President Recep Tayyip Erdoğan’s assurance that Turkey’s financial system faces no systemic threat from the forced liquidation of 131 investment funds has drawn a line between an acute capital-market scandal and the country’s broader banking system. For international investors, however, the critical question is not only whether contagion can be contained. It is whether regulators can unwind roughly $18 billion in fund assets, protect more than 455,000 investors and credibly address alleged market manipulation without damaging Turkey’s efforts to attract long-term foreign capital.
How a Liquidity Problem Became a Market Crisis
The immediate crisis began when Pusula Portföy disclosed that some of its funds could not meet redemption requests on time. Concerns then spread to Tera Portföy, which had agreed to acquire parts of Pusula’s portfolio-management and brokerage businesses but said the transaction had not been completed and that it was not responsible for the redemption process.
The underlying vulnerability was a mismatch between the liquidity promised to fund investors and the liquidity of the assets held inside the funds. Several affected vehicles reportedly had concentrated positions in thinly traded shares. Such holdings can produce exceptional reported returns when incremental buying pushes prices higher. They become much harder to monetize when investors simultaneously demand their money back.
The pressure intensified after the Capital Markets Board of Turkey, known by its Turkish abbreviation SPK, announced broad amendments to its investment-fund guidelines on August 28, 2026. The regulator said the changes were designed to address risks involving money-market funds and equity-focused hedge funds, particularly unsecured lending between related parties, portfolio concentration and unusual stock-price movements.
Once investors began requesting redemptions, managers reportedly sold more liquid securities because their concentrated small-cap holdings could not be disposed of quickly without causing severe price declines. That converted a problem inside particular funds into selling pressure across Borsa Istanbul.
According to reporting by Bloomberg cited by Spain’s Cinco Días, investors withdrew approximately €960 million from Turkish investment funds on September 16. The BIST 100 fell about 9 percent over three sessions, including a 5.5 percent decline that triggered a market-wide trading interruption.
Banu Kıvci Tokalı, founder of BVeri Consulting, told Bloomberg that concerns about the quality and liquidity of fund collateral had increased fears that other funds and companies could also experience difficulty. Alper Akalın of Akalın Finance said redemption demands were probably forcing managers to sell their most liquid holdings first, amplifying losses in index shares.
Authorities Build a Containment Structure
The official response was rapid and coordinated. On September 17, the SPK ordered the liquidation of 131 funds belonging to seven portfolio-management companies. The regulator appointed Ziraat Bank, Turkey’s largest state-controlled lender, and İşbank, the country’s largest listed private bank, to oversee the process.
The SPK subsequently extended one part of the liquidation timetable from three months to six months. That extension reduces the immediate risk of fire sales, but it also means affected investors may wait longer for distributions. The reported value of the funds, approximately TRY890 billion or $18.3 billion at the time of the intervention, does not establish what investors will ultimately recover. Realizable value will depend on asset quality, market liquidity, valuation practices and the sequence in which positions are sold.
The SPK said on September 23 that the funds had 455,758 unique investors, based on records from Turkey’s central securities depository. That clarification showed the problem was materially larger than a dispute involving a few sophisticated clients, even if it remained concentrated within a limited part of the financial system.
The Central Bank of the Republic of Turkey also acted on September 17. It said it would increase funding through one-week repo auctions when necessary, revise banks’ borrowing limits and reduce collateral haircuts in central-bank markets. These measures allowed banks to obtain more lira liquidity against eligible assets, supporting orderly market functioning without directly guaranteeing the impaired funds.
The distinction is important. General liquidity support can prevent forced selling from destabilizing otherwise solvent intermediaries. It cannot restore the value of overvalued or illiquid securities, nor can it eliminate losses generated by misconduct.
Treasury and Finance Minister Mehmet Şimşek said the liquidation would not create pressure on Borsa Istanbul because regulatory changes should prevent contagion. Erdoğan reinforced that message after a cabinet meeting on September 28, saying Turkey’s financial system remained strong and that authorities would not permit citizens’ rights to be violated through market manipulation. He also scheduled discussions with economic officials and relevant institutions to consider further measures.
Why a Banking Crisis Still Appears Unlikely
Available data support the government’s argument that the episode is not, at present, a conventional banking crisis. The Turkish banking system entered 2026 with meaningful capital and liquidity buffers, while the affected investment funds sit outside the deposit-insurance framework.
The Banking Regulation and Supervision Agency reported a sector capital-adequacy ratio of 16.52 percent in March 2026. The non-performing loan ratio stood at 2.62 percent, while total banking assets reached almost TRY49.7 trillion. Foreign-owned banks recorded a capital-adequacy ratio of 17.93 percent, according to the agency.
The International Monetary Fund reached a similar conclusion in its February 2026 Article IV assessment. It said Turkish banks remained profitable, capital and liquidity buffers were adequate and non-performing loans were well provisioned. The IMF nevertheless identified continued vulnerabilities from high dollarization, rising corporate foreign-currency debt and reserves that remained below its preferred adequacy benchmarks.
Market behavior during the first stage of the fund crisis also suggested limited macroeconomic contagion. Cinco Días reported that the lira moved by less than 0.1 percent during the September 16 equity selloff. Five-year sovereign credit-default swaps rose by about seven basis points to 237, while two-year and ten-year bond yields increased, but there was no simultaneous run on bank deposits or disorderly currency collapse.
Tufan Cömert, executive director for global markets strategy at BBVA, told Bloomberg that the turmoil would be unlikely to change Turkey’s macroeconomic fundamentals, lira carry-trade appeal or sovereign-credit story unless the liquidity problem spread substantially beyond asset management.
That qualification matters. A fund crisis becomes systemic when losses undermine lenders, collateral values, payment channels or depositor confidence. Publicly available information has not demonstrated that chain of transmission. The central bank’s precautionary intervention was intended to prevent it from forming.
The Greater Risk Is Institutional Credibility
Even without a banking crisis, the episode creates a serious governance test. The SPK has said its August reforms were intended to prevent systemic risks linked to unsecured related-party lending and unusual stock-price movements. Foreign investors will ask why such practices were able to grow large enough to require the liquidation of 131 funds.
The criminal investigation has further raised the stakes. Reuters reported that authorities detained senior figures associated with Pusula and Tera and that other suspects were arrested, barred from leaving Turkey or subjected to asset restrictions. The allegations remain subject to investigation and judicial proceedings.
On September 28, Euronews reported that prosecutors lifted restrictions on 45 companies and 19 funds following a new SPK assessment, while restrictions on individuals remained. Şimşek said the government’s priority was to protect investment, employment, production and exports, and that businesses unconnected to market-distorting conduct should not be penalized.
That approach is commercially significant. Indiscriminate freezes can interrupt working capital, supplier payments, investment projects and export contracts. Swiftly separating operating companies from suspected wrongdoers can reduce collateral damage, provided the criteria are transparent and consistently applied.
Political allegations have added another layer. Fatma Betül Sayan Kaya, a deputy chair of Erdoğan’s Justice and Development Party and a former cabinet minister, resigned after an opposition spokesman alleged that she had sold shares worth approximately TRY1.3 billion shortly before the market decline. Kaya has not directly answered the trading allegations and said she stepped down so the claims could be clarified. The allegations have not been proven.
For foreign institutions, the issue is equal treatment under securities law. A credible outcome requires disclosure of investigative findings, enforcement against any proven manipulation or insider trading, and procedural protection for innocent investors and companies.
Capital Markets Matter to Real-Economy FDI
Portfolio investment and foreign direct investment are different forms of capital. A multinational building a factory does not normally base its decision on the daily value of a Turkish hedge fund. Yet capital-market governance still affects the cost and execution of direct investment.
Foreign-owned Turkish subsidiaries rely on local banks, foreign-exchange markets and sometimes domestic bond or equity issuance. Acquirers use market prices to value targets. Joint ventures depend on reliable shareholder records, related-party disclosures and enforceable governance rules. If local asset prices are regarded as vulnerable to manipulation, investors apply larger risk discounts and demand stronger contractual protections.
The timing is sensitive because Turkey had been recording an improvement in direct investment. The Investment and Finance Office, citing central-bank balance-of-payments data, said Turkey attracted $13.1 billion in FDI during 2025, an increase of 12.2 percent. Excluding real estate, inflows reached $10.7 billion, which Şimşek described as the highest level in a decade. Wholesale and retail trade received 32 percent of inflows, manufacturing 31 percent and information and communication 14 percent.
Turkey also remains under inflationary pressure. The central bank held its one-week repo rate at 37 percent on September 10 and said high energy prices posed an upside risk to inflation. Its September survey put market participants’ year-end 2026 inflation expectation at 29.4 percent, above the IMF’s earlier 23 percent projection. High nominal rates increase working-capital costs and make liquidity planning especially important for new entrants.
Capital-market accessibility is another concern. S&P Dow Jones Indices placed Turkey on its 2026-2027 classification watchlist for possible reassessment of its emerging-market status. Its methodology considers liquidity, transparency, political stability and market accessibility. Although index classification primarily affects portfolio flows, a downgrade to frontier status could weaken trading depth and increase the equity financing costs of Turkish companies, including potential acquisition targets and local partners.
What This Means for Foreign Investors
The crisis does not currently provide evidence that Turkey’s banking system is insolvent or that productive foreign investment should stop. It does show that investors must distinguish between system-wide financial strength and institution-specific governance, liquidity and enforcement risks.
Companies considering market entry should stress-test Turkish partners, banks, brokers and treasury arrangements rather than relying on headline assurances. Due diligence should examine beneficial ownership, related-party transactions, pledged shares, exposure to concentrated funds and the liquidity of any securities offered as collateral.
Incorporation and corporate structuring also require attention. Ring-fenced Turkish operating entities, clear reserved matters, dual-signature controls and carefully drafted exit provisions can limit exposure to a local partner’s financial difficulties. Legal and tax compliance work should cover SPK rules where securities are involved, foreign-exchange regulations, beneficial-ownership reporting and the tax treatment of financing, dividends and asset transfers.
Government relations and regulatory liaison will be important as the SPK, Treasury, central bank and banking regulator revise rules and implement the liquidation. Foreign investors need verified interpretations of official measures, particularly where asset restrictions, licenses, incentive payments or financing approvals could affect project schedules.
Investment-incentive applications should be evaluated separately from capital-market conditions, but their cash-flow assumptions must reflect high interest rates, inflation and possible delays in local financing. Import-export planning should similarly include currency, counterparty and payment-routing contingencies.
Finally, project management becomes critical once capital is committed. Treasury controls, milestone-based funding, supplier monitoring and contingency facilities can prevent market volatility from disrupting construction, equipment imports or production launches. These are the practical areas in which an FDI advisory firm such as fdiconsultancy.com supports market entry, incorporation, incentives, compliance, government relations, import-export execution and on-the-ground delivery.
The decisive signal will come not from official reassurance alone, but from the quality of the liquidation, the transparency of enforcement and the reforms adopted afterward. If Turkey contains losses while demonstrating equal treatment and stronger supervision, the episode may remain a painful but localized correction. If valuations, accountability and investor recoveries remain opaque, the damage will extend beyond the 131 funds into the risk premium applied to Turkish investment more broadly.