Indonesia's sukuk proceeds may be higher than target

Reuters - Indonesia has yet to decide on the final size of its rupiah Islamic bonds, or sukuk, but it may be higher than an initial target of 5 trillion rupiah ($546.6 million), a finance ministry official said.

The ministry is in the process of selling 7-year and 10-year sukuk, the government's first sukuk issuance, as part of efforts to finance the state budget deficit and diversify debt instruments in the domestic financial market.

'The size has not yet been set. Some investors are asking for higher coupon rates,' said Dahlan Siamat, the finance ministry's senior official in charge of sharia financing, told Reuters late on Thursday.

When asked whether the size would be higher than the finance ministry's initial target of 5 trillion rupiah, Siamat said: 'Yes. It looks like that.'

'Let's wait until Aug. 26 on the settlement date. The finance minister herself will announce the details,' Siamat said, referring to Finance Minister Sri Mulyani Indrawati.

He declined to give details, but the government has said yields on the sukuk would refer to yields in the secondary market for conventional government bonds of similar maturities.

Seven-year government bonds were priced to yield around 11.7 percent on Friday, while 10-year government bonds were priced to yield around 11.9 percent.

Indonesia has said it also plans to sell dollar-denominated sukuk in November. The government will start a roadshow for the paper in the fourth week of October.

Sukuk bonds comply with Sharia, or Islamic law, which bans charging interest. Investors are instead paid income derived from assets such as rent from property or commercial transactions such as trade in goods and services.

Indonesia, Southeast Asia's largest economy, still lags neighbours such as Malaysia in developing Islamic products. With Muslims accounting for 85 percent of the population of 226 million people, Indonesia is considered a huge potential market for the Islamic finance industry.