Iran: Teetering on the edge

Iran is open for business, or so the Republic claims but with investors still keeping a distance from the world’s largest Islamic economy due to lingering uncertainties and less-than-sophisticated legal infrastructure, how successful has the once-reclusive nation been at capturing investments? This week’s cover story traces the flow of foreign capital into the Iranian market.

The IFN Editorial Team brings you a stable of reports this week covering first half-yearly global Sukuk performance, the impact of the UAE’s new SME financing rules, the repercussions of increasing cyber threats on Islamic banking digital innovation and a detailed look at Oman’s latest corporate Sukuk while also delivering analyses on Palestine as well as the global Islamic syndicated financing market. Our IFN Correspondent brings you updates from Kazakhstan and our resident columnists Kavilash Chawla and Mohammed Khnifer share their two cents on the recent events in Turkey and the Islamic finance education space respectively. We also have a feature on Shariah compliant syndicated financing by Osman Arslan, CEO of Turkey’s Ziraat Participation Bank

As usual, we hope you find this week’s issue an informative and insightful read. Until next week.

Sovereign Sukuk: Togo makes headway

In what would be its sovereign debut issuance, Togo announced that it is launching a 10-year Sukuk offering with the Islamic Corporation for the Development of the Private Sector (ICD) as the lead arranger for the deal. Over in Southeast Asia, meanwhile, key sovereign issuers Malaysia and Indonesia kept the market busy with their regular issuances. DANIAL IDRAKI brings you the usual updates.

Togo has launched a XOF150 billion (US$250.99 million) 10-year Sukuk offering with a 6.5% profit margin, according to its prospectus, and the subscription period for this facility will run until the 10th August 2016, with a possibility of early closing. The ICD is the lead arranger while lead managers comprise SGI African Stock Exchange (Attijariwafa Bank), BOA Capital Securities (BMCE Bank of Africa), Coris Bourse (Coris Bank International), Ecobank Development Corporation (ETI) and Management Company and intermediation of Togo (Togo SGI). Proceeds from the facility will be used to finance the country’s economic and social development projects.

Malaysia’s government investment issue (GII) Murabahah issuance of RM3.5 billion (US$856.96 million) with a profit rate of 3.74% was oversubscribed by 2.45 times after receiving total bids of 211 with a total amount of RM8.59 billion (US$2.1 billion), according to an announcement on Bank Negara Malaysia’s website.

The government of Indonesia is targeting to raise IDR4 trillion (US$304.8 million) through the sale of its sovereign Sukuk (SPN-S 27012017 and four project-based securities series) on the 26th July 2016 in a bid to finance the Republic’s 2016 State Budget, according to an announcement on the Ministry of Finance’s website.

Upcoming sovereign Sukuk



Expected date


XOF150 billion



US$2 billion



XOF150 billion

July 2016


IRR60 trillion






JOD175 million



PKR79.1 billion











South Africa






Hong Kong

US$500 million to US$1 billion


Ningxia Hui Autonomous Region

US$1.5 billion



XOF150 billion






US$500 million





Shandong Province

CNY30 billion


Sindh Province

US$200 million



KWD5 billion

Sept 2016




Sri Lanka

US$1 billion




Arab Monetary Fund aligning with global Islamic finance bodies to facilitate integration of Shariah finance in Arab world

Islamic finance is top on the agenda of the Arab Monetary Fund (AMF) as an instrument to develop the economies of Arab nations and the institution has aligned with the IFSB to meet this objective. VINEETA TAN reports.

“Providing assistance to the development of the Islamic finance industry and supporting capacity development in the region have always been among our top priorities, and we look forward to pursuing and intensifying this effort to better tackle the needs of [the] Arab region to building up innovative, robust and competitive financial systems at both domestic and regional levels,” said Dr Abdulraman A Al Hamidy, the director general chairman of the AMF board.

The AMF and IFSB have for years collaborated in the area of Islamic finance; however, both the institutions decided to take their cooperation to the next level by formalizing it through a three-year MoU under which they will jointly establish and promote Islamic finance development initiatives in the Arab region. This includes conducting joint awareness programs, hosting joint training programs and expanding Islamic finance e-learning courses and the database as well as expanding the body of Islamic finance research. 

Recognizing Islamic finance as a potential tool to support its development goals, the AMF has been forming strategic alliances with global Islamic finance bodies to accelerate the integration of Shariah finance to boost financial inclusion. In October 2015, the AMF entered into an MoU with International Islamic Liquidity Management Corporation to provide technical support services to develop the industry.

Apart from building Islamic finance capacity in the Arab world, the IFSB is also leveraging this new partnership with the AMF to create a stronger presence in the region. “This MoU provides an excellent platform for the IFSB to engage and build relationships with its members in the Arabic-speaking jurisdictions,” confirmed IFSB Secretary-General Jaseem Ahmed. “It is an opportunity to benefit from both institutions’ expertise, especially for enhancing the outreach to member countries for awareness-building, exchange of information and knowledge-sharing.”

Company Focus: Amana Takaful Life expanding Takaful business in Sri Lanka with IPO offering

Company Focus: Amana Takaful Life expanding Takaful business in Sri Lanka with IPO offering.

In a showcase of the growing importance of Takaful in the Sri Lankan market, Amana Takaful Life (ATLL), a wholly-owned subsidiary of Amana Takaful, recently announced that its IPO of 50 million shares at LKR1.5 (1.03 US cents) each on the Diri Savi Board of the Colombo Stock Exchange — amounting to LKR75 million (US$512,996) — were oversubscribed, as it seeks to expand its footprint in the under-served market. DANIAL IDRAKI takes a look at what is in store for the growth of the life Takaful provider in the South Asian nation.

According to the Insurance Board of Sri Lanka (IBSL)’s Statistical Review 2015, the number of effective policies in force as a percentage of the total population was 13.4% in year 2015, while insurance premium as a percentage of GDP was 1.09%, reflecting a growing need for higher levels of penetration to provide coverage in a population of approximately 20 million. The IBSL’s report stated that insurance penetration is still at a lower level compared with many other economies in the Asian region, and this indicates that there is a significant opportunity for insurers to expand their businesses. 

ATLL commented that its IPO, which represents a 10% stake in the company, provides a growth impetus for the life Takaful provider, which has outperformed the industry for three consecutive years in terms of growth. “We see tremendous opportunity in the growth story of Sri Lanka,” ATLL’s CEO, Reyaz Jeffrey, noted during the announcement of its IPO plans. “The market is relatively untapped and we see increased demand for life insurance, stemming from key economic activity and infrastructure development. As we approach US$4,000 per capita income, there will be key segments that will actively seek life insurance as opposed to the current push strategy,” he explained.

According to ATLL, it has grown at a compound annual growth rate (CAGR) of 31% over the last five years and recorded a gross written premium (GWP) of LKR928 million (US$6.35 million) for the financial year ended the 31st December 2015, a 36.71% growth over the previous year. ATLL was separated from its parent company in 2015 as part of an industry-wide regulatory directive to segregate life and general insurance companies in the country. In its first year of operations as an independent entity, the company recorded a profit after tax of LKR18 million (US$123,119), according to its annual report.

ATLL noted that it plans to grow at a CAGR of 34% over the next five years, supported by several initiatives that include entering into bancassurance arrangements with Amana Bank, in which discussions are currently ongoing. With the Sri Lankan insurance industry as a whole posting a commendable growth rate of 16.12% in total GWP in 2015 — amounting to LKR122.39 billion (US$837.14 million) — ATLL is on a journey to realizing a great potential for growth in a market that is slowly but surely moving in a direction that utilizes Islamic finance principles.


Sukuk sector sees surge as second half looks promising

Since its stellar performance of 2012, Sukuk volumes have struggled against regional and economic headwinds hampering their trajectory. The oil price plummet of 2014-15 strained the GCC and Southeast Asian markets while ongoing financial pressures have distracted attention away from the burgeoning development of this fledgling sector. However, as commodities recover and oil bounces back, 2016 looks considerably more promising. LAUREN MCAUGHTRY takes a bird’s-eye view. 

The markets are approaching a more stable setting, as activity picks up after Ramadan and the post-summer buzz looks positive. The Bloomberg Commodity Index is up 7.62% year-to-date (as of the 25th July) — up from a record low of 72.88 on the 20th January this year — while oil prices have also firmed up this year and in June the US Energy Information Administration upped its crude forecasts to US$43 per barrel in 2016 and US$52 per barrel in 2017. 

On the back of this stability, the Sukuk sector is seeing a minor surge. According to the latest results from Fitch Ratings, Sukuk issuance from key markets rose 11% in the first half of 2016, underlining expectations of a gradual recovery in the market after a disappointing performance the previous year. Total new Sukuk issuance (with maturity of more than 18 months) in the key markets of the GCC, Malaysia, Indonesia, Turkey and Pakistan rose to US$21.74 billion — compared with US$19.54 billion in the first half of 2015. With an even spread over the two quarters (US$11.07 billion in the first quarter and US$10.67 billion in the second quarter), growth also looks to be consistent rather than boosted by big outlying deals. 

In fact, in the first half of the year Sukuk represented 30% of total issuance in these key markets, up from 28% in 2015. “The proportion would have been even higher,” noted Bashar Al Natoor, the global head of Islamic finance at Fitch Ratings, “but for the return of Abu Dhabi and Qatar to the sovereign bond market.” 

Sovereigns in the Gulf have primarily tapped the conventional market this year as a quick way to raise easy funds from international investors, with US$5 billion and US$9 billion from Abu Dhabi and Qatar respectively. However, with several more Gulf states including Kuwait and Saudi Arabia considering a foray into the capital markets this year, the Sukuk sector could benefit from further sovereign interest. “The decision whether to issue bonds or Sukuk, or a mix, depends on factors including the target investor and funding base (international or regional and local), the existence of a Sukuk structure and Islamic finance strategy, and the needs and size of the Islamic finance industry,” said Bashar. 

On a positive note, investor appetite has improved this year: benefiting from the hunt for yield in the light of low rates in mature markets, while emerging markets’ appeal has been renewed by the recent resurgence of commodity prices. With downwards pressure on interest rates from the recent UK decision to leave the EU and the upcoming elections in the US, jittery investors have calmed down and issuance volume should benefit from a more stable environment. 

“We… expect issuance to be relatively quiet in the third quarter due to the combination of the summer and Eid breaks, with a pick-up toward year-end,” said Bashar. “Overall, our expectation is for 2016 Sukuk issuance to at least match 2015 issuance of around US$32 billion.”

UAE eases rules for SME sector — a fine opportunity for Islamic finance?

The Ministry of Human Resources recently issued a decree that exempts SMEs from bank guarantees beginning October this year, in what is considered a move to boost the growth of the industry in the Emirates. How will the new decree, DANIAL IDRAKI asks, present a prime opportunity for Islamic finance to fill the funding gap of the SME sector, which has been underserved by banks in the past?

Minister of Human Resources and Emiratization Saqr Ghobash said recently that the bank guarantees had been in place to safeguard laborers’ rights, but after studying the level of commitment displayed by SMEs, the ministry decided to put in place the decree to exempt the businesses from bank guarantees. “The decision is considered a major step toward reaching a competitive knowledge-based economy that revolves around young Emirati talents. The decree came in line with the ongoing future government strategy which appreciates the empowerment of citizens in the labor market to enhance its productivity,” Saqr noted in a statement.

According to a report by KPMG, SMEs make up 90% of employment in the UAE and 40% of bank lending, as well as contributing 40% to the country’s GDP. It forms the backbone of the country’s economic development, with over 282,000 companies currently operating in the Emirates. The report noted that the SME sector has been relatively underserved by banks and other financial institutions for some time, as it has always been seen as more likely to fail than larger organizations. “Banks are more reluctant, even in good times, to lend to SMEs. Perhaps the biggest issue has been the ability of financial organizations to accurately assess the risk of financing SMEs, [and] one of the key reasons has been the inability of banks to understand who their customers are, and what they want to do,” KPMG commented.

If the SME sector in the UAE has not had much progress in securing funding from banks over the years, how then might the new relaxed ruling by the government provide an opportunity for Islamic finance to flourish in the sector? Given the necessity of the direct link between Islamic finance and real economic activities as well as financial inclusion, funding SMEs meets Shariah requirements as it satisfies the material and social needs of a particular community. With the SME sector now doing away with bank guarantees, a requirement that has stifled the sector’s growth over the years, Islamic financial institutions are presented with an incentive to develop specific products tailored to the needs of the SME community for the growth of the sector.

According to a joint report by the World Bank and the IDB, Islamic finance can play a significant role in closing the financing gap for SMEs by developing an enabling environment for asset-based and equity-based finance, which would allow markets to attract excess liquidity in Islamic financial markets, especially in the Middle East, that are seeking attractive investment opportunities. “Irrespective of how Islamic finance is labeled, based on the core values of promoting economic development through a portfolio of asset-based and equity-based financing solutions, a clear financing gap for SMEs can be tackled and served through Islamic banking and non-banking financial services,” the joint report noted.

The recent decree indicates the strategic importance of the SME sector to the country and after having had a tough time over the past year with tightening liquidity among banks and plunging commodity prices that have shaken much of the GCC region, it is certainly a respite for the sector, and an opportunity for Islamic financial institutions to make further inroads.

Cybersecurity locks down Islamic banking digital innovation

It is the digital era — and banks, including if not especially Islamic banks, stand to lose out should they not adapt and implement effective digitization strategies. In previous IFN coverage on the digital race, we have focused primarily on the economics of digitalization as the main impediment for many Islamic banks; VINEETA TAN this week however highlights another aspect that could be a hurdle for financial institutions to adapt in a period of disruption.

Not moving fast enough
Over the next three years, it is likely that four out of 10 retail banks would be displaced by digital disruption — this is what is projected by technology services provider Cisco which also posited that retail banks are not optimizing their earning potential through digital services. It is estimated that consumer banks have the potential to realize US$405.3 billion over the 2015-17 period, yet in 2015, less than one-third (29%) managed to capture that opportunity; and as a result of not digitizing more fully, a total of US$144 billion globally in opportunities have escaped retail banks.

“With the pressing realities of agile ‘fintech’ disruptors, digital consumer demands and complex regulatory hurdles, the question of how retail banks can compete and capture the revenue opportunity at hand has come to the fore,” commented Mike Weston, the vice-president of Cisco Middle East. “Too many banks are moving slowly or not at all. By waiting to digitize their business, or by delaying new technology initiatives, banks risk not only missing out on the potential value at stake, but are actually at risk for being put out of business altogether.”

Cyber threat
Islamic banks are especially more vulnerable due to economies of scale: generally speaking, Shariah banks are smaller and therefore have greater constraints when it comes to allocating resources to develop their digital offerings. Building mobile applications, streamlining payment systems, enhancing online gateways, and providing virtual tellers and video-based advisors are cost-intensive exercises, and except for a few well-capitalized Islamic banks (especially those with access to the deep pockets of their conventional parent), it is generally a struggle for Shariah banks to develop such digital capabilities.

Cost aside however, there is another lingering issue that these banks face: the threat of cyber attacks. Cyber attacks are grave issues in the financial world and if hackers are able to infiltrate and steal from central banks and mega banks (US$81 million was stolen from Bangladesh’s apex bank in February while confidential information on JPMorgan Chase’s customers were compromised as a result of a hack in 2014), it is no surprise that the financial community is extremely wary about the digital game. After all, virtualized delivery models, asset transfers, wealth management and omnichannel capabilities are all exposed to such attacks which could very well trigger a collapse of the banking system. The US Treasury is understood to have recently concluded a cybersecurity exercise to better safeguard the financial fraternity. 
These fears have translated into the rate of digital adoption by banks (or lack thereof): an overwhelming majority of the 1,014 senior finance and line-of-business executives worldwide surveyed by Cisco attributed cybersecurity risks and threats as a major hindrance to digital innovation in their organizations. The findings are alarming: 60% are reluctant to jump on the digital bandwagon due to the perceived risks while 39% admitted that mission-critical initiatives have been halted due to such concerns.

The Middle East, home to a large concentration of Islamic financial institutions, is more susceptible to such attacks. In 2015, Middle Eastern companies suffered more losses than any other regions as a result of cyber incidents; a 2016 PwC report found 56% losing more than US$500,000 compared with 33% globally, and 13% losing at least three working days, compared with 9% globally. These cyber criminal activities have created a booming market for cyber security or cyber defence in the Middle East, which is expected to grow at a cumulative annual growth rate of 22.5% from 2016-22.

Already multiple cybersecurity start-ups have emerged from this time of uncertainty, and Islamic banks will also need to make their move to assess and adopt the right measure to avoid making cybersecurity concerns a hindrance to digital innovation, on which their survival in the competitive landscape hinges.

Understanding syndicated finance

Syndicated finance is a typical financing provided by a consortium of financiers by sharing the risk of the obligor as the amount of the financing is such that it cannot be taken entirely by any single financier. OSMAN ARSLAN writes.

For conventional banks, this is a straightforward structure governed by a single financing agreement whereas the Islamic type of the syndicated structure becomes more complex with the inclusion of a commodity trade transaction. 

The structure also known as the Tawarruq arrangement is simply based on the spot purchase of commodities by the investment agent on behalf of the financiers and the deferred sale of such commodities to the purchaser, whereas the purchaser would immediately turn the acquired commodities through an on-sale into cash. 

The benefit of the commodity Murabahah is that it fixes the return to the investors without taking any inventory risk in the subject commodities. This very structure, however, has been subject to a lot of controversy for years now as it is not a genuine economic transaction since the ultimate aim of the obligor is not to gain possession of the commodities but rather to receive cash derived from it. 

Despite the fact that syndicated commodity Murabahah are widely applied financing tools among the Islamic banks, we see that Shariah scholars are not unanimously contented with its extensive application in the syndicated market. 

The lack of alternative underlying assets in sufficient amounts caused precious metals traded in liquid markets to become the adequate commodity in the syndicated Murabahah finance market for years. However, we are also witnessing the emergence of alternative structures such as using Sukuk certificates listed in exchange markets instead of commodities. Contrary to the metal trade-based commodity Murabahah, this seems to be a genuine trade transaction where the bank has the option to either hold the Sukuk certificates in its portfolio with the anticipation of a capital gain and benefit from the interim cash flows or implement an on-sale if there is an immediate need for cash. 

The introduction of Sukuk certificates, apart from its expansion and ease of execution, however is again subject to further scrutiny from scholars. Furthermore, the purchase and sale of Sukuk certificates in a syndicated finance facility also depend on the availability of Sukuk certificates which are subject to the availability of adequate assets to serve as the underlying pool for Sukuk certificates being purchased and sold in syndicated Murabahah facilities.

Having conventional banks as participants in syndicated Murabahah facilities also stipulates the existence of a fixed return. Unfortunately, demand and participation from the conventional side would severely shrink if Islamic banks were to use a Wakalah-based syndicated finance with an ‘expected profit’ element envisaged for the participants. This, however, might be mitigated through additional steps such as the Wakeel’s commitment not to place funds below a certain threshold rate. Wakalah-based financing seems to have common ground between fully-fledged Islamic banks on a bilateral basis where the Muwakeel is fine with the ‘expected profit’ and is sure that all investments made by the Wakeel are Shariah compliant. 

Nevertheless, as the study for market acceptable alternative structures continues, the commodity Murabahah structure still appears to be the main structure enabling Islamic banks to tap Islamic syndicated markets to facilitate their cash financing needs. Islamic banks have been demonstrating higher growth than their conventional peers for years both in the GCC and elsewhere in the world. For Islamic banks to meet the continuously increasing demand for Shariah compliant products and services, the mere reliance on equity and funds collected is definitely not sufficient to fuel further growth in the Islamic finance industry. That is why syndicated finance and Sukuk issuance will remain vital sources for Islamic banks as part of the expansion of their investor base and globalization strategies beyond their local markets.

Amid discussions on the Tawarruq arrangement used in the syndicated finance market, the requirement for an acceptable and decent economic transaction to take place might force the end of the product life of the Tawarruq arrangement for Islamic banks if the industry can come up with a globally accepted and applicable Shariah compliant trading alternative to facilitate the ongoing growth in the syndicated finance market. 

Osman Arslan is CEO of Ziraat Participation Bank. He can be contacted at reyhan.imac@ziraatkatilim.com.tr.

Iran’s inward investment environment: Will a watched pot never boil?


A year has passed since the Iran nuclear deal and the lifting of international sanctions — but where is the flood of inward investment that the economy expected to see? Rumors have emerged of dissatisfaction within Iran at the slow progress of economic change, while foreign investors remain wary of the market and uncertainty over US secondary sanctions continues to inhibit activity. LAUREN MCAUGHTRY takes a closer look at what is really happening in the world’s largest Islamic economy. 

Iranian concerns
The Joint Comprehensive Plan of Action (JCPOA), an international agreement on the nuclear program of Iran, was agreed in Vienna on the 14th July 2015 and EU and primary US sanctions were lifted the following January. After an initial surge of excitement however, the optimism began to slow. US banks and citizens are still restricted from engaging with Iran, and the country remains unable to process international financial transactions or repatriate assets from overseas accounts. Uncertainty is rife and dissatisfaction appears to be spreading within the country — in April, US Secretary of State John Kerry met with Iranian Foreign Minister Javad Zarif to discuss concerns over the implementation of the JCPOA, after Iran voiced frustration at the slow pace of the financial sanctions relief promised by the deal. Iran’s central bank governor, Valiollah Seif, has already warned that the agreement could be at risk if the US doesn’t act to facilitate Iran’s reintegration into the global markets. 

Slow progress
However, observers note that a transformation of this magnitude will always take time. “Upon the lifting of sanctions, the sentiment in Iran arguably was one of over-excitement, with expectations of immediate benefits,” explained Clemente Capello, the founder and chief investment officer of UK-based asset management firm Sturgeon Capital. “The reality is, these benefits take a while to play out, and as such expectations are adjusting.”

“What the European banks are looking for is clear guidance from the US as to what they can and can’t do,” agreed Kiyan Zandiyeh, the portfolio manager for Sturgeon Capital’s Iran Fund. “The Iranians see this as a stumbling block to getting benefit from the lifting of sanctions and they are exerting a lot of pressure to change the situation.” However, he warns that: “There still is a level of mistrust between the Iranians and their counterparts to the JCPOA, and vice-versa, with certain factions on both sides having an interest in the deal not being fully implemented.”

This divergence between expectation and reality has been reflected in the recent volatility of the market. “Between January (when sanctions were lifted) and April, the market rallied just above 30%,” noted Kiyan. “However since then till the end of June, it fell 10%. So from initial high hopes, we saw a dramatic lowering of expectations.” 

Positive steps
Recent months have brought good news, however — and the market is looking optimistic. Foreign direct investment into Iran rose to US$4.5 billion in the first quarter of this year — the highest growth in over a decade, according to fDi Intelligence. 

Although the volumes do not yet meet the stated government ambitions of US$30-50 billion in foreign capital per year, progress has been positive. KPMG recently released a report that found 12 sectors for inward investment worth an estimated US$250 billion, while inward FDI projects jumped from just three in 2013 to nine in 2015. 

Siemens in March signed a preliminary rail deal for US$2.3 billion while Airbus and Boeing have reportedly received orders for US$27 billion and US$17.6 billion respectively; and talks this month with Japan’s Mitsui Chemicals and French oil giant Total are expected to bring in a further US$60 billion in foreign investment. 

On the banking side, a report from the Financial Times claims that the financial services sector has also seen inward investment of over US$60 billion. “There are current liquidity issues but once these are resolved, banks will be the big winners. The Iranian economy is bank-based and when trade finance and LCs return, you will find the better banks will have a very high return on equity and will benefit from that growth story,” pointed out Payam Malayeri, the head of asset management at Griffon Capital, a Cayman Islands-registered asset management and private equity group and one of the few investment firms fully focused on the Iranian market. 

A challenging market
All this sounds promising — so what’s the bad news? Most significantly, practitioners warn that Iran’s financial, legal and regulatory framework is simply not yet advanced enough to accommodate the influx. “The barriers to entry are notable — foreigners need handholding and guidance,” explained Payam. “The integration of Iran back into the global economy will take time. Currently, there is a rather [large] gap between Western regulatory standards and regulations in Iran. SWIFT is on, but correspondent banking relationships are a stumbling block today. There are a lot of challenges and most foreigners who want to work with or invest in Iran will need the help and guidance of local experts.”

A question of perception
While there are very real obstacles to development, much of the white noise in the market appears to be a question of perception. “There are two types of challenges — real and perceived,” commented Capello. “From an infrastructure standpoint the market is well developed. We have more than a decade of experience in frontier markets and Iran is the most developmentally sound, liquid, diverse market that we have dealt with, so concerns around that are misguided. The main concern for us is that western and international banks are still not keen to transact Iranian business because they are afraid of sanctions. Their compliance departments have not been updated and their internal regulations prevent them from having anything to do with Iran. That has been the biggest challenge for everybody. The most frustrating point is that it is not a rational conversation, but a dogmatic one.” 

Moving forward
So how do you overcome these issues? Reputation is important, as is working with a local partner. One of the first things that Sturgeon Capital did in the asset management space was to set up an institutional grade, very transparent and scalable platform for governance and industry best standards. “We spend a lot of time on sanctions compliance and what that means in terms of how you invest,” noted Payam. 

“It’s a very hard market for those that don’t have the relationships to penetrate,” agreed Abradat Kamalpour, a finance partner and head of the newly-created Iran desk at Ashurst. “However, those that have the relationships and the language and the cultural understanding are doing very well. We are already deeply involved in a number of transactions.”

As impetus builds, there is increasing pressure on the US to clarify the situation and remove uncertainty. “Right now the restrictions are just a self-inflicted disadvantage by the US,” said Capello. “It’s not getting anywhere in terms of its stated political objectives, which are to create better understanding between the west and Iran. The sanctions are really just making life difficult for banks.” 

However, progress is gradually taking place. “There is a lot of momentum building up,” noted Abradat. “The expectation that it would take off overnight after sanctions were lifted was always unrealistic — these things take time. Any investor that wants to get in needs to go and understand the market first, meet people, understand the legal framework. No one is going to put half a billion dollars in tomorrow. But the due diligence trips and the compliance investigations are happening now.”

A land of opportunity
For those early movers brave enough to dip a toe in the waters, the rewards look to be worth the risk. Valuations are cheap, with average PE ratios standing around 7, according to Griffon Capital. “Average dividends for the broader market are around 11-12% — around 30-50% cheaper than emerging markets and frontier markets,” pointed out Payam. “We think this discount will close in the years ahead so first movers will have an advantage.”

The returns are already validating entry. Between its launch on the 4th April 2016 to the 28th June, Griffon Capital’s initial euro-denominated share series gained 3.6% despite a market correction of 8.2% in the TEDPIX (the main index of the Tehran Stock Exchange) and has thus far materially outperformed the industry benchmark. “We expect our AUM [assets under management] to be between EUR50-60 million (US$54.86-65.83 million) by December 2016 year-end,” noted Payam. Sturgeon has seen a similar trajectory. “Performance has been positive — from February to June, we are up 13% in euro terms while the market is up about 8%,” Capello told IFN. 

The improving macroeconomic environment should only help matters — last month the country’s inflation rate dropped to single digits (9.7%) for the first time in 25 years, which means riskier assets like equity will benefit. The Tehran Stock Exchange in July announced its approval by the World Federation of Exchanges, which should bring another boost. But it’s not just the equity markets that are tempting foreign investors. “At the moment, you can also invest in government treasury bills, which are giving yields north of 20% — very attractive in a world where most sovereign bonds are bringing in zero,” said Payam. “It’s a great choice for yield-hungry investors and it also brings diversification to a portfolio.”

The key benefit of Iran is its already developed and diversified economy — only around 10-20% of its GDP comes from hydrocarbons, compared with around 45% for Saudi Arabia, for example. “Iran is not just an oil and gas story. There are deals being done on solar, rail, auto manufacturing, technology, mining and minerals, pharmaceutical, technology and aviation,” noted Abradat. “It’s just a matter of time before the big guys can start playing ball with confidence.”

Investor interest
So who has been brave enough to take the first plunge? Unsurprisingly, the first movers have been high-net-worth investors and family offices. “They are the more intrepid and nimble investors with less red tape and are faster to get comfortable,” commented Payam. However, the investor profile is already changing. “We do have institutional investors in our fund already and by the end of the year they will be the majority,” he noted. “They have taken more time to come online because their due diligence takes longer, but they are getting there slowly.”

And while the standard intelligence says that US citizens are banned from engaging in Iran, IFN has learned that the opportunities may nevertheless be too tempting for some investors to pass up. “We have seen dramatic interest from high-net-worth investors and family offices — including Americans,” revealed Capello. “Americans are not allowed to decide whether to invest in Iran, but there are ways around that — there are exceptions for certain types of investors. Without going into detail, we have found a lot of interest from investors that were a combination of two groups: [those with] 1) a certain amount of sophistication and 2) limited bureaucracy in their organization.”

Islamic opportunity
The elephant in the room is of course the impact that all this interest and activity could have on the Islamic finance industry. There have been concerns that while Iran is ostensibly the world’s biggest Islamic economy, its systems are so different that this may not have a notable impact on industry development. However, Abradat believes that it is instead an issue of changing perceptions. “Everything in Iran’s financial market must be Shariah compliant. Shariah compliance is done based on the models developed in Iran and signed off by the relevant Shariah scholars in Iran. Other players in the market will need to adapt to understand their way of transacting,” he explained. “You have the GCC model and the Malaysian model. Now there is another model in the market, and Iran has the largest amount of Islamic banking assets in the world so it will behoove the industry to take notice. If people want to access the Iranian market, they will need to understand how it works.” 

Investors are already aware of the specific requirements of the Iranian economy, and while not all funds investing into Iran define themselves as Shariah compliant to their investors, they believe that they offer a genuinely Islamic opportunity. “All investments in Iran are Shariah compliant. All the fixed income is Islamic, so they all tick the Islamic boxes. It is an Islamic country so there are no non-Islamic sectors,” Payam explained to IFN. “The majority of investors have been conventional investors looking for returns. However, we have also talked to investors who focus on the Islamic side, and want exposure to Iran because it complies with their requirements.” Even those asset managers who have not yet explored Shariah compliant options are, through the opportunities in Iran, learning more about the potential within the Islamic market. “Our mandate is more generic,” commented Capello. “We are at a stage where we would be interested to learn more about Islamic investors but we are still in the early stages.”

Looking ahead
So where next? Instead of being a watched pot that never boils, Iran appears to be transforming before our very eyes into a vibrant and attractive investment destination — and key players are starting to sit up and take notice. “The bigger financial institutions are about six months to a year away from entering the market and a lot of them are just getting ready now,” said Abradat. “There is a lot of interest in the Iranian market from Asia — especially Southeast Asia as well as Japanese and Korean institutions — and these players are going in aggressively and signing deals. There are also a lot of European banks already doing business there, and since launching our Iran desk we’ve had a few global banks approach us to make plans. A few GCC entities are very interested but they are in the early stages.” 

And of course, all this interest will only have a positive impact on the Shariah compliant financial framework. “These banks will have to develop Islamic finance capabilities to get involved in Iran, and that will act as a catalyst for the global industry,” Abradat confirmed. “The institutions that are getting in now and building the relationships and taking measured and calculated steps to move in will be in a very good position. The global Islamic finance industry could do with a bit more energy. Ever since the financial crisis, innovation has slowed and it needs a bit of impetus. Once Iran opens up, it will act as a catalyst for the market, and it will be a vital cog in the global wheel.”

At the end of the day, however, the appeal will be in the performance — and institutions will follow where investors forge a trail. “In a world where returns are going down and investors are hungry for yield, Iran looks very attractive,” concluded Payam. “It is a classic case of risk versus rewards — but the rewards are underestimated and the risk is overstated. With time, that will reverse.”

The blunt end

By Mohammed Khnifer, an Islamic debt capital markets banker at a supranational banking institution as well as an AAOIFI-certified Shariah advisor and auditor.

Europe’s top business schools are sending a message: “MBA holders may no longer be able to push the envelope of financial innovation.” The rapidly changing spectrum of investment and wholesale banking requires its match of Master of Science (MSc) specialized finance degrees. 

The good old days when a human resources (HR) manager is forced to choose a graduate specialized in economics to be placed in the corporate finance division (which is not the graduate’s exact discipline) should have gone by now. But apparently, they are not (at least in some jurisdictions). 

What the old generation of HR managers, who might not have a proper banking academic background, should come to realize is that the financial industry is in the process of being reshaped from top to bottom by graduates who hold the so-called specialized finance degrees (SFDs). 

As MBA holders were the hot trend for the past decade, MSc holders with a specialized finance background should be the winning bet in the age of financial innovation as their technical expertise is poised to take us to the next level. Specialized MSc degrees in capital markets, corporate finance, financial engineering, Islamic investment banking, financial risk management and even international shipping should change fundamentally the way the recruiting process is being implemented by these universal banks. An MSc degree provides a professional boost when it is arguably most needed, helping students to get ahead right at the start of their careers. In contrast, MBAs often stipulate several years of work experience as a pre-entry requirement.

These are the next generation of graduates whom you should pay a premium in order to recruit them. Unfortunately, many of them are eliminated by a computer-based software while they are in the first stage of the recruitment process. They do not even reach the scrutiny process by the HR staff. With the evolution of progressive specialized MSc degrees, the stakeholders of the investment banks should adapt their recruiting process to the fact that financial education will ultimately raise standards as the pool of talent deepens. 

It is usually the case that these HR staff do not have an academic qualification in banking or finance which makes the process of grasping what Islamic finance is all about more difficult. 

While the need for highly trained human capital in the Islamic financial services industry is well acknowledged, the root of the problem seems to stem primarily from the employment selection criteria of HR who apparently are not instructed to handpick Islamic finance graduates who hold specialized MScs.

With that being said, there are signs that HR in Wall Street are changing their methods, albeit slowly. Of US-based professionals in possession of an MSc degree in finance on eFinancialCareer.com’s resume database, just 4.8% are working in mergers and acquisitions, while 7% work in a markets-related role. Let us see how many years we will take to change the recruitment methodology of HR.



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