Iran has been among the first nations to implement Islamic finance schemes, specifically in its banking sector by applying the usury-free legislation in 1983. However, when considering the standard framework adopted, such as employing Shariah compliant instruments both in Islamic and global markets, Iran falls short in comparison with the international Islamic banking and finance community. ALIREZA HOJJATNIA writes.
On the banking side, there are four factors that are to be blamed for Iran’s undeveloped Shariah compliant market:
1. Incomprehensive research on the Islamic banking and finance industry
2. The meaningful gap between theoretical research and operational frameworks
3. The inefficient interaction between the Iranian central bank’s Fiqh committee and that of the Islamic banking research institutions, and
4. The incapacitated legal environment in the Islamic banking and finance sector.
Table 1: Growth of Iranian Sukuk securities over the years | ||
Year | IRR (trillion) | US$ (million) |
2010/11 | 0.29 | 6.94 |
2011/12 | 3.42 | 81.35 |
2012/13 | 2.64 | 62.85 |
2013/14 | 8.11 | 193.16 |
2014/15 | 8.26 | 196.61 |
2015/16 | 12.28 | 292.36 |
2016/17 | 58.66 | 1,396.73 |
2017/18 | 132.73 | 3,160.24 |
US$/IRR: 42,000 | ||
Source: Iranian Capital Market central asset management company (Sukuk.ir) |
On the finance and capital market side, the situation is even worse. Iran has everything to surpass other leading nations like Malaysia or even Indonesia for good. But why have all the efforts of Iranian policymakers come to a dead end until today?
A smart point to consider here is to look for reasons behind a country like Malaysia reaching the top. Looking at the stats, it is obvious that a massive portion of Sukuk securities issued in Malaysia belong to foreign companies. A rational conclusion is that a safe and stable economy, in particular a capital market framework, goes hand in hand with a strong currency and has the power to attract foreign capital to Islamic instruments.
Over the past years and mostly due to its geopolitical status in the region, Iran has neither the required economic stability nor the proper infrastructure to achieve the ambitions of being prominent in the Islamic banking and finance world. The fact that economic sanctions were previously levied on the nation’s banking and capital market transactions for quite some time also did not help.
The second point to consider is the good old infrastructure thing and to be more precise, the credit rating issue. When it comes to underwriting corporate Sukuk or other Islamic instruments, the first thing that an ‘international finance technocrat’ will ask is the credit rating of its issuer. Table 1 shows the growth of Iranian Sukuk securities over the years and it shall be noted that domestic players are now enjoying the benefits of Islamic securities and it is time to direct the focus on foreigners. In fact, it is almost impossible to expect the participation of experienced investors in any investment or finance schemes without the presence of a well-known global rating agency, although good measures have been taken toward building better infrastructure to make the credit ratings practical; as of today, three rating agencies, one with international partnership, are active in the Iranian capital market. However, taking a hard look at the Iranian capital market, one realizes that, moving at the current pace, reaching international standards is currently far-fetched.
The third point, and in the case of Iran the most important point, is the matter of priorities. From top to bottom, all economic agendas have been focused on more vital and urgent stuff to consider first before even thinking of any moves toward internationalization. Furthermore, the different interpretation of Shariah compliance in Islamic nations has made mutual collaboration with other players more challenging. The economies of scale are also not in favor of expanding tools to introduce Islamic securities to a wide range of foreign investors. As an example, developing English-based trading platforms for Iranian equities and Islamic Sukuk securities is the perfect pitch to mention here. Not only have Iranian brokers and financial institutions, merely based on a simple cost-benefit analysis, locked the idea back in their basement, but the regulator itself also has no priority to develop such platforms.
All being said, it is not surprising that the Iranian capital market and banking sector does have the potential to become a world leader in the Islamic finance community; however, the aforementioned shortcomings, specifically on the brokerage and capital market side, will need to be addressed immediately before any expectations can be built. Prioritizing the measures, the legal environment is perhaps the most important one for policymakers, considering the fact that it could be the key to unlock the flow of foreign-sourced capital to the Iranian brokerage industry. More effective and precise regulations would eventually and hopefully lead to a more solid foundation, enabling Iran to earn its place in the Islamic finance community.
Alireza Hojjatnia is the vice-president of international affairs at Agah Group. He can be contacted at [email protected].