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EghtesadOnline: Islamic sukuk issued by private companies posted substantial growth in the first half of the current fiscal year (March 21-Sep.22).

Value of the corporate bonds reached 67 trillion rials ($250 million) by end of the second quarter, rising 182% compared to 24 trillion rials ($88m) in the corresponding period last year. 

Corporate bond issuance has increased in value and in the number of companies willing to use this financial product. The number of issuing companies was two with bonds worth 4.35 trillion rials ($16m) five years ago compared to 11 companies in the first half of the present fiscal year. 

According to the Securities and Exchange News Agency, 18 other companies have received approval in principle to raise funds worth 149 trillion rials ($550m) from sukuks.  

Corporate sukuks are Islamic bonds normally issued to help non-government companies raise funds to finance their current operations, activities, or projects or expand business.

The jump in corporate sukuks is linked largely to easing guarantee procedures and credit rating for originators. For years, cumbersome rules restrained listed companies’ access to the debt market. 

Up until last year, credit rating was not mandatory for issuing sukuk and stringent rules governed the selling of debt by private firms. 

The Sureties and Exchange Organization for the first time early this year allowed private companies to issue bonds  subject to their credit ratings.

As per rules on issuing sukuk in Iran’s capital market, sukuk originators must guarantee the reimbursing of principal and interest on bonds. Apart from approval from credit rating agencies, companies wanting to issue sukuks are required to provide third person guarantee or offer stocks as collateral.

Islamic sukuk issued by private companies are backed by their products, particularly those manufacturing auto parts, home appliances and machinery.  

 

 

Gov’t Dominance  

Despite the gradually expanding footprint of private companies in debt financing, the market is dominated by the government, at times depriving the private sector of much-needed emergency funding. 

Iran's bond market has grown exponentially thanks to government moves to tap debt instruments to help cover the bulging budget deficits in recent years. 

Market size was estimated at 2,860 trillion rials ($10.6 billion) in early 2021. The market has grown by an unprecedented 1,800% in five years. 

The share of government debt has increased from 10% in 2014 to 90% and dominance of the government has resulted in a crowding out effect on the economy suggesting that rising public sector spending has apparently constrained private sector spending. 

One of the common forms of crowding out takes place when the government increases its borrowing and sets in motion a chain of events that results in curtailing private sector spending.  

Earlier Shahin Cheraghi, a former member of the High Council of Securities and Exchange, the capital market policymaking body, predicted the bond market would still be dominated by the government in the years to come as it will have to continue selling debt to pay the principal and interest on bonds.

 

Sukuk