Improving Public Debt Management
In the OIC Member Countries
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strict national regulations, basically all assets in Iran are considered to be Islamic finance
assets. Iran represents 37.3% of the global Islamic banking assets (IFSB 2016). While interest
payments are forbidden in Iran’s unique form of sharia compliant banking system (Vizcaino
2015), the usage of profit and loss sharing within the framework of financial intermediation is
allowed (Ahmad 1994). As the CBI cannot access the traditional instrument of setting the bank
rate, it sets maximum and minimum profit sharing ratios, which may be adjusted from time to
time to steer credit expansion (Ahmad 1994). The CBI also determines socalled ‘provisional
rates’ which are minimum and maximum expected rates of return from various facilities to the
banks and maximum rates of commission the banks are allowed to charge for investment
accounts (Ahmad 1994). The deposit rates are updated regularly by the Money and Credit
Council (MCC) and vary regarding maturity. The banks' provisional deposit rate ceiling is set at
20%, proportionate to the maturity of deposits (CBI 2015a). The minimum expected lending
rates for transaction contracts are set specifically for each economic sector, e.g. for
manufacturing and mining, construction and housing, agriculture, trade and services and
exports (CBI 2015b). The expected maximum profit rate of Profit/LossSharing (PLS)
contracts concluded between banks and credit institutions and their clients is set at 24%. The
maximum lending rate on loans and facilities extended by banks and credit institutions for
nonPLS contracts currently equals 21% (CBI 2015a).
In contrast to the private banking system, transactions among the government and other
elements of the public sector including the CBI and nationalized commercial banks are legally
based on a fixed rate of return. This may be problematic, as the fact that the government can
take loans under a conventional fixed rate within an interestfree banking system implies that
bank charges would be indexed to this rate instead of representing profits of borrowing
entities (Iqbal and Mirakhor 1987).
In 2015 Iran has started to expand its Islamic bond market. There are various types of
instruments such as murabahah, musharakah, ijarah, and different types of sukuk with various
maturities. In September 2015, Islamic Treasury Bills (ITBs) were introduced in Iran (Kalhor
2016). These ITBs are zero coupon bonds sold at a discount to their face values. The acquired
profit is nontaxable and they are nontransferable (Goodarzi and Kalhor 2016). ITBs have a
one year maturity and are traded predominantly at the Iran Fara Bourse, an overthecountermarket operating in capital markets for listed and unlisted securities (Iran Fara Bourse 2016).
The effective rate of return of ITBs is expected to be higher than the official bank deposit rate
that is set by the central bank (Bozorgmehr and Arnold 2015). Sovereign sukuk , ijarah and
Sovereign Settlement Bills were issued for the first time with the beginning of the Iranian fiscal
year in March 2016 (Kalhor 2016).
The Iranian fiscal year 2016 included the issuance of 225 trillion rials ($7 billion) of debt,
which contain 75 trillion rials ($2.5 billion) of ITBs while the remainder represents sukuk (Kalhor 2016). Shortterm instruments such as ITBs are predominantly used for cash
management, ensuring an efficient cash flow and securing the government’s liquidity.
The effective borrowing cost rate on total government debt at the end of the year remained
relatively stable at around 1% between 2011 and 2015. In 2016, borrowing costs have been
expected to increase to 4.8%, and this positive trend is projected to continue. The IMF
emphasized that these borrowing cost rates are high due to the inefficiency of the deposit and
lending rates caps set by the CBI, and that marketdetermined borrowing cost rates would
better reflect liquidity and risks (IMF 2015a). New international issuances of government
bonds are expected to come with a yield of around 8% (Fitch 2015).