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Can Turkish banks avoid economic reality?

How much longer can Turkish banks increase profits while the economy shrinks? The luck and skill of the industry have meant that defaulting borrowers have not yet caused a credit-quality crisis. But in Turkey, financial meltdown is often just around the corner. Dominic O’Neill reports from Istanbul.

Turkey: Foreign investors stay cool

IN THE NARROW market streets of Besiktas, Istanbul, business is unseasonably slow. Fatih, a 48-year-old florist, is playing backgammon with a friend in front of his half-empty store. The lack of custom means he is finding it increasingly difficult to pay his debts. He is unable to help his wife, whose credit-card debt has snowballed since a foreign car company made her redundant last year. Her six-month pay-off ran out about a month ago.

"The banks have scattered around credit cards like seeds, but there are no jobs any more," he says.

Such stories tarnish the image some Turkish banks like to project of themselves as rapidly growing but conservative lenders that shielded themselves from the credit crunch after learning from Turkey’s 2001 financial crisis. The ratio of non-performing loans in the Turkish banking system reached 5.2% at the beginning of August, up from about 3% before Lehman Brothers filed for bankruptcy. The worst-affected segments are consumer, car and small and medium-sized enterprise loans – and, above all, credit cards.

Most Turkish credit-card customers pay off the full amount as soon as it comes due – unlike in the US, for example.

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