Islamic bonds to help Indonesia fund crisis spending

Indonesia launched its first retail Islamic bond this month hoping to catch up with its neighbours in the Islamic finance business and help fund a US six-billion-dollar ($8.9 billion) economic stimulus package.

It may be the world’s most populous Muslim country and Southeast Asia’s largest economy but Indonesia has been slow to capitalise on strong demand for Islamic bonds, or sukuk, which follow principles of Islamic sharia law.

The SR-001 sukuk, which have a yield of 12 percent, will mature in three years effective from February 25 this year.

The government has not disclosed the amount of the issuance and will decide the size based on total demand.

“I think demand will be strong because the 12 percent coupon is very attractive,” PT Mandiri Sekuritas bond analyst Handy Yunianto told Dow Jones Newswires.

President Susilo Bambang Yudhoyono said sharia finance was “more crisis-proof” than the Western model of free-market capitalism, as he opened a “Sharia Economy Festival” in Jakarta earlier this month.

He urged local sharia banks, which do most of their business with small and medium-sized enterprises, to play a bigger role in the economy this year and “respond to the national development agenda”.

Sukuk conform to Islamic Shariah law in which charging interest is forbidden and speculation is shunned, as is investment in businesses such as gambling and alcohol.

They create returns through profit-sharing agreements or from the lease of securitised assets owned by the seller.

Indonesia’s sukuk use the assets model, known as ijarah, and are backed by government land and buildings.

Although Muslims form the majority in the country of 234 million people, shariah finance comprises only one to two percent of all finance, said Islamic scholar Azyumardi Azra.

Until now Jakarta had only issued sukuk to institutional investors.

Its first rupiah-denominated sukuk was issued last year while a global sukuk planned in October was delayed.

The government has been eager to publicise the retail offering as it tries to catch up with the more sophisticated Islamic finance markets in neighbouring Malaysia and Singapore.

Central Bank Governor Boediono told the festival the US-led global economic meltdown was a reminder of the low-risk advantages of Islamic finance.

“The crisis has provided us with a lesson that we should not become too involved in speculative activities, but should be primarily focused on providing a real contribution to the productive sector and society as a whole,” he said, according to The Jakarta Globe daily.

“Taking this lesson on board, banks should go back to basics and sharia lenders could serve as a role model.”

Finance Minister Sri Mulyani Indrawati said in a speech to kick off the bond sale that the retail sukuk was part of efforts to widen the investor base for government securities and to boost flagging revenues.

The government plans to use the income to finance its widening budget deficit and offset the cost of stimulus spending needed to boost domestic demand.

Indonesia has pared back its 2009 growth forecasts to 4.7 percent from an earlier 6.2 percent due to sharply declining commodity exports and foreign capital flight as investors pull out of emerging markets.

The projected budget deficit has climbed to 2.5 percent of gross domestic product from an earlier one percent.

The national budget for fiscal year 2009 assumes state revenues of roughly 82.8 billion dollars and 87.1 billion dollars in expenditures.

The stimulus package offered to parliament late last month is a mix of spending, tax breaks and business incentives designed to create jobs in an election year and prop up domestic demand – the engine of Indonesia’s economy along with commodity exports such as palm oil.

source : asiaone


Parliament has yet to approve the package.-