The juridical committee of the Securities and Exchange Organization (SEO) has approved a plan to design new Islamic securities that would be protected from high inflation, an effective way that could eliminate inflation risk -- one of the most significant risks to fixed-income investments.
Inflation in recent years exceeded 40 percent though it plunged last month to 15.5 percent, a level that is said to be still high compared with international standards. The committee’s director, Abbas Mousavian, believes the new securities would reduce the inflation risk and help boost the struggling capital markets.
In the nominal fixed-income investments, investors could lose if inflation increases, as the purchasing power of interest payments could be eroded over time.
The new securities, an updated version of other Islamic bonds Mosharekat and Ejare, are expected to be demanding, Mousavian told IRNA. He also expressed hope that the Money and Credit Council (MCC) would approve the plan.
“After several meetings, the committee finally came to the conclusion that new inflation-protected securities can be designed in the form of previously known Mosharekat and Ejare securities,” he explained.
By purchasing Mosharekat bonds, investors agree to share the profit of a project conducted by a company. Ejare securities pool investor’s money to buy goods for a company and then receive the rent for the usage of those goods.
The new securities will protect investors against inflationary concerns. However, the official argued that they would still allow both the security buyer and seller to use their “put and call options” to avoid any expected loss. As an example, he noted, if the asset value exceeds the predetermined amount at the time of issue, the issuer can use its call option when an unexpected economic shock endangers the estimated profitability of a certain project.
Furthermore, he pointed to the new Ejare securities, saying that instead of issuing a four-year Ejare security with certain payments, four one-year Ejare securities are set to be designed in which the writer is committed to rent the asset for four years while adjusting the coupon payments to the annual inflation.
