The capital market is dominated by stock exchanges and its main function is the financing of economic enterprises, especially large companies. However, statistics show that despite the improvement in the performance of capital market in financing production in the 1390s [Iranian years from March 2011-21], it is still far from the optimal point, Abolfazl Roghani, a member of the Iran Chamber of Commerce, Industries, Mines and Agriculture, prefaced a write-up for Mehr News Agency with this note. The translation of the full text follows:
According to statistics, even though the growth rate of Iran's economy was close to zero throughout the 1390s, financing through the capital market increased by 6,000% from 110,700 billion rials [$240.19 million at the current exchange rate] to 7,180 trillion rials [$14.73 billion] at the end the decade. This means that the government and economic enterprises that faced a lack of money borrowed more than 7,000 trillion rials [$14.37 billion] from the stock market only in the last year of the period.
Iran's economy faced many challenges in the 1390s, including sanctions, and it can be estimated that if the capital market had not developed properly, Iran's economy and the government would have faced more challenges, and even this issue could have led to the dissatisfaction of banks.
Although the share of the capital market in financing the economy increased from 3% to 12% at the end of the fiscal decade of 2011-21, most financing of companies in Iran is still done through the banking system and the share of capital market is very low.
A comparison of the volume of liquidity in the capital market and the number of economic actors and investors in the capital market shows that its growth rate in financing production is not proportional to the real growth of the capital market and its vast financial opportunities have not been used properly.
Minor Role
Statistical data shows that in the fiscal 2022-23, the total value of transactions of Iran’s four stock exchanges reached 130,253 trillion rials [$272.07 billion], which is a new record in the half century of capital market activity. These transactions were carried out by millions of investors, some of whom participated actively and others semi-actively in the transactions.
According to some statistics, due to the increase in the ratio of money to total liquidity, since the beginning of this year [started March 2023], on average, between 10-20 trillion rials [$20.52-41.05 million] of new liquidity have entered the capital market.
Also, at present, the total value of the companies in the capital market exceeds 100,500 trillion rials [$215.55 billion] and the annual volume of traded goods is 10,200 trillion rials [$24.63 billion]. All these figures indicate the capital market liquidity and that it can be appropriate place for financing. However, comparing the size of transactions, the value of companies, the number of investors and the size of Iran's economy shows appropriate measures have not yet been taken to increase the role of the capital market in financing production commensurate with the existing needs.
What Do the Statistics Say?
According to statistics, although in the fiscal 2022-23, the capital market was able to provide 6,000 trillion rials [$12.31 billion] of the financial resources needed by the economy, this amount is much less compared to the financing handled by the banking system.
The data show that loans from the banking system in the fiscal 2022-23 amounted to 40,448 billion rials [$91.31 million], which shows an increase of 45.3% compared to the previous year.
From the total amount of facilities offered by the banking system, 30,762 billion rials [$77.23 million], equivalent to 84.6%, were allocated to business owners and 15.4% to final consumers, i.e., households.
Banks paid 30,000 billion rials [$61.58 million] in loans in the fiscal 2021-22, which shows a 54% rise compared to the previous year.
This set of data shows that the total amount of financing provided through banks in the last two years was close to 70,500 billion rials [$153.96 million] and the ratio of financing provided through the capital market compared to banks in the fiscal 2022-23 was around 12%.
A comparison of the financing through the capital market with banks clearly shows that the capital market is still far from the desired point and to increase the role of the capital market in production financing, the existing processes must be accelerated, because at the current rate, it will take years for the capital market to find its real role in financing Iran's production and economy.
Challenges Facing Capital Market Financing
Financial experts performed well in the 1390s and successfully developed financial instruments and institutions necessary for financing in the capital market, but this is not enough because only developing institutions and financial instruments cannot increase the role of capital market in the economy.
A review of financing processes through the capital market shows that the process of financing through the capital market faces two basic challenges.
The first challenge is related to the administrative processes of financing and issuing licenses through the stock exchange organization which, according to many private sector businesses, is long and time-consuming. The second challenge pertains to the unfamiliarity of managers and private businesses with capital market financing tools, for which the capital market authorities are to blame.
What Is the Solution?
The solution to the first challenge is to reduce the time of the administrative process of financing and issuing licenses through the capital market.
Currently, many companies are complaining about the long and time-consuming process of financing through the capital market, and expect the stock exchange organization to adopt a more practical and serious solution in this regard. Increasing the speed of issuing permits and approval by this organization can lead to the injection of more financial resources into the production sector.
In addition, according to experts, the main task of the capital market is to facilitate the financing process for large companies whose function in the economy is specifically defined. As a result, the issuance of financing licenses for these companies should be done more easily.
Regarding the second challenge, i.e., the lack of familiarity of economic actors, especially private sector managers, with capital market instruments and institutions, the related authorities should start taking more serious measures.
These authorities are ineffective in introducing capital market financing opportunities to the private sector, and the major part of capital market financing is used by the government.
It is necessary for capital market authorities and institutions to introduce the methods of financing in the capital market to the managers of economic enterprises by holding meetings, events and annual and quarterly conferences. In this regard, even the removal of monopoly for the establishment of new local stock exchanges can be a way forward, because the development of regional stock exchanges can lead to the familiarization of economic enterprises throughout Iran with the functions of the capital market.
It may be necessary to establish local stock exchanges in some provinces independently, so that through the acceptance of new companies, economic enterprises will become more familiar with financing tools in the capital market, and this will help turn the country's economic wheels more rapidly.
