MUSTAFA SÖNMEZ – Hürriyet Daily News , July/28/2014

Turkey, with its state, corporations and individuals, has rapidly learned how to borrow in recent years – something it had previously been avoiding as a culture.

Several sayings have been passed on to us from our forefathers in our traditional culture advising us to avoid taking loans. It is believed that the most important factor that caused the collapse of the mighty Ottoman Empire  was the level of state borrowing. When the international need to borrow occurred in the mid-19th century, it was initially believed that borrowing from a Muslim country would be better than borrowing from a non-Muslim country; thus, borrowing from the King of Morocco was first considered, before being given up.

HDN Because it was a widespread belief that borrowing from broker’s in Istanbul’s Pera neighborhood by Europe’s rising imperialist states had accelerated the collapse of the Ottomans, the founders of the Republic always preferred a policy of self-sufficiency, rather than borrowing from abroad. This actually meant heavy taxes on farmers.

Until 1980, Turkey sustained its relationship with global capitalism in a rather introverted style; Turkey’s lenders were institutions such as the World Bank, the IMF and the European Investment Bank.

Long-term, soft loans were taken from them in the form of credit for projects given mostly to the state. After 1980, the door to integrating with the world economy was opened, and in the 1990s and 2000s this door became further ajar, also encouraging the private sector – along with the public sector – to borrow internationally. So much so that the stage we have reached today is where Turkey’s outstanding external debt is near $390 billion and two thirds of this debt belongs to the private sector. Turkey’s total external debt has reached half of the national income and this is actually a fragile threshold.

The state is now more cautious in borrowing. External and domestic public debt is around 34 percent of national income. Because this is quite low compared to the EU public debt/national income rate of an average of over 80 percent, it is considered a positive indicator for Turkey, particularly in the eyes of the loaner…

Family debts 

As the year 2000 began, a significant factor added to Turkey’s economic and social texture has been family loans or individual loans. Banks have found quite an important climate in terms of marketing their external loans to individuals. An indispensable leg of the ruling Justice and Development Party (AKP) government’s growth model has focused on the domestic market and domestic demand, and for this to happen individuals were to take loans and use credit from banks. Particularly with the introduction of the necessary regulation for long-term housing credit, individual loans accelerated; the credit card marketing of banks rapidly increased.

Today in Turkey, there is a household borrowing and culture of dimensions unprecedented before 2003. Borrowing, which has occurred as housing, personal needs and vehicle credit from banks, as well as cash credit through credit cards – even though it lost its pace in 2014 – has been constantly increasing for 12 years. Today, banks give one third of their credit to individuals.

HDN Dimensions

Household financial liabilities, which were 26.5 billion Turkish Liras at the end of 2004, reached 372 billion liras by the end of the first quarter of 2014. In nominal, non-inflation adjusted terms, this means an increase of 117 times… First, the bubble of inflation has to be removed from this outcome. When this is done, then we can see that the debt burden, which was 100 in the year 2004, has increased to 564 in mid-2014.

That means that the real hike is 474, or 47 times in 11.5 years.

Borrowing for what?

One of the most common mistakes in the media is that household loans have always been regarded as the result of all kinds of distress, some kind of a financial problem. However, the inner composition of loaning should be analyzed carefully in order to prevent exaggerations.

Especially after 2005, when long-term housing credit started being offered, housing credit made up for one third of all family loans in the total of individual loans. While car loans constituted a share of 8-9 percent in the first years, in later years their share in the total fell to 3 percent. Thus when one talks about household debt, it has to be remembered that 36-37 percent of this comes from loans for housing and cars. These are not loans that are resorted to as a result of financial difficulties; they are loans that people with a regular income have opted for, which should be considered separately.


The individual loans that need to be focused on in terms of household financial difficulties are the amount of cash loans through “consumer loans” and credit cards. Consumer credit is mostly known as credit that is used to cover debts by another debt and their share in the total is up to 41 percent today from 22 percent in 2004, which is grave!

The share of loans through credit cards was 25 percent at the end of 2013. With the restrictive new measures then introduced by the Banking Regulation and Supervision Agency (BDDK), this went down to 22.5 percent in mid-2014. It is indeed important that, as a total, consumer credit and credit card loans exceed 63 percent.

Is it a heavy burden, individual loans of 372 billion Turkish Liras? Both the BDDK and the Central Bank believe that whether individual loans, which they closely monitor, constitute a risk or not has to be expressed by comparing them with household incomes. The Financial Stability Report prepared by the Central Bank every quarter shows the debt burden only makes up of 50 percent of family incomes, thus indicating there is still a long way to go.

The BDDK had determined that household income, together with savings, foreign exchange deposits, jewelry, bonds and bills, stock exchange and cash, in the first quarter of 2014, was 730 billion liras. The burden of individual debt was 372 billion liras in the same period. This meant a total debt level that did not exceed 51 percent of household income. Relevant institutions reminded that this rate in EU countries was 80-90 percent and in some countries exceeded 100 percent, expressing that there was a long way to go in individual loans.

There are also criticisms that it is not adequate to only take into consideration the registered loans taken from financial institutions when family borrowing or individual debts are considered. We know that families take loans outside of banks as well; they become engaged in other borrowing and lending relationships.

In particular, those segments of society that consider it a sin to obtain earnings from interest rates opt for loans with bills, loans with foreign currency, purchases in installments without using credit cards, loans from acquaintances and friends. Even if they make up just a quarter of today’s visible debt stock of 337 billion liras, the parameter of family debt liabilities suddenly becomes much more important.

One of the carefully monitored indicators of individual loans is the one about returns. Is there a risk of them turning into bad debts? According to the data from the end of May, bad debts from bank loans are 33 billion liras, corresponding to nearly 3 percent of all kinds of loans, with one third of them being individual loans, in which return issues are experienced in credit cards and consumer credit.


Written by Mustafa Sönmez