In the first two months of the pandemic, these financial institutions extended low-interest consumer loans to almost 7 million people to provide financial support and mitigate the economic slump. Around 1.8 million of those were first-time borrowers and, although the official figures are not known, the number of applicants far exceeded the number of loans made.
The cheap loans of 2020 were not a new strategy. Following the failed coup in 2016, Turkish policymakers responded with a state-sponsored credit campaign. The government’s strategy was to stimulate the economy ahead of the April 2017 referendum to amend the constitution, which led to the establishment of a presidential rather than parliamentary system. They also implemented a similar approach after the economic downturn resulting from the 2018 currency crisis. The volume of credit expansion during the first months of the pandemic, however, surpassed those previous years’ campaigns. Other upper-middle income countries took different measures. For example, Brazil and Argentina were more generous in providing direct cash transfers and targeted assistance to those in need. Extending cheap loans rather than providing direct financial support or beefing up low-income assistance programs typifies the Turkish government’s approach to managing the economy in the last six years. It partly builds on the previous popularity of “financial inclusion” programs in the 2010s that portrayed access to credit and financial services as a solution to endemic poverty, but which also led to the growth of household debt.
Financial inclusion programs typically entail the expansion of financial education and microcredit campaigns. They are designed to remove the barriers that hinder access to financial institutions for lower-income borrowers. States adopting financial inclusion policies invite previously excluded social segments into the financial system, using campaigns or nudging techniques, with the help and contributions of financial institutions. Microcredit institutions quickly provide new borrowers with small loans as they require less paperwork and no collateral (aside from the necessary credibility in group lending). Using credit to substitute for income, however, can result in the over-indebtedness of newcomers or the transfer to the creditors of a significant part of the current and future income of low-income groups. In other words, converting those groups previously excluded from the financial system into bank customers and small entrepreneurs does not always produce the outcomes desired by international financial institutions such as the World Bank. In Bosnia, for example, almost 60 percent of microcredit users had debt payments that surpassed their disposable income. In Kenya, steps taken to advance branchless banking resulted in at least half of the population losing significant parts of their income due to late payment fees. Since lenders had set three-digit interest rates (annualized) for the overdue fines, financial inclusion carried predatory characteristics for many people.
Inviting masses into the financial sector, organizing financial literacy programs amid stagnating or declining real wages and expecting people to reinvent themselves as entrepreneurs or small-scale investors were the main pillars of the financial inclusion agenda. It did not solve the problems faced by low-income groups, women and minorities. Instead, these groups’ increased access to credit resulted in heightened credit dependency, further aggravated during the Covid-19 pandemic. This toxic brew of indebtedness and crisis pushed low-income groups to increasingly resort to consumer loans, a move facilitated by the state, while the banking sector supplied both the discourse and official action plans. The primary beneficiaries have been the banking sector and the social bloc built around Erdoğan, which maintained its strength despite economic turbulence and deepened inequalities.
In the late twentieth century, like their counterparts in much of the Global South, Turkish policymakers saw financial liberalization as the remedy to insufficient domestic savings and the unwillingness of the owners of capital to invest their money inside Turkey. But financial liberalization—including the lifting of policies that imposed restrictions on those moving capital out of Turkey—created a cyclical pattern of booms and busts that continues. The dependency of the economy on imports and the Turkish governments’ difficulties in managing monetary and fiscal policy contributed to these cycles. When the economy experienced high growth rates, accompanied by higher current account deficits under favorable global financial circumstances, it was easier for corporations to access credit in US dollars. Much like other countries of the Global South, fragility in the financial system and large accumulated debt levels then created economic turbulence, triggering capital outflows and resulting in dramatic crises.
Eventually, these crises were followed by a new cycle—one stimulated by capital inflows. This included capital that flowed to corporations, lured by the government’s high interest rates for foreign investors (relative to rates in the Global North), as well as increasing domestic consumption facilitated by the deepening of domestic financial markets. With the ability of corporations to access new financial resources, Turkey’s economy grew at a rate of 7.3 percent on average from 2003 to 2008. This growth was accompanied by an expansion in household debt levels driven by government policy choices that were themselves shaped by extended International Monetary Fund surveillance that discouraged state spending on public goods and services.
Under these circumstances, Turkey’s Central Bank followed the path of reserve accumulation like other central banks in the Global South. This political choice was less costly than it would have been, as the unprecedented levels of foreign direct investment and portfolio flows created an abundance of US dollars, which in turn propped up a relatively high value for the Turkish lira. Accessing cheap foreign currency credits and lending more and more to domestic consumers amid relative appreciation of the domestic currency generated enormous revenues for the newly restructured banking sector. The Central Bank’s strategy did not channel the banking sector funds to long-term credit provision for new investment but rather to short-term loans aimed at stimulating consumption in the face of stagnant real wages and an increased cost of living, all of which drove households to increase their borrowing.
There were two main actors in this period of rapid household debt growth between 2002 and 2013—the state and the private banks. In 2001–2002, the state spent almost 25 percent of GDP to bail out the banking sector and in the ensuing years was forced to allocate primary budget surpluses to controlling public debt levels. At the same time, the austerity programs succeeded in imposing an unprecedented fiscal discipline on the state, and the borrowing of the public sector declined rapidly. Without a heavily indebted public sector to lend money to, these financial institutions saw household consumers as their new market. In the ensuing decade, the ratio of consumer loans to GDP jumped from around 2 percent to 13 percent. Though the ratio remained low compared to some other countries in the Global South, the pace of increase was notable as it occurred alongside high overall growth rates, except for the 2008–2009 collapse around the global financial crisis.
The ruling Justice and Development Party succeeded in controlling public debt and increasing social expenditures: The ratio of public social spending to GDP increased from around 5 percent to about 10 percent in the early 2000s. Despite this positive metric, the gradual commodification of essential public services and the stagnation of real wages in many sectors limited its beneficial impact on the working class. The consumption capacity of low-income groups increased not because of increased real wages but due to expanded credit opportunities.
As an official strategy, financial inclusion was adopted in the Turkish context in 2014, much later than the global push that characterized the 00’s. The financial transformation affiliated with inclusion was, however, evident in the integration of millions of households into the financial sector in the early twenty-first century. By the time financial inclusion became a widely cited development tool and officially declared a target, Turkish state managers were already attempting to deal with the ramifications of its negative effect—accumulated household debt.
The Predatory Characteristics of Financial Inclusion
Turkey’s official financial inclusion strategy (drafted in 2013 and implemented until 2018) envisioned the growth of household savings and the emergence of millions of fiscally prudent borrowers working in lockstep with the state and private banks. The only non-governmental actors that contributed to the policymaking process were the financial sector representatives and their affiliated associations. Indeed, the financial inclusion strategy was merely a compilation of those representatives’ proposals rounded out with some inclusive-sounding rhetoric borrowed from international financial circles. The absence of organizations representing the interests of the working-class borrowers meant there was no critical discussion of the potential pitfalls of a massive expansion of borrowing, such as the enormous burden that the financial sector fees and commissions would place on debtors.
The state’s strategy explicitly emphasized the strength of Turkey’s banking sector and financial infrastructure. The policymakers saw no problems with the supply of financial services, only the need for financial education that would transform the population into suitable consumers of these services. The financial education promoted by the authorities included financial literacy programs sponsored by private banks as well as household budgeting courses organized through the cooperation of the state, financial institutions and the non-governmental organizations that worked closely with the banks. While organizations such as the Association of Financial Literacy or networks such as TurkishWIN partnered with private banks (or payment processors such as Mastercard) to promote financial literacy programs, the absence of a structural critique that connected the need for borrowing to persistent low wages and the rising cost of basic services meant these campaigns were mostly window dressing.
Predictably, the Turkish financial inclusion process worked to deepen social inequalities just as the country was drifting toward a crisis in the late 2010s. The proponents of financial inclusion, however, heavily emphasize two counterexamples. One specific characteristic of Turkey’s financial inclusion program is the state’s central role in the microcredit sector. Despite the initiatives of some associations, the Turkish microcredit sector remains mainly state-organized and controlled by a wakf (foundation). The most extensive program is Turkey Grameen Microfinance Program. In collaboration with the Grameen Bank, Turkey Waste Reduction Foundation provided most of the microcredit in the 2010s. The program extended credit to over 50,000 women annually in the mid-2010s. Since the credits were not securitized and the foundation is a non-profit, this fact has been put forth as a positive example by policymakers. Nevertheless, the markup rates of the program were not low, with nominal interest rates of 15 percent and real interest rates revolving around 6 to 9 percent in the early to mid-2010s. There is more than enough fieldwork documenting that many women used microcredit to smooth their consumption and remained dependent on credit.
The second example touted by supporters of financial inclusion is the 2012 pension fund regulations, which matched 25 percent of the pensioner’s contribution with funds from the state. Though it is perceived as a successful effort to increase savings, these funds are concentrated in the upper-level income groups with salaries sufficient to generate savings. Unregistered workers, who comprise one-third of the workforce, as well as the laborers who receive the minimum wage (around 50 percent of the workforce in the 2010s according to the calculations of trade union confederations) would not have been recipients of these new state contributions.
While interest rates were rising in the post-2013 period, there was no significant improvement in real wages, and people were being pushed in growing numbers into the financial system to make ends meet. Under these circumstances, banks’ lending practices (though monitored by the Banking Regulation and Supervision Agency) revealed predatory characteristics. While workers were increasingly relying on credit cards to supplement their low wages and resorting to late payments, banks set higher overdue fees and commissions in a coordinated manner. These actions violated the law according to Turkey’s Competition Board, which notably issued fines to 12 banks for coordinated action against consumers in 2013 and launched new investigations in the 2010s. The average rate of interest on consumer loans doubled the inflation rate during this period according to Central Bank data. The inability of the masses to roll over debt amid increasing interest rates in the mid-2010s pushed the number of orders waiting on court bailiff desks higher, nearing 20 million during the 2018 currency crisis. By the end of the same year, debt collectors had a portfolio consisting of 3.5 million separate loans previously extended to around 1.5 million people.
The outcome of the financial inclusion strategy of 2014–2018 is not well documented. Elements of the strategy were repeated in the new five-year plan published by the Erdoğan administration after the country’s transition to a presidential system in 2018. Still, there has been no comprehensive evaluation of the successes and failures of the program. The Global Findex data from 2011 to 2017 suggests that the Turkish population became more integrated into the financial system. More people use financial services despite the stagnation of household indebtedness as a ratio to GDP in the mid-to-late 2010s. The ratio of account owner women to the total adult female population jumped from 32 percent in 2011 to 54 percent in 2017. As a result of the pension regulations, more people have savings in the banks, but the data also shows that at the same time, more people than ever are in debt.
From Currency Crisis to Pandemic
Increased dependency on credit became a more acute problem for Turkish citizens as the tightening of global finance slowed the country’s economic performance in 2018, triggering a severe currency crisis and subsequent recession. The state’s rhetoric of the early 2010s that encouraged borrowers to take personal responsibility for their own economic circumstances and financial future was converted into a new discourse about economic warfare against Turkey’s enemies. For example, at the height of the 2018 currency crisis, policymakers launched a new campaign offering cheap credit rates through public banks to home buyers in state-selected projects. Its objectives were to simultaneously mitigate the financial losses of the urban middle classes and to support the construction sector. In this way, the state mobilized its financial capacity to bail out some construction companies and provide favorable borrowing conditions for a minuscule and wealthy segment of society. The state, however, presented this campaign as a vital protection of a primary sector for the country’s future. At the campaign’s press conference, “Time for Investment in Turkey” held on August 28, 2018, the then Urban and Environment minister supported the new credit campaign with the statement: “Today is not about gaining; it is about sacrifice.”
Various state-sponsored credit expansion attempts provide examples of the Erdoğan administration sticking to the debt-led growth strategy of the 2000s and supporting further borrowing. Yet they also demonstrate that the Turkish financial inclusion process diverged in recent years from the dominant approach of most of the international financial community, which centers on deploying new technologies to increase borrowing and deepen financial markets. When the currency crisis struck, the images of financially literate and business savvy borrowers participating in the growth of the Turkish economy quickly gave way to those of a benevolent state helping those in need through increasing loans. Turkey’s state-owned banks became the engines of credit expansion in these times of financial volatility since private banks restricted their lending to safer bets where they could ask for more collateral and ration their credits.
The story of debt expansion and financial inclusion in Turkey also sheds new light on the state’s pandemic-era response, revealing how the credit growth of the early 2000s left a stark imprint on subsequent policy responses. Each time the economy stagnated, or incoming capital dried up, the Justice and Development Party governments (and later the Erdoğan administration) pushed for new credit campaigns allowing households and small and medium enterprises to roll over their debts. The pandemic-era response was the same: policymakers used public financial institutions to postpone or attempt to manage severe economic challenges. This willingness to deploy public institutions and assets to mitigate damage is at least partly responsible for the ruling party’s ability to maintain the broad alliance they built in the early 2000s.
Turkish policies of financial inclusion also revealed a subtle gender discourse based on a joining of conservative and patriarchal values with the image of female entrepreneurialism. The implication is that the neoliberal marketplace—being supposedly devoid of politics—is an acceptable zone of female engagement and empowerment. As the gendered inequalities in wage, status and working conditions in Turkish labor markets were never a concern for the ruling party or the banking sector, the financial transformation likely intensified women’s relative indebtedness. Although official statistics are not available over a sufficient period to make a conclusive argument, providing financial literacy programs for women in distressed economic conditions and with stagnating wages probably just produces more indebted women. And it stands as a microcosm of capitalism’s broader forces that continue to innovate new methods to extract value from the marginalized and working classes to drive accumulation and expansion.
Recurrent currency shocks during the Covid-19 pandemic led to renewed state activism in Turkey and the promotion of an economic model that relies on cheaper labor and depreciated domestic currency. This orientation has not yet produced the results expected by the Erdoğan administration, such as the minimization of current account deficits, lower unemployment ratios and rapidly increased export volume. The erosion of central bank capacity in the aftermath of the 2018 crisis and the pandemic made it harder to slow down currency depreciation, resulting in further price hikes. In 2022, the highest inflation rates of the twenty-first century were recorded in the country, raising concerns also among conservatives who now face growing challenges in presenting the last two decades as a remarkable success story. The social bloc built around the Justice and Development Party and the president, though maintaining its disharmonious unity, is facing challenges in controlling the working-class neighborhoods. The endurance of the Erdoğan administration partly depends on its ability to avoid new economic turmoil and postpone problems through new credit campaigns. Policies of financial inclusion, however, generated an unsustainable pattern and the previously accumulated household debt—which at the time supported the success narrative of the Justice and Development Party—now seems to limit the future options of state managers.
[Ali Rıza Güngen is a MESA Global Academy Fellow for 2021–2023.]
 For a detailed account of financial transformation in Turkey in recent decades and the crisis management during 2018–2019, see Ü. Akçay and A. R. Güngen, “Dependent Financialisation and Its Crisis: The Case of Turkey,” Cambridge Journal of Economics, 46/2 (2022).
 Similar data and detailed tables on household indebtedness and the financial inclusion process are available in my previous works: A. R. Güngen, (2018) “Financial Inclusion and Policy Making: Strategy, Campaigns and Microcredit a la Turca,” New Political Economy, 23/3 (2018) and A. R. Güngen, Politics of Debt: Financial Inclusion in Turkey, (Istanbul: İletişim, 2021) [Turkish]
 T. Bulut and F. Adaman, Diyarbakır’dan İstanbul’a 500 Milyonluk Umut Hikâyeleri: Mikrokredi Maceraları (İstanbul: İletişim 2007); S. Arı, Batman’da Mikro Kredi Deneyimleri, Kadir Has Üniversitesi Sosyal Bilimler Enstitüsü (unpublished MA thesis, 2011).