According to the statistics from the Islamic Council Research Center, Iranian experiencing an inflation rate of 86%, although this figure is reported to be around 46% by the Central Bank. The accumulation of inflation in recent years has made economic conditions harder for the weaker sections of society. As a result, in recent years, private sector companies have entered the field and they makes a lot profit from.
The emergence of finance service businesses, “LendTechs”, and startups in the “buy now, pay later” sector in Iran has introduced a new slogan to online shopping sites: “Buy today, pay later.” These startups, which have unexpectedly grown in recent years, encourage users to purchase everyday items like dairy products and meat on installment. This shift in Iran’s business landscape highlights worrying aspects of the Iranian people’s economic situation. Although many users are satisfied with the “BNPL” (Buy Now, Pay Later) services, the sudden and rapid growth of these businesses, often due to government lobbying, reflects a social reality: “Iranian has become poorer.”
The disordered economic situation and persistent inflation in Iran have significantly reduced the purchasing power of vulnerable groups. In recent years, the rate of inflation has grown faster than wage increases, gradually reducing the economic power of these groups. The weakening of purchasing power in Iran’s economy has intensified to the extent that salaried workers have lost the ability to finance even their basic needs. The discrepancy between income and the increase in inflation and currency rates has forced employees and wage earners to take loans even for minimal living expenses. Previously, people used credit for investing in financial markets or real estate, but now, salaried workers and lower income groups have turned to credit for buying food items and daily expenses.
The government’s economic performance has led to a decline in the trading of capital assets, impacting consumer interest in credit purchases. With a significant portion of individuals’ income being allocated to rent, many rely on small credit lines for leisure and even basic necessities like food.
Another key factor in creating this situation is the exchange rate; the increase in the exchange rate has heightened the cost pressure of imported goods in household budgets. People who preferred to buy items like home appliances from foreign brands have retreated from this desire due to the new currency rates and are resorting to buying domestic or even second-hand home appliances on installment.
“Donya-e-Eqtesad”, Iran’s economic morning newspaper addressed the issue of installment lifestyle with three questions. The first question was: “Have you had any experience with conditional purchases (installment, credit, or on account) in the past year?” For this question, the options of yes and no were provided. 51.6% of respondents answered affirmatively.
The second question was: “For which goods have you made installment purchases?” Three options were designed for this question: household and digital appliances, everyday goods, and both. Statistics show that 63% of respondents made installment purchases only for digital devices and household appliances. On one hand, the chaotic economic conditions have led some families and segments of society with low purchasing power, unable to afford cash purchases, to opt for installment purchases and create account-based transactions for their everyday needs, including food, groceries, and clothing. Over 15.5% of respondents have turned to installment buying for their basic and daily necessities. 21.5% of respondents chose the third option.
Studies on the price range of installment purchases indicate that 35% of respondents made their installment purchases in ranges less than 10 million Tomans. Given the popularity of purchasing household appliances and digital goods on installment, the statistics for purchases over 10 million Tomans differ.
Overall, 37.4% of installment buyers purchased goods priced between 10 to 50 million Tomans, and 27.6% of installment buyers purchased goods costing more than 50 million Tomans. Field studies show that grocery stores, butcheries, protein shops, stationery stores, clothing stores, and similar shops also advertise installment sales and account-based transactions with large signs. This reality, which is not very pleasing to the people themselves, is the evident truth of the country today. The economic conditions have shifted people’s tastes towards conditional purchases.
Donya-e-Eqtesad
The difficult economic conditions have led to the growth of businesses that offer small loans for the purchase of daily consumables. Often, these websites offer goods at a price higher than the market value and allow payment in installments. The process involves the user completing registration, establishing a credit rating, receiving the requested amount, and then repaying the borrowed credit over a specified period after use.
One of the main reasons for the increase in food prices in Iran is the “subsidy distribution system”. Thanks to oil revenues, the Iranian government had previously allocated a substantial amount of subsidies to food items. In continuation of the accelerating process of privatizations in Iran, the sudden reduction of these subsidies has caused a heavy shock to food prices.
Another method, known as BNPL (Buy Now, Pay Later), enables users to receive credit instantly at the time of purchase and settle it in a shorter period. Both of these methods typically involve small loans ranging from 500,000 to 150 million Iranian Tomans.
A significant point is that these online sales websites also offer consumer goods on credit. Investigations show that these sites sometimes sell a single piece of cheese for 49,800 Tomans in four installments of 12,450 Tomans each.
The value of one US dollar stands at 50,310 Tomans, while one Euro is equivalent to 55,927 Tomans as of December 29, 2023.
The economic situation in Iran has not only affected technology companies. In recent years, chain commercial complexes, offering installment sales of Iranian home appliances and wedding trousseaus, have grown remarkably. These companies, aligning with themes favored by the leader of the Islamic Republic like “buying Iranian goods,” sell various home appliances, from carpets to refrigerators and televisions, on an “installment basis from the start.”
The extensive advertising of these complexes has almost taken over all billboards in Tehran. Recent reports indicate that one of these complexes, named “Saraye Irani,” located in the Afsarieh area of Tehran, has caused traffic disruptions due to inappropriate location and overcrowding. This situation, according to a member of Tehran’s Islamic Council, occurred due to the municipality’s disregard for “traffic studies and attachments.” These types of stores have spread throughout Tehran and other major cities, seemingly outnumbering the needs of customers.
The investment in this type of business is so substantial and unusual that it seems to be backed by more than just ordinary investors; investors for whom even urban regulations do not prevent the construction of their stores. Many social media users believe that the operators of these complexes have political influence, and some even think that all the brands are owned by one person, who has set up a false competition under different names. In this context, what is the reason for the rapid growth of installment sales businesses?
The rapid growth and public interest in installment payments come at a time when Iran’s economic structure is based on cash transactions. Unlike most countries where people purchase assets like housing through bank financing, Iranian consumers are accustomed to saving first and then making purchases. The prominent emergence of businesses offering small credit services is unexpected for consumers used to a cash-based system.
Studies indicate that last year, the Central Bank of Iran adopted contractionary policies due to a downward trend in loan growth. The Central Bank’s policies, including maintaining high interbank interest rates, have increased the duration of bank deposits. This phenomenon itself raises questions about the growing influence of credit companies amidst such ambiguities. According to “Capital Intelligence”, a rating agency, Iran’s credit rating for domestic and international repayment obligations is B+, which has improved over the past year but indicates that Iran’s economy does not have an ideal credit risk situation. On the other hand, applicants’ experience shows that the process and conditions for obtaining loans from banks are very difficult and taxing. A major question among many users is how, amidst such challenging banking conditions, financial technology startups are able to offer loans with relative ease.
The 80% Effective Rate of Online Loans
The cash transaction structure in a persistent inflationary environment has turned out to be disadvantageous for depositors and advantageous for capital owners; fintech startups are capitalizing on this feature. These companies, usually backed by their affiliated online stores with high liquidity, enter the “LendTech” sector.
Credit businesses, contrary to the ease of use portrayed in their advertisements, earn significant profits from this approach. They obtain credit from banks at the government-approved interest rates (around 21 to 23 percent) and offer it to users at an effective rate of up to 80 percent.
Investigations show that the effective rate of many of these businesses varies from 40 to 80 percent. The effective interest rate includes the loan interest rate and the commission these companies charge users. Many of these companies, which offer lower effective rates than others, compensate for this by limiting users to purchasing more expensive goods from their affiliated sites.
In a situation where the economic conditions have forced workers and wage earners to use credit purchases, the popularity of these methods is increasingly growing, and startups are benefiting from this situation. While online credit purchasing is a common method worldwide and many Iranian companies use this space healthily, the rapid emergence of such economic activities can be seen as influenced by the economic mafia of the Islamic Republic. In a context where Iran’s financial system is reluctant to provide facilities to small applicants, obtaining credit from the banks of the Islamic Republic and then distributing it among ordinary users is beyond the capability of any ordinary company or individual interested only in economic activity.
One of the largest credit payment companies affiliated with “Digikala,” which is attributed to government institutions and individuals, announced in its annual report that “the active installation number for this company’s credit application exceeds one million and claims to have allocated more than 9,200 billion Tomans in credit to users.”
The financial dimensions of the activities of credit companies are currently insignificant compared to the total economic transactions of Iran, but given the growth rate of such activities, they may become a significant part of online transactions in the future. Generally, using small credits gives families more flexibility in expenses, but accumulating debt comes with risks. As the level of debt increases, borrowers’ ability to repay becomes more sensitive to income reductions and sales.
With the widespread adoption of the credit payment system in Iran without considering economic reforms, it’s predictable that the risk of default and even corruption in such a process will increase, especially when Iran’s banking system lacks a clear and transparent algorithm for “user credit rating.” A crisis similar to the credit institutions or the default crisis of bank facilities in this sector may recur. If these problems arise, the ultimate losers will again be the consumers of the Iranian economy, as defaults will lead to increased bank overdrafts and inevitable inflation.
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