Shariah governance is a key concept in any Shariah compliant financial system. As a wholly Shariah compliant financial market, the banking sector and capital market are the two pillars of the country’s financing system. The Shariah governance framework encompasses both the two aforementioned pillars, with the Shariah committee at the highest level of Shariah supervisory which is followed by other elements. Herewith, the Shariah committees of the two pillars have brought many Shariah-related concerns about the development of financial products. MAJID PIREH provides a brief description elaborating on the Iranian market changes in 2020 and what will probably happen in 2021.
Review of 2020
In a general snapshot in terms of Shariah-related aspects, 2020 was the year of reforms and developments. While the markets witnessed the introduction of new financial products in previous years, the market regulators in both segments (ie the Central Bank of the Islamic Republic of Iran and the Securities and Exchange Organization (SEO) of Iran) considered making the needed adjustments in the products as much as was necessary. During this year, certain Sukuk (such as Sukuk Manfa’at) and financing mechanisms (such as margin trading) were under the modification process. Moreover, the central bank introduced the Productive Credit Certificate as a Shariah compliant financing product in the banking system and the SEO developed Sukuk issuance and financing via Islamic treasury notes in the capital market.
As at the end of September 2020, the value of outstanding Sukuk plus Islamic treasury notes in the capital market reached to over IRR2,500 trillion (US$59.7 billion), a 60% increase in comparison with the corresponding figure at the end of the 21st March 2020 (ie the end of the Iranian year). As at the end of September 2020, the value of outstanding Sukuk issued by the government, municipalities and corporations has passed IRR1,830 trillion (US$43.5 billion). However, at the aforementioned date, the government was the issuer of over 82.5% of the financial products with the rest by corporations and municipalities.
In terms of financial institutions, 10 investment banks and five data processing companies were active in the market. Likewise, 30 portfolio managers and 244 funds were providing services to their clients following the regulations which the regulator had announced.
Preview of 2021
The market regulators have specific plans for both development and reforms in 2021. In the capital market, the SEO has announced its plans to attract investors’ attention. At the same time, it has increased Shariah supervision by asking its Shariah committee’s approval when issuing more types of Sukuk. Sukuk Manfa’at is a specific case in which the Shariah committee is deeply involved in the issuance process.
Additionally, in 2021 the capital market of Iran will focus more on finalizing sovereign Sukuk Wakalah issuance in order to develop government financing instruments. At the moment, Islamic treasury notes and Sukuk Murabahah are the two main government financing products. Besides Sukuk wWakalah, issuing white certificates in compliance with Shariah principles should be completed in 2021.
At the moment, unfortunately, there are no clear energy consumption reduction instruments in the financial markets and we hope newcomers can develop such vehicles. Facilitating sovereign Sukuk issuance in the market and making some adjustments to the Islamic treasury notes issuance process are other notable initiatives which the financial market will probably witness in 2021.
While 2020 was a year of many up-and-down trends in terms of the equities market indices, the market regulators initiated some plans to develop market financing instruments. The development of Sukuk Manfa’at, the introduction of white certificates in a Shariah compliant structure, reforms in the margin trading process and the development of Shariah compliant risk-hedging vehicles are some notable plans which the financial market will probably witness in 2021. The Iranian financial market had introduced many new Shariah compliant financial products in previous years, and now it is time to make reforms in the previously launched vehicles. While there is a long way to go to have a developed Shariah compliant financial market in Iran, but hopefully the future will be brighter in terms of the development of Shariah compliant products.