Credit card debts threaten
Turkey’s economy
Bank employees were passing out credit card applications and helping people fill them out. Mr. Yuksel made the equivalent of a few hundred dollars a month working for a lighting fixture shop. But it turned out that did not matter.
“They were asking people to sign, and I did,” he said. Within a week he had a card and a spending limit many times his paycheck.
That was in 2001. Today, Mr. Yuksel, a 32-year-old father of two, owes more than $8,000, much more than his annual income and an amount that will take him more than a decade to repay. He is among millions of Turks who are in over their heads in debt they incurred after local banks aggressively marketed credit cards to low-income people.
Mr. Yuksel’s tale of living on borrowed money illustrates one of the ills plaguing the country’s economy and threatening a new financial debacle in an unstable region. It echoes the subprime mortgage calamity in the United States in 2008, in that the Turkish banks often seemed oblivious to the risk that their new customers might not pay them back.
Unfortunately in Turkey getting is Credit Card is very easy and people fall in the debt trap very quickly, Unlike Europe where as Credit checks are made on a person before credit card is issued, as the banks give away credit cards to people with low income with limits 10 times their monthly salary, they end up thinking that the cash as their own and make cash withdrawals adding to their debt, unfortunately as the credit card system unlike Europe has only been in operation for the last 25 years people still have no idea on how to use it and the banks take advantage of this, in fact the banks make more money in a year in Turkey from default credit cards then any other credit they issue. It is one of the only countries that, I know will charge interest on interest to make money and it is all legal. for example if a person has a debt of 1000TL and defaults by the time the case goes to court that debt ends up being 3500-4000TL as interest and late payment charges continue to add up, after it goes to court the debt goes up even more with legal expense and court fee’s. so by the time the person has realize all this they end up with 6,000-7000TL debt, and end up with bailiffs at their door. Even when you work out a payment plan with the creditor until the final debt is paid, interested in still being added on the balance. so what looked like a small debt of 1000TL can end up costing 15-16000TL by the time you pay it off. Defaulting on payment means loosing your home, your personal property and it is all legal in Turkish Law.
Thank you for this interesting comment, Erkin Salih.
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The blame for this potential crisis lies entirely with the banks.
I can remember working for a UK bank in the early 1970’s and you had to satisfy a serious list of questions before being given a credit card. Similarly with all loans you had to jump through hoops to get one.
In the last 20 years banks and other lenders have begged people to get into debt. In the past all lenders had a link to others and if someone already had loans then further loans were refused. In recent years people have loans with multiple lenders, several credit cards and are unable to pay for any of them. The UK and others started to reintroduce limited checks to cut back on future toxic debt. Turkish banks got greedy and failed to learn from Western Europe, all the markers are there to be seen but the banks have ignored them not only leaving thousands of people with debts they will never pay but banks with potentially serious liquidity problems.
David, unlike the UK whereby the banks have to free the interest on a bad debt, unfortunately in Turkey they make more money, so the banks are not loosing anything but making a lot more money from bad debts. Unlike the UK where the banks do credit checks to satisfy themselves the person is credit worthy in Turkey it is not the case, As i explained in my previous comments. this also applies in North Cyprus as well. I will give a better example for you.
Debt 1000TH
letter sent to customer on default 55TL add on 1000TL = 1055
late payment Fee 28% 295TL = 1350TL
you have 10 days to pay in full, if not then the case is passed onto the legal department
Legal Department letter to customer via notary 350TL = 1700TL
you have 10 days to declare your finances and personal possessions, if you fail to reply within 10 days, then you end up in jail for 10 days for failure of disclosure.
If in 10 day lets say you are not in the position to repay then you can get taken to court.
so far your debt has gone from 1000TL to 1700TL
Court fee’s 450TL = 2150TL
Interest charged for 1 month waiting for court date 28% 602TL = 2752TL
the court can order you then to 12 installments of debt based on 2752TL
2752TL/12= 230TL per month
First payment 230 from 2752TL = 2522TL left
Interest charge 28% 706TL = 3228TL, can you see where i am going, you end up paying up to 15000TL for 1000TL debt as interest is calculated on the balance left each month so the debt goes up and not down.in the mean time the banks are laughing because under normal situation if you only paid the interest on the debt that you owe with default is only 6% per month so the bank are making 22% more on bad debts then normal rate and they get every penny of their money back, unlike in the UK. that is where the big difference is between the west and Turkey, another example id the bank feels that you are going to default, then they pass the debt to the court bailiffs and when they turned will take everything from the house worth selling at a fraction of the cost, TV value 2000TL they will list it as 200TL as all the removed items are auctioned off and the worst part is that they can block you from leaving the country if they feel that you are not going to pay the debt.
Unfortunately a whole different ball game compared to the west. A friend in Istanbul defaulted on his Garanti bank Credit card 4 years ago for 4000TL, to date he has paid 19000TL Interest and still has 6 more payments of 850TL to go before he is cleared of any debt.
This is a real interesting comment, Erkin! It seems the Turkish banks are somewhat frivolous in giving credits to customers. But what will happen in the end, when there are a huge amount of debts but nothing to give back to the banks? You can milk a cow for as long as she gives milk…
I appreciate what you are saying Erkin but eventually there will be a build up of this toxic debt whereby there will be no money for a customer to pay the bank ie the customer is bankrupt. They will have no home, no job, no family……..no life!!
This is why the two big lenders in USA went bust – Fanny Mae & Freddie Mac – pure greed! They reposed properties as you quote but eventually the housing market collapsed, nobody was buying so the reposed properties were worthless. I like the comment above “You can milk a cow for as long as she gives milk…” it gets right to the point.
I do not believe in state regulation but in the case of the Turkish lending sector the state must step in and reduce these ridiculously high interest rates, control how money is lent and set up a campaign of education in the media about debt management.
A complex issue and one which my brain would hurt if I was in charge of the Finance Ministry and with elections coming up. My undergrad studies in economics are too far away. LOL