A new and somewhat unlikely player is set to emerge in the mortgage-backed securities (MBS) world: the Islamic Republic of Iran.
According to a Reuters report, the lifting of international sanctions on Iran will bring a new flush of cash to the one-time pariah state, but the local debt market has been stagnant for years and is need of new vehicles to provide funding options. Iran is looking at this product to spur a new wave of domestic housing construction and investment from global entities.
"The MBS concept is a newcomer to the market—this is designed to diversify lending sources and bring fresh money for banks," said Majid Pireh, senior Islamic finance expert in the Research, Development and Islamic Studies Department of Iran's Securities and Exchange Organisation (SEO). "We have to find alternatives due to limitations in the market."
One of the challenges in creating an Iranian MBS market is the nation’s use of Shariah financing, which prohibits interest payments. However, the bonds that could be used for MBS issues would be able to carry Shariah-approved "profit rates" that function much like interest rates.
Iran’s SEO will mandate that originators hire a guarantor firm that will monitor the securities and ensure payments for investors—a requirement that will ensure consumer protection but increase origination costs for the institutions creating these securities.
Still, this new market will take some time to develop, as Pireh acknowledged Iranian bankers have very little experience in contemporary securitization processes and credit rating agencies currently have no access to this market.