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.-

 

The world’s biggest Muslim nation struggles to build its Islamic finance industry

imagesBank Indonesia Headquarters, Jakarta

 

In a bid to drive growth in the fledgling Islamic bonds industry, Indonesia’s central bank says it will relax the rules for investors who buy the bonds.

Despite being home to roughly 10 percent of the world’s estimated 1.3 billion Muslims, Indonesia has struggled to build up its Islamic finance industry, lagging well behind countries such as Malaysia, Singapore and even Pakistan.

However, the recent introduction of a new law that would allow the government to issue Sukuk, or Islamic bonds, is expected to trigger significant growth in the sector. The government announced this week it has already set aside US$2 billion in assets to back the bonds, which it expects to sell in two separate issues this August and October. Sukuk bondholders are paid income derived from assets such as rent from property because Islamic law bans lending for interest.

Mulya Siregar, Bank Indonesia’s head of Islamic finance, pledged this week that the central bank would change the rules surrounding Sukuk to boost investor interest in the securities.

As the rules stand, investors in Islamic bonds are required to hold them until maturity.

“We will change that regulation,” Siregar told an investment conference Thursday.

“That regulation was made in 2000 or 2002, when Bank Indonesia was still learning about how to develop Islamic finance so it just worried at that time whether the securities of Sukuk were an asset or not. But now, I think we agree they should be an asset so that investors are able to trade them.”

Pushed on the timing of the change and whether it would be before the government’s planned August issue, Siregar said it would be “as soon as possible.”

The move could be a significant boost for Sukuk in Indonesia, which have so far received little interest from traditional investors. In Malaysia, on the other hand, more than 50 per cent of Sukuk issuances are taken up by commercial bond traders.

“A real issue for Indonesia is that conventional investors do not participate in the Sukuk market,” said Badlisyah Ghani, head of CIMB Islamic Bank in Malaysia

“This is a peculiar situation that does not exist in Malaysia. All investors, including conventional banks, chase after Islamic instruments. As a result Islamic bonds in Malaysia are cheaper by 5 to 20 basis points compared to conventional bonds.”

If the Indonesian government and central bank get the regulatory framework right, a sovereign Sukuk would set a benchmark price for corporate bonds and allow the country to capture a significant share of the global market for Islamic bonds, which Moody’s estimates was worth US$100 billion last year.

“Sukuk is important for Islamic banking development,” says Siregar. “Right now, the problem for Islamic banking in Indonesia is liquidity.”

It would also allow Indonesia to attract investors from the Middle East and provide another funding source for the government, which is struggling to finance its budget deficit as the record-high oil price leaves it saddled with a bulging fuel subsidy bill. The government raised fuel prices by an average of 28.7percent Saturday in an effort to control its surging subsidy problems.

But experts warn Indonesia still has a long way to go to set up the right regulatory framework. The new Sukuk law, introduced last April, was restricted to dealing with the government’s ability to issue Islamic bonds. It did not deal with the unfavorable tax treatment of the securities or the lack of incentives for companies to issue Islamic bonds.

Most Islamic bonds involve a sale and purchase, or leaseback, of assets, which attracts Value Added Tax. That generally means they are taxed twice as much as conventional securities.

“The government is dealing with its own issue first and then with that liquidity, creating the necessary benchmark for industry, it needs to extend the regulatory system to have good laws for corporate issuers,” says Ghani.

Still, he believes demand is already strong, despite the lack of regulatory certainty.

“Even without those tax incentives, there have already been 17 Sukuk issues in the market worth 2.2 trillion rupiah or about US$250 million. It’s a very exciting market.”

There are only three purely Islamic banks in Indonesia with another 20 mainstream banks offering shariah services. Islamic banking made up just 1.6 per cent of national banking assets in 2006, according to Bank Indonesia and the capital markets regulator Bapepam estimates Sukuk bonds make up about 2.5 per cent of total issuance.

According to Moody’s, the global Islamic finance market has grown by about 15 per cent for each of the past three years and is worth US$700 billion. Sukuk is the fastest growing part of the market with volumes of US$97.3 billion last year. New issuance increased 71 per cent to US$32.65 billion.

source : asia sentinel