21 July 2016, Al-Monitor
TEHRAN, IRAN — Despite efforts by Iranian authorities to draw multinational companies to the 9th International Exhibition of Exchange, Bank and Insurance held July 10-13 in Tehran, the foreign presence was not strong. Shahrad Padidar, the investment and business development director of Karafarin Investment Group, told Al-Monitor the weak presence of foreigners was predictable. Indeed, several keyIranian banks and investment companies also declined to take part in the event because they assumed such events would have little impact on their businesses, Padidar said.
TEHRAN, IRAN — Despite efforts by Iranian authorities to draw multinational companies to the 9th International Exhibition of Exchange, Bank and Insurance held July 10-13 in Tehran, the foreign presence was not strong. Shahrad Padidar, the investment and business development director of Karafarin Investment Group, told Al-Monitor the weak presence of foreigners was predictable. Indeed, several keyIranian banks and investment companies also declined to take part in the event because they assumed such events would have little impact on their businesses, Padidar said.
“Foreign companies do negotiate — sometimes for long months — with Iranian brokerage firms, but at the end of the day they don’t make any investment due to political concerns,” he said, referring to his own experience in negotiating with European investors.
However, Ali Madad Soleimani, the publication and media director at the Securities and Exchange Organization (SEO), believes a stronger engagement of foreign investors in the country’s capital market is likely, though he admitted during his interview with Al-Monitor that only several foreign nationals were present at the exhibition — on the very last day of the event.
Iran’s capital market regulator has taken serious steps to make Sharia-compliant financial instruments more attractive for foreign investors. Sukuk, or Islamic bonds, for example, is the instrument Iranian officials have increasingly offered in the market, as it appears to have been attractive to investors. The value of the sukuk market has tripled since last summer, reaching 215 trillion rials ($6.95 billion), though the sum appears tiny when compared to the $250 billion in investment the Iranian government needs to implement its projects to boost the economy. Indeed, the sukuk industry may need more standardization; if not, it will remain relatively small. Yet, SEO chief Mohammad Fetanat told Al-Monitor he is confident that the market will boom in a few years.
Tehran-based foreign companies have already invested as much as $1 billion in the Iranian capital market, Fetanat said on the sidelines of the exhibition. But he did not specify how much market share the Islamic bonds — Murabaha, Musharakah and Ijarah — have grabbed. Rather, he noted that the supply side in the sukuk market has remained weak, pointing out that the market could otherwise rapidly grow.
“We have planned to diversify our financial instruments and expand the market to respond to the rising demand within the country,” Fetanat said, noting that low and negative bond yields in developed markets coupled with a relatively fixed currency rate in Iran have added to the Iranian bond market’s attractiveness. But domestic demand for sukuk is too little to help the government raise enough capital for the implementation of its numerous development projects. Thus, the SEO has prepared to also reach out on global markets and attract new investors, Fetanat added. The problem is that Iranian financial law does not allow sukuk to be traded in foreign currencies — a major obstacle in the way of the industry’s development and a barrier that will be difficult to overcome in a matter of months.
“The government-backed bonds cannot be traded in foreign currencies. This has practically kept Iran’s sukuk out of global markets,” the SEO chief said. It appears that this barrier can be removed if only the administration of President Hassan Rouhani and parliament work closely together to amend the budget law. Fetanat said he hopes that will be done in a matter of months, and he noted that there already is a huge demand for Iranian sukuk in regional and European markets. “In our negotiations with other countries, we received a request for $1 billion worth of Islamic bonds,” he said, without identifying the requester, expressing hope that billions of dollars of Islamic bonds will be offered on global markets should existing legal problems be addressed.
Other SEO experts who spoke with Al-Monitor at the exhibition were also optimistic about the future of the Iranian stock and bond markets. Reza Mirzakhani, an expert with SEO’s Research, Development and Islamic Studies Department (RDIS), told Al-Monitor he believes foreign investors will be interested in Sharia-compliant instruments, as financial transactions in Iran are all based on real assets, emphasizing that high-return Islamic bonds are all guaranteed by the Iranian government — a big advantage for new investors. He also noted that the SEO’s Islamic Fiqh (Jurisprudence) Council meets twice a week to discuss how to further improve Sharia-compliant instruments.
Although some critics worry that Iran’s slightly different interpretation of Sharia governance could be a stumbling block to its entry on the international stage, Mirzakhani said Iran’s financial regulations are more flexible than other Muslim countries. Mohammad Javad Farahanian, the education director at the SEO, shared the same thoughts, telling Al-Monitor that the RDIS has shown much flexibility and has eased financial regulations in a way that financial instruments can be compatible with international standards.
Despite the positive signals SEO officials have been sending, the private sector — which is involved in doing business with multinational investment entities — complains that foreigners do not make investments through private brokerage firms unless they receive a sovereign guarantee.
Padidar, of the Karafarin Investment Group, said that without a government body offering a guarantee that all obligations will be satisfied when and if the primary obligator goes into default, no major investment will be made through the private sector’s brokerage firms. In other words, the political risks are still prevailing, despite the lifting of nuclear-related sanctions and hopes for the inflow of capital to the Iranian market. Thus, it seems that neither the Central Bank of Iran nor any other government body wants to take the risks of the private sector’s possible default on its obligations — a policy that continues to make foreign investors skeptical of the future prospects of Iran’s capital markets.
