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Auto Investment Securities
Economy, Business And Markets

Auto Investment Securities

Iran’s securities exchanges are on a roll. They are unveiling a new financial instrument every other day these days.
This year Islamic Treasury Bills, Estensa sukuk and foreign exchange futures have either been introduced, as in the two former cases, or have started their introduction process, in the latter case.
Hamed Soltani-Nejad, the chief executive of Iran Mercantile Exchange, said IME is working in conjunction with Iranian automakers and the Securities and Exchange Organization to introduce Auto Investment Securities (AIS), Financial Tribune’s sister publication Donya-e-Eqtesad reported.
The securities will help automakers finance their vehicle production while offering them a new avenue for making sales.
The AIS works based on Moshareka Islamic contract—an Islamic mode of finance in which capital is provided by two or more parties for project development.
Banks can provide financing to a project with equity rather than a fixed-interest loan. The profits of the project are shared among the investing parties on the basis of their participation or on a pre-agreed ratio and the losses are shared on the basis of equity participation.
The buyers of AIS are financing car production and will earn interest on their securities. AIS holders can either ask for their money plus interest or a car from the automaker at maturity.
If the bearer asks for the delivery of a car, they will have to pay the difference between the total value of the AIS they hold and the company’s car price at the maturity date.
The automaker is obligated to use the funds from the sale of these securities for a particular vehicle model, meaning the securities will potentially become as diverse as the number of vehicle models in production.
The IME hopes that secondary trading of the securities will secure their liquidity, so that AIS can replace the conventional pre-sale model used by manufacturers. In normal pre-sales, car buyers would pay around 60% of a car’s price at the time of the order and later increase their pay to over 90% of a car’s value.
On delivery date, they quote the remaining difference with the car’s actual price on that day and receive interest on their money for the period between ordering the car and its delivery date.
“Securitizing car production will give automakers access to money from small investors,” said Soltani-Nejad.
As automakers are heavily backed by the government and the parliament, the interest rate they offer is usually near bank deposit rates.
However, automakers are notorious for delivery delays.
The executive claims this not to be a problem.
“The good thing about this plan is that because these securities are issued at IME, it is impossible for the issuer to delay or default on their obligations,” Soltani-Nejad said.
The 2007-08 financial crisis is a good reminder of the validity of his claim.

  Sharia Compatible
Iranian capital markets are relatively undeveloped. Despite having access to new infrastructure and software, they lack size and liquidity due to years of total government dominion over the economy and botched privatization attempts in the last decade, which merely transferred industry ownership from government to semi-state organizations.
But since the passing of the new securities and exchange law in 2008, the financial industry started expanding and private ownership started to be seen as a necessity.
Financial innovation in Iran is not easy however, as normal financial models and products cannot be copied, because they must be compatible with Sharia-Islamic law—that takes its own time and requires its own novel solutions.
Soltani-Nejad said AIS has been approved by SEO’s Sharia Committee and it can be used for other products as well.

 

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