ALONG with most business and industry, Turkey's banking sector has learnt to ignore the political turmoil that has so animated Ankara since the autumn of 1995. The banks in general, and the private banks in particular, have been far too busy getting over the financial and general economic crisis of 1994 to worry too much about the squabbling politicians.

According to a recent treasury report, the banks have fared remarkably well. Taking 85 per cent inflation into account, the banking system as a whole achieved a 34.3 per cent increase in real net profits in 1996 to TL 261 million million, up from TL 105 million million in the previous year. Equity rose by 74 per cent in real terms to TL 799 million million in 1996, the same report says.

Banks also reduced their open foreign exchange positions by $566 million - down to a total $2,520 million - limiting their exposure to currency shocks, the report adds. The central bank further built up its foreign exchange reserves last year, as an insurance against a recurrence of the run on both foreign exchange and lira deposits which triggered the 1994 drama.

Deposits are the main funding source for the banks. Turkish lira in the banking system rose by 133 per cent to TL 2,606 million million in 1996. The growth in foreign currency deposits was even more robust. A report by the leading bank, Is Bankasi, says that foreign currency deposits are now worth $30,200 million and account for 56 per cent of all deposits. Bankers say that foreign exchange - especially the US dollar - has become a virtual parallel currency in Turkey because of popular fears about the country's uncertain political direction.

Most banks had a good year in 1996 because loan demand was higher than in previous years. Akbank, the leading private sector bank, increased its loan income by 70 per cent, having decided to focus on loans as a long-term strategy.

Corporate credit demand continues to be strong because businesses are investing in new plant and technology, partly as a consequence of the EU Customs Union which began on 1 January 1996. This has reduced trade barriers and exposed local companies to much tougher competition.

The proliferation of plastic cards has encouraged strong growth in consumer credit. At the end of 1996 the number of credit cards issued was up by 44.5 per cent to 3,202,970 from 12 months earlier. Retail transactions in Turkey using locally-issued cards nearly trebled; foreign credit card transactions almost doubled, according to data from the industry's own Bankalararasi Kart Merkezi (BKM - Interbank Card Centre). In all, there were nearly 73 million credit card transactions worth TL 258 million million.

Indeed, in terms of technology, the Turkish banking sector is comparable with many European markets. There is inter-active banking, advanced automated teller machines (ATMs) are abundant and banking via Internet is also available.

Although the EU agreement does not include financial services, it has had an impact on the banking sector, Is Bankasi says in its report.

However, the banking system is still tiny compared with those in the EU. Speaking at the 40th assembly of the Union of Banks in late May central bank governor Gazi Ercel noted that total assets in the banking system amount to around $70,000-80,000 million, compared to $5 million million in the EU.

Some banks also rely heavily on profits from trading in treasury bonds and bills, which makes them vulnerable to the government's borrowing policies. In 1996 the treasury managed to lengthen the overall structure of its debt while decreasing the yields on bonds and bills. In March, it began auctioning two-year bonds with risk premiums above the projected Consumer Price Index (CPI).

The first four or five auctions of the new CPI instruments were successful until the deepening political uncertainty dampened demand, forcing the treasury to turn to other state funding sources, notably the state banks.

The state banks command about 38 per cent of all banking assets but are less efficient and profitable than their private counterparts. They are open to political manipulation and are obliged to cater to state-owned companies and the treasury. In an April report Moody's Investor Service singled out the four main state-owned banks - Ziraat Bankasi, Emlak Bankasi, Halk Bankasi and Vakiflar Bankasi - for their deteriorating performance, and loss of market share.

The fragility of the state banks was well illustrated in June when Ziraat Bankasi, the country's largest institution, failed to repay TL 16 million million owing to commercial banks. Ziraat's available funds had been drained by transfers to the treasury to help meet public sector wage payments. The central bank stepped in with financing from auctions of repo instruments, but also cautioned the treasury not to use Ziraat as an exchequer, according to local press reports.

'The government is considering privatisation for some, but the financial condition of the largest (state) banks has been allowed to deteriorate while they are still expected to play a social role,' Moody's said in its report. The other prominent feature of the report was a warning that the creditworthiness

of Turkish banks is being damaged by the persistent macro-economic and political instability.