• Iran’s banking sector, with assets of IR15,901 trillion ($558bn) makes up 45 per cent of the global Islamic finance sector
  • If sanctions are lifted, Iranian sukuk could boost issuance volumes
  • Iranian financial institutions do not follow emerging international standards, which will further fragment the market

Iran’s banking system, which is entirely Sharia-compliant, is already the largest Islamic finance sector in the world.

The sector has assets of IR15,901 trillion ($558bn) as of May 2015, according to the central bank.

This makes up 45 per cent of the global Islamic finance sector, according to Washington-based Moody’s Investors Services, and is the third largest banking sector in the Middle East, after the UAE and Saudi Arabia.

Moody’s predicts that when Iranian banks reenter international markets following the lifting of international sanctions expected in early 2016, sukuk issuance will receive a substantial boost.

“Future potential for both domestic and international sukuk issuance is large”, says Khalid Howladar, global head of Islamic finance at Moody’s

This will have an effect on international sukuk markets. Currently lack of supply drains liquidity as investors buy and hold scarce instruments.

“Given the sheer size of the banking system and the country’s financing needs, we expect a major boost to sukuk volumes,” says Howladar. “However, Sharia harmonisation across jurisdictions would likely remain difficult.”

Iran’s banks follow the same broad Sharia principles, but do not tend to use international standards. This will further fragment Islamic finance markets, Moody’s predicts. The sector is already hampered by a lack of standardisation of sukuk structures, although the situation had improved in recent years.

However, integration may be held back by growing anti-Iran sentiment in the GCC, fuelled by regional conflict.

This also puts the GCC’s Islamic banks in the best position to enter the Iranian market, if the political situation allows.

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