Definition of Interest-free Sukuk: Interest-free Sukuk are the securities that are issued based on interest-free loan agreements, on the basis of which the issuer owes equal to the face value of the Sukuk to the owners of Sukuk and needs to pay the debt by the maturity date.
Nature of Interest-free Sukuk:
Governments and well-known charity organizations could use Interest-free Sukuk in order to carry out the projects that are in the interest of the public or in order to establish a relationship between the owners of charity funds, who aim to give part of their fund to those in need in form of interest-free aides. Thus the applicants of Interest-free loans could use the financial instruments of Interest-free Sukuk. In other words, the government or charity organizations could issue Interest-free Sukuk with certain maturity dates and collect the extra funds available to charity workers and invest them in certain investment projects or directly give to those in need of Interest-free loans through Interest-free funds or banks. Then, they will pay off the matured Interest-free Sukuk through the annual budget or through collecting the installments on Interest-free loans.

Various debt securities are traded in the Iranian capital market including general Murabahah, Islamic treasury, Musharakah, SPV securities, productive credit certificates and Salaf which are all shariah compliant.
In the Iranian Capital Market it is common that the word "sukuk" is used for the financial instruments issued by SPVs, such as: Ijarah, Murabahah, Manfaah, Istisna, mortgaged-backed and asset-backed
Sukuk.
According to the Guidelines for SPVs' Activities, ratified by the Securities and Exchange High Council of Iran, the only entity authorized to establish and manage SPVs in the Iranian Capital Market is the Capital Market Central Asset Management Company.

Historical background of Islamic instruments

The financial market is divided into money and capital markets; as a result, the financial instruments applied in these markets are divided into two groups of money market instruments and capital market instruments.

The first idea of Islamic financial instruments was raised in the mid 1970s, when the first Islamic banks in countries such as, Egypt, Saudi Arabia and Sudan made their debut and afterwards Islamic banking was established in Pakistan and Iran, too, which mainly focused on Riba-free banking.

In line with the development of transactions structures by the Islamic banks, the idea of Islamic financial instruments was also improved in the capital market.

The idea of issuing Ijarah certificates as the first Islamic financial instrument was brought up by Dr. Monzar kahf in 1997. Kahf considers the international sukuk issuances of Malaysia and Bahrain in 1999, as the debut of Islamic financial instruments.

Sukuk Definition

The term of “sukuk” for Islamic financial instruments was first suggested by jurisprudence committee of Islamic Development Bank in 2002. “Sukuk” is an Arabic word and plural of “sakk”, which means “cheque” in Persian or script of property ownership. Juridical standard No. 17 of accounting & auditing organization of Islamic financial Institution, have defined Sukuk as: "The certificate with equal nominal value after underwriting operation, confirms the payment of forenamed nominal sum in certificate by purchaser to publisher and their holder will become owner of one or more assets, the profit of assets or beneficiary of a project or a specific investments activity".

Differences between sukuk and the conventional bonds

 There are several benefits in sukuk. According to some authorities, sukuk is considered as a bridge between money market and capital market. Major advantages of sukuk are as the followings:

• It increases the originator’s liquidity
• Sukuk can be used by corporates to achieve an optimum balance between debt and equity on their balance sheet.
• Although a part of originator’s assets is isolated, he can still use it.
• Since sukuk are issued based on assets, they reduces the risks and funding costs.
• It affects the capital market development by changing the assets to securities (securitization)
• Sukuk are tradable in secondary markets.

Sukuk background in Iran

SPVs Involved Sukuk Issuances in Iran Capital Market

The history of Islamic securities Issuance in Iran dates back to 1994 when Tehran Municipality issued 43 million USD participation paper (named as Musharakah Securities). The Law for the Issuance of Participation Papers was enacted by Iran’s Parliament in 1997.

Before passing The Securities Market Act (SMA) of the Islamic Republic of Iran in 2005, financial instruments in the Iranian capital market were restricted to only common stocks, share rights, depository receipts, and participation papers. Since enactment of the SMA in 2005 and The Law for Development of New Financial Instruments and Institutions in 2009, dramatic changes have taken place in the Iranian capital market such as establishing the Securities and Exchange Organization (SEO) as the sole regulatory and supervisory authority to the market, establishment of Shariah Board of the SEO as an unified and independent shariah governance body, establishment of new financial institutions and issuance of new financial instruments, to name but a few. The ratification of different kinds of Sukuk (such as Ijarah, Murabaha, Istisna, Standard Parallel Salam, Manfa’ah (Usufruct), mortgage-backed, and Asset Backed sukuk by the Shariah Board, has made them prominent and dominant instruments for financing and investing. In essence, Sukuks have been used, applying different underlying assets such as tangible assets and financial assets (like stock as underlying assets of Ijarah Sukuk) to finance public and private sectors.

Fixed Income Sukuk in Iran Capital Market - Firsts:

•2011, first ijarah sukuk was issued to raise funds for Mahan Air,

 •2013, first Murabaha sukuk was issued to raise funds for Industrial Group of Boutan

 •2015, first and only Istisna’ sukuk was issued to raise funds for National Industries and Mining Development Company

 •2016, first Mortgage backed sukuk was issued to raise funds for Maskan Bank

 •2018, first Ijarah sukuk with stocks as the underlying asset was issued to raise funds for The Social Security Investment Co.

 •2018, first stock collateralization as guarantee for sukuk was applied for The Social Security Investment Co.

 •2019, first Manfa’ah sukuk was issued to raise funds for Saba Arvand Oil and Gas Development Co.

 •2019, first Asset Backed sukuk was issued to raise funds for MaskanJonoub Investment Co.

 •2020, first credit rated sukuk was issued to raise funds for Mehr Ayandegan Financial Development Group.

 •2023, first Murabaha sukuk in order to purchase stocks was issued to raise funds for Shahr Financial Group.

Besides issuing Sukuk in the capital market, there are some other Islamic instruments in the market such as Islamic Treasury Bills issued by the government to settle its debts to contractors. Actually, the government gives securities (called Islamic Treasury Bill) to contractors, whose amount equals what the government owes. Contractors can either hold them to maturity (at most for one year) or can sell it at discount in the secondary market. Contractors must not be part of the government (or affiliated to the government).

Although the Iranian Islamic Capital Market is dominated by the issuance of stock and Sukuk, there are always innovative ways to foster its development. Using Islamic contracts or combination of contracts to resolve needs of the market has emerged from the interaction between the SEO and the Shariah Board.

As an untapped market, the Iranian Islamic Capital Market enjoys plenty of unique potential to rival other Islamic markets in terms of diversity, depth, and return. Our market is promising for the entire Muslim and non-Muslim investors around the world to have a safe, secure, and high-yielding investment.