In Iran, all financial instruments should comply with Shariah rules and regulations. Thus, it is unlawful in the financial system to trade in any conventional financial instruments or to establish any financial institution where its performance contradicts Islamic rules and regulations.
Review of 2016
Table 1 shows some areas of major developments witnessed in 2016 in the capital market.
Preview of 2017
Iran’s financial system is trying to strengthen current available mechanisms and introduce new structures. In this regard, some innovations and modifications are expected in 2017. A snapshot is provided in Table 2.
Table 1: Major developments in 2016 in the capital market |
||
Islamic financial instruments |
Islamic equity market |
The lifting of many parts of the financial sanctions after nuclear talks brought some hope for investors. Investors are still looking for more results despite more or less achieving their goals. The market cap value in securities exchanges exceeded US$130 billion. |
Islamic derivatives market |
Like in previous years, gold coin futures contracts played a major role in the Islamic derivatives market. Under the spotlight were currency derivatives and also agricultural futures. |
|
Sukuk market |
Sukuk Ijarah, Musharakah, Murabahah, Salam and Istisnah are the five types of Sukuk issued in the Iranian capital market in 2016. The Sukuk Manfaah structure faced important discussions for issuance and has been finalized. In 2016, a debut sovereign Sukuk facility with an Ijarah structure was introduced to investors and the state of Iran was funded by this type of Sukuk. |
|
Islamic treasury notes market |
Following the resolution of the Shariah Board of the Securities and Exchange Organization of Iran (SEO), the government used Islamic treasury notes for fundraising with tenors of less than a year. From the beginning until the end of 2016, the notes were issued in the market more than 10 times. Contractors who delivered projects to the government received some notes and had the option to discount them in the capital market and obtain financing through Islamic treasury notes. |
|
Islamic mortgage-backed securities |
After long negotiations, Islamic mortgage-backed securities debuted. Islamic mortgage-backed securities are mainly used for securitizing residential receivables from Bank Maskan in Iran. The bank was authorized to guarantee payments for investors in order to protect investors as there were no ratings for the securities. |
|
Financial institutions |
Investment banks |
There are nine investment banks active in the Iranian capital market. Except for one specialized investment bank which operates in the housing sector, the other eight investment banks provide a general range of services to clients. |
Brokerage companies |
As at the end of 2016, there were 108 licensed brokerage firms officially active in the market. However, they provide different services depending on their capital adequacy as well as permission from the SEO. |
|
Islamic funds |
In 2016, more than 180 funds provided different services including fixed income and variable income and index tracking services. |
|
Rating agencies |
The SEO announced regulations for the establishment of rating agencies. As at the end of 2016, no rating agency has yet been officially established and started operations. |
Table 2: Potential developments in 2017 |
|
Islamic equity market |
There is a positive outlook for the future performance of corporations. New IPOs in the equity market might strengthen this trend. |
Islamic derivatives market |
In the Shariah compliant derivatives market, it is hoped that there would be a portfolio futures market as an alternative to conventional index futures. Currency futures might be another newcomer in the Iranian Islamic derivatives market. |
Sukuk market |
Iran plans to introduce a Sukuk Manfaah structure to finance authorized companies in 2017. |
Islamic treasury notes market |
The government found an important alternative fundraising method through Islamic treasury notes and this is expected to be a continuous process in 2017 with new phases. |
Islamic mortgage-backed securities |
Islamic mortgage-backed securities debuted in 2016 and the market needs more support and cooperation in this area with more convergence between the capital market and the banking system. |
Investment banks |
No newcomers are expected in this segment but there should development in the range of services in 2017 for Iranian investment banks. |
Brokerage companies |
An Islamic model for margin trading is being mulled which could facilitate many procedures in 2017. |
Islamic funds |
The development of funds and their client diversity will hopefully happen in 2017. Specifically, construction funds as well as new exchange-traded funds are expected to attract more attention in 2017. |
Rating agencies |
Hopefully, 2017 might be the year for the official establishment of a rating agency in the market. |
Conclusion
While 2016 saw many good innovations namely, Islamic mortgage-backed securities and the development of the Islamic treasury notes market, 2017 might witness the emergence of the Sukuk Manfaah structure in the market. For derivatives, the SEO and the Central Bank of Iran should cooperate to launch Islamic currency futures. Regarding financial institutions, it is hoped that there will be the establishment of a first rating agency in Iran. Overall, there is huge potential for the Iranian financial system to find more diversity in Islamic financial instruments and derivatives as well as financial institutions.
Majid Pireh is the Islamic finance senior expert at the Securities and Exchange Organization of Iran. He can be contacted at [email protected].