Iran’s financial system, as a wholly Shariah compliant financial market from the legal point of view, is composed of the banking sector and the capital market as the two pillars of its financing system. Apart from this, Shariah compliant insurance services protect market players against risks and damages which might harm them.
2022 was a year in which the financial system witnessed many fluctuations; while the around 40% inflation rate affected many businesses in Iran, the central bank debuted some initiatives to implement suitable fiscal policies such as strengthening tax-related plans, smoothing sovereign Sukuk issuance as well as the development of the Sukuk market and Shariah compliant derivatives.
Review of 2022
One of the main issues the Iranian capital market initiated in 2022 was changing the profit payment structure in some floating rate Sukuk such as Manfa’ah or Musharakah. It is noteworthy that profit calculation and payment in Iran follow a traditional structure in which issuers announce a provisional profit rate at the beginning of the Sukuk issuance and mid-term profit payments will be equal to this rate.
At the maturity date, the issuer will release the audited calculations and if extra payable profit remained, the issuer will settle with the investors. However, if the final profit rate is less than the provisional previously paid profits, the difference will be considered as a gift by the issuer for the investors.
The aforementioned structure is visible both in capital market Sukuk and deposits which banks accept. However, in 2022, the financial system tried to reorganize the previous structure and attempted to pay calculated and audited profit amounts to the investors or the deposit holders.
The new policy has brought some challenges for the issuers since they were using the previously announced profit payment mechanism and changes will usually result in some challenges at the beginning.
This realization of the profit is one of the main objectives which Shariah has always emphasized and we hope to see it in the new year.
Another notable issue that the Iranian financial system welcomed in 2022 was Shariah aspects of crypto assets. Herewith, due to its investment attractiveness, many people are looking to see how the crypto asset market will be in the future. This is still an issue on the table for Shariah experts and after some negotiations, some security-based tokens and coins were approved by Shariah scholars. However, in terms of payment coins or utility coins, there are still some challenges which hopefully the market will find a clear answer to in 2023.
In the capital market, 11 investment banks and five data processing companies have received operation licenses in the market. Likewise, 30 portfolio managers and 244 funds were providing services to their clients following the regulations which the regulator had announced. Nevertheless, in the banking system, eight state-owned banks besides 20 private and semi-private banks were actively providing services to their clients. Additionally, two Qard Hasan banks are technically operating in the field of Shariah compliant microfinancing.
Preview of 2023
The establishment of Shariah compliant crypto asset funds based on utility coins will attract much attention in 2023 for Iranian market players. The negotiations and meetings are still taking place to see how the experts will conclude.
Modifying some regulations in relation with Sukuk issuance will lead to some changes in Iran’s capital market. Herewith, profit payments will be modified based on real audited amounts instead of the provisional rates. Moreover, critical changes in embedded options will result in the fundamental modification of profit calculations.
Like the previous year, the issuance of sovereign Sukuk and Islamic treasury notes will provide financing vehicles for the government. However, the market is proposing new Shariah compliant derivatives such as profit rate futures contracts to conduct a more rational behavior for the payment policies. It is not yet finalized in the country, but market activists expect the new risk management vehicle to assist them in planning.
Conclusion
In the aforementioned paragraphs, I mentioned some facts about what happened in 2022 and discussed some plans for the new year. 2022 passed with all the lessons it had for financial policymakers and market players. Iran’s Islamic financial market has a lot to do in order to realize brilliant Islamic finance goals such as SRI and realization of profit payments and there should be much more developments to take place.
Hope is a key word in this regard and it is a great opportunity for officials to provide better services for the people. God bless all in the new year of 2023 and with great wishes for the development of Islamic finance and banking globally.
Majid Pireh is the secretary of the Shariah committee at the Securities and Exchange Organization of Iran. He can be contacted at [email protected].