Strategic Management of the Central Bank of Turkey - Case Study Example

STRATEGIC MANAGEMENT Executive Summary: This is a strategic management report on the Central Bank of Turkey intended for a group of managers within the bank. The report evaluates the structure and function of the banking organisation in Turkey and analyses the external and internal influences to which the organisation is subjected. The outlook of the organisation and banking industry is evaluated from a strategic perspective considering a five year time frame. The results are analysed to show how they influence decision making and policies within the organisation and a critical analysis is done to evaluate the organisation’s strategic approach. To improve the overall business environment and effectiveness of the organisation, the response patterns and management approaches are identified. PART – I Background: The Central Bank of the Republic of Turkey also known as Türkiye Cumhuriyet Merkez Bankası has its head office located in Ankara, Turkey and was established as a joint-stock company with the majority of shares belonging to the Treasury. The bank has 4770 employees and is the fundamental centralised bank of Turkey controlled by the government (TCMB history, 2005). The first major bank in Turkey was the Ottoman Bank that was jointly set up with French and British capital in 1856. The Ottoman bank became a state bank and achieved the monopoly of issuing bank notes. Although the Turkish Republic extended the period of privilege of the Ottoman Bank until 1935, a new plan to set up the central bank was under way by 1926. The Central Bank of the Republic of Turkey was established by law 1715 which was enacted on June 11, 1930. The central bank had the privilege of issuing bank notes and this remained its monopoly for 30 years (TCMB, retrieved 2005). The privilege was further extended in 1955 and was extended indefinitely in 1994. The main aim of the bank was to support the economic development of the country so the bank was entrusted to the following duties and responsibilities. To set rediscount ratios and to regulate money markets, To execute Treasury operations, To take, jointly with the Government, all measures to protect the value of Turkish currency. (Central Bank of Turkey, retrieved 2005) Several changes were made to the central bank law with the introduction of economic development plans for Turkey during the 1960s. The law 1211 restructured the responsibilities of the central bank and implemented the financial policies within the framework of developmental objectives of the country (TCMB, 2005). During the mid-1980s, the central bank introduced inter-bank money market, foreign exchange money market and open market operations. The organisation chart of the bank is given as follows: Source: TCMB, Organisation Chart, retrieved 2005 According to the legal basis, the governing bodies of the bank are a) General Assembly, b) Board, c) Monetary Policy Committee, d) Auditing Committee, e) Office of the Governor, f) Executive Committee The organisation chart shows that the general assembly is subdivided into an auditing committee, the governor and the board. There are four vice governors who oversee the different departments of the banking divisions. Within each of these divisions there are management departments and unit managers who report to the vice governor of that department. This report mainly comprises of a report on the bank’s performance and management objectives aimed towards informing and motivating the managers of the different sub divisions of the bank. Having given the organisational structure and the general background history of the bank, it is important to understand the background of the financial markets in which the bank operates and the nature of the Turkish economy. Isik and Hassan (2003) point out that Turkey experienced a financial crisis in 1994 resulting in record levels of contraction in economy and banking during the period. The authors used a non-parametric approach to measure the efficiencies and productivity of the Turkish banking sector for a period of four years from 1992 through 1996. The productivity growth was decomposed into mutually exclusive and exhaustive components with technological changes and efficiency changes to understand the impact of economic crisis on different aspects of bank productivity. The results of the analysis showed that there was a loss of productivity to a substantial degree in the year 1994, at least by 17%. This loss of productivity is attributable to technical regress and decrease in efficiency in these banks. The impact of the economic crises was studied on different groups of banks in Turkey. Isik and Hassan reported that the foreign banks were more affected during the crises although public banks were relatively unharmed during period of crisis. The relative immunity of state and central banks against crises conditions in the 1990s could be explained by the fact that they had relatively low open positions in foreign exchange in the advent of crises and had relative soundness and safety measures during crises. Bank size, productivity and crises were also studied for possible interdependence of these factors and the study found that although economic crises affected banks of all sizes, the adverse impacts were high in case of smaller banks. The Turkish government and the smaller banks worked hard to recover from the crises and within two years attained the pre-crises productivity and efficiency levels. Thus during the 1990s, all banks, including the public sector and foreign banks were affected by the financial crises and the smaller banks were more affected. However with government help and individual efforts all these private and especially public banks could regain their lost glory and economic stability within a couple of years. This report deals with the strategic management of the central banking organisation considering the external factors of economic crises in the 1990s and the internal factors of organisational hierarchy and political and bureaucratic control. Mercan et al (2003) discuss the implications of the association of Turkey and the International Monetary Fund (IMF) which provided some financial security and stability to Turkey by 2000, following its financial crisis. To combat high inflation, a natural consequence of the crisis, Turkey implemented an exchange rate based stabilization program. Tow more crisis period in November 2000 and February 2001 followed and the survival and productivity of some banks were called into question. This led to the restructuring of the banking sector in Turkey during the early 21st century to maintain and enhance its efficiency. Some of the factors identified in determining bank’s performance were noted as modes of ownership that is whether public or domestic banks or private or foreign banks; the impact of financial crises in Turkey and neighbouring countries, effects of financial liberalisation, cross country movements and overall impact of globalisation and changing economies (Mercan et al, 2003). All these factors seem to have led to changes in the national macroeconomic policies and international development for Turkey. The factors, both internal and external that can affect the strategic management of an organisation like the central bank could thus be enlisted as follows: 1. Economic changes within the country 2. Economic changes in the international scenario and neighbouring countries 3. Financial policies of the banks 4. Organisational hierarchy and authority 5. Globalisation and financial liberalisation factors 6. Modes of ownership 7. Size, productivity and efficiency of the banks 8. Political and governmental control Goals and Objectives: The goals and objectives of this report is not just to identify the factors that determine the efficiency and productivity of the Turkish banks, but also in this case specify the management approaches that would especially suitable for the Central bank’s agenda. The Central Banks’ main aim is to provide economic stability to the country and governmental authorities. Considering this central aim, the Bank has its roles and responsibilities to produce bank notes and execute treasury operations, stabilise the economy and regulate financial markets to suit the challenging needs of globalisation. The objectives of this report aims at providing the blueprint for a strategic management approach that the central bank could follow to improve its efficiency and productivity and to meet the demands of the new economic structure of the national and international markets. Goals and objectives of this report could thus be summarised as 1. Identifying market factors 2. Delineating strengths and weaknesses of the financial management approaches used 3. Understanding the role of economic factors 4. Laying down the blueprint for a strategic management approach to enhance productivity and efficiency of the bank Scope and Methodology: The primary objectives of the Bank has been given as striving to achieve and maintain price stability, economic stability and cut down on inflation. The methodology used here is drawing up of a report based on data collection. The results will be analysed considering the next five year time frame and the approach taken by the organisation. The second part of the analysis will evaluate the extent to which the central bank is responding to the changes in the external environment. What impact does organizational culture and strategic leadership have on the organization? How successful are the actions which are already being taken and what management approach could be recommended? Results: The total liabilities of the banking sector seem to have increased since 1996 as given by this graph shown here. Source: TCMB, Electronic data delivery system - 2005 Investment and development by banks also seems to have increased considerably and is seen in the graph given below. Investments and development peaked in 2002 although this trend has been decreasing since then. The above graph shows that total liabilities of banks have been increasing steadily despite the help of the IMF and although Turkey has come out of the financial crises of the 1990s, there may be several other factors that need to be considered when discussing the role of the Turkish banking sector. An emphasis on efficiency and productivity may be important for a strategic management approach. Source: TCMB, Electronic data delivery system - 2005 Considering the nature of the graphs, sudden variability in investment and development and a possible decline in investment opportunities may be seen in the next few years. Investment and development objectives seem to have reached its peak during 2002 which has declined since. Possible reasons are a slump in the economy and some adverse effects of globalisation projecting Turkey’s economic crises and inflation rates. The first graph suggests that liabilities of the Turkish banking sectors would continue to increase even in the next five years despite the aid from IMF and the banking sector should be prepared for such changes in the next few years. We move on to the next part of analysis that involves charting out how the central bank plans to cope with its future plans and prospects and what are the leadership or organisational strategies that have been sorted out. What are the effects of organisational culture or strategic leadership on the organisation? PART II – Analysis: One of the management approaches to the central bank’s functioning seems to be based on the dynamics of national economies. Developments in financial markets seem to have two important implications on the global economy and economic policies. Firstly if a country has strong fundamentals and a strong banking structure then it is less vulnerable to distortions due to intensive capital fluctuations. However turmoil in the 1990s showed that macroeconomic stability may not guarantee financial stability (Financial stability, Governor Speech, 2005). Thus the second implication was that it is possible to avoid crises even without much discipline in the financial markets. Thus risk management was seen as a major management approach in the 1990s to avoid or reduce the impact of financial crises. Restoring financial stability in the markets, maintaining price stability, reducing inflation were some of the objectives followed by the bank using risk management methods. This was done by regularly monitoring the financial systems, by running and assessing the country’s payments systems, and taking necessary measures for crisis resulting in transparency and publication of financial reports to provide accountability. Thus an in-depth analysis of financial vulnerability and possibility of instability are identified and sorted out as risk management policies of the bank (Financial stability, Governor speech, 2005). Lowering public debts, currency reforms, decreasing economic uncertainties, strengthening macroeconomic fundamentals, increasing competitiveness and aiming for increased productivity through changing dynamics of the economy were some of the objectives highlighted the bank’s policies. The growth rate identified since 2002 has been given as 27.9%. There has been a rapid growth in the Turkish economy in the last 3 years and the main factor for driving growth has been an increase in productivity. Banks also seem to have an effective contribution to increased productivity and the charts below show the rate of GNP growth in the last few years and the contributing factors involved. There has been rapid growth in productivity across all sectors in the early part of 2004 and the effects were seen even in 2005 (EO, 2005 Central Bank Turkey). Thus the growth of the economy seems to be uphill and although liability factors may remain high for Turkish banking industry, the upward trend of economic growth signals a stronger and stable economy. Source: Economic Outlook. Governor’s Remarks 2005 The strategy of cutting down on inflation and focusing on increased productivity with risk management approaches such as constant monitoring of financial systems and association with the IMF seems to have had some positive effects on Turkish banking sector and socially on the workings of the central bank. Despite the increases in liabilities due to the financial crises in the 1990s, there has been an upward trend in GNP growth and this trend is expected to continue over the next 5 year period. Considering this, the Turkish economy seems to be in for a stable and productive period. The graph above shows that the GDP increase during the period 1990-2000 was only 4.1% compared wit the GDP increase in 2002-2004 which is 7.5%. The contribution of the factor of productivity in overall GDP growth has risen from 3.3% to an incredible 51.3%. (EO, 2005 Central Bank Turkey) Considering the growth of the economy and the improved productivity and efficiency of the banking and other sectors, the organisational and leadership factors that have driven to such improvements could be highlighted and further recommendations on functioning could be given. The organisational factors within the central bank could be delineated within a strict hierarchical structure although despite different authority or power levels, the diversification of responsibilities to audit committee, monetary policy committee and the executive committee as well as the governor show several levels of accountability, monitoring and assessment (EO, 2005 Central Bank Turkey). Considering that the powers have been equally distributed, there is enough room for transparency and financial accountability making the bank a publicly controlled organisation. Yet at a certain level the bank is completely controlled by its legal statutes and functional parameters as laid down by the government and state. Being a state controlled organisation the elements and roles of leadership seem to have been again distributed across several levels, although the governor has a major decisive role to play as the head of the organisation in this case. The vice governors control the different departments such as human resources, legal, statistics or legal units and also oversee functioning of the branches. The managers in different units oversee the day to day functioning of the particular unit and thus the organisation is driven by a strict culture of hierarchy and authority. Leadership and hierarchical patterns have been described by Burns and Stalker (1961) who distinguished organisation forms based on change and stability. In a hierarchic stable mechanistic system, there is a distribution of functional tasks which are broken down and each management personnel is responsible for fulfilling a specified task rather than focusing on the whole purpose. In the hierarchic stricture communication is between superior and subordinate and the instructions are given by the superiors. Local rather than general knowledge is preferred in this pattern. In case of networked or organic organisation forms, the form of communication is based on collective decision making and advice rather than instructions and there is an adjustment with others and interaction at the level of performance. The current banking systems, for the central bank seem to be strictly state controlled and instructions come from governmental decision levels rather than decisions made at the managerial levels. Considering this fact, recommendations could be made to provide a more transparent and networked and changing management system rather than a power controlled hierarchical and inflexible one (also see Franziska, 2005). Thus the first recommendation for the central bank based on Burns and Stalker’s theory (1961) would be a change from a mechanistic hierarchical organisational structure to a more flexible network controlled organic management system. The next step is identification of the potential methods or functions within the organisation that may be responsible for better performance, productivity and efficiency. This could be explained with the theory of organisational management and organisational learning. Following the financial crises, organisational learning could be defined as one of the major factors that may have been responsible for changes and better implementation of such methods could be recommended for future benefits of the organisation. Argyris and Schon (1978) defined organisational learning as the detection and correction of error. There have been other similar definitions stating that organisational learning involves processing of information through which certain behaviours within the organisation are changed (Huber, 2004). Organisational learning seems to be more than the summation of individual learning by members of the organisation as the learning seems to remain in the history and experiences of the organisation and affects all members, present and future. Organisational learning involves detection of errors in a system and changing or correcting these with associated policies or structural changes if applicable. As in this case study considered of the Turkish banking industry and especially of the Central bank, identification of inefficiency and decreased productivity led to correction of weaknesses and helped increase productivity and efficiency of the banking sector in general and improved the stability of the Turkish economy. Considering this, our second recommendation would be to include more principle of organisational learning to promote an active system of assessment, correction of errors and monitoring of financial and management systems within the organisation. Conclusion: In this report, several points have been highlighted to suggest the implications of external and internal factors in driving organisational management and change. The case considered here is that of the Central Bank of Turkey which has reported a decrease in investments but a steady increase in the stability of the Turkish economy and the bank’s productivity and performance in general. The liabilities of the bank seem to have been affected due to the Turkish economic crises in the 1990s, although there has been a reduction in inflation showing an upward trend for a stable economy suggesting that the bank’s crisis and risk management strategies have been successful. The hierarchical structure has been analysed in the context or organisational theory and the theory of organisational learning has been shown as focal to the improvement in efficiency of the organisation. Recommendations for a more networked and participatory organisational structure and more focus on organisational learning culture have been made in this report. Bibliography: Argyris, Chris. Organizational learning : a theory of action perspective / Chris Argyris, Donald A. Schon. Reading, Mass. ; London : Addison-Wesley, 1978. Burns, Tom. The management of innovation / Tom Burns and G. M. Stalker. London : Tavistock Publications, 1961. Franziska Schobert Linking financial soundness and independence of central banks—Central and Eastern Europe, Turkey and CIS countries  Research in International Business and Finance, Available online 19 October 2005, Huber, George P. The necessary nature of future firms : attributes of survivors in a changing world / George P. Huber. Thousand Oaks, CA ; London : Sage Publications, c2004. Ihsan Isik and M. Kabir Hassan Technical, scale and allocative efficiencies of Turkish banking industry  Journal of Banking & Finance, Volume 26, Issue 4, April 2002, Pages 719-766 Maxwell J. Fry Government revenue from monopoly supply of currency and deposits  Journal of Monetary Economics, Volume 8, Issue 2, 1981, Pages 261-270 Serpil Canbas, Altan Cabuk and Suleyman Bilgin Kilic Prediction of commercial bank failure via multivariate statistical analysis of financial structures: The Turkish case  European Journal of Operational Research, Volume 166, Issue 2, 16 October 2005, Pages 528-546 Ramazan Gençay and Faruk Selçuk Overnight borrowing, interest rates and extreme value theory  European Economic Review, Available online 23 February 2005, Muhammet Mercan, Arnold Reisman, Reha Yolalan and Ahmet Burak Emel The effect of scale and mode of ownership on the financial performance of the Turkish banking sector: results of a DEA-based analysis  Socio-Economic Planning Sciences, Volume 37, Issue 3, September 2003, Pages 185-202 Ihsan Isik and M. Kabir Hassan Financial deregulation and total factor productivity change: An empirical study of Turkish commercial banks  Journal of Banking & Finance, Volume 27, Issue 8, August 2003, Pages 1455-1485 Ihsan Isik and M. Kabir Hassan Financial disruption and bank productivity: The 1994 experience of Turkish banks  The Quarterly Review of Economics and Finance, Volume 43, Issue 2, Summer 2003, Pages 291-320 Cemal Berk Ouzsoy and Sibel Güven Bank asset and liability management under uncertainty  European Journal of Operational Research, Volume 102, Issue 3, 1 November 1997, Pages 575-600 Muhittin Oral and Reha Yolalan An empirical study on measuring operating efficiency and profitability of bank branches  European Journal of Operational Research, Volume 46, Issue 3, 15 June 1990, Pages 282-294 Financial Stability and Implications of Basel – Governor’s Remarks, 2005 Central Bank of the Republic of Turkey Publication Economic Outlook Report, 2005 - Governor’s Remarks, 2005 Central Bank of the Republic of Turkey Publication For more publications, Organisation Chart and history see: www.tcmb.gov.tr http://www.tcmb.gov.tr/yeni/eng/index.html Read More