Considering the role of finance, which is moving money through time horizons from present to the future by lending and from future to the present by borrowing, the Iranian economy has benefited from the financial market and indeed utilized it to the full capacity.
Concentrating on capital capacity in Iran should be a priority. Efficient capital management would increase market efficiency and may ultimately lead to reduced systematic risks.
Foreign investment inflows will have many great advantages for the Iranian economy as indicated in many debates and findings. However, eliminating obstacles for such inflows has its own timeline and challenges, in which the market has seen considerable evolvements throughout the process, according to Financial Tribune.
Utilizing the capabilities of debt financing based on domestic investments has started recently in the Iranian capital market and could create significant values on liquidity enhancements and proper debt management as one of the aspects of Resistance Economy strategies. Encouraging the issuance of innovative debt instruments through regulatory support is a major step forward taken by the Securities and Exchange Organization of Iran.
Few Cases in Point
Mortgage-backed securities would allow a mortgage lender to get rid of bad debts on their balance sheet and take back the ability to lend more mortgages and increase their existing returns.
The largest mortgage lender in Iran’s market is Bank Maskan and it was the very first issuer of this instrument in the 2016. The lender has efficiently utilized domestic reserves to its benefits.
The first issued tranche was worth around $90 million, as it has officially announced to issue another $200 million in the current year.
Large organizations can convert their accounts receivables into liquid cash by securitizing their receivables and using debt-financing capabilities in the domestic market. Individual receivables would be combined into a sellable new security as an investment instrument.
This instrument in Iran is in the form of a sukuk called “Purchase of Receivables” with SPV formation. Therefore, such debt would no longer exist on the company’s balance sheet since it is on the SPV and rather than waiting for customers paying their bill, liquidity flows will be accelerated.
Public listed companies are always facing major challenge in the amount and deadline of their payments for distributed dividends. In order to keep the liquidity measures high, the later the dividends pay out, the better for the company but, on the other hand, stockowners would like to receive their returns.
An innovative approach made it possible for collateralizing such dividends as underlying asset for debt financing instruments that could create an operative distributed dividend security that assist both sides to achieve their objectives.
Tehran Stock Exchange in the first week of September 2017 paid dividends worth approximately $320 million to more than 2,500 investors. In 2016 alone, 11% of the total market value worth around $7 billion were distributed as dividend payout, which could be considered a remarkable domestic resource for further financing large organizations as an underlying asset.
Another innovative debt instrument that can create substantial value for the market is profit participation certificates that hopefully would be taken under consideration to enrich the Iranian debt financing market.
Profit participation certificates are debt obligations with profits of company shareholders as an underlying asset. The instrument pays a fixed rate of interest conditioned with further profits generated from the company and would be available for distribution in maturity. Such debt-financing instrument could be endowed with many attributes and features to satisfy more market players and public listed company owners.
The company can keep its liquidity under management and investors can share returns according to their risk measures. Government linked companies, profit-making companies with bad debts, illiquid companies with great assets or very large enterprises would be able to gain a lot more by keeping their profits and boost their cash flow through this innovative debt instrument.
Ultimately, to complete the full set of debt financing instruments, we look forward to the launch of one of the most lucrative debt financing mechanisms as a regulated trading market of repo agreements in Iran’s capital market. This would direct the boost for cash flow management, bank reserves management and money supply efficiencies.
Dealers finance their ownership of a security by borrowing money from market on an overnight basis or a short-term tenor and posting the security as collateral in a regulated market.
As mentioned earlier in this note, utilizing the full capacity of debt-financing attributes supported by domestic reserves could lead to great achievements and it perfectly relates to Resistance Economy precepts.
Iran’s financial market has already initiated a progressive trend and has taken remarkable steps for completing its mission to provide an infrastructural platform for both domestic and international participants.