Turkiye’s fund crash and the fortunes behind it

The collapse of 131 funds has put Ankara’s economic policy and its well-connected investors under scrutiny.

08.10.2026

By Fatih Yasli

Source:https://thecradle.co/articles/turkiyes-fund-crash-and-the-fortunes-behind-it

For the past three weeks, politics and society in Turkiye have discussed almost nothing but the fund crisis of 15–16 September and its consequences. Over those two days, two large portfolio management companies reported defaults on redemption payments, saying they could not meet investors’ requests to withdraw their money.

Investors rushed to pull money from the funds. When the companies could not meet the demand, a severe liquidity crisis emerged. On 17 September, the Capital Markets Board (SPK) ordered the liquidation of 131 funds belonging to seven portfolio management companies. It initially allowed three months for the liquidation process, then extended the period to six months.

According to the SPK, 455,758 individual investors held stakes in the 131 funds. Their combined value was estimated at around $18 billion. The simultaneous fall in the stock market index and share prices meant the effects reached beyond those investors.

Many who had bought shares directly also watched their holdings lose value as the selloff spread across the exchange. Moreover, some of those alleged to have made large sums from related share trading had direct or indirect ties to circles close to the government.

Among the most prominent was Fatma Betul Sayan Kaya, then a deputy chair of the ruling Justice and Development Party (AKP). Opposition politician Zeynel Emre alleged that Kaya and her husband, Ilyas Kaya, invested a combined 163 million lira, approximately $3.3 million, largely in shares of Ozata Denizcilik, and later received around 2.17 billion lira, approximately $44 million, from selling them.

Kaya asked to be relieved of her party duties so the allegations could be investigated. Turkish media subsequently reported that the couple returned approximately 2.2 billion lira.

Was the fund crisis an isolated failure, or did it grow out of the structural weaknesses of Turkiye’s economy and the government’s economic policies?

The government’s allies favor the first explanation. To understand why the crisis may have deeper roots, we need to go back to 2018.

‘Where is the $128 billion?’

Turkiye held its first election under the new presidential system in 2018. President Recep Tayyip Erdogan won another term and appointed his son-in-law Berat Albayrak, a former energy minister, as treasury and finance minister.

During Albayrak’s tenure, the Turkish lira lost considerable value as the government tried to keep interest rates artificially low. Savers turned to dollars rather than accept low interest rates, driving the dollar’s value sharply higher.

This was compounded by US President Donald Trump’s threats and sanctions aimed at securing the release of American pastor Andrew Brunson, who had been arrested over allegations connected to the Gulen movement’s attempted coup of 15 July 2016. In August 2018, the exchange rate jumped from around five lira to the dollar to 7.24 lira.

The decline continued. One dollar cost 4.55 lira when Albayrak took office and 8.59 lira when he resigned in 2020. The dollar’s price in lira had risen by nearly 89 percent.

It later emerged that the lira’s losses could have been much greater. To contain demand for foreign currency, the economic team led by Albayrak had quietly released a very large share of central bank reserves into the market through complex mechanisms and the use of public banks. The reserves were substantially depleted. According to opposition economists, close to $128 billion was spent.

After Albayrak resigned, the opposition turned the question “Where is the $128 billion?” into a political campaign intended to put pressure on the government. The question appeared on banners and became a shorthand for the way currency policy had been conducted without a clear public accounting of its costs. The government never gave an answer that satisfied its critics and carried on.

Erdogan turns to rate cuts

Following Albayrak’s resignation, Lutfi Elvan was appointed treasury and finance minister on 10 November 2020 to oversee a return to policies described as “orthodox.”

Elvan pursued a program built on neoliberal principles such as “macroeconomic stability,” “fiscal discipline,” and “fighting inflation.” Interest rates rose from 10.25 percent to 19 percent during his tenure, while the exchange rate fell to around 6.90 lira to the dollar.

By mid-2021, however, Erdogan had begun signaling a change in interest-rate policy. “August is the turning point; we are starting to lower interest rates,” he said on television. At its September meeting, the central bank cut rates from 19 to 18 percent, putting them below inflation once again. Further cuts followed, bringing rates down to 14 percent by December.

In speeches during this period, Erdogan defended the cuts by invoking the religious concept of nas. In Islam, nas refers to an “explicit ruling,” and Erdogan said he opposed interest on the grounds that Islam’s ruling on it was clear. He went further, arguing that “interest is the cause, inflation is the result”: high interest rates caused inflation, he claimed, so inflation would fall as rates fell.

The market’s response to these artificial rate cuts was a rapid flight from the lira and a surge in demand for dollars. After rates were reduced to 14 percent, the dollar rose above 18 lira. Only four months earlier, it had stood at around 8.5 lira.

In Turkiye, where production depends heavily on imported energy and other inputs priced in dollars, this sharp rise quickly increased costs. Prices rose across the economy, bringing inflation with them. Inflation stood at 19.2 percent in September 2021, when the cuts began. By the end of the year, it had nearly doubled to 36 percent. The Cradle reported on the lira’s collapse and its effects at the time.

One political consequence of the rate cuts was Elvan’s removal in December 2021, while the cuts were still underway. He was replaced by Nureddin Nebati, who could also be described as belonging to the “Albayrak school.” Nebati’s role was to carry out the interest-rate policy set by Erdogan.

Nebati and his team knew that artificially lowering interest rates was fueling demand for foreign currency and driving down the lira’s value day by day. Like Berat Albayrak, they needed a means of slowing that decline. This time, however, they would not rely on central bank reserves. They devised a new mechanism called FX-protected deposits, or Kur Korumali Mevduat (KKM).

Under the scheme, savers were told: “Keep your money in lira. If the exchange rate rises by more than the interest you earn by the end of the term, we will pay you the difference as well.” The method did bring exchange rates under control for a time. But the state had to pay the exchange-rate difference, even if it did so in lira, and that could not be sustained. By 2023, inflation had also climbed toward 80 percent.

How the funds took off

After Erdogan won the 2023 elections, the government returned to orthodox policies. Mehmet Simsek, who had been part of the economic leadership during the AKP’s early years in power and was well known in international financial markets, was appointed treasury and finance minister.

Soon after taking office, Simsek introduced his “program to fight inflation.” Its central aim was to keep demand for dollars low and prevent the dollar’s exchange rate from rising rapidly. Production costs would then rise more slowly, allowing inflation to decline gradually. The new economic team also aimed to phase out FX-protected deposit accounts. As it did so, however, it needed to prevent money leaving those accounts from flowing into dollars.

To hold down the dollar, reserves continued to be sold through backdoor channels, though not on the scale seen previously. Over the following three years, suppressed wages and constrained demand helped bring inflation down.

Those sales alone could not keep demand for foreign currency low, while the FX-protected deposit mechanism was being wound down. To compensate, foreign investors were offered the chance to convert their currency into Turkish lira and earn high interest through what is known as the “carry trade.”

Investors took an interest, but that, too, was insufficient to prevent demand for foreign currency. At precisely this point, the funds now at the center of the crisis came to the rescue.

As economist Umit Akcay wrote:

“The continuation of high inflation kept alive the desire to preserve the real value of savings, while keeping savings in Turkish lira necessitated higher interest rates and increased attractiveness of Turkish lira-denominated financial instruments. The rapid rise of funds occurred precisely in this environment.”

As financial journalist Sebnem Turhan explained, the push to keep savings in lira after the June 2023 policy shift drew money from deposits into money market and hedge funds.

These funds offered a way to direct the money of savers, companies, and small investors into lira rather than dollars. Some also offered striking short-term returns through shares with a limited public float.

Large fund purchases could push up the price of those shares, raising the funds’ reported returns and drawing in further investors. The inflow of new money could then sustain further purchases of the same shares, at least while investors kept coming.

Moreover, some of those alleged to have profited from this market were close to circles around the government. The financial sector offered the government's new elites an opportunity to grow wealthy quickly.

For ordinary people, these developments had another meaning. Under a labor system based on low wages, and with high interest rates making credit hard to obtain, many turned to the funds as a means of getting by. Profits from modest investments could help pay credit-card and consumer-loan debts and keep household budgets afloat.

Behind the public’s interest in the funds, then, was the suppression of wages in the name of fighting inflation. The minimum wage was held below the hunger threshold, while average wages moved ever closer to the minimum.

The economic authorities were aware of what was happening in the market and of the speculation involving these funds. But in an economy where events such as the 19 March arrest of Istanbul Mayor and opposition presidential candidate Ekrem Imamoglu could trigger the rapid flight of billions of dollars, they chose to let the funds’ expansion continue. The price of that decision, taken to protect the lira, was that the central bank faced renewed pressure to sell dollars after the fund crisis broke.

The collapse of the funds has exposed weaknesses that successive economic programs failed to address. Policies meant to keep savings in lira helped fuel a market in which figures close to power could amass fortunes, while hundreds of thousands of investors now face an uncertain wait for their money.