Some 30,000 Iranians applied for credit cards in the first three days of the country’s trial scheme in September, blowing away previous expectations of possible demand.

The introduction of credit cards may go some way to satisfy the pent-up demand for credit in the Islamic Republic, but at the risk of worsening non-performing loans in the already fragile banking system.

Iran has not used credit cards in any form since the 1979 Islamic Revolution, which swept away not only the Western-backed Shah of Iran, but also all foreign companies including Visa and Mastercard.

According to the government-owned Bank Melli Iran (BMI) on September 22, the trial scheme attracted existing customers who used the bank regularly as well as a surge of new customers.

The new cards, which tap into Iran’s Shetab banking system, will be able to be used in stores across the country, but not abroad, as the Central Bank of Iran (CBI) still has not secured the use of the payment system outside the country.

According to BMI, they offer three kinds of cards: gold, with a limit of IRR500mn ($14,000), silver, with a limit of IRR300mn ($8,400), and bronze, with a ceiling of IRR100mn ($2,800).

Like foreign cards, the new cards do not require cash deposits. Cardholders will not be charged any interest if they clear their debts within a month, otherwise they will be given 12-36 months to settle their debts at a lending rate of 18% – which is less than Britain’s Barclaycard at 18.9%.

The other bank which has begun offering the cards is Iran’s recently merged Bank Ayandeh (Future) which is requiring deposits against the value of the card. However, as is stated on the company’s main page, they have offered special “credit cards” to users for some time.

Not happy

Other banks in Iran are not part of the new scheme, with the slapdash nature of the introduction of the scheme by the CBI, and issues regarding creditworthiness being two of the main reasons for the hesitancy.

As it stands Iran has no modern method of verifying someone’s credit worthiness. The current method used by all banks is to demand to see someone’s monthly salary along property deeds, before making a call on whether to grant a loan. This cumbersome system makes many in the local financial industry confused on how this scheme will work on a large scale. 

Another major issue with the introduced scheme is the lack of capital in the banking system as a whole. Iran’s banks – both private and publicly owned – have all suffered from a lack of liquidity in recent years. This issue was compounded during the years of runaway inflation, which caused the banks to use their own funds to open branches as property was deemed as a better investment than having cash.

Many bank CEO have urged the CBI to halt their drive to lower interest rates as their profit margins continue to get squeezed.

For the private banks, which have had zero government support in recent years to help with their own crises, the credit card scheme is particularly unattractive.  One employee of a private bank said to bne IntelliNews that banks are still struggling with bad debt from the peak inflation years, which greatly hurt their bottom lines.

She added: “If the central bank forces banks to lower their rates without choice, many will simply not offer the services like credit cards.”

The introduction of credit cards raises the risk of worsening the problem of non-performing loans (NPLs) in the country. Bank Melli stated in June that their NPLs stood at 8.6% of their total loan book at March 21.

Elsewhere the situation is thought to be worse. In August, Abolfazl Roghani, the chairman of the Iran Chamber of Commerce, Industries and Mines and Agriculture (ICCTMA), said that there is in excess of IRR850tn ($27.4bn) of NPLs in the financial system.

However, other bank managers still see the advantages of using the new scheme as a way to attract new customers.

The managing director of privately owned Bank Parsian, Kourosh Parvizian, said that private lenders will welcome the plan to offer cards but may have to give clients a 30-40 day grace period to allow them to pay their debts. “Such a mechanism would help fulfill [CBI] goals for increasing demand,” he added, Banker.ir reported

The credit card scheme is also being welcome by an exhausted population whose access to loans has become even tougher in recent years as banks have often charged 26% for giving loans, against CBI policy guidelines.

As an employee of one of Tehran’s brokerage firms said of the new scheme: “It’s a good thing – how it comes under Islamic banking I’m yet to understand – but our people need credit… otherwise, we are never going to be able to move forward.”