Turkey brings in Interest-Free Property Funding for the Domestic Market

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Turkey brings in Interest-Free Property Funding for the Domestic Market

New regulations concerning financing for housing and vehicle sales were published in the Official Gazette on March 7. Turkey now has new rules governing its interest-free markets.

In the Turkish economy there are already over 300,000 customers who are desperate to avoid being charged sky-high interest rates. The Turkish parliament has recently passed the bill that has authorised the development of an expanding financial system.

Following the implementation of the “savings financing system” savings companies could do business in Turkey. However, this system has failed to see much usage due to limited official regulation of creditors.

It has benefited from low mortgage rates, which have permitted housing and construction booms recently. However, it has started to show signs of weakness since September 2020 because of the recent double-digit inflation.

The percentage of properties which were financed with mortgages accounted for only 15% in January 2021, compared to 57% in July 2020.

Turkey’s benchmark interest rate of 17 per cent makes it the highest in any advanced or developing economy The new regulations, loosely based on Islamic financing principles, is expected to attract a wave of new customers.

In addition to the terms of the principal of the loan agreement, customers are asked to make extra payments of between 7% – 10% to help offset the cost of this product’s usage over the useful life of the total amount of time they agreed to cover.

The borrowers will receive their target amount halfway through the agreed period – or earlier if they win one of the lotteries held by the creditors. They can then buy a property.

By design, the lending to government doesn’t come with government guarantees, but, with regulation, those who participate in the programme may take claims against a company providing the service.

This system is likely to be primarily embraced by those individuals who are adhering to Islamic values, particularly those that regard interest rates are prohibited.

While there are currently about five companies in the interest-free funding sector, Eyüp Akbal, chair of Fulvius from the late 1990s, states “Four out of five are new to us, and there is a steep rise in the number of businesses operating in the sector today.”

The lack of regulations before means there is no official date on how many people borrowed in this way. It is estimated to have 300,000 users and the sector could be worth 60 billion liras (nearly $8 billion).

The system is aimed at those in the lower and middle classes. It is hoped that this initiative will stimulate the domestic property market for individuals and families concerned about mortgage interest rates.

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