To provide a better picture of the situation: on average, credit markets comprise 75% of capital markets around the world. In comparison, in the past four years, the bond market accounted for merely 5% of transactions in Iranian capital markets.
A shift from a bank-based economy into a more market-oriented structure is one of the key objectives that Iran is striving to materialize. This is largely due to the credit crunch faced by many financial institutions in past years due to these entities’ assets being in effect frozen in light of many microeconomic and macroeconomic pressures.
To achieve this shift toward a more market-oriented structure for financing, the bond market should for a number of reasons be highlighted as a leading force in this important process.
First and foremost, developing the bond market would significantly help strengthen and expand the private sector, whose growth has been a priority for the government. Iranian private sector firms currently heavily rely on banks as a major source for financing. In order to move forward, this must change.
One of the most important tasks of financial institutions, with respect to helping promote a healthy and vibrant business atmosphere and enhancing economic growth and employment, is to be able to provide financing. An underdeveloped bond market gives the banking sector a quasi-monopoly position in the lending market. As a consequence, banks end up with less — and more costly — capital to lend to small and medium-size enterprises (SMEs).
Over the past Iranian fiscal year, 3.4 quadrillion rials ($114 billion) was extended to corporate loan seekers to accommodate their “working capital” requirements. However, Iranian bankers are not really interested in lending money to SMEs, but are more inclined toward lending to major companies for one fundamental reason: There are no rating agencies such as Moody’s or Standard & Poor’s in Iran.