Iran’s automotive funds could be a global Shariah investments model

The global automotive industry, a behemoth built on debt and leverage, stands today at a crossroads for Islamic investors. 

While millions of consumers worldwide embrace potentials in various Shariah compliant manufacturing concerns, major automakers — from Detroit to Tokyo — remain largely off-limits to those seeking ethically-screened equities. 

The reason is stark: their debt-to-equity ratios routinely exceed the 33% threshold mandated by standard Shariah screening methodologies. Also, there ESG concerns about their polluting emissions – already easing with the shift to electric vehicles. 

Yet, an unlikely market operating under unique constraints due to economic sanctions, has forged a solution: Iran.

The automotive sector in Iran, a major global emerging market that produced over 1.1 million vehicles in 2024, has a long and notable history with French manufacturers. For decades, French marques, particularly Peugeot and Renault, have been a dominant force on Iranian roads through local assembly and long-term partnerships with major domestic players.

But it hasn’t been a smooth ride with the French either. Western sanctions on Iran’s economy brought this partnership with Renault to a halt nearly a decade ago. 

Despite this, Iran persevered to build a unique solution of a centrally managed ecosystem of six dedicated automotive-focused investment funds. By instituting a strict regulatory firewall through the Securities and Exchange Organization’s central Shariah Board, the six funds ensure the flow of capital is compliant with Islamic rules, channeling domestic savings into the heart of the vehicle supply chain.

Table 1: Automotive sector funds in Iran

Source: Tehran Stock Exchange

The debt problem and the Persian solution

The inherent problem for Islamic equity investors – especially foreigners, who stood at 5,100 as of July 2025 – is the nature of modern industrial finance. 

The accepted standard is clear: conventional debt must not exceed 33% of NAV. Since car manufacturers require immense capital for retooling, supply chain management and R&D, often relying heavily on Riba-bearing debt, they are typically screened out. This hard limit effectively rules out almost every major international vehicle producer.

In Iran’s case, the six automotive sector funds operate directly under its Islamic government oversight, making them automatically acceptable to Shariah-minded investors. They have become self-reliant by working with non-Riba-contaminated assets within Iran’s automobile and vehicle parts supply chain, without the need to wait for global industry giants to clean up their debt-laden books.

Integrating finance with national industry

The Iranian automotive industry is an economic pillar, second only to the energy sector, employing hundreds of thousands of people directly and indirectly.

Major domestic players like Iran Khodro (IKCO) and SAIPA have long dominated production. The sector’s size — coupled with external pressure like production inefficiency and limited access to stable foreign technology — forced policy makers to engineer a financial structure that could sustain the industry domestically.

While the model works, it has its vulnerabilities — and one of them is a concern that businesses anywhere can identify with: liquidity.

Arash Mohbbi-Nejad, secretary of the association of auto parts manufacturers, pointed out that as at September 2025, the top two Iranian automakers owed suppliers over IRR620 trillion (US$147.52 million) and unresolved receivables currently exceed IRR160 trillion (US$38.08 million).

Arash urged the expansion of financing tools such as the Oragh-e Gam commercial papers and purchase receivables to prevent production halts. There could be “severe social and economic repercussions if liquidity shortages persist,” he warned.

The Renault withdrawal: an Iranian lesson in finding workarounds  

In 2017 — two years after the removal of US sanctions on Iran following its nuclear deal with the Obama administration — Renault announced a EUR660 million (US$778 million) venture with local partners in Tehran. 

An initial production capacity of 150,000 cars was planned, with an expansion later to 200,000. Some 3,000 jobs were to be created. Renault was to eventually have a two million-vehicle market by 2020 and Iran a R&D center for automobiles.

None of that happened as US President Donald Trump, who succeeded Barack Obama, reimposed sanctions on Iran in 2018 over its suspected atomic bomb program. 

In the seven years since, and with Trump returning to the White House this year, Iran has learned the importance of having workarounds to any situation.

Iranian auto financiers “are increasingly creating in-house financial institutions to leverage capital market capacities,” said Alireza Kenani, CEO of Karamad Financial Group. Karamad, an unit of the Kerman Motor Group, is one such financier, he said.

This approach could be customized by other nations, particularly those in the GCC or Southeast Asia, that are also trying to develop heavy industrial bases while promoting Islamic finance. 

While other Muslim-majority nations have established thriving Islamic finance markets, few have successfully squared the circle of providing Shariah compliant exposure to heavy industry — especially one as capital-intensive as car manufacturing — without resorting to complex purification or dividend screening.

Instead of waiting for global car giants to clean up their books — a nearly impossible feat — markets can create centrally governed, Shariah compliant investment vehicles designed to specifically track the non-Riba-contaminated assets of the automotive supply chain, R&D and manufacturing partnerships.

Iran's automotive sector, often overlooked due to geopolitical complexities, has inadvertently pioneered a clear, auditable, and scalable Shariah template. It offers a powerful counter-narrative: where debt prohibits, innovative financial engineering — backed by a central Shariah authority —permits. 

For the global Islamic financial industry, the road to compliant heavy industry exposure may just run through the unexpected lanes of Tehran.