As Iran opens for business following the lifting of nuclear sanctions imposed by the West over the past 12 years, it is of utmost importance to gear the country’s capital markets for increased foreign investment.
“At the moment, the Iranian capital market looks like a neighbor that you have had for 10 years but never seen,” said CEO and board member of Sina Financial and Investment Holding, Behzad Golkar, in an interview with Arabian Business.
“Now, after 10 years, you meet him and say to yourself: Wow, I have this neighbor–fantastic!"
With total assets under management close to $7 billion and 3,950 employees, SFI is one of the largest financial institutions in Iran. The holding's 2015 turnover was estimated at $1.5 billion, up from around $1.25 billion in 2014. Its subsidiary Sina Bank, first set up in 1986 and listed on Tehran Stock Exchange with a market capitalization of $507 million as of June 2016, reported total assets of $4.39 million in 2015, up from $4.06 million in 2014.
"Iranian capital markets need fresh blood to connect to international markets. And, in the same way, I think foreign investors are looking to Iranian capital markets. Why? Because the Iranian economy as a whole is strong, it has a good [investment] infrastructure and can be considered an emerging economy with plenty of opportunities.”
The removal of sanctions could trigger at least $50 billion a year in foreign investment, according to Central Bank of Iran Governor Valiollah Seif. He told Bloomberg in January that GDP growth could accelerate to 5-6% from 3%, in the year to March 2017.
Foreign companies have already started to enter Iran, particularly in the hospitality and aviation sectors, with UAE’s Rotana Group and US aviation manufacturer Boeing among those to have secured deals since January.
The last decade has created a “very tough situation” for Iran, Golkar says. “We will not bounce back in weeks or months. It could take two or three years, but in time I believe everything will be set up to open the market for foreign investors.
“The pioneer, in my opinion, will be capital markets. This is because investing in financial instruments is so much simpler than investing in fiscal assets.”
Tehran Stock Exchange is among the five biggest markets in the Middle East, with more than 300 listed companies and a market cap of around $100 billion.
> Challenges and Risks
Golkar is confident of the potential strength of Iranian markets, but concedes the system poses regulatory challenges and risks for foreign investors.
“There are a lot of lacks, a lot of unadjusted systems, especially in banking, which exist as a result of Iran having been closed off to the world for so long,” he said.
“It could take another year for banks and financial institutions to close these gaps so they can connect directly to international markets.”
There are a number of policies and regulations with which Iranian institutions must comply if they wish to do international business. One of these is Basel III, a package of reforms designed to strengthen the global banking system through tighter assessment of liquidity and other risks.
Golkar says that before sanctions were imposed, Iran operated in accordance with Basel I, which is now hugely out of date.
Within Basel III are requirements such as "Know Your Customer", which requires tougher due diligence on corporate ownership and other measures intended to prevent money laundering. These require Iranian banks, which have been cut off from international markets for a decade, to set up new systems and procedures–no simple task, says Golkar.
“When you have a plan to work in international markets, you have to meet international standards,” he said.
“At the moment, companies inside Iran, particularly in capital markets, are trying to upgrade themselves. But they do not have sufficient knowledge of how to do that, so it’s taking time but they are trying to do it as quickly as they can.”
He said SFI has been working with contacts in London, Germany and elsewhere to expand expertise. It has implemented training schemes for its employees which, among other things, aim to teach them business proficiency in spoken English.
“If you want to cooperate with foreign investors and attract more people from overseas, it is crucial you speak the same language as them. This means the language of capital markets, of course, but it also means being able to speak in English,” Golkar says.
One of the positive outcomes of talks with advisors in Europe are plans to launch two $55 million equity funds targeting the UK and Germany. One is a fixed income fund and the other a liquidity fund, and both funds are open-ended and would launch under the Sina brand.
Advisors in the UK and Germany are helping to raise the money and the company is targeting a 20% rate of return for each and an August launch date.
“I think there could be a lot of interest in equity funds, because of the rate of return nowadays, especially with fixed income funds and inside Iran. The Iranian rial is at around 20% now while inflation rates were less than 10%; this is fantastic.”
However, Golkar admits restrictions on custodian accounts in Iran could pose problems.
“We are trying to solve this issue but it is a problem.”
Another of the group’s objectives is to set up an investment bank. Golkar reveals that SFI has applied for permission from the government to open a new investment bank in Iran. The group has begun courting international banks in an attempt to find a shareholder based outside of Iran with whom to partner and access global investment markets.
Under the plan, the bank would be seeded with an initial $100 million, with a target to grow to $500 million within five years to 2021. It would seek to invest in capital markets in Iran and beyond, and Golkar says the partner bank would help SFI to form “a bridge” into foreign markets. He is eying a launch this year.
Ruling out the possibility of sanctions "snap-back"–a shared concern among some investors–Golkar said: “I think real investors know snap-back will not occur. I’m very positive about the future. Before sanctions, everything was working. The Iranian market worked well with the international market under the old system. But the sanctions put barriers on that system. Because of that, I think that there is no will, within Iran and also in the world, to snap-back the sanctions. It’s not just economic, it’s political too; there are lots of other interests at stake."
He is doing what he can to tap up foreign business as policymakers sift through outdated rules and regulations, and seek to minimize the risks for investors.
As Golkar says, “When you invest in something there is always a degree of risk and reward. If the return for the investor is more than the risk, he will still come, and this is a feature of emerging markets and Iran is the same.”
