Turkish banks face credit card legislation

The Turkish government has submitted
legislation to the country’s parliament that, if passed, would
limit the interest rates on credit cards to twice the one-month
Central Bank deposit rate (currently 1.35 percent).

This would almost half the income Turkish banks
generate from their credit cards as the current interest rate is
around 4.5 percent a month, and under the proposal the maximum
chargeable would be 2.7 percent on the basis of the current Central
Bank deposit rate.

According to data from the Interbank Card
Centre (ICC), the number of credit cards in Turkey, which has a
population of 70 million, has surged from just under 14 million in
2001 to 37.3 million in 2007. Turkey ranks third in Europe in terms
of the number of cards. According to ICC data, credit card
transaction volume in 2007 rose by 31 percent to TKL142 billion
($114 billion) and surged another 36.3 percent in the first quarter
of 2008 to TKL40.6 billion.

The government’s draft legislation, submitted
by the Banking Regulation and Supervision Agency (BDDK) and aimed
at protecting consumer rights, would also prevent banks from
charging an annual fee for credit cards, limiting them to a
one-time issuance charge, and reduce the penalties banks can charge
mortgage borrowers who repay early.

Should the legislation be passed, it is likely
that both fee income and interest income for Turkish issuers would
fall sharply. The Turkish Union of Banks (TBB) is urging the
government to be “sensitive” on the issue.

The TBB said in a statement that credit card
payment systems significantly contributed towards the country’s
economy, that measures to be taken on this issue should be in line
with the market economy, and that they should not negatively affect
domestic and foreign competition.

The government’s move reflects growing concern
about the accelerating growth of credit card usage in recent years,
due to heightened bank competition and a foundation of positive
growth in the years since the country’s 2001 economic crisis.

Turkey’s youth consumers are forming an
increasingly important credit card demographic and higher levels of
disposable income have led to issuers and retailers heavily
promoting credit card usage for basic everyday purchases.

Consumer credit spending growth has come at the
same time that there has been an increase in the number of large
shopping malls in Turkey’s main urban areas, and worker migration
from smaller cities to larger cities has also boosted credit card
spending.

Although Turkey’s per capita income still
trails European Union levels, it has surged to $9,333 in 2007,
compared to $7,500 in 2006.

The proposed law to limit high credit card
interest rates in Turkey has also triggered investor fears about
bank income and is already hurting share prices at leading Turkish
issuers such as
Yapi Kredi,
Garanti,
Akbank and
Is Bank, which are regarded as having the highest exposure to
the credit market.

According to analyst Sevda Sarp of Ata Invest,
credit card balances accounted for 21 percent of Yapi Kredi’s total
loans as of the end of the first quarter of 2008, followed by
Garanti at 13 percent and Akbank at 11 percent.

If passed, it is likely that the legislation
will also impact smaller card issuers who will have to stump up
higher costs for marketing and promoting their cards. However,
industry analysts are divided as to whether the legislation will be
passed. When the proposed legislation was first announced at the
end of May, Turkish banking sector shares began to fall
rapidly.

The chairman of the TUDER consumer association
welcomed the proposed legislation, saying it was inevitable given
the sharp rise in indebtedness due to ill-informed purchases by
consumers, who were using credit cards for regular daily
purchases.

“This is a social problem which has been stored
up and is ready to explode. The government’s duty should not just
be bill proposals…it must pursue policies which prevent consumers
becoming excessively indebted,” TUDER chairman Engin Basaran
said.