Economy, Business And Markets

Fixed-Income Funds Hold Key to Debt Market Growth

Bank deposits still make up 77% of Iranian fixed-income investment fund’s portfolio.Bank deposits still make up 77% of Iranian fixed-income investment fund’s portfolio.

Securities and Exchange Organization’s attempts to regulate fixed-income funds have so far proved fruitless and consequently prevented the debt market from growing and realizing its potential.

It has been about three months since SEO mandated the funds to cut down their fixed-income portfolio in bank deposits and certificates to 50% of their nominal capital.

SEO’s move, alongside the Central Bank of Iran’s decision back in September to cut annual and fixed interest rates down to 15% and 10% respectively, was meant to channel the capital locked in banks’ coffers back into other markets, especially the capital market.

“Naturally, reduced deposit rates are a boon to the capital market. And with further regulating [fixed-income] funds, capital can move toward more productive sectors,” Shapour Mohammadi, the head of SEO, said during the Third Conference on Islamic Finance in Tehran on Sunday.

It took a while, but the Central Bank of Iran’s crackdown on regulating interest rates finally paid off and things have now stabilized in the money market.

Fixed-income funds, however, have defied SEO.

The survey of funds by the Persian daily Donya-e-Eqtesad indicates that bank deposits still make up 77% of their portfolio while only 4% of their capital are invested in equities. So what is preventing them from complying?

First of all, most of the funds are in fact subsidiaries of banks and act as liquidity-adjusting instruments. They offer fixed rates higher than banks’ interest rates and, at the same time, have little investment risk due to the backing of banks. If they do comply, they will have to invest their excess capital in equities, which is a considerably more risky venture and could potentially lead to their insolvency as their attraction dwindles.

In fact, tinkering with the funds’ portfolio requires a fundamental reform in the banking system, one that would quench their never-ending thirst for liquidity.

This is while money and debt market have converged on their returns and fixed-income funds are the last link of the chain to fall in line.

On behalf of the government, the Ministry of Economic Affairs and Finance issued nine million Islamic Treasury Bills in Iran Fara Bourse on November 19 under the “TB121” ticker. The one-year ITBs were valued at 9 trillion rials ($219.51 million) and offered a yield to maturity of 14.1%.

“Their YTM is on the same level as the deposit interest rates set by CBI.

The government plans to issue 345 trillion rials ($8.41 billion) more ITBs by the end of the current fiscal year (March 20, 2018),” Mohammadi said.

The debt market was host to 50 trillion rials ($1.21 billion) of Islamic Treasury Bills in the fiscal 2015-16 and about 350 trillion rials ($8.53 billion) the year after.

The currently underdeveloped debt market could be the main winner here, if new liquidity can finally seep into it.

The SEO chief estimates that the potential capital can move from funds to bonds at about 410 trillion rials ($10 billion).

Latest statistics indicate the Iranian debt market makes up 4.7% of the country’s 6.69 quadrillion ($163.19 billion) GDP and 6.8% of the capital market’s total of 4.67 quadrillion rials ($114 billion).

This is while Donya-e-Eqtesad’s study of 15 developed countries shows that the debt market’s size is 113% and 185% larger than the countries’ GDP and capital market value respectively on average.

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