Borrowing costs

Turks consider interest-free real estate financing amid rising borrowing costs

ISTANBUL (Reuters) – Turkey’s parliament this week approved regulations governing the interest-free housing finance market, paving the way for a possible boom in a system that has already attracted around 300,000 customers eager to avoid high rates. exorbitant interest.

FILE PHOTO: Commercial and residential buildings are seen in Sisli district as the outbreak of the coronavirus disease (COVID-19) continues, in Istanbul, Turkey September 7, 2020. . REUTERS/Murad Sezer

The so-called “savings finance system” has been in use in Turkey since 1991, but the lack of official creditor monitoring has so far kept some borrowers out.

Home sales and a building boom have helped boost economic growth in recent years, but sales have fallen since September when interest rates were raised to fight double-digit inflation. Mortgages only covered 15% of all home purchases in January, compared to 57% last July.

With the new regulations in place and Turkey’s benchmark interest rate at 17%, the highest of any advanced or developing economy, the savings finance system loosely based on Islamic finance principles is expected to attract a wave of new customers.

Under the cooperative system, customers agree to make payments over a number of years totaling the amount they wish to borrow plus an additional cost of 7-10% which is not strictly considered interest. They then receive their target amount halfway through the period – or sooner if they win one of the creditor-held lotteries – and purchase a property.

Hasan Dursun, 30, bought a house after receiving funding 3½ years ago.

“I recommended this to three or four people who had thought about it but were worried. Now that there is state protection, they can see that it will be guaranteed,” he said.

Although the government does not guarantee the loans, the regulations mean that those who join the system could sue a company if they run off with their money.

The regulation requires companies offering such financing to have a minimum capital of 100 million lira ($13.3 million) and must seek approval from the banking regulator.

The system has been used primarily by those who adhere to Islamic values ​​that restrict the use of interest rates.

For Turkish President Tayyip Erdogan and his Islamic-rooted AK Party, the system should advance his goal of adding more Islamic financing tools to the economy.

Erdogan, a self-proclaimed “enemy” of interest rates, regularly calls for lower borrowing costs.

Last year he said the share of Islamic institutions in the financial sector had tripled to 6.3% since his party came to power in 2002. The government is aiming for a 20% share by 2025 .

The number of companies operating in the interest-free financing sector has increased from around five in 2018 to 40, said Eyup Akbal, chairman of FuzulEv, which has been operating in the sector since the 1990s.

“Payments that participants made to companies without legal protection created trust issues,” he said. “The system absolutely needed to be regulated.”

Akbal said the lack of regulation before meant there were no official data on how many people were using the system, although it was estimated to be around 300,000 and was worth up to 60. billion lira.

“With the trust problem solved, the system could easily double or triple in four to five years,” he said, adding that the system was geared towards low- and middle-income people.

($1 = 7.5105 lira)

Reporting by Ceyda Caglayan; Written by Ali Kucukgocmen; Editing by Hugh Lawson