The Central Bank of Turkey has taken an unorthodox step, with a view
to controlling and limiting foreign borrowings by Turkish residents, by
prohibiting them from borrowing revolving cash loans from lenders located
abroad. The ban, which came into effect on the 6th May 2014, has already
caused controversy and may have a negative impact on the ability of Turkish
borrowers to raise cross-border finance.
The ban was incorporated into the Capital Movements Circular. Unfortunately
the wording of the ban is unclear and lacks detail and this is causing
ambiguity and uncertainty.
What is clear is that the ban applies to revolving cash loans from banks,
financial institutions, companies and individuals located abroad. What is less
clear is whether it applies to:
• Non-cash credits;
• Existing facilities executed before the ban was introduced;
• Overdrafts; or
• Lombard credits.
Unhelpfully, the Central Bank has not published any guidance on or the
reason for the ban. However, the Turkish Treasury has made an unofficial and
verbal statement that provides that the ban:
• Does not apply to revolving loans utilized to finance a Turkish borrower’s
overseas business, provided the loan proceeds are not brought to Turkey;
• Applies only to cash facilities and not to non-cash facilities; and
• Also applies to revolving facilities executed before the ban was introduced.
Although this statement is helpful, it does not remove the uncertainty that
an official written statement would. In fact within Turkey there is a widely
held view among practitioners that the ban does not have retroactive effect,
despite the statement of the Turkish Treasury which provides that it does.
As regards the reason for the ban, the most likely reason is that the Turkish
Treasury want to be able to monitor the extent of cross border borrowing by
What effect the ban will have on long-established banking practices like
Lombard credits or overdrafts, or even to some Islamic finance structures
(which could also be caught by the ban) is still unclear. Individual credit
structures that include a revolving credit will need careful analysis to ensure
compliance with the ban. Importantly foreign banks will need to look closely
at their current and future operations and their existing loan portfolio to avoid
violating the new ban