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IRAN: Increased trade
and investments into Iran anticipated from sanctions relief are promising
to bolster the Republic’s banking sector – benefiting both domestic and
international players. From the pool of interested and potentially keen
foreign entities however, analysts have singled out Islamic banks of the
UAE and Lebanon as having a comparative advantage to capitalize the vast
business opportunities in the Islamic Republic once trade and financial
barriers are lifted, although with significant credit risks.
“We anticipate increased longer-term business opportunities for Dubai banks
if the Iranian economy opens up, given the private sector nature of the
Dubai economy and its strength as a logistic hub,” opined Khalid Howladar,
the global head of Islamic finance of Moody’s Investors Service. “In
addition, a rise in inward investments from Iranian nationals could
moderate the impact of the softening real estate market in Dubai.”
While many global players are turning their attention toward Iran, with
several already making their move into the market, the UAE and Lebanon are
especially better positioned due to their close trade relationship with the
Republic as well as affinity (as existing legal infrastructure) for Shariah
banking.
Accounting for 11% of non-oil exports (US$11.5 billion), Iran is one of the
UAE’s largest non-oil export markets while the emirate is Iran’s
third-largest non-oil export market. “The UAE is also particularly
well-positioned to serve as a regional base for an increased number of international
companies that seek to do more business in Iran given the quality of local
logistics infrastructure,” noted Moody’s in its latest report on Iran.
Lebanon on the other hand was exploring a free trade area with Iran when
sanctions were imposed in 2012, building on the healthy combined 16% annual
rate of growth of Lebanese exports to Iran between 2005-09.
While opportunities are plenty and links between Iran and the UAE and
Lebanon have already been forged, Moody’s however noted that the latter two
are not immune to operating risks. “Although physical expansion into Iran
would provide banks with asset diversification and revenue growth
potential, the still fragile operating and geopolitical environment would
expose foreign banks operating there to asset quality issues inherent in
emerging economies undergoing fast transformation,” cautioned the rating
agency. As of 2014, non-performing loan levels in Iran reached 14.4%.
Home to IRR15.9 trillion (US$529.88 million)-worth of banking assets as of
May 2015, Iran’s fully Shariah compliant financial market is the largest in
the world; and the removal of sanctions would usher in exciting development
opportunities for the global Islamic finance industry across different
segments.
“Given the sheer size of the banking system and the country’s financing
needs, we expect a major boost to Sukuk volumes,” said Howladar. “However,
Shariah harmonization across jurisdictions would likely remain difficult.”
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