Financial Institutions in Turkey

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HACETTEPE UNİVERSİTY FACULTY OF ECONOMICS AND ADMINISTRATION SCINCE DEPARTMENT OF ECONOMİCS INTERNATIONAL FINANCE FINANCIAL INSTITUTIONS IN TURKEY TERM PAPER BY: ALTYNBEK USUPBAEV 9861215 ANKARA 2006 Financial Institutions in Turkey Financial institutions are the parts of the financial system. The financial system is the complex structure, and every year it channels billions of dollars, euros, yens, Turkish liras from savers to people with productive investment opportunities. Financial institutions commonly separated as depository institutions and as non-bank institutions. Our major target in this paper is to have a wide look at financial institutions in Turkey. For easy work and best understanding it makes sense to follow mere wisdom “think globally- do

locally”. So, in order to make a proper outline, I plan firstly work on general financial institutions all over the world, and then look whether they exists in Turkey, their structure and how they work. Non-bank Financial Institutions Although depository institutions, or by other words banks are the financial institutions we deal with most often, they are not the only financial institutions we come in contact with. In such transactions like purchasing insurance from insurance company, or buying a share of common stock with the help of the broker, we are dealing with non-bank financial institutions. The role of non-bank financial institutions is to transfer funds from lenders-savers to borrowers-spenders. In the time of technological progress, non-bank financial institutions

innovate new services, and now compete more directly with banks by providing banklike services to their customers. Insurance Companies: Every day we face the possibility of the occurrence of certain catastrophic events that could lead to large financial losses. Because these losses could be large relative to our financial resources, people found the solution by buying insurance coverage that will compensate the sum of money if catastrophic events occur. Life Insurance Companies: The first life insurance company in the United States (Presbyterian Ministers’ Fund in Philadelphia) was established in 1759, in Turkey it was established in 1893 by Osmanli Sigorta, a member of Osmanli Bank. In 1918 was created İttihad-i Milli – the first insurance company created by Turkish

laws. This huge difference in time was because insurance in Ottoman Empire was accepted as gambling, and correspondingly was forbidden. But after two great fires in Beyoglu and Kumkapi (Stanbul) in 1870 the laws were rearranged, and gave permission for foreign insurance companies to service in Ottoman Empire. Life insurance company sells policies that provide income if a person dies and incapacitated by illness, or retire. Such companies are organized in two forms: as stock companies or as mutual companies. Stock companies are owned by stockholders; mutuals are technically owned by policyholders. Because death rates for population as whole are predictable with a high degree of certainty, life insurance companies can accurately predict what their payouts to policyholders will be

in the future. Consequently, they hold long-term assets that are not particularly liquid – corporate bonds and commercial mortgages as well as some corporate stocks. There are two principal forms of life insurance policies: permanent life insurance (such as whole, universal, and variable life) and temporary insurance (such as term). Permanent life insurances policies have a constant premium throughout the life of the policy. In the early years of the policy the size of the premium exceeds the amount needed to ensure against death because the probability of death is low. Thus the policy builds up a cash value in its early years. But in later years the cash value declines because the constant premiums falls below the amount needed to ensure against death, the probability of which