Shadow Lenders Selling Phantom Phones Spook Banks: Turkey Credit

Businesses that convert consumer credit card debt to fraudulent bank installment loans are opening faster than Turkish authorities can shut them down.

Once closed, “they immediately spring up under another name,” Soner Canko, general manager of Turkey’s Interbank Card Center, said in a Nov. 22 interview in Istanbul. “What we see here is a diabolical invention with astonishing creativity.”

Since July 2011 the center, known as BKM, has helped close about 15,000 merchants that convert customers’ credit-card obligations, which can carry interest rates of more than 30 percent, into no-interest bank installment loans for fake purchases of goods from smartphones to refrigerators, Canko said. Turkish police made 285 arrests connected to this practice last year, according to the website of the Department to Fight Against Trafficking and Organized Crime.

The crime wave follows a 94 percent jump in consumer credit-card debt over the past three years to 82.7 billion liras ($40 billion) by Dec. 6, a period during which the central bank gradually cut its benchmark one-week repo rate to a record low of 4.5 percent from as high as 7 percent in November 2010. About 5.9 percent of consumer credit-card debt is classified as non-performing, more than double the average ratio on all loans.

‘Be Sensitive’

Bonds slid this week on unrelated allegations of government corruption, including at a state-run bank. The yield on the two-year note jumped 50 basis points during the last three days to 9.42 percent.

About 56.7 million credit cards are in use in Turkey, a country of 75.6 million people, according to October data from BKM, an umbrella organization of 28 Turkish banks focusing on payment systems. That’s more cards per capita than in Greece and Poland, and about on par with the U.K., according to 2012 data from the European Central Bank. Credit card spending rose at an annual rate of 14 percent to 32.8 billion liras in October, BKM data show.

“Please be sensitive in getting credit cards,” Prime Minister Recep Tayyip Erdogan was cited as saying by the state-run Anatolia news agency on Dec. 1 in the southwestern province of Fethiye, Mugla. “Credit cards are the biggest source of the interest-rate lobby. Live within your means. Or they’ll take whatever you’ve got at home.”

Jewelry Ban

Regulators are beginning to act. According to a draft published by the Banking Regulation & Supervision Agency in Ankara on Nov. 26, credit card installments will be capped at six months for purchases of goods including electronic items, telecommunications and jewelry.

If enacted, these rules would supplement those introduced on Oct. 8, which raised minimum monthly payments on card debt and forced banks to set stricter spending limits.

The central bank has capped overdue interest on credit card debt at 30.2 percent. That compares with annual inflation of 7.32 percent in November and a weighted average rate of 13.5 percent for regular bank loans, according to data compiled by Bloomberg.

Banning jewelry sales on credit card installments could be a solution to fake purchases, Vatan newspaper cited the banks regulator chief, Mukim Oztekin, as saying on Nov. 5. “What we see is the borrowing of money that’s perceived as if a trade was made with a credit card,” Oztekin said.

Officials at the Ankara-based central bank and BRSA both declined to comment when contacted by Bloomberg through e-mail and by telephone.

Websites, YouTube

The practice is advertised on wall posters and handbills, and on dozens of websites that use various forms of Turkish names for “credit card center,” “Istanbul installments,” or “easy credit card installments.” There are also YouTube videos that serve the same purpose.

“Your debt to the bank will never end even if you regularly make minimum monthly payments,” one street advertisement for in Istanbul’s Bahcelievler district reads. Some fliers use examples to show how the system works.

“We close your 10,000-lira card debt, charge you 16 percent annual interest and take 11,600 liras from your card as a 12-month installment purchase,” says one picked up from a car’s windshield in Bahcelievler. “You pay your card debt in 12 months as it looks like you’ve been shopping. After we swipe your card you have no relationship with us.”

The ad gives contact phone numbers, without providing company names.

Extreme Solution

The booming trade indicates that consumers are “drowning in a swamp of card debt,” Sukran Eroglu, head of the Istanbul-based Association to Protect Consumers, known as Tukoder, said by phone on Dec. 11. “These people are trading on their desperation.”

Such despair was illustrated on Nov. 21, when Tugrul Bayir, a father of three, threatened to blow himself up in front of Erdogan’s office in Ankara after attaching glass cement and clock dials to his clothes in an effort to look like a suicide bomber. Detained by police after a scuffle and later released, according to Anatolia news agency, Bayir said on Nov. 28 that he wanted to be killed because of his debts, totaling about 30,000 liras, a third of which is on credit cards.

“People will lose their mental health because of all those cards,” Bayir said from Ankara.

Consumer card debt accounts for a quarter of household liabilities, the central bank said in its financial stability report published on Nov. 28. Individuals who have monthly incomes of less than 2,000 liras account for 42 percent of all outstanding consumer loans, the bank said.

Legitimate Businesses

While card debt rises, government borrowing costs have also been increasing. Turkish two-year benchmark yields climbed 438 basis points, or 4.38 percentage points, since May 22, the biggest increase in emerging markets. U.S. Federal Reserve Chairman Ben S. Bernanke said that day the central bank’s monthly bond buying of $85 billion could be scaled back. The lira weakened about 10 percent against the dollar since then, amid capital flight from emerging markets.

The Fed said yesterday that it’s cutting its monthly bond purchases to $75 billion from $85 billion, taking the first step toward unwinding the unprecedented stimulus put in place to help the U.S. recover from the worst recession since the 1930s.

“Citizens are well aware of high overdue interest rates,” Muharrem Ozay, an Istanbul-based attorney specializing in commerce and finance, said by phone on Nov. 21. So they see the shadow lenders “as a practical solution, not a crime. The idea is to postpone debt repayment.”

Draining Swamp

These so-called shadow lenders generally have a legitimate business that allows them to get hold of point of sale devices from banks. They might sell phone minutes, jewelry, electronic goods or home appliances, all on installment plans, according to BKM’s Canko.

“Smartphones are among the favorites,” he said.

An April 29 ruling by the Supreme Court of Appeals in Ankara describes the lenders as “sequential loan sharks.” The court upheld a lower court decision that a defendant, whose legitimate business is selling jewelry, should be sentenced for between two and five years and also be fined. The ruling, which serves as case law, didn’t reveal the name of the defendant.

Huseyin Aydin, the head of the Banks Association of Turkey, said in an interview at a Nov. 14 news conference in Istanbul that the organization has no data on the volume of this business. Aydin is also the chief executive of state-run TC Ziraat Bankasi AS, Turkey’s biggest state-run lender, in Ankara.

Turkish banks are taking their own steps to respond. As of Jan. 1, lenders will have to end contracts with businesses that engage in a “fictitious transaction,” canceling point of sale devices they’d given to them earlier, according to the banks association. They won’t be allowed to make new contracts with such businesses for a year, a period which may be extended in case the practice is repeated.

These rules will allow banks to “fight against the swamp instead of the mosquito,” BKM’s Canko said.

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