December 5, 2013 1:31 pm

Turkey launches offensive on credit cards

Turkey's prime minister, Recep Tayyip Erdogan©AP

Turkey's prime minister, Recep Tayyip Erdogan

Turkey has begun an offensive – against credit cards, with chilling government warnings about the perils of excessive use and a host of new regulations.

Amid the fierce rhetoric, Ankara says it is trying to safeguard the economy against structural imbalances and to protect the country’s 76m strong population, which owns 57m credit cards, from getting too deep into debt. According to some observers, the initiative could even rebound to the banking sector’s own good – although bankers themselves remain sceptical.

“My citizens, please be careful with credit cards,” said Recep Tayyip Erdogan, Turkey’s prime minister, in a recent speech. “Don’t fall prey to them: they would take whatever you have.”

He went on to describe credit cards as the biggest tool of what he calls the interest rate lobby: a reference to domestic and international financiers he accuses of trying to hold back Turkey’s growth. The prime minister describes the practice of charging interest, which is proscribed by Islamic law, as “the greatest monster”.

But Mr Erdogan’s words do not just echo in political rallies. The new restrictions on credit cards will limit the amount consumers can borrow depending not just on how much they earn, but what goods they intend to buy.

Some analysts – such as Moody’s Investors Service – say these are sound prudential steps. But privately bankers grumble they will hit growth prospects in a sector already extensively used by government for management of the economy.

Measures introduced by the banking regulator in October capped credit limits for new cardholders at twice their monthly income for the first year and cut people off from new lending if they failed to make minimum payments three times in a row. That same month the central bank also lowered the monthly interest rate cap on credit cards.

The banking regulator is now consulting on a second wave of proposals it is expected to enact soon. According to the draft, these would oblige customers to pay off credit card debt contracted to pay for electronics, telecoms and jewellery within six months, and set a limit of 12 months for white goods and furniture.

Such measures will change the landscape for Turkey’s banking sector, which traditionally accounts for almost a third of the market capitalisation of the Istanbul Stock Exchange, and in which groups such as UniCredit, BBVA and Citigroup hold strategic stakes in leading institutions, while HSBC, ING, National Bank of Greece and Sberbank control outlets of their own.

Credit cards have represented one of the fastest growing parts of the country’s banking business in recent years. According to data compiled by Moody’s, credit card loans granted by 15 leading banks increased by an average of 77 per cent from 2010 until June this year.

For banks with more than a 10 per cent share of the segment – including Is Bank, Akbank, Garanti Bank, Finansbank, and the market leader Yapi Kredi – credit card loans accounted for between 7 and 26 per cent of their total loan portfolio, the report says.

Ensuring more transparency for borrowers to understand what it means to sign up for a credit card is a very important step that needs to be taken in this country and a very forward proactive measure. Despite the short term impact on profitability it will be [in the ]long term very beneficial to the system

- Carola Schuler, Moody’s

The government says it is imposing the restrictions to damp consumer spending and so rein in Turkey’s current account deficit, which at 7 per cent of gross domestic product is widely identified as the country’s economic weak spot.

It is an unconventional way of doing so. But the central bank has often been reluctant to take the orthodox route of increasing headline rates. Restrictions on the banking sector have sometimes been used instead to manage demand, whether through centrally-imposed increases on banks’ cash reserve requirements or the latest credit card regulations.

Senior bankers say the credit card restrictions will hold the sector’s growth below its potential, but in a highly charged political atmosphere, in which Mr Erdogan’s denunciations of the so-called interest rate lobby loom large, are hesitant to criticise the government on the record. When contacted by the Financial Times, leading banks and financial organisations declined to comment on the impact of the new regulations.

However, Carola Schuler of Moody’s argues the steps will help the banks themselves to negotiate an era in which credit card usage could spread faster than financial literacy.

She says that in coming months there would be an “inevitable dent” in Turkish banks’ profitability since market interest rates have risen, with loans lagging deposits. By contrast, she argues that the restrictions on credit cards would eventually aid banks by bolstering their asset quality.

“Ensuring more transparency for borrowers to understand what it means to sign up for a credit card is a very important step that needs to be taken in this country and a very forward proactive measure,” she says. “Despite the short term impact on profitability it will be [in the ]long term very beneficial to the system.”

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