Islamic finance has grown at a fast pace (average +20%) since the 2008 global financial crisis and was estimated to be worth USD2.1 trillion of assets in 2014 by the Centre of Islamic Banking and Economics (CIBE). In 2015, the Dubai-based CIBE has estimated that global Islamic financial assets will reach USD2.5 trillion, of which an expected USD150 billion will be Sukuk (Islamic bonds) issuance.

Source : BMI & Bloomberg

Muslim countries obviously dominate the Sukuk market – as per the chart below. Investors have recently seen increasing supply from Western (non-Muslim) countries. Last year, the UK issued its first ever £200 million Sukuk bond which has been trading well in the secondary market. On top of this, three banks (Societe Generale, Bank of Tokyo-Mitsubishi and Goldman Sachs) set up Sukuk programs in 2014 which, if successful, will improve liquidity in the global Sukuk market.

Debt market constitutes the three major pillars of the capital market along the equity and derivative markets, which is used in large scale, worldwide, to finance both government and private sectors.

Most emerging economies have bent toward credit markets to issue bonds such as Malaysia, Brazil, South Korea, to name a few from 1997 onward. This is contributing to economic efficiency in emerging countries and helps moving economic growth in line with their financial market.

As to Iran, Iran Fara Bourse (IFB) is an exchange market home to modern financial instruments, all sharia-law compliant, including instruments like Murabaha, Musharakah and Ijarah, types of Sukuks with various maturities and Islamic Treasury Bills (short-term sovereign debt), made its first debut on September 30, 2015(with 13th 2016 set as maturity date). These are sovereign bonds and their yields on investment are guaranteed by the government.

According to Amir Hamooni, CEO of IFB Co., Iran stands the third position among Islamic Countries in the secondary market trades of the Islamic securities, showing 30% rise YOY, after Turkey and Egypt, citing international figures. He also noted that 86% of the debt market transactions pertains to IFB. The current market value of credit market reached $3.4 billion, added Hamooni.

Nonetheless, in respect to overall financing figures in the country in the FY 2014/2015, less than 3.2% belongs to debt market and about 89.2 % was facilitated amid money market and 7.6% by stock exchange, noted Central Bank of Iran governor, Valiolah Seif.

Source: IFB Co.

On average, credit market comprises 75% of total capital market globally and in the past four years the existing bond market accounted for about 5% of transactions in the capital market of Iran, based on the reports by Securities Exchange Organization (SEO). This, by itself, indicates high potential of this section of capital market of Iran to grow and develop in the years to come.

Shift from a bank-based economy into a more market-oriented financing structure is one of the underlying targets the country is striving to materialize. The reasons why this change is more important and necessary than ever might be shortlisted as follows:

  • Non-Efficiency of banking system in optimal allocation of scarce available resources
  • Existence of credit crunch in the country and lack of resources for financing
  • Unreasonable interest rates, imposed on loans and facilities, granted in the previous years
  • Low diversity and non-utilization of modern financial instruments for financing in the capital market of Iran


For a number of reasons, the bond market should be the leading force in this important process. First, it would significantly help strengthen and grow the private corporate sector. Corporations currently rely heavily on banks as the major source for financing their businesses. Going forward, this must change.  An under-developed bond market gives the banking sector a quasi-monopoly position in the lending market. As a consequence, banks have less and more costly capital to lend to the small and medium-size enterprises as one of the most important tasks of financial institutions, in respect to extending healthy and vibrant business and enhancing the economic growth and employment.

Source : BMI

Over the year 2014/15, 3,414,000 Billion rials were granted to corporate loan seekers to accommodate their “working capital” requirements. But the bankers are not interested in lending money to SMEs and more inclined toward big corporations due to one big basic reason: there are no rating agencies such as Moody’s Investors Service or Standard & Poor’s and the like to rate the companies, seeking for debt securities issuance. 

Another case in point is that repayment of the interest rates to the lenders is not viable as IRR of projects and production return rate in Iran, in the wake of recent recession, has hit rock bottom. Thus, borrowers are not able to pay pack their liabilities to the banks. This has led, in turn, to resources becoming frozen and banks not capable of creating money for others in need of capital. Consequently, we can easily note that bankers cannot bear the overload of demands for cheap money as they are also obliged to act as the trustee for those who deposited their savings with them.

In conclusion, we should say that the financing structure modelled upon leveraging via banking system has to necessarily change and give its place to capital market, most specifically to debt market to play its legitimate role, like its peers across exchange markets around the globe.

Source: CBI

Nonetheless, Fara Bourse has come up with diverse Islamic tools, highlighted earlier in the text to help the entities asking for financial resources. For example, regarding those sectors lacking sufficient capital to buy their raw materials, the OTC market has introduced Murahaba sukuks, an interest-free loan, which provides credit sale under Sharia. Financing via this mechanism, supplies the companies to get along with their production and thus contribute into tax revenues for the government and keep themselves healthy financially.

Next in line is the international trade system in Iran being very open and the financial system as its completing component, being closed. Foreign trade portion in the prior year was around 90 bn dollars and the overall GDP stood at $432 bn. In other words, this means that the former to operate well requires about $100 bn at a minimum. The disappointing fact is that the financing burden of this system typically weighs on domestic capital providers, the banking system, so to speak.

Source: IMF; World Economic & Financial Surveys

As a result, supply and demand equilibrium is lost. This counts as another proof that the country should take on the responsibility to launch its debt market. However, this is already paved with the introduction of Islamic Treasury Bills last year and with this year’s public offering of 40 mn ITBs in addition, the whole number of sovereign debt published reached 50 mn,TB05 being the symbol on IFB. 

Iran enjoys good historical record in respect to international borrowing. It is noteworthy to say that Iran sold 1 bn Euros worth of Euro-denominated bonds in 2002. This was the country’s first and last foreign bond issuance since the 1979 Islamic Revolution.  This can be looked upon as a new beginning for issuing currency notes again, as their absence for financing, in capital market of Iran, is well-perceived, more than before, so to speak.

Development of a sovereign bond market provides a number of important benefits if the prerequisites to a sound development are in place.

At the macroeconomic policy level, a government securities market provides an avenue for domestic funding that is traditionally provided by the central bank and, thereby, can assist the government  to force fresh blood into the vessels of economy of Iran and help state officials to monetarily support projects in the macro-level.

A government securities market can also strengthen the transmission and implementation of monetary policy, including the achievement of monetary targets or inflation objectives, and can enable the use of market-based indirect monetary policy instruments. 

The existence of such a market not only can enable authorities to smooth consumption and investment expenditures in response to shocks, but if coupled with sound debt management, can also help governments reduce their exposure to interest rate, currency, and other financial risks. 

Finally, a shift toward market-oriented funding of government budget deficits will reduce debtservice costs over the medium to long term through development of a deep and liquid market for government securities.

At the microeconomic level, development of a domestic securities market can increase overall financial stability and improve financial intermediation through greater competition and development of related financial infrastructure, products, and services. Development of a securities market can help change the financial system from a primarily bank-oriented to a multilayered system, where capital markets can complement bank financing

Prerequisites for establishing an efficient government domestic currency securities market include a credible and stable government; sound fiscal and monetary policies; effective legal, tax, and regulatory infrastructure; smooth and secure settlement arrangements; and a liberalized financial system with competing intermediaries. 

Where these basics are lacking or very weak, priority should be given to adopting and implementing a stable and credible macroeconomic policy framework, reforming and liberalizing the financial sector, and ensuring the proper pace of liberalization in different areas (for example, financial sector versus capital account measures).

Characteristics of ITBs of Iran

Islamic Treasury Bills (ITBs) are short-term instruments of Government borrowing, having the following features:

  • Zero Coupon bonds sold at a discount to their face values
  • Currently issued in 5 tenors of maturity
  • Purchased by individuals, institutions and corporate bodies domestically and internationally, irrespective of their residential status through regulated brokers in Iran's capital market.
  • Can be traded freely in the country’s secondary market. The settlement is normally through a book entry system; physical delivery could be affected if required.
  • Profit is non-taxable
  • They are non-transferable

 Launching debt market in Iran is the most viable panacea for the economic dilemmas at the present time. As the banking sector is struggling with a great number of problems internally and externally, most significantly NPLs and accumulated liabilities of the government, thus there is no practical solution left to the government than extend the credit market to the full in the coming years if it means to make up for the losses, took place due to severe sanctions, over the country’s economic growth.

To gauge the feasibility of running debt market in Iran, the liquidity to GDP ratio is employed.  According to statistics this figure was 72.4% over 2014/15. This was 90% in Germany and the US, each, in 2014. This is an index that indicates the availability of ample liquidity in the country to establish such an immense market in the future.

Also, Iran’s public debt is so slim and is about 11 % of GDP, according to IMF, with GDP estimated at $417 bn for 2015.

By Mahdi Goodarzi & Navid Kalhor