
- Receivables from financial lease agreements;
- Export receivables: Loans extended by banks and special finance houses (collectively referred to as “banks”) to finance export transactions and receivables of factoring companies originating from export transactions;
- Other receivables: receivables of joint stock corporations from installment sales represented by notes;
- Agricultural or small-size enterprise loans extended by special purpose state banks; and
- Receivables of real estate investment companies represented by notes originating from real estate sales or option agreements.
Although the types are very limited, the reason behind rare issuance of ASBs by non-bank private sector companies until recently were higher funding costs (as compared to banks and the State) as well as the crowding out by public sector debt.
Higher funding costs:
Banks enjoy stamp tax and charge exemptions for credit facilities they extend. However non-bank private sector issuers face many fiscal burdens. Stamp tax is one of these (0.6%). In addition, for the issuance and offering of such securities, compared to savings deposits, non-bank issuers must also bear additional liabilities arising from capital markets legislation such as Capital Markets Board registration fee (0.3% including pertinent charges) and quotation fee (0.15% including pertinent charges). Issuers must also supply a bank guarantee, which in general increases costs 2% c.a. As a result, most asset-backed securitizations were carried out by and between banks.
Due to such costs, private sector ASBs could not compete with banks or the public sector. It was carried out by a small number of eligible non-bank issuers in international markets out of Turkish Borders.
Crowding out by Public Sector Debt:
During the years of high inflation, the public sector issued various instruments to satisfy its very high funding needs. Issuance and returns of Treasury bonds were exempted from fiscal liabilities such as the 0.3% Capital Markets Board registration fee including financial activity charges and the 0.15% Istanbul Stock Exchange quotation fee, so their real yields were exceeding those of non-bank private entities’. However, during the previous years, the Turkish Treasury’s need for loans has dropped due to strict application of austerity measures on government spending and constant increase of special consumption taxes. Thus, as a policy, public sector securities have started to give-up their dominant position in the capital markets.
Turkish income/corporate taxation regime of security income was changed at the end of 2004 to be effective for gains incurred after 1 January 2006. In this context, the benefits provided for public sector securities have been minimized and a final flat rate withholding tax of 15% has been the applicable taxation method for almost all security types. The banks or intermediary institutions will be responsible for withholding the tax on gains realized by their clients in three-month intervals and transfer to the tax authority. Equal taxation may be a good start for the re-rise of ASBs. However, the indirect taxes and some other fiscal burdens are still in place.
As the domestic market is hungry for new security instruments (due to lack of variety), ASBs may be an option. However, in order to provide depth and width within the Turkish securities market, more reforms are needed.
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