Two birds with one stone

In order to clear debts of the previous government, 11th administration has asked capital market authorities to step in. After the Minister of Roads and Urban Development, the President emphasized the crucial importance of Sukuk securities as the only option for paying off government debts. Ministry of Roads and Urban Development plays a pioneering role in this field. Abbas Moussavian member of the Sharia Board of the Central Bank of Iran answered our questions regarding the clearance of government debts to contractors deploying Sukuk.



In order to combat recession, the government is pursuing the policy of capital market empowerment to raise capital. On the other hand, it has emphasized the crucial importance of Sukuk (al-ijarah) issuance to pay off government debts. Is it an appropriate policy?
Sukuk securities are structured to comply with the Islamic law (Sharia). Both Islamic and non-Islamic countries have had a highly successful experience with Sukuk during the past decades. Sukuk are among the best and Sharia compliant ways of financing state-owned and private entities, public limited companies (Plc) and co-operatives.

Do you believe that Iran's government would be able to pay off 200000 billion rials of Ministry of Roads and Urban Development debts to contactors deploying Sukuk securities?
Sure. As a matter of fact, Ministry of Roads and Urban Development owns a variety of productive and tangible assets which can be used to back "Sukuk al-ijarah" securities in order to raise capital.

Due to ambiguity surrounding Sukuk, what is the mechanism of issuance?
As I mentioned, productive assets such as freeway construction projects are used to back securities and the funds can then be used in other construction projects or for paying off ministry's debts to contractors.

According to what you said, there would be no more concern over underpinning Sukuk securities. Is that right?
Yes. Airports, railways, roads and freeways can all be used as productive assets to back Sukuk. Ministry of Roads and Urban Development owns several hundreds of billions of rials worth of assets which could be turned into securities for raising capital. Private sector can also participate in BLT (Built-Lease-Transfer) or BOT (Built-Operate-Transfer) project financing, in this way the government kills two birds with one stone, Sukuk issuance would help the government to both pay off its debts and invest in other construction projects. Public participation paves the way for economic growth and prosperity.

What about interest rates?
Discussions were held by the Sharia Board of Securities and Exchange Organization (SEO) regarding interest rates formulation. The outcome was to sell the securities at "market price". The interest rate might be set at 22% (which is not attractive). However, when for example a 10 million rial certificate is traded at 9500000 rials- which is the market price- that would determine the real interest rate. Market pricing mechanism is the key solution for attracting investors.