In particular, the banks were unable to adjust lending rates according to the perceived creditworthiness of borrowers, and resorted instead to significant collateral requirements and to credit rationing. Furthermore, because the scarcity of land in Malta seemed to guarantee that its value would never go down, property has always been considered a safe investment, so that Maltese banks relied heavily on real estate as collateral, attaching insufficient importance to the viability of projects. As a result, many potential customers were denied access to credit. This, together with the absence of a capital market, meant that savings could not be channelled effectively into productive private investment and tended to flow instead either into inefficient Government-owned enterprises, into the property market or, despite exchange controls, into overseas assets. This situation created imbalances in bank balance sheets, which, when the economy was liberalised and exposed to market forces, came to represent a potential threat to financial stability. For example, the changes in relative prices that occurred in the wake of liberalisation tended, in some cases, to result in a deterioration in loan quality. Furthermore, bank balance sheets included a large number of Government-guaranteed loans to public corporations and utilities that were largely shielded from competition. Despite these distortions, however, no major bank collapse or financial crisis was experienced. A major change occurred in the late 1980s and early 1990s when a programme of financial liberalisation and privatisation fundamentally transformed the economic climate. For a start, the Government’s shareholding in the banks was reduced.
In other words, most financial savings are channelled through the banking sector. The banking sector’s total assets amount to 66 percent of GNP. The BIS Review 42/1997  -4-  reformation of the financial sector had the effect of reinforcing the privileged position of the banks. Turkey has a universal banking system, which is another way of saying that Turkish banks are allowed to participate directly in all forms of financial activity except insurance. The Banking Act of 1985 governs the establishment of banks, their capital structure, branch banking, foreign banking, credits, deposit insurance, and all other activities related to banking. Today our banking sector is highly competitive and efficient. It is integrated with the international financial markets. Its strength is based on an up-to-date technical infrastructure, a well-educated work force and experienced, and a well-qualified management. The banking sector’s adaptability, shown by its rapid introduction into the system of new financial instruments, has increased the available range of financing sources. Financial reform has increased the efficiency and competitiveness of our banking sector. The Istanbul Stock Exchange is one of the best performing of all the emerging markets. Its total market capitalisation is increasing, both in nominal terms and as a percentage of GNP, which indicates that it is playing an increasing role in the transmission of domestic financial savings. The GNP share of market capitalisation has increased to 22 percent, while the GNP share of M2y, which is the total of financial savings held in the banking sector, is around 40 percent.