Financial & investment
In December 2005, stock exchange law approved by Majlis (Islamic Republic of Iran Parliament) and it was the beginning of the development of Investment and Financing System in Iran, which establishment of new financial institutions has been one of the most important results of the stock exchange law in Iran. Iran’s capital market has been developed in recent years increasingly, this development has been remarkable by quantity (market size, increasing capital markets role in financing Companies) and by quality development (planning and running new financial institutions). Some of the most important financial institutions in the capital market of Iran include:
Investment bank, brokerage firms, financial data processing companies, investment advisors, asset management, funds, holding and investments companies. These companies obtain their license from Stock Exchange and work under supervision of this organization.
Iran leasing market growth over time and there are many opportunities for its development. Although leasing industry saturated in some fields such as automotive leasing rapidly, it does not enter in other areas such as big ticket leasing and state leasing. leasing companies must obtain a license from the Central Bank
According to Article 1, Section 18 of the Securities Market Act, the investment bank: means a company which is active as an intermediate between the issuer of securities and public investors and can involve in dealing, brokerage, market making, investment advisory, asset management, subscription, underwriting, and similar activities after obtaining permission from the Security Exchange Organization. Minimum of required capital is 2,000 bn IRR to establish investment bank in the form of private joint- stock company. Now there are 9 active investment banks in Iran capital market.
Table 16-1 Investment bank status in licensing
Nowadays, investment banks manage 36 funds, which the majority of funds are fixed income.
Table 16-2 Funds net asset value under management of Investment banks
Table 16-3 Income statement of total investment banks
Table 16-4 Average profitability ratios of investment banks (%)
According to Article 1, section 17 of the Securities Market Act, Asset Manager means a legal entity, which purchases and sells securities done for the investors with the gaining profit based on a particular contract and according to article 1 section 4 of establishment and activities’ instructions, Asset Management means deciding on purchasing, selling or keeping securities in certain investor’s name by Asset Manager in the framework of a specific contract for acquiring profit for the investor and specific fund means the sum of Asset Management (Including cash, securities and receivables), which belongs to a specific customer. According to SEO board approval, minimum capital required has been set 20,000 mn IRR. According to the Asset Management companies’ statute, also these companies can perform investment advisory, offering and listing, and financial data processing, by obtaining the SEO license. The numbers of active asset manager are 10 companies in Iran capital market; all of them are private.
Despite Asset Management companies, other active financial institutions in Iran capital market can obtain the asset management license from SEO. 85 licenses of asset management have been granted to various financial institutions in the year ended in March 2016. The following table shows the operating license of asset management in separation of the financial institutions:
Table 16-5 Operating license of Asset Management in
separation of the financial institutions
Figure 16-1 Composition of Asset Management licensees
Only 11 funds of total Financial Institutions operating in Iran are under management of Asset Management companies.
Table 16-6 Asset Management companies’ profitability ratios (%)
Brokerage activity requires obtaining the establishment permission and license of the SEO and membership in SEBA (Securities and Exchange Brokers Association). Brokerage firms provide services to investors by establishing a branch, office, agency or trade hall in Tehran and other cities. Services may be carried such as client orders on the exchange and OTC markets, future and securities, and issuing and canceling of funds units. As well, the brokerage firms provide online and internet trading. According to SEBA (Securities and Exchange Brokers Association) report, there are 107 active brokerages in Iran.
Table 16-7 Status of brokerage firms’ licenses
Source: Securities and Exchange Brokers Association
Brokerage is attorney and authorized representative for buying and selling and no one can buy or sell security without their intermediaries’ in the stock exchange and gain fees.
Table 16-8 Approval fees of brokerage firms in each exchange market
The total transactions value will determine the brokerage firms’ income in Iran capital market.
Table 16-9 Trading value in Iran capital markets (mn USD)
Financial Ratios show that the brokerage industry profit has been declining.
Table 16-10 Brokerage industry’s profitability ratios
Investment fund license issued by the SEO and their activity is carried out under their supervision.
Figure 16-2 Composition of Investment Fund in the year ended in March 2017
Active Investment Funds in capital market generally divided into three categories, which stock fund reached 58% of total funds.
Table 16-11 Information related to Investment Fund
Table 16-12 Composition of fund assets and return rate in the year ended in March 2017
According to the establishment statute, the minimum capital required is equal to or over than 3 bn IRR. Investment advisory companies can act in the Offering and Listing consulting, asset and fund management by getting the license from the Security Exchange Organization beside their main activity. Already 13 companies work as Investment advisory in Iran capital market.
Although, 173 fund have received activity license, but only 11 fund managed by investment advisory companies by the end of 2016.
Table 16-13 Investment Advisory companies licenses
Investigating the investment advisor’s income composition in the year ended in 2016 indicates that they have gained 28% of their income in line with their main activities; undeniably, 57% of company’s income concluded providing services to its related entities.
Figure 16-3 Investment Advisory company’s incomes share from the primary
and subsidiary activity fields
Net profit margin, return of assets and return of equity ratios has been remarkably reduced in the year ended in March 2016 in comparison to the previous year.
Table 16-14 Investment Advisory companies’ profitability ratios (%)
Financial data processing
Financial Data Processing Company is a legal entity, registered by the SEO as a financial institution referred to section 21, Article 1 of the Securities Market Law and processes financial data under supervision of this organization. The minimum capital required is equal to or over than 3 bn IRR. These companies’ main activities are collecting and processing data in order to decision- making in investments. Every year, companies provide a lot of financial information that need to be processed in many cases. These processes include the calculation of financial ratios, industry averages; Beta and so on. Financial data processing companies are responsible for processing financial information and investors use these processed information in their analysis. Provide processed information to investors in order to speed the decision- making. Availability of processed data is very important for analysts and investors. and helps to expertize the capital markets. Currently, 5 financial information processing companies are active in Iran capital market.
The holding company minimum capital is determined about 50 in the private joint stock and about 100 bn IRR in public joint stock company according to the Securities and Exchange Board of Directors approval in May, 2007.
According to section 21, Article 1 the Securities Market Act, Investment Company is a financial institution. Minimum capital of investment companies has been determined about 100 bn IRR according to Securities and Exchange Directors Board approval in 2013.
Investment Company in capital market
Investment group has 2.85% share of total market value over 3,334 mn USD. P/E ratio is 8.27.
Figure 16-4 Trends of investment group index
Founding and registering Exchange Companies is allowed only with permission of the Central Bank. The activity permit is given and issued for the first time with a validity period of 2 years and by the Central Bank approval, it can be extended up to 5 years for the next time.
The minimum capital required is 40 bn IRR for exchange company establishment in Tehran and in the large cities, and amounted to 20 bn IRR in other cities.
Exchange operations include buying and selling of cash currency,
Operations related to the foreign payment order through credit institutions, and providing cross- border banking services through brokers in the framework of the Laws & Regulations of foreign exchange and buying and selling of Gold coins minted by the Central Bank.
The total exchange bureau licensed is about 420 including 397 partnerships exchange, 23 related to the banks and credit institutions by the Central Bank of Iran. 9 exchange Partnerships are active in free zones
Table 16-15 Active Exchange Companies in Iran
Engaged in leasing operations are permitted only by legal entities. Leasing establishment and registration is only with the Central Bank permission. In addition, subsidiary credit institutions or credit institutions are just allowed to establish or acquire in just one leasing company. aving Iranian nationality is one of the leasing companies’ conditions of establishment. The minimum capital required for establishment and operation of leasing companies has been set to 100 bn IRR. Central Bank of the Islamic Republic of Iran established leasing statute that has been limited the activities of leasing subjects to durable consumer goods. Whereas the major forms of leasing services in global markets includes financial leasing (capital) and operating leasing.
The Association of Iranian Leasing Companies (AILC) and the Community of Iranian Leasing Companies were the two main related agencies in the Iranian leasing industry. They merged in
April 2014 to establish a unique authority called the Iranian Leasing Society, which monitors the total leasing activities under the license of CBI. Its main purpose is to integrate all the practitioners of the Iranian leasing industry, to improve the business, to inspire talented members and to use their capacity in the industry, to facilitate the legal environment in order to progress, to review the infrastructure and to expand the members’ positions.
During 2016, the total number of leasing companies with official licenses from the Central Bank of Islamic Republic Iran (CBI) was totaled 36 companies. Among the 36 noted leasing companies, shares of 10 companies are traded on the Tehran Stock Exchange (TSE) and Iran Fara- Bourse (IFB). The following table illustrates the composition of Iranian leasing companies by ownership, producer, independent, captive and bank leasing. Bank leasing, producer and captive leasing companies account for 89% of leasing companies.
Figure 16-5 Leasing Companies by ownership type
Source: CBI, INLA
Nominal interest rate of leasing contracts determined by the central bank. Now, leasing company’s interest rate would not exceed 21%.
It is estimated that the volume of new leasing contracts in 2015 grew by 17% compared to 2014 (by considering exchange rate fluctuations).
Figure 16-6 Leasing contract trends
The leasing penetration rate presented is a measurement showing the level of leasing development in the country and it is calculated based on two criteria – GDP based and investment based.
Table 16-16 Leasing penetration rate
The volume of new contracts in 2015 is presented by sector. The automobile industry accounts for 90%, with the highest share among all the sectors.
Table 16-17 New business volume by sector 2015
Figure 16-7 New business volume by sector 2015
New leasing contracts in 2015 by asset type are highlighted in the following Table 16-18 Light commercial vehicles account for the highest number of contracts. Passenger/lorry vehicles and heavy vehicles were ranked second with a 9.30% share. According to published statistics, the absence of leasing in oil and gas equipment and also less participation in other infrastructure areas such as the construction sector are noticeable.
Table 16-18 New business volume by asset type 2015
Table 16-19 Profitability ratios of leasing industry (%)
Leasing industry in capital market
7 leasing companies being traded on the capital market in Iran. The average P/E ratio of active leasing companies is 6.34. The market value is almost 497 mn USD that specified 0.42% of the total market value.
Figure16-8 Leasing industry trend index
Islamic Securities (Sukuk)
Sukuk are among the most recent products that are created using structural application in the Islamic financial markets. In order to design flexible securities that could respond to different financing needs of economic agencies in the capital market on one hand and to comply with Islamic principles and standards on the other hand, Muslim scholars started thinking about designing Islamic financial instruments. To this aim, expansive studies were conducted into Sharia- compliant contracts and their ability to be used as instruments so that to design financial instruments that would be able to replace bonds and preferred stocks, which are mainly based on Riba and loans with interests.
Iran capital market experienced issuance of Sukuk for the first time in March 2011 for financing Mahan Airplanes Corporation with issuance nominal value of 28 mn USD. Form that time till now, Iran capital market has welcomed other Ijarah Sukuk
issuances for financing companies in different sectors including banking sector, Airplane Corporation, project management industry and so on. While Iran financial system since 1994 was using Musharakah Sukuk for financing different companies whether state owned or private owned, it was banking sector that placed infrastructures for issuance and trading of Sukuk.
Since the issuance of Islamic financial instruments, 14.5 bn USD Islamic financial securities published in Iran and held to maturity equal to 9.8 bn USD in 2017.
2.2 bn USD was related to issuance of Islamic treasury that have been used to government finance while issuance of Islamic financial instruments increased to 100% in the year ended in March 2017 rather than its previous year.
In Iran Capital Market issuance of Musharakah Sukuk, Ijarah,
Murabaha, Salam, Mortgage- backed, Islamic treasury, and Istisna’a are implemented.
Table 16-20 Dealing issued Sukuk in 2017
Table 16-21 Issued Musharakah
S W O T
– Emphasis on the stock exchange market development
– Restrictions and barriers elimination for foreign investment
– Establishing stock committee risk
– Supportive laws & permanent control
– Improve transparency and public awareness
– Some Insufficiency in implementation of licensing & attracting foreign investment
– Fluctuation in rate of inflation
– Banking system dependency to the financial system
– Immovable property ownership prohibition for foreign investors
– Lack of Appropriate capital circulation
– Legal and administrative restrictions in listing
– Lack of financial instruments diversification
– Sukuk (Islamic bond) deals development
– Privatization through IPO
– Creating sufficient incentives for more companies in order to enter the stock exchange
– Lack of planning on the investment culture development in Iran
– Unimportant role of capital market to attract liquidity
– Economic dependence on oil
– Lack of coordination between monetary and fiscal policy
– The imbalanced legal and economic support between the public and private sectors