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    Will the Check Law slow down recovery?

    Güven Sak, PhD17 December 2009 - Okunma Sayısı: 1042


    Answer for the question above is affirmative. Let us see why.

    This is exactly a "the road to hell is paved with good intentions" situation. Attempts for a regulation with good intentions have the potential to generate adverse outcomes. I guess there are a number of clumsy moves the government has made since 2007.  Some moves do not automatically give good results just because you have good intentions. Before trusting in God, you should sit and think how the issue will evolve. This is the moral of the study that must be stated from the beginning.


    Check law draft was ratified by the Parliament the day before. The government was in a hurry; otherwise opposition parties would have resisted. Therefore, we had a brand new regulation long term and medium term impacts of which are not assessed properly. The government seems to be in an election rush. So they wanted to relieve businessmen, postdated checks of who were being circulated wildly, by abolishing imprisonment under the new regulation. The government who did not take any step to ease the impacts of the global crisis, this time stepped in without a moment's delay attempting to reduce the burden businessmen had to bear due to government's earlier failure to introduce precautionary measures. So, will this aspirin treatment work? No, it will not. This decision to go with the aspirin treatment seems to have the potential to further the short term finance problem of firms. This regulation will cause more problems than it solves. Let us see how.

    Let us first address three arrangements this regulation introduces: First, No 5941 Law abolishes de facto the imprisonment for dishonored checks. Hereafter, a person who was subjected to an investigation due to issuance of dishonored checks will be able to be freed from legal proceedings by settling with the submittee or submitting a payment plan directly to the public prosecution office. So, in effect, a period where dishonored checks will be punished with a fine began. This way, checks in a way turned into bills. This is the first point to state. Second, a regulation framework, which substantially increased the responsibilities of banks in issuing checks leading to a fall in the number of depositors give issue checkbooks to, was established. In the context of the struggle with informality, Ministry of Finance introduced a series of new notification liabilities as well as criminal liabilities for bank officers. While owning a checkbook was made harder through obligations introduced for banks and eased for those drawing checks, it become harder for banks to issue checkbooks. How would you decide the customer you will give a checkbook to under the huge liabilities you have as a bank? You would probably block deposits first. Thus, giving checkbooks to depositors have now become harder.

    The story does not end here. The third conclusion drawn from the first two is: With this regulation, firms' practice of using checks as short term finance instruments has come to an end. It can be discussed whether this is good or bad; but this regulation signals the end of this practice. As for the medium term, there appears no transition period regulation present; it will be useful to revise the analysis on the pace of economic recovery in 2010 under the framework of No 5941 Law.

    There issue is that: Commercial credits extended between firms are important for Turkey's economy. In addition to cash based systems; payment upon goods method is widely used. When selling a good to another firm; the seller firm either undertakes all the risk and uses open account method and sells the goods to the buyer it knows and trusts; or asks for a postdated check. In that case, the seller extends a short term credit to the buyer. Seller finances this credit with its own means and also sells the check with a certain discount to the bank he works with, receiving short term finance. Now given that it is harder to have a checkbook and it incurs bigger liabilities to draw a check; it will be impossible to maintain a short term finance mechanism based on postdated checks. Moreover, as the portfolio checks banks keep as a guarantee for the case where the credit becomes non-performing cannot be submitted before maturity, banks will no longer accept checks as collaterals. Postponed checks were a solution firms with low access to the financial system invented on their own. This method was severely impaired along with the crisis; and now it is legally abolished.

    So, what is the issue again? Use of postdated checks can be an old-fashioned method. However, if market mechanism is abolished, another mechanism to replace it must be introduced. Otherwise, firms would only be deprived of a method they used to access short term finance or working capital finance. This is exactly what the mentioned regulation did. What is more, the regulation did not introduce an alternative method.

    The efforts reflect good intentions. The government tried to protect the people who encountered troubles as the government failed to implement necessary precautions and who were thus punished with imprisonment. Though the intentions are good, the outcome appears to be devastating as yet. It seems that this is exactly what the proverb 'jumping from fryer pan into the fire' refers to.

    Ladies and gentlemen, the government is in action. Everyone must beware.

    By the way, please do not think that the series of fabulous clumsiness is limited with the Check Law; the story will be continued.


    This commentary was published in Referans daily on 17.12.2009