Interest-free property funding legislation enters into force

ISTANBUL

Turkey’s new regulation governing the interest-free funding market for housing and car sales took effect as it was published in the Official Gazette on March 7.

The Turkish Parliament approved the legislation last week, clearing the way for a possible boom in a system that has already drawn around 300,000 customers keen to avoid sky-high interest rates.

The so-called “savings financing system” has been used in Turkey since 1991, but a lack of official scrutiny of the creditors has so far kept some borrowers away.

Housing sales and a construction boom have helped drive economic growth in recent years, but sales have declined since September 2020, when interest rates were ramped up to tackle double-digit inflation.

Mortgages covered only 15 percent of all property purchases in January, compared with 57 percent last July.

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

Under the cooperative system, customers agree to make payments for a number of years totaling the amount they wish to borrow, plus a 7 percent to 10 percent additional cost that is not strictly considered as the interest.

They then receive their target amount halfway through the period - or earlier if they win one of the lotteries held by the creditors - and buy a property.

Hasan Dursun, 30, bought a home after receiving funding three and a half years ago.

“I recommended this to three or four people who had been considering it but were concerned. Now that there is state protection, they can see that it will be guaranteed,” he told Reuters.

While the government does not guarantee the loans, the regulation means those who join the system would be able to sue a company if it were to run off with their money.

The regulation requires companies offering such finance to have a minimum capital of 100 million Turkish Liras ($13.3 million), and they must apply to the bank regulator for approval.

The system has been used mainly by those adhering to Islamic values that restrict the use of interest rates.

Turkish President Recep Tayyip Erdoğan regularly calls for lower borrowing costs.

Last year he said the share of participation banks in the finance sector had grown threefold to 6.3 percent since his party came to power in 2002. The government is targeting a 20 percent share by 2025.

The number of companies operating in the interest-free funding sector has shot up to 40 from about five in 2018, said Eyüp Akbal, chair of FuzulEv, which has been operating in the sector since the 1990s.

“The payments that participants made to companies not having legal protection created trust issues,” he said.

“The system absolutely needed to be regulated,” he added.

Akbal said the lack of regulations before meant that there was no official data on how many people used the system, though it was estimated to be around 300,000 people, with the sector’s volume worth up to 60 billion liras (nearly $8 billion).

“With the trust issue being lifted, the system could easily grow two to three folds within four to five years,” he said, adding that the system was focused on low- and medium-income people.