New legislation passed by the Turkish parliament late February dealing with restructuring credit card debt came as welcome news to economists and market watchers.
The new law promises stricter standards for the evaluation of credit card applications, tighter alignment of account limits with regular income, and a reduction in the ceilings on penalties for late payments. This is good news considering Turkey’s problem of card debt.
The fact that Turkey is one of the fastest growing markets for Visa and MasterCard has not helped alleviate the problem. This is due primarily to the country's belated introduction to credit cards, which in turn is linked to its relatively late start in liberalising its economic model.
As the protracted reign of a command economy ended with economic liberalisation measures ushered in during the early 1980s, the subsequent pace of achievements has been so rapid as to distort the evolution of the country's payment mechanisms at the retail level.
Consumers skipped the personal cheque-account stage altogether and moved directly from cash to plastic in the mid-1990s, with accelerating enthusiasm through the turn of the century and beyond.
However, Turks have had a love-hate relationship with plastic money — despite a general affinity for new systems emerging with technological advances, as demonstrated by their immediate embracing of mobile phones and online banking. Chronically high inflation, though currently under control, and reciprocally high nominal and real interest rates, combined with a low GDP per capita, have proven disastrous for many consumers taking on more credit card debt than they can afford.
However, banks are also to blame, at least in part, for an inordinate rise in the stock of debt associated with credit card transactions. They have generally maintained rather loose standards on ability to pay when issuing credit cards — peddling them through stands at malls and supermarkets, making them available to anyone able to complete an application form, and sending out unasked for pre-approved credit cards.
Data released by the Interbank Card Center (ICC) and the Central Bank of Turkey (CBT) provide a good indication of the basic scenario. According to the ICC, the number of credit cards in circulation in Turkey reached 29m as of the end of September 2005. Cumulative CBT figures up to the same point in time show that 570,000 credit cards were in default, with debts amounting to TL1.17bn, the equivalent of $875m. The total volume of debt outstanding in connection with credit card usage amounted to TL16bn or $12bn, according to the CBT report. However, the ICC and CBT data shows that almost 2% of credit cards in circulation as of the end of the third quarter of 2005 were in default, or, from a positive perspective, that slightly more than 98% were in good standing.
On a less positive note regardless of the perspective, the underlying monetary values indicate that the volume of debt associated with accounts in default represented 7.3% of the total stock of debt on credit cards. This seems to paint a more sombre picture of the default rate than does the ratio indexed to the number of cards, especially as the 7.3% rate prevailing in September 2005 reflects an increase of three percentage points over the corresponding figure at the end of 2004. It also represents the highest rate on record since a peak of 8.9% registered at the end of 2001, the year Turkey experienced a major economic downturn.
While the current default rate is slightly lower than the global average, estimated to be somewhere between 8 and 10%, the pace that Turkey is catching up with international norms is particularly alarming.
The only mitigating factor is that the problem seems to be localised, as suggested by CBT figures anchoring the entire amount in default to 570,000 cards and an assessment by the Banks Association of Turkey connecting these cards with 250,000 people. Fortunately, preparations are underway to gain some degree of control over a persistent albeit isolated tendency to finance rather than earn a living, and a system providing the means to do so.
There is no denying that the most reassuring development towards stabilisation is the recent law on bank and credit cards. The law will also have the benefit of centralising legal considerations relevant to this area of banking, which, for want of a framework law dedicated exclusively to credit cards, is currently regulated in reference to six different pieces of legislation. Like Turkish economists, local lawyers now have reason to smile.