This has raised eyebrows among market players and pundits, since they view this policy by Rouhani’s Cabinet as detrimental to the general health of the nascent debt markets. They argue that utilizing the bond platform for short-term financing requirements is against the very essence of these markets, which are in effect designed for long-term funding purposes.
This dilemma is primarily attributed to ever-growing calls for cash from bankers. Considering the market cap of the debt markets — estimated to stand at approximately $8.4 billion — with that of the money market, Islamic bonds stand no comparison. Thus, this leaves no room for privately held entities to use the capacities of debt markets.
Moreover, high interest rates in the debt markets are neither attractive nor economically sound for private companies. Accordingly, these firms avoid tapping capital markets for financing and rather seek loans from government-subsidized banks or apply for discounted loans granted by the country’s sovereign wealth fund, the National Development Fund.
Indeed, the total financing through the issuance of sukuk in the previous Iranian calendar year (ended March 19, 2016) amounted to just less than 200 trillion rials ($6.1 billion), jumping almost eightfold in value compared to the year before. These figures underpin the fact that the state sector was the major benefactor of Islamic bonds owing to the lack of proper guaranteeing of such instruments, complicated bureaucracy and contentious feasibility of expansion schemes, alongside the high yields.
For one, the decadeslong imposition of sanctions on Iran has forced leading credit rating agencies such as Moody’s and Fitch to abandon the country. This has pushed Iranian firms seeking to sell debt on the country’s debt market to turn to domestic guarantors in a bid to gain the necessary approval of the market regulator, the Securities and Exchange Organization (SEO). In this situation, guarantors act to secure repayments of the coupons and the principal of issued securities on time and at maturity date to avoid possible default by the bond issuers.