Loan and Interest Rate Puzzle…

Banks and real sector in Turkey charge an interest rate between 29% and 50% on loans while you need to repay a loan with the highest rates if you have taken it out of a non-bank institution. Even a quarter of these rates cause consumption and investments to come to a halt in developed economies, but in developing economies, the momentum continues in one way or another. Let me tell you why.

Actually, these rates alone could have led to an economic slowdown in Turkey, however the fact that companies are in dire need of loans due to the inadequacy of their working capital has created an “organisational blindness “. The damage that would result from taking out a loan to continue to do business, regardless of the cost, is utterly ignored.

A significant number of companies that are described as “corporations” do not deign to generate revenues through transactions that will not be understood by their bosses or partners when looking at the financial statements. It is not the size of the company that matters here, but the mindset and approach. These operations aimed at generating revenues, which are performed by taking advantage of the complexity of the tax regime and the intricacies of doing business in Turkey, impose non-business-related costs on companies. Many businesses are trying to find loans to maintain their own operations, but in the meantime, they are using cash to finance the desires and ambitions of their owners and executive staff. But do not misunderstand me, when I say “many”, I do not mean “all”. I certainly do not like stereotyping like the Chair of the Central Bank has recently did. However, I will stay away from.

As I have mentioned both in my latest book “Reintroduction to Economics” and in my many other articles, the problems begin as soon as the boss closes his ears to hearing different voices. For this reason, to help make critical decisions, it is positively necessary to establish a board of directors that comprise different voices. Although the board will obviously have permanent members, some of them must be replaced with new ones periodically, just to help keep a fresh and open mind.

Who is the Central Bank sending a message to?

Another major problem is committing the company in long-term and costly investments, merely by relying on the profit on paper, which is appraised on the basis asset valuation. It would be suicidal to make such investments, especially with the current interest rates. Taking out a loan to finance your company’s everyday operations is quite understandable, but if you are doing it to engage your company in expensive investments, then you should stop and reconsider your decision.

Taking out loans to try to keep alive a company that does not, cannot or is not allowed to profit from its own activities is not a sustainable at all, even if the interest rates are at a record low levels. Of course, in such situations, some, but not more than a handful, manage to sell their companies to their new owners before the inevitable end. Making ordinary people partners in such lack of foresight through public offerings does not change the inevitable aftermath either.

Now let’s take a look at the rapid increase in lending: I observe that banks refrain from giving out long-term loans. Loan growth is a natural outcome of ever-increasing expenditures due to soaring inflation. But this data should be interpreted by excluding both the rising inflation and the circulation rate of loans that are being given out with short-term deposits.

I think the CBRT is trying to send a message to political leaders, not to business world, “We are actually working. Do not pay any attention to complaints”.