Banking, the master key to lure foreign investors into Iran’s capital market!
By Mahdi Goodarzi
Now it is no news that after JCPoA, cravings towards entering Iran’s capital market was rippling amid foreign merchants and businessmen; a desire based on the unseen potentials that they cannot be ambivalent to. The capital market was not an exception and the visits paid by fund and portfolio managers, investment banks and brokers within the past 2 years proved that they could not afford to overlook the opportunity and lose this golden chance.
This article is not to discuss Iran’s capital market related topics for the fact that pending the last two years, investors have been able to penetrate the market and gather ruling information. However, Iranian banking infrastructures, in order to develop the existing correspondents or even to incept new ones, would be left for debate. The processes of banking transactions are better known when it comes to trade finance, mainly because even before the nuke deal, Iranian banks were already connected with their foreign counterparts. But, as far as the capital market cares, fundamentals of banking relations are different and new levels of mutual understanding are needed.
Along the road to make everything world class, new concepts will come along, which have hardly ever been the subject of discussion for Iranian banks. They have to get themselves familiar with senses like Knowing Your Clients (KYC), Compliance, Anti-Money Laundry (AML), and the Third Party Involvement in Transactions (e.g. exchange houses). A handful of them are now struggling with all these new perceptions.
The significance of knowing the banking side of Iran’s capital market is to reach a state where, beside the Iranian party’s efforts to meet the ends sooner, the foreign counterparts also show interest and get their hands dirty to come up with a solution and encourage their bankers to facilitate these transactions. It seems that the stairway to heaven is passing through foreign banks as well and the urgency of the matter will eventually force investors to push them a bit harder. It might be a good idea for foreign financial intermediaries to act as catalysts in this fusion. Knowing their wants along with the barriers ahead has made them the perfect candidates directing linked banks to take the lead and help the transition happen faster.
With no doubt, Iran’s banking structure has been worn out in terms of international standards and the general belief implies necessity of a reform. The role of the Central Bank of Iran (CBI) as regulator is undeniable to ease the shift. With new directives on publishing financial statements based on IFRS, improving the disclosure levels and restructuring the reserves policies, it is safe to say that the administration is now on the right path. Needless to say, joining the FATF was the biggest gesture showing good faith in and commitment to reform. Performing due diligence, opening EU branches (e.g. in Germany) and alike, herald brighter and better horizons; this, however, is really difficult to change overnight. It is not a secret that only adapting to global measures, at full tilt, will heal the sector’s wounds; nevertheless, the brilliant and decisive measures taken so far shall not be ignored.
Despite all the bumps in the nation’s banking structure, there have been tremendous endeavors by Iranian banks in the passing year to lift the said barriers and the admissible measures taken have now led into a couple of active AIF’s in the market, although the said funds are compelled to choose tiny European banks carrying out their businesses while the blue-chips are sitting on their hands and waiting for an opening to get deep.
The fact that no global custodian has yet entered Iran should not be interpreted as if there are no feasible ways of doing business here. The regulator is seriously in pursuit of new solutions to overcome the obstacles, paving the way for foreigners and making them feel more like home when they are performing in Iran’s capital market. As an instance, the new mechanism of settling directly with the local custodian, regardless of the broker, AKA “The Blue Model”, can be mentioned, as the bold of those in response to international clients’ needs and demands. The model is to address the very major concern of foreign investors with regards to the settlement risk they had to bear with brokers before. The regulatory admitted that imposing brokers default risk on investors was an inapt expectation. Therefore, they came up with a scheme allowing the direct settlement between the overseas bank account and the Iranian one with the CSDI.
All in all, it is noteworthy to stress that Iran’s capital market and its regulatory bodies are dynamic, committed and responsive to global community’s requests; the developments after JCPoA are stamps over its veracity. Although a tough course ahead, the path to reform should be taken step by step and structures, banking in particular, shall be formed precisely in order to close a win-win deal.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.