Central Bank of Iran Assigns Sukuk Trading to Capital Market

The Central Bank of Iran has finally stepped in and put a stop to the trading of the so-called Sakhab bonds by banks and delegated them to the Securities and Exchange Organization.

Sakhab is one of the many types of debt securities issued by the government meant to clear its debts to contractors. It matures in a year and is priced at 1 million rials ($26.1) per bond. It could only be traded in certain branches of Bank Melli Iran.

Things seem to have come full circle, considering that the SEO had previously refused to accept more Islamic treasury bills in the capital market in March and the government decided to sell them through banks. Consequently, the only result so far has been to antagonize investors and playing into the hands of middlemen who benefit from lack of transparency in an unregulated market.

In a letter publicized on Tuesday, CBI’s head of Credit Department, Ali Asghar Mirmohammad-Sadeqi, announced that “banks and credit institutions are no longer allowed to participate in the secondary trading of sukuk”.

The new Minister of Economic Affairs and Finance Masoud Karbasian also echoed similar remarks during his inauguration ceremony on Wednesday, vowing to stand against the issuance of any bond issued by the government outside the capital market.

The government started issuing bonds for its debts to contractors in 2015 and they were exclusively traded on the over-the-counter market Iran Fara Bourse. But that was only until this year’s March when the bonds’ high rates and low risk made them rival equities and the government was pressured to refrain from issuing more.

According to a report published by the Ministry of Economic Affairs and Finance, the return on one-year bonds stand at about 27-29%,  while the rate is down to 20-23% for bonds maturing on more than a year.

In a controversial move, the government issued 120 trillion rials ($3.13 billion) of Sakhab bonds late March and handed over the secondary trading to the banks. The opaque condition of secondary trading prompted the mushroom-like growth of a black market and eventually gave rise to a more severe condition.

Cash-starved contractors predominantly cannot afford to wait for the bonds to mature so they start looking for someone to sell at a discount. Then comes along shady dealers, buying them 30-37% lower than their face-value and either selling them at higher rates or cashing in on their yields.

“The unofficial bond market has caused rates to spike and reach unreasonable levels. They are going to be controlled through careful planning,” chief executive of SEO, Shapour Mohammadi, was quoted by Securities and Exchange News Agency as saying.

Market experts have long raised concerns about a deepening gap between the equity and debt markets, and further channeling capital toward low-risk, high-return bonds.

“These rates do not reflect the actual reality of our economic condition and they will make investors shy away from the risk of investment in the equity market,” Ali Nikoogoftar, a senior market analyst at Bazar Saham Brokerage, told Financial Tribune.

However, others warn that taking up arms against the bond market will not solve the equities’ woes, and that investment in the equity market must be made more attractive so it can compete for the limited liquidity in the economy.