Iran falls short to Internationalize its Islamic financial market?
This article was first published in Islamic Finance news Volume 15 Issue 19 dated the 9th May 2018.
By Alireza Hojjatnia
Iran has been among the first nations to implement Islamic finance schemes, specifically on its banking sector by applying the usury-free legislation in 1983. Considering the standard framework adopted such as employing Sharia-compliant instruments both in Islamic and global markets, however, Iran falls behind in comparison with the international Islamic banking and finance community.
On the banking side, there are four factors are to blame for Iran’s undeveloped sharia complied market:
- Incomprehensive research on the Islamic banking and finance industry;
- The meaningful gap between theoretical research and operational frameworks;
- The inefficient interaction of Iran central bank’s fiq committee and that of the Islamic banking research institutions; and
- The incapacitated legal environment in Islamic banking and finance sector.
On the finance and capital market side, the situation is even worse. Iran has everything to surpass other leading nations like Malaysia or even Indonesia for good. But why all the efforts of Iranian policymakers have come to a dead-end until today?
A smart point to consider here is to look for reasons behind a country like Malaysia reaching the top. Eyeing the stats, it is obvious that a massive part of Sukuk securities issued in Malaysia belongs to foreign companies. A rational conclusion is that a safe and stable economy and in particular, capital market framework, hand in hand with a strong currency, has the power to attract foreign capitals to Islamic instruments. Over the past years and mostly due to its geopolitical status in the region, Iran has neither the required economic stability nor the proper infrastructure to achieve the ambitions of getting prominent in Islamic banking and finance world, let alone the fact that economic sanctions levied on the nation’s banking and capital markets transactions with hiccups for quite a time.
The second point to consider is the good old infrastructure thing and to be more precise the credit rating issue. When it comes to underwriting of corporate Sukuks or other Islamic instruments, the first thing that an “international finance technocrat” will ask is about the credit rating of its issuer. Figure 1 demonstrates the growth of Iranian Sukuk securities over the years and it shall be noted that domestic players are now enjoying the benefits of Islamic securities and it is the time to direct focus to foreigners. In fact, it is almost impossible to expect experienced investors’ participation in any investment or finance schemes without the presence of a well-known global rating agency, although good measures have been taken towards building better infrastructure to make the credit ratings practical and as of today, three rating agencies, one with international partnership, are active in Iranian capital market. However, taking a hard look at the Iranian capital market body, one realizes that reaching international standards are currently far-fetched moving at current pace.
The third and in the case of Iran, the most important point is the matter of priorities. From top to bottom, all economic agendas have been focused on more vital and urgent stuff to consider first before even thinking of any moves towards internationalization. Furthermore, the “different interpretation of sharia compliance” in Islamic nations has made the mutual collaboration with other players more drastic. The economies of scale are also not in favour of expanding tools to introduce Islamic securities to a wide range of foreign investors. As an example, developing English based trading platforms for Iranian equities and Islamic Sukuks securities are the perfect pitch to mention here. Not only have Iranian brokers and financial institutions, merely based on a simple cost-benefit analysis, locked the idea back in their basement, but also the regulator itself has no priority to develop such floors.
All being said, it is no news that Iranian capital market and banking sector do have the potential to become a world leader in Islamic finance community; yet the shortcomings mentioned above, most specifically on the brokerage and capital market side, shall be addressed effective-immediately before any expectations are built. Prioritizing the measures, legal environment can be seen as the direst one to get under the policymaker eyes considering the fact that it could be the key to unlock the flow of foreign-sourced capital towards Iranian brokerage industry. More effective and precise regulations would eventually and hopefully end on more solid grounds to stand on, enabling Iran to earn its place in Islamic finance community.
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.