Limitations of Sukuk

"Sukuk Al Ijarah" securities are structured to raise capital for governments or corporations and are issued by involving a tangible asset in the investment (land, building, equipment and machinery) and the Sukuk issuer raises capital by buying or leasing those assets. Thus in order to clear government debts to contractors, making revisions to current procedures is deemed essential. It seems that government tends to sell assets to an intermediary and use the money for paying off its debts. Such plan would have some limitations:
1- In asset-backed Sukuk using "al-ijarah" structure there is a true sale between the originator that issues the Sukuk and Sukuk holder and the intermediary owns the assets, by contrast sale of government assets follows particular procedures.
2- According to the law, government debt securities are issued by the Central Bank of Iran which requires technical and legal infrastructures while the Central bank lacks such infrastructures. Although the instructions to issue "ijarah Sukuk" were given by the Central bank last year, from the legal point of view it is not possible to issue the license for an intermediary and the transfer of asset is not qualified for a tax exemption. The only entity permitted to issue Sukuk qualified for tax exemption and establish an intermediary is the Securities and Exchange Organization (SEO). As a result, an overhaul of rules and regulations is a prerequisite.
3-Bonds interest rate needs to be taken into account. 20 percent is not attractive to investors and the issuance of government bonds in 2013 fared badly. Therefore, the government should offer more attractive rates which of course would put a financial burden on government.
4-Issuance of government bonds and directly assigning them to contractors in 2013 resulted in failure. Due to the reduction of the bonds value at maturity and worse than that reneging on promises by the government to pay periodic interests and issuer banks' negligence, it turned out to be of no use at all for some contractors.
5- Iran's bond market (debt market) has not fully developed (with a trading volume of 35000 billion rls). As a result, sudden injection of cash (200000 billion rials) into this market is out of question and Iran's government requires a set of financial tools in order to clear its debts.