Regulation of interest-free finance could boost home sales in Turkey
Turkey’s parliament this week approved a regulation 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 keen to avoid sky-high interest rates.
The “savings financing system” has been in use in Turkey since 1991.
Home sales and the construction boom have helped boost economic growth in recent years, but sales have declined since September when interest rates rose. Mortgages only covered 15% of all home purchases in January, up from 57% last July.
With the new regulations in place and Turkey’s benchmark interest rate of 17%, the highest of any advanced or developing economy, the savings financing system loosely based on Islamic financing principles should attract a wave of new customers.
In 2020, the country recorded a record 1.5 million home sales.
As part of the cooperative system, the client agrees to make payments over several years totaling the amount he wishes to borrow plus an additional cost of 7 to 10% which is not strictly assimilated to interest. They then receive their target amount halfway through the period, or sooner if they win one of the lotteries held by creditors and buy a property.
Hasan Dursun, 30, bought a house after receiving financing 3.5 years ago.
“I recommended it to three or four people who had considered it, but were concerned. Now that there is state protection, they can see that it will be guaranteed, ”he said.
While the government does not guarantee the loans, the regulations mean that those who join the system could sue a business if it runs away with their money.
The regulations require that companies offering such financing have a minimum capital of 100 million TL ($ 13.3 million), and they must seek approval from the banking regulator.
The system has been used primarily by those who adhere to Islamic values which limit the use of interest rates.
President Recep Tayyip Erdoğan has regularly called for lower borrowing costs.
Last year, he said that the share of Islamic institutions in the financial sector had tripled to 6.3% since the coming to power of his ruling party, the Justice and Development Party (AKP) in 2002. The government targets a 20% share by 2025.
The number of companies operating in the interest-free finance industry has increased to 40, from around five in 2018, said Eyüp Akbal, president of FuzulEv, which has been in the industry since the 1990s.
“The payments that participants made to companies without legal protection created trust issues,” he said. “The system absolutely had to be regulated.
Akbal said the lack of regulation previously meant there was no official data on how many people were using the system, although it was estimated that around 300,000 had done so for one. value up to TL 60 billion.
“With the trust issue lifted, the system could easily double, triple in four to five years,” he said, adding that the system was geared towards low and middle income people. .