The world is waiting with bated breath as the fate of Iran slowly unfolds. The removal of sanctions on the Islamic Republic could herald a new chapter in the international economic landscape, more particularly to the Islamic financial universe. VINEETA TAN provides an overview on the world’s largest Shariah compliant financial market.

Legal and regulatory
Under the 1983 law of Usury Free Banking, banks in Iran are not allowed to engage in transactions paying or receiving interest, making its entire financial system entirely Shariah compliant. Regulated by the Central Bank of Iran, the rules of the Shia Islamic financial system practiced, however, allows the selling of debt at a discount and in theory may permit banks to accept Riba from non-Muslims. 

Banks may accept deposits from the customers as Gharzol-hassane (benevolent loans) and in turn provide loans on the basis of a profit and loss (PLS) system. 

Business environment
Despite the heavy sanctions imposed on Iran that have isolated it from the majority of the global financial markets, the country has commendable growth with GDP expanding 4.2% last year. International trading does still occur with Iranians making use of private exchange houses and trading companies in other countries to circumvent the restrictions; instances of utilizing forged identities and Hawala (paperless dealing run on trust) transactions to pay and receive money do still occur.

The prospects have begun to look better for Iran as the 5+1 nations consider lifting their sanctions on the Islamic nation, a move which could usher in immense opportunities for the Islamic finance world as Iran readies to join the international community. A number of countries have voiced their keen interest in strengthening, if not build, bilateral ties with the Islamic Republic, including Azerbaijan, Turkey, Indonesia, and Singapore among others. Iran has also committed to joining China’s proposed Asian Infrastructure Investment Bank (said to rival the IMF and World Bank) as a founding member. 

Banking and finance
With 45 institutions in the market (including three government commercial banks, five government specialized banks, 19 private commercial banks as well as five branches of foreign banks), the Iranian banking system is oversaturated. Bank Melli is the largest bank in Iran, and the largest Islamic bank in the world. According to Islamic Banking Intelligence, total assets for the bank reached US$42.54 billion in 2012.

In October 2014, the Iran-Russia Joint Chamber of Commerce confirmed that Tehran and Moscow are in the process of accessing the possibilities of establishing a joint bank as an effort to enhance bilateral trade between Iran and Russia, and as a way to bypass sanctions on Iran’s banking sector.

Source: Central Bank of Iran

Source: Central Bank of Iran

Capital market
The Securities Exchange Organization is looking at introducing new Islamic capital market instruments. At present, Sukuk, particularly Musharakah papers, are a popular mode of financing in Iran. However, the high inflation rate (16.2% as at the 1st April 2015 according to Trading Economics) continues to pose a challenge to the Republic’s financial system.

Outlook
As the world’s third-largest oil and second-largest gas reserves, the prospects of Iran joining the mainstream financial stage are extremely attractive. This is perhaps more for the Islamic finance community considering that it is the world’s largest Shariah compliant financial market, with total banking assets reaching US$482 billion in 2014 (according to the Dubai Center for Islamic Banking and Finance). With the termination of sanctions looking like a real possibility, various countries are reaching out to Iran, with Iran also looking outwards. For example, according to Islamic Republic News Agency, the Iranian government is looking to increase its share in the global Halal food market, from its current share of approximately US$400 million out of a total of US$700 billion of turnover. However, that is not to say that the opening of the Iranian market to world players and its entry into the international arena would be smooth as the country wrestles with high inflation and a largely loss-making banking industry among other geopolitical and economic challenges.