1. Overview of the Concept of Interest and Its Fundamental Characteristics
The notion of interest is a longstanding one, integral to both everyday and commercial activities, thereby forming a significant part of the legal landscape. The primary legal source concerning interest in Turkish law is the Code on Legal Interest and Default Interest No. 3095. Complementing this code are the Turkish Code of Obligations, the Turkish Commercial Code, and the Banking Law.
Under the law and established case law, interest originates from either statutory provisions or legal transactions. These transactions may encompass torts, unjust enrichment, or contracts, with the latter being the most prevalent. Although there is no statutory definition of interest, the Court of Cassation defines it as the civil outcome of money receivables. Essentially, interest compensates for the deprivation of money, functioning as a form of fee or rent for the creditor.
Interest is also described as a civil benefit that the creditor is entitled to demand by law or legal transaction, due to the temporary loss of their money. Therefore, interest arises from money debts and is dependent on the principal receivable, possessing an accessory nature. According to Article 131/2 of the Turkish Code of Obligations, interest may be claimed if the right to do so is reserved by contract, notification, or the surrounding circumstances.
Even if the principal receivable is terminated, the interest receivable can persist. This ancillary characteristic of interest also influences its statute of limitations. While the statute of limitations for the principal receivable determines the validity of default interest, the statute of limitations for principal interest is five years, pursuant to Article 147 of the TCO. Consequently, even if the principal receivable has a longer statute of limitations, the interest may become time-barred after five years.
Another key characteristic of interest is its accumulative nature until payment. As outlined in Article 104 of the Turkish Code of Obligations, periodic performances such as interest are deemed fulfilled if a receipt is given without reservation. This illustrates that interest continues to accrue until the principal receivable is paid.
2. Varieties and Attributes of Interest within the Turkish Legal System
2.1. Simple Interest vs. Compound Interest
Simple interest is the most commonly recognised form, calculated solely on the principal at a certain rate over a specific period. In contrast, compound interest, or anatocism, involves calculating interest on both the principal and the accumulated interest. Compound interest is generally prohibited in Turkish law due to its potential to create substantial financial burdens for debtors, particularly in medium and long-term debts. However, the Turkish Commercial Code No. 6100 allows compound interest in limited scenarios, such as merchant agreements lasting over three months or commercial loan agreements between merchants.
2.2. Contractual Interest vs. Statutory Interest
Interest can arise from legal provisions (statutory interest) or contractual agreements (contractual interest). Statutory interest is legally accrued on receivables where the amount is not determined by contract. The legal interest rate is prescribed by law. Conversely, contractual interest is determined by the parties within the contract and can include principal interest, default interest, and compound interest. However, there are limits to ensure fairness, as outlined in Article 2 of the Turkish Civil Code and Article 120 of the Turkish Code of Obligations, which cap the annual default interest rate to 100% more than the statutory rate.
2.3. Principal Interest vs. Default Interest
Principal interest accrues until the due date of the debt, while default interest accrues after the due date, upon the debtor's default. Principal interest may arise from law or contract and does not depend on the statute of limitations for the principal receivable, which is five years. Default interest, on the other hand, accrues automatically when a monetary obligation is not fulfilled on time and follows the principal receivable's statute of limitations.
2.4. Interest in Ordinary Transactions vs. Commercial Transactions
Commercial interest pertains to transactions arising from commercial enterprises and can be claimed even in the absence of an explicit interest clause in the contract, as per Article 3 of the Turkish Commercial Code. For ordinary business transactions, an interest clause must be included in the contract to claim interest on the principal.
2.5. Interest Rates on Deposits
Deposits, defined under the Banking Law No. 4389, refer to money accepted with a commitment to repay on demand or at a certain date. The Central Bank regulates the maximum interest rates applicable to deposits and related transactions.
2.6. Rediscount and Advance Interest
As of 1 April 2024, the rediscount interest involves re-exchanging discounted assets, as provided under Article 45 of the Central Bank Law, with the current rate at 50.75%. Advance interest, determined at 51.75%, applies to advances granted against certain assets.
2.7. Interest on Foreign Currency Debt
Foreign currency debt, unless otherwise agreed, is generally paid in the national currency. However, in cases involving torts or unjust enrichment with an element of foreignness, the obligation may be fulfilled in foreign currency. The interest rate for foreign currency debt is the highest rate paid by state banks for a one-year term deposit in that currency, unless a higher rate is agreed upon.
Recent Developments
On 21 May 2024, the Turkish government issued a presidential decree published in the Official Gazette, significantly raising the legal interest rate from 9% to 24% annually, effective 1 June 2024. This adjustment, under Presidential Decree No. 8485, amends Article 1 of Law No. 3095 on Legal Interest and Default Interest. This policy shift addresses the financial challenges posed by inflation, aiming to protect the value of principal claims in legal disputes and collections, thereby ensuring that creditors do not experience excessive value loss by the time of recovery.
Potential Effects on Monetary Disputes and Creditor Liabilities
Increase in Compensation Amounts: Creditors will receive significantly higher total payments in legal disputes, potentially increasing the financial burden on businesses.
Prompt Resolution of Cases: Higher interest rates may incentivise quicker settlements to avoid accruing high interest costs.
Boost in Out-of-Court Settlements: Parties may prefer mediation or settlements over prolonged litigation.
Impact on Financial Planning: Businesses must reassess financial strategies to manage increased liabilities due to higher compensatory and interest payments.
Conclusion
Interest is a crucial component of commercial and legal transactions in Turkey. Despite its auxiliary nature to the principal receivable, interest retains its independent status, allowing it to be claimed, sued for, transferred, or pledged separately. Recent legislative changes, such as the significant increase in legal interest rates, reflect ongoing adjustments to align with economic conditions. Staying informed about such changes is essential for safeguarding legal and financial rights.
For specific legal advice tailored to your circumstances, please contact CCS Law.