Domestic Economy
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10th Batch of ITBs to Start Secondary Trading

Islamic Treasury Bills are sold at a discount to their face value and bear no coupons, meaning they are traded at a lower price than their face value but are redeemed at face value on maturity
10th Batch of ITBs to Start Secondary Trading10th Batch of ITBs to Start Secondary Trading

The 10th batch of Islamic Treasury Bills, worth 15 trillion rials ($418 million at market exchange rates), will open for secondary trading this week.

The bonds were underwritten and given to government contractors in lieu of overdue payments some 40 days ago. After their opening for secondary trading, contractors can cash them in by selling them to a third party. These bonds will mature next September.

The Iranian government started giving bonds to contractors in repayment of its debt a year ago.

The government of President Hassan Rouhani is struggling with debts it inherited from its predecessor, Mahmoud Ahmadinejad. Tehran owes 1,000 trillion rials ($33.3 billion) to the banking system and is facing a squeeze on funding due to falling oil revenues and the impact of sanctions.

ITBs are sold at a discount to their face value and bear no coupons, meaning they are traded at a lower price than their face value but are redeemed at face value on maturity.

The first three batches of ITBs have already matured and batches four to eight are currently being traded. The introduction of these bonds to Iranian markets was taken as a welcome sign in the development of money markets last year.

Now, however, money managers talk about the government going too far too soon by borrowing too much through bonds.

The bonds have had ample demand in a market where low risk securities are scarce. The recent weak performance of stocks has ramped up demand for debt securities.

The government has sold Murabaha contracts for wheat worth 10 trillion rials ($278.8 million and wheat Salaf contracts valued at 26.5 trillion rials ($745.2 million) in the past month. These are on top of ITB offerings.

Critics say excessive government borrowing is oversupplying the market while repayment of some of these bonds at maturity remains under question.

Murabaha is an Islamic financing structure in which an intermediary buys a property with free and clear title. Similar in structure to a rent-to-own arrangement, the intermediary retains ownership of the property until the loan is paid in full.

Salaf is an Islamic financial instrument with similarities to futures contracts used to forward sell an underlying commodity with a predetermined interest for the period.

Last year, Estensa, Murabaha sukuks and Islamic Treasury Bills were added to Musharakah and Ijarah sukuk, which were already on offer on Iran Fara Bourse.

Recently, mortgage-backed securities joined the fold as Bank Maskan was given the green light to offer 3 trillion rials ($86.4 million at market exchange rate) of MBS.

MBS is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes or packages the loans together into a security that investors can buy.

Iran prides itself on not having defaulted once in its 35-year history on its debts.  

Moreover, the country has one of the most advanced Islamic markets in the region and issues a wide range of sukuks, or non-interest debt securities.

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