Al Monitor| Navid Kalhor: The Islamic bond market in Iran was first kick-started in 2011, with Mahan Air�s issuance of ijara sukuk on the over-the-counter Iran Fara Bourse (IFB) to finance its purchase of an Airbus passenger jet. Though President Hassan Rouhani�s administration sees the shifting of financing to the capital market as a way to ease the burden on cash-stricken local banks, things have not turned out as expected. The government, municipalities and state companies are now the largest issuers of debt on Iranian exchanges. Indeed, at present, 88% of the 450 trillion rials ($13.8 billion) of outstanding debt on securities markets is issued by state actors.





Official data indicate that private firms merely account for 10% of overall financing on debt markets, while the rest goes to state organizations and companies. Alireza Tavakoli Kashi, director of modern financial instruments at IFB, told leading business weekly Tejarat-e Farda in November that high financing costs is one of the major obstacles in the way of privately run firms raising cash on debt markets. In this vein, he noted that the cost of financing through bonds on IFB is in the region of 21-25%, adding that �for many private companies, this is not affordable.�

The government�s budget deficit is thought to be the key driver of the spike in the yield of Islamic bonds offered for sale on the exchange markets. Mohammad Reza Pourebrahimi, head of parliament�s economic commission, addressing the 2nd Financial and Islamic Seminar at Alzahra University on Jan. 1, highlighted that financing has been prioritized for state companies rather than private firms, and that this has pushed up return rates in debt markets.

In this vein, the hefty borrowing by state-controlled firms has also compelled the low share of corporate bonds when it comes to the issuance of sukuk (Islamic bonds). Not only does government bond issuing dent corporate offerings, but the high yields the government is presently paying to sell its bonds put private companies in a much more fragile situation to use the market to their advantage. 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.

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