Financialization in Turkey: The Case of Consumer Debt

Abstract

The last decade has witnessed a considerable rise in consumer credit in developing countries. This study offers a political economy approach to an analysis of the rise in consumer debt by drawing on the case of Turkey. It argues that the recent rise in consumer credit is historically unique and it needs to be analysed by considering the demand- and supply-side determinants and contextualizing them in the many transformations that have occurred in the financial and non-financial sectors of the economy over the last decade. On the supply side, banks adapted to the new economic and political environment, which has been characterized by Turkey's deepening integration into the world economy, by diversifying their activities towards consumer lending. On the demand side, consumer credit growth is linked to the relative deprivation in popular incomes during this period in that poorer households have come to depend on credit for everyday basic consumption.

Notes

^[1] For developed countries, see C. Lapavitsas, A. Kaltenbrunner, D. Lindo, J. Michell, J. P. Painceira, E. Pires, J. Powell, A. Stenfors and N. Teles, ‘Eurozone crisis: beggar thyself and thy neighbour’, Journal Balkan and Near Eastern Studies, 12(4), 2010, pp. 321–373. For developing countries, see IMF (International Monetary Fund), Global Financial Report April 2006, IMF, Washington, DC, 2006.

^[2] Ibid.; G. Ma, E. Remolona and I. Shim, ‘Introduction for “Household debt: implications for monetary policy and financial stability”’, BIS Papers No. 46, 2009, pp. 1–3.

^[3] E. Başçı, ‘Credit growth in Turkey: drivers and challenges’, BIS Papers No. 28, 2006, pp. 363–375.

^[4] D. Bryan, R. Martin and M. Rafferty, ‘Financialization and Marx: giving labor and capital a financial makeover’, Review of Radical Political Economics, 41(4), 2009, pp. 458–472; P. Dos Santos, ‘At the heart of the matter: household debt in contemporary banking and the international crisis’, Economiaz, 72(3), 2009, pp. 54–79; G. A. Dymski, ‘The global financial customer and the spatiality of exclusion after the “end of geography”’, Cambridge Journal of Regions, Economy and Society, 2(2), 2009, pp. 267–285; C. Lapavitsas, ‘Financialisation, or the search for profits in the sphere of circulation’, Economiaz, 72(3), 2009, pp. 98–119; C. Lapavitsas, ‘The financialisation of capitalism: profiting without producing’, City, 17(6), 2013, pp. 792–805; J. Montgomerie, ‘The pursuit of (past) happiness? Middle-class indebtedness and American financialisation’, New Political Economy, 14(1), 2009, pp. 1–24.

^[5] See N. Ergüneş, ‘Global integration of the Turkish economy in the era of financialisation’, Research on Money and Finance Discussion Papers, 2009, < http://www.researchonmoneyandfinance.org/media/papers/RMF-08-Ergunes.pdf> (accessed 12 October 2011).

^[6] Z. Bilgin and U. Yavas, ‘Marketing of consumer credit services in a developing country: a status report’, International Journal of Bank Marketing, 13(5), 1995, pp. 31–36.

^[7] See, for instance, L. M. Ausubel, ‘Adverse selection in the credit card market’, Mimeo, University of Maryland, 1999; and D. S. Karlan and J. Zinman, ‘Observing unobservables: identifying information asymmetries with a consumer credit field experiment’, CEPR Discussion Paper No. 911, 2005, < http://www.econ.yale.edu/growth_pdf/cdp911.pdf> (accessed 10 December 2012).

^[8] B. A. Cynamon and S. M. Fazzari, ‘The end of the consumer age’, 2010, < http://www.ie.ufrj.br/datacenterie/pdfs/seminarios/pesquisa/texto1708.pdf> (accessed 10 February 2012).

^[9] Ibid.

^[10] See note 4.

^[11] C. Lapavitsas, ‘Financialised capitalism: crisis and financial expropriation’, Historical Materialism, 17(2), 2009, pp. 114–148.

^[12] C. Lapavitsas and P. Dos Santos, ‘Globalization and contemporary banking: on the impact of new technology’, Contributions to Political Economy, 27, 2009, pp. 31–56.

^[13] There is some evidence that corporate bond issuance has also become an important source of funding in some East Asian and Latin American countries. See M. S. Mohanty, G. Schnabel and P. Garcia-Luna, ‘Banks and aggregate credit: what is new?’, BIS Papers No. 28(2), 2006, pp. 11–39.

^[14] World Bank, Global Development Finance, Washington, DC, 2007.

^[15] P. Turner, ‘The banking system in emerging economies: how much progress has been made?’, BIS Papers No. 28, 2006.

^[16] K. Guo and V. Stepanyan, ‘Determinants of bank credit in emerging market economies’, IMF Working Paper, 11(51), 2011, < http://www.imf.org/external/pubs/ft/wp/2011/wp1151.pdf> (accessed 11 June 2012).

^[17] D. Milhajek, ‘Domestic bank intermediation in emerging market economies during the crisis: locally owned versus foreign-owned banks’, BIS Papers No. 54, 2010.

^[18] For an analysis of how this process has functioned in Brazil and Korea, see J. P. Painceira, ‘Financialisation, reserve accumulation and Central Bank in emerging economies: banks in Brazil and Korea’, Research on Money and Finance Discussion Papers 38, 2012, < http://researchonmoneyandfinance.org/media/papers/RMF-38-Painceira.pdf> (accessed 22 July 2012).

^[19] CGFS (Committee on the Global Financial System), ‘Financial stability and local currency bond markets’, CGFS Papers No. 28, 2007. Sterilization had led to an increase in issuance of government debt securities that could be presented as collateral in repo operations, reporting that between December 1999 and June 2010, it increased from around $1 trillion to $5 trillion for a set of larger emerging market economies. R. Moreno, ‘Foreign exchange market intervention in EMEs’, BIS Papers No. 57(12), 2011.

^[20] Dos Santos, op. cit.; Dymski, op. cit.

^[21] See note 1. In some of these countries, this was undertaken simply by issuing a large number of credit cards with the expectation that the average default rate would be covered by the high interest rates charged, see J. A. Hanson, ‘Post-crisis challenges and risks in East Asia and Latin America’, in G. Caprio, J. A. Hanson and R. E. Litan (eds), Financial Crises: Lessons from the Past, Preparation for the Future, The Brookings Institution, Washington, DC, 2005, pp. 15–62.

^[22] For an analysis on developed countries, see A. Barba and M. Pivetti, ‘Rising household debt: its causes and macroeconomic implications—a long-period analysis’, Cambridge Journal of Economics, 33(1), 2009, pp. 113–137.

^[23] Dymski, op. cit.

^[24] I. Mas and M. Almazan, ‘Banking the poor through everyday stores’, Innovations, 6(1), 2011, pp. 119–128.

^[25] C. Park, ‘Consumer credit market in Korea since the economic crisis’, in I. Takatoshi and A. K. Rose (eds), Financial Sector Development in the Pacific Rim, East Asia Seminar on Economics, 18, The University of Chicago Press, Chicago, 2009, pp. 161–196.

^[26] Montgomerie, op. cit.

^[27] See G. G. Akin, A. F. Aysan, G. I. Kara and L. Yildiran, ‘The failure of price competition in the Turkish credit card market’, Emerging Markets, Finance and Trade, 46, 2010, pp. 23–35. The authors estimated the sensitivity of credit card interest rates to the cost of funds (determined by the overnight interest rates) in Turkey between 2001 and 2006, concluding that credit card interest rates are insensitive to downward trends in the cost of funds.

^[28] See D. Gültekin-Karakas, Global Integration of Turkish Finance Capital: State, Capital and Banking Reform in Turkey, Vdm Verlag Dr Müller, Saarbrücken, 2009.

^[29] The increasing presence of foreign investors in the government debt market also led to a reduction in the dominant role of domestic banks in the public domestic bond market. The ratio of equities owned by foreign customers to total equities on the Istanbul Stock Exchange increased from 43 per cent in 2001 to 62 per cent by the end of 2011. CMBT (Capital Markets Board of Turkey), Annual Report, Ankara, 2011. Moreover, the share of non-residents in the domestic debt stock of the government securities increased from 4.4 per cent in 2003 to 17.3 per cent in 2011, according to Treasury statistics.

^[30] E. Yeldan, ‘Patterns of adjustment under the age of finance: the case of Turkey as a peripheral agent of neoliberal globalization’, Working Paper 126, PERI, UMASS, Amherst, MA, 2007.

^[31] H. Ersel and F. Özatay, ‘Fiscal dominance and inflation targeting: lessons from Turkey’, Emerging Markets Finance and Trade, 44(6), 2008, pp. 38–51. While there was increasing interest in borrowing from abroad, the financing behaviour of Turkey's corporations did not change much as a turn away from bank loans to open market securities took place, as happened in developed countries. Indeed, the corporate bond market has not been much developed in Turkey. The crowding-out of corporate bonds by government securities and availability of alternative financing sources are two of the major reasons behind the underdevelopment of Turkey's corporate bond market. Furthermore, as opposed to many other developing country firms which borrow mainly from Eurobond and US dollar bond markets, the major sources of funds borrowed by Turkish corporations were from foreign banks or foreign branches and subsidiaries of domestic banks.

^[32] Banks have adapted themselves to the new environment also by finding ways of increasing their fee- and commission-generating activities. The extension of financial services to households has played a major role in this process, as banks started to collect different types of service and commission fees, including credit card charges, late payment fees, transfer fees and so on. As a result, the ratio of income from net fees and commissions increased from 14 to 17 per cent between 2001 and 2010 (see note 28).

^[33] BRSA (Banking Regulation and Supervision Agency), Financial Markets Report, Ankara, December 2011.

^[34] The Central Bank decision to increase the amount of required reserves that banks must set aside against liabilities in the last quarter of 2010 led to a further increase in the ratio of funds raised through repo transactions. The decision aimed to restrain the rapid credit growth, however, banks responded to this policy change by increasing the repo transactions they made with the Central Bank. In addition, bond issuance in international markets by domestic banks in 2011 created another source and contributed to the increase and diversification of the funding base.

^[35] See note 33.

^[36] BRSA (Banking Regulation and Supervision Agency), ‘Structural developments in banking’, Ankara, December 2006.

^[37] See < http://www.turkstat.gov.tr>.

^[38] C. Özel and C. Yalçın, ‘Yurtiçi Tasarruflar ve Bireysel Emeklilik Sistemi: Türkiye'deki Uygulamaya İlişkin bir Değerlendirme’, TCMB Çalışma Tebliğ, 13/4, 2013.

^[39] Assuming that the average monthly income of the lowest income group is the maximum, 1000 TL, then the yearly income will be 12,000 TL. This means that in 2010 and 2011, the amount of loans borrowed by people within the lowest income group constitutes almost 60 per cent of their income.

^[40] It is well known that a highly unequal income distribution is a major characteristics of the economy. More importantly for the purpose of this paper, is the evidence on the persistent gap between income and expenditure of labourers in the 2000s, indicating their increasing reliance on debt to cover the gap. S. Bahçe and A. H. Köse, ‘Krizin Teğet Geçtiği Ülkeden Krize Bakış: Teorinin Naifliği, Gerçekliğin Kabalığı’, Praksis, 22, 2010.

^[41] See, for instance, Z. Yükseler and E. Türkan, ‘Türkiye'nin Üretim ve Dış Ticaret Yapısında Dönüşüm: Küresel Yönelimler ve Yansımalar’, TÜSİAD-Koç University Economic Research Forum Research Reports, 2006.

^[42] See note 30.

^[43] For a detailed analysis on Korea, Turkey and Mexico, see Ö. Onaran, ‘From the crisis of distribution to the distribution of the costs of the crisis: what can we learn from previous crises about the effects of the financial crisis on labor share’, PERI Working Paper Series No. 195, 2009.

^[44] For a detailed analysis of how the new law further shifted the balance of power from labour to employer, see A. M. Özdemir and G. Yücesan-Özdemir, ‘Labour law reform in Turkey in the 2000s: the devil is not just in the detail but also in the legal texts’, Economic and Industrial Democracy, 27(2), 2006, pp. 311–331.

^[45] F. Demir and N. Erdem, ‘Labour market performance after structural adjustment in developing countries: the interesting but not so unique case of Turkey’, in L. K. Valencia and B. J. Hahn (eds), Employment and Labor Issues: Unemployment, Youth Employment and Child Labor, Nova Science, New York, 2010, pp. 1–37; E. Yeldan, ‘Growth and employment in Turkey’, report prepared for the ILO Turkey Office, 2012.

^[46] For details, see S. Coşar and M. Yeğenoğlu, ‘The neoliberal restructuring of Turkey's social security system’, Monthly Review, 60, 2009, pp. 36–49.

Additional information

Notes on contributors

Elif Karacimen

Elif Karacimen is a member of the Department of Economics at Recep Tayyip Erdogan University, Rize, Turkey. She received her PhD in economics from School of Oriental and African Studies, University of London in 2013.