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Islamic Bonds Make Debut in 1st Debt Issue
Economy, Business And Markets

Islamic Bonds Make Debut in 1st Debt Issue

Iran has begun to issue Islamic Treasury Bills, a version of short-term sovereign debt, for the first time to provide a fresh fiscal stimulus to its economy.
About $300 million-worth of Treasury Bills—a Sharia law-compliant way for the government to raise money—are being offered to investors at a steep discount to their face value in a sign of how capital markets are developing in Iran.
The public offering will test the international community’s reaction to Iran’s risks following a breakthrough nuclear agreement with world powers that is expected to lift economic sanctions on the country next year, the Financial Times reported.
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.
The government issues the one-year bonds to contractors in lieu of paying them and the securities are now being offered to investors via over-the-counter market, Iran Fara Bourse.
Crucially, the effective interest rate on the bills is expected to be higher than the official bank deposit rate, which is about 20%.
“There is a credit crunch in Iran and the solution is to increase the money supply,” said Majid Zamani, chief executive of Kardan Investment Bank, the Tehran-based company that is acting as market maker on the Islamic T-Bill sale.
This is the first opportunity in many years for the market to give its verdict on the sovereign debt of Iran. The government, according to Zamani, is planning $600 million more of these Islamic T-Bills in the coming months.
Saeed Laylaz, an economic analyst, said the issuance of these Treasury bills is the first step toward reviving financial relations with the world.
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.
Iran’s economy started growing last year after three successive years of contraction, but it has slowed this year and many Iranian economists predict a sharp deterioration.
Gholamali Kamyab, vice governor of the Central Bank of Iran, told delegates at last week’s Second Iran-Europe Forum: “Having deep debt markets in Iran is one of the instruments that we can use to raise funds internally.” He said the issue of Islamic T-Bills was “quite new, so we will have to wait and see how it goes”.
The CBI is allowed by the Monetary and Credit Council—a decision-making body—to issue 100 trillion rials ($3.3 billion) of bonds in the current year to the end of March 2016 if needed.

 

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