indonesia: Launch of the sukuk bond

Monday Morning:It may be the world’s most populous Muslim country and Southeast Asia’s largest economy, but Indonesia has been slow to capitalize 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...Read More

Indonesian Islamic Banks going strong

PRMinds :Government support, improving confidence on Islamic banking system and comparatively higher panic in conventional banks due to financial crisis will help the Indonesian Islamic banking institutions to procure more deposits.

According to a recent research report, “Indonesian Islamic Banking Outlook to 2013” by RNCOS, a leading research firm, with the government support and improving consumer confidence on the Sharia-compliant financial products, the deposits with the system are expected to grow at a strong CAGR of nearly 47% between 2009 and 2013...Read More

Tug-of-War Over Talent Looms as Local Banks Develop Islamic Finance Sector

Jakarta Globe:As the financial world crumbles and fresh commerce graduates around the globe struggle to find employment, Indonesia’s financial sector is confident the opportunities are there for those with a differing vision of the future of industry.

The job market in conventional banking might be shrinking, but in Shariah banks, or Islamic financial institutions, there is a shortage of talent...continue Reading

In Jakarta, financial help comes via Islam

FRANCE 24: Like many emerging countries, Indonesia has not been spared by the current financial crisis. The Jakarta stock exchange has lost 50 percent of its value since the start of 2008. It’s in light of this that the Indonesian vice-president recently called on his fellow citizens to turn to Islamic banks, which have seen exponential growth since the end of the 1990s.

Based on rules set down by Sharia law, Islamic banks don’t charge interest and don’t associate with businesses linked to alcohol, tobacco, gambling or pornography. They only work with clients that are prepared to share the risks – and it’s in this way that a number of customers have been won over. But are Islamic banks the only ones not to succumb to the effects of the financial crisis?

The industry really took off in Malaysia and Indonesia is following suit. With Islamic banks growing at twice the rate of traditional banks, the hope is that Western countries will soon be signing up to them too.

Indonesia may delay first global Islamic bond

reuters: Indonesia’s first global Islamic bond is likely to be delayed because of financial market turmoil, a minister said on Friday, a further blow after the government cancelled all domestic debt auctions for the rest of this year.

Southeast Asia’s biggest economy had originally hoped to raise between $500 million to $1 billion from the sale of the Islamic bond, or sukuk, but “is unlikely to do it now, given market conditions,” Minister Paskah Suzetta told Reuters.

“I expect it would not be a good idea to raise debt, because the market is very competitive and there are many competitors. Everybody is aiming at the Middle East,” Suzetta added.

Indonesia has responded to the current global financial crisis with measures ranging from greater protection for bank deposits to efforts to improve liquidity and avoid a credit crunch.

The central bank has intervened in currency markets to support the rupiah while the Indonesia Stock Exchange halted trading for three days last week in an attempt to prevent heavy losses. The government had planned to sell the dollar-denominated sukuk, which was expected to have a maturity of 5-10 years, in November, with a road show scheduled for the fourth week of October.

The Finance Ministry had originally said the amount could be around $1 billion, but more recently it said that the amount would depend on market conditions.

Last week, Indonesia’s finance ministry said it would cancel planned domestic debt auctions this year due to turmoil in financial markets, and would only consider resuming the debt sales if conditions stabilised. The most populous Muslim nation raised 4.7 trillion rupiah from the sales of its first Islamic bonds in late August, short of its five trillion rupiah target.

Analysts said that while the sales were lower than targeted, with domestic investors buying almost 90 percent of the bonds, the issue still signalled strong growth potential for Islamic finance.

Indonesia has a population of 226 million people, and about 85 percent are Muslim.

Indonesia plans retail sharia bonds' sales in H1 '09

Reuters : Indonesia's finance ministry plans to issue sharia government bonds for retail investors in the first half of 2009, in a bid to expand domestic-based investors, a senior finance ministry official said on Wednesday.

Indonesia has fallen behind its neighbours such as Malaysia and Singapore in developing Islamic finance, which has seen buoyant growth in the past few years on the back of the petrodollar boom in the Middle East and growing wealth in Asia.

The most populous Muslim nation raised 4.7 trillion rupiah ($504.3 million) from the sales of its first Islamic bond in late August, short of its 5 trillion rupiah target.

Analysts say although the sales were lower than targeted with domestic investors buying almost 90 percent of the bonds, it signalled strong growth potential for Islamic finance in the country of 226 million people where about 85 percent are Muslim.

'The retail sukuk will be issued in the first half, maybe in April before the election,' the treasury director general at the ministry, Rahmat Waluyanto, told reporters.

'We cannot elaborate the size of the bond yet as we still have to appoint the selling agent. They are the ones who can gauge the potential for the issue.'

Islamic law, or Sharia, bans the payment of interest and Islamic bonds replace coupons with income derived from assets such as rent from property or commercial transactions.

The development of Islamic finance has long been held up by tax and regulatory hurdles, but Indonesia's parliament in July passed a bill removing those barriers.

The government, which targets a budget deficit of 94.5 trillion rupiah or 2.1 percent of GDP this year, has been intensifying its efforts to broaden its financing options and expand its relatively small domestic debt market.($ 1 = 9,320 rupiah.

Indonesia appoints brokers to sell Sukuk issue

Reuters -- Indonesia's finance ministry said on Monday it has appointed three of the biggest local securities firms to sell the country's first rupiah-denominated Islamic bonds.

PT Mandiri Sekuritas, PT Trimegah Securities Tbk, and PT Danareksa Sekuritas were appointed selling agents, the ministry said in a statement on its Web site, www.dmo.or.id, while law firm Marsinih Martoatmojo Iskandar Kusdiharjo was appointed legal consultant.

The rupiah-denominated Islamic bond, or Sukuk, may be issued in two tranches, a senior official at the finance ministry said. 'There is a possibility that it will be issued in dual tranches, in seven-year and 10-year maturities,' Dahlan Siamat, a director in charge of Islamic financing at the finance ministry, told reporters late on Friday.

'The consequence for that will be on the price, for the 10-year (tranche) investors might demand a higher coupon.'

Indonesia, which has the world's largest Muslim population, also plans to sell dollar-denominated Sukuk in November. The proceeds from both rupiah and dollar Sukuk issues will be used to help plug the budget deficit.

The finance ministry aims to use 18.371 trillion rupiah, or about $2 billion worth of property, as the underlying assets for the Islamic bonds, setting the maximum amount of such bonds that the government can issue.

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.

Following are the new details of the timetable of rupiah Sukuk issuance.

Following are the details:

Book building : Aug 15-22

Pricing and allotment : Aug 22

Offer period : Aug 15-22

Settlement : Aug 26

Listing on the bourse : Aug 27

Strengthening Islamic finance

Indonesia's nascent but growing sharia banking industry gets a major boost this week from the passage of the new Islamic banking law, putting the country on a stronger footing to attract Islamic funds.

Together with the Islamic bond law, adopted a few months ago, the Islamic banking law will serve the interests of the growing number of Muslims who are not comfortable with conventional financial systems which charge interest on capital.

Many Muslims consider interest as riba, (prohibited by sharia law) and that's an important reason why more Indonesian Muslims are turning to Islamic banking services and even looking at Islamic investment in the form of sukuk, Islamic bonds.

Sharia bank lending increased by 30 percent in 2007, higher than the 25.5 percent lending growth of commercial banks. But sharia banking is expanding from a smaller base, currently accounting for only 1.98 percent of the total banking market.

This small sharia banking market segment is attributed to the country's late entrance into Islamic finance. Indonesia saw its first sharia banking in the early 1990s, with the establishment of Bank Muamalat Indonesia in 1991.

This was the only fully compliant sharia bank until the financial crisis in 1997, which many Muslim scholars attributed to the false logic of a financial system based on debt contracts.

To them, the crisis was generated by a debt structure whose nominal values and maturities were out of line with the ability of the economy to service them.

After the crisis, along with the rise of fundamentalism and some resurgence of mainstream orthodoxy among Muslims, sharia banking is becoming more popular. Two more full sharia banks were established, Bank Syariah Mandiri, the largest sharia bank by assets, and Bank Syariah Mega Indonesia.

On top of that, several conventional banks, including foreign-owned banks, have established sharia windows. These are not separate institutions, but specialized units within conventional banks that offer sharia-compliant products for their clients.

Sharia operations in this country have been governed by regulations from Bank Indonesia (BI), the central bank. The passage of this Islamic banking law provides a stronger legal basis for sharia banking and finance.

Unlike the present BI regulations, the law gives more room for sharia banking to develop. The law, for example, requires any sharia window in a conventional bank whose assets already reach 50 percent of its mother bank (or after 15 years of institutional existence since the passage of the law) to be separated from the conventional host bank and become an independent fully compliant sharia bank.

The passage of the law, however, does not automatically address all the problems currently faced by sharia banking and finance. The double taxation issue is one of them. Because sharia banking does not charge interest, sharia banking transactions often involve selling and buying of assets, which belong to the bank until the end of the transaction, when the client buys the asset back. This selling and buying cycle is subject to taxation, which may mean double taxation, compared to a conventional loan to buy an asset where it is only purchased by the client once.

The government has promised to address this with changes in taxation laws.

Another big problem for sharia banking is the limited choice of instruments currently available to Indonesian customers compared to countries with more developed Islamic financing institutions. Many fixed rate instruments currently available from sharia banks are not really very different from interest based transactions in conventional banks.

If you want to borrow money from a sharia bank to buy a car, for example, you have to buy the car from the bank and not from the car dealer. The bank would charge you a price based on the original price of the car plus management fees and the profit for the bank and its depositers.

Therefore, technically, there is not necessarily a big difference in pricing between sharia banks and conventional banks. That's why even Muslims themselves have expressed some skepticism and even cynicism regarding the present practices of Islamic banking.

There is a challenge for sharia finance scholars to devise truly sharia banking instruments or investment instruments that would attract more people to put their money in sharia banks and be recognized as sharia-compliant in Indonesia and internationally. These could include fixed cost instruments where there are fees or charges but not interest, and variable cost instruments where the client may share profits or losses with the bank.

If more instruments are available and attractive and better advertised, then sharia banking should serve not only Muslims but also people of other faiths, who are perfectly free to use it.

The Agriculture Development Bank of Iran, for example, through partnership with farmers, helps them to convert their physical possessions into assets that can generate additional capital, therefore improving their collateral and capacity to borrow.

Similarly, Islamic finance can be used here in Indonesia to convert dead capital of farmers into income-generating assets. This way, Islamic finance will be able to become a vehicle to develop and empower the economy for Muslims and non-Muslims alike.

Allianz Indonesia awarded best Islamic life insurer

The FINANCIAL -- Allianz Life Sharia Indonesia was honored as the Best Islamic Life Insurer 2008 by Karim Business Consulting in the fifth Islamic Finance Award 2008.

Jens Reisch, CEO of Allianz Life Indonesia, together with Kiswati Soeryoko, Head of Takaful Business of Allianz Life Indonesia, received the prize out of the hands of Adiwarman Karim, CEO of Karim Business Consulting, the leading Takaful business consulting firm in Indonesia.

"We are happy and proud to receive this award. It shows that our sharia business is not only profitable, but also recognized with an outstanding and solid financial performance. This award strengthens Allianz's position as the first choice for our customers, business partners and employees," said Jens Reisch at the ceremony.

Allianz Life Sharia received highest marks in three of six categories: Underwriting Surplus-Assets ratio, Investment Income-Total Investment ratio and Underwriting Surplus-Premium ratio, with a total score of 984 out of 1,000.A high demand for flexible takaful-based insurance solutions.

Allianz started Takaful business in Indonesia in April 2006. Since then, the company has sold more than 15,000 policies, clearly exceeding all targets. Kiswati Soeryoko added: "We have started a very sound business, as the strong financials of our business show. However, for us it is more important to be able to serve a wider market in Indonesia with best-in-class services. We understand that there is a high demand for flexible yet comprehensive takaful-based insurance solutions."

Apart from Indonesia, Allianz is also offering takaful-based insurance products in North Africa and the Middle East. Furthermore and in order to respond to the needs and market potential in Islamic countries Allianz Global Investors launched two Shariah-compliant funds in May 2008, specifically designed for clients in the Middle East.

About Takaful insurance

Takaful (joint guarantee) respects that Islamic Law (Sharia) prohibits traditional insurance which Sharia regards as a bet. With Takaful insurance, a community of insured parties pays into a fund, which then aids each member in case of a loss. The insurance company only receives a set fee for managing the risk pool, and a share of the money invested according to the rules of the Koran.
As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer, provided on the right.

Indonesia looks for share of Islamic finance market

Indonesia's government is hoping new Islamic finance laws will entice foreign investment in the growing sector and secure a share of the $US700 billion global Islamic finance market.

Asian countries like Malaysia, Singapore and Hong Kong have been leading the way in the fast-growing sector, but despite being home to ten percent of the world's muslim population, Indonesia has so far held back.

Dr Muhammad Syafii Antonio, from the Central Bank of Indonesia, has told Radio Australia's Connect Asia program they are working hard to change the image of Islamic banking in both government and civil society.

"The issue of Islamic bond is a strategic instrument for the national economy," he said.

"We have to see the Islamic instrument not from narrow base religious approach, but from a wider approach how to accelerate the growth and development of Indonesia."

At the moment Islamic investment only makes up around 2.3 percent of Indonesia's national bond market.

The Indonesian government is hoping that new laws will attract investment from the Middle East, and Dr Antonio says with the new changes in legislation, investment could increase to 5 percent within the next two years.

And he says whilst they are still strides away from the volume of Islamic investment seen in neighbouring Malaysia, Indonesia still has the largest number of Islamic financial institutions in the world.

"We do have three fully fledged Islamic banks, and about 25 Islamic divisions of conventional banks, and we have around 106, or 110 Islamic rural banks," he said.

"So in terms of players, Indonesia is bigger, and in terms of market Indonesia is promising, so Indonesia is too big to be ignored."

Indonesia Prepares an Islamic Bonds Industry

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.

Govt may up backup assets for Islamic bonds

Aditya Suharmoko, The Jakarta Post, Jakarta

The government is considering increasing the amount of backup assets for its planned issuance of government Islamic bonds, a ministry official says.

The value of the backup assets has already reached Rp 18.8 trillion (US$2.02 billion).

The Finance Ministry's director general of state wealth Hadiyanto said Monday the current amount was the result of using assets from 20 government offices as a guarantee, and using more assets was under consideration.

"This year, we can take into account the assets of 57 government offices, such as the Education Ministry, the Defense Ministry and the Religious Affairs Ministry. All of them have a large amount of assets," said Hadiyanto.

The government is set to issue its first Islamic bonds, or sukuk, to the domestic market in August and to the international market in October.

The bonds will be based on assets, known as ijarah, which the ministry has valued at Rp 18.8 trillion, as a guarantee for selling the bonds.

"The underlying assets will be a reference for the government in selling the sukuk," Hadiyanto said.

The government needs to secure Rp 94.5 trillion to cover the 2008 budget deficit. It aims to obtain Rp 104.7 trillion from debt financing this year, including bond sales.

Hadiyanto said the government was working on a government regulation on Islamic bonds, as stipulated under the recently enacted sukuk law.

The House of Representatives endorsed the law in early April, empowering the government to issue Islamic bonds, particularly to attract investors from the Middle East who are reaping windfall profits from the soaring oil prices.

The ministry's director general of debt management, Rahmat Waluyanto, said investors were waiting for Islamic bond issuances.

"We have approached some potential domestic and overseas investors," said Rahmat, without elaboration.

Rahmat said issuing Islamic bonds would give the government more diversified bond instruments and would boost the liquidity of the domestic bond market.

Three Indonesian banks to open sharia units-c.bank

JAKARTA - Three Indonesian banks plan to open sharia-compliant units this year to tap the potential of Islamic finance in the world's most populous Muslim country, a central bank deputy governor said on Wednesday.

Analysts say Indonesia has the potential to become a major player in global Islamic finance because around 85 percent of its around 226 million people are Muslim.

It lags neighbouring countries like Malaysia and Singapore because of tax and accounting framework issues, but analysts expect sharia financing to take off after parliament passed the long-awaited sharia finance law last months.

Siti Fadjrijah told Reuters state-owned PT Bank Rakyat Indonesia BBRI.JK, the country's third largest lender, and PT Bank Bukopin BBKP.JK, will convert their conventional units to sharia-compliant banks.

She said another state bank, PT Bank Negara Indonesia Tbk BBNI.JK, will also set up a new Islamic bank together with Islamic Corporation for the Development of the Private Sector (ICD), a unit of Islamic Development Bank.

"This year three new sharia banks will be established in Indonesia," Fadjrijah said on the sidelines of an Islamic finance conference in Jakarta.

When asked if Bank Indonesia will give more licences for foreign banks, she said:

"It depends. When investors establish a new bank I will ask what are their expectations, how they will increase their business. We must know their target."

Sharia, or Islamic law, bans payment of interest, allowing money to be earned only from physical assets. It also bars investment in alcohol, tobacco or gambling.

HSBC (HSBA.L: Quote, Profile, Research) is the only foreign bank which has sharia operations in Indonesia, but there are several domestic banks with sharia-compliant operations.

Indonesia's central bank said in July it expects total assets of Islamic banks to rise to 91.57 trillion rupiah by the end of 2008.

Fadjrijah said the country's Islamic banking industry is set to meet its target of a 10-15 percent share of national banking assets by 2015 from less than 5 percent currently.

Global Islamic assets are growing at an annual pace of 20 percent and are set to hit $2 trillion in 2010 from the current $900 billion, thanks to a flood of petrodollars, Ernst & Young said in February.

Indonesia approves law for first Islamic bond

Indonesia's government on Wednesday passed a new bill on Sharia-compliant debt, paving the way for country's first Islamic bonds (sukouk) to be sold in international and domestic markets.

The country's House of Representatives had agreed to pass the new bill on Monday which will allow the government to sell a total of 15 trillion Indonesian rupiah ($1.63 billion) worth of sukouk, reported Indonesian newspaper Jakarta News.

"We still do not know whether we will issue the Sharia bonds in foreign currencies or rupiah," said Anggito Abimanyu, the Finance Ministry's head of fiscal policy, following the law's approval. "We will evaluate the market first."

Finance Minister Sri Mulyani Indrawati said earlier in the week it might take between one to one-and-a-half months for the ministry to draw up the necessary regulations following the approval of the bill.

Sukouks have risen by 64% to $5.5 billion so far this year, data from Thomson Financial shows, whilst Islamic finance assets are growing at an annual pace of 20% and are set to hit $2 trillion in 2010 from the current $900 billion.

Ramzi A. Zuhdi, director for Sharia banks at Bank Indonesia, said he expected the endorsement of the sukouk law would boost the Islamic finance sector in the world's most populous Muslim country.

"We hope the government can launch Sharia bonds right away and boost Sharia-based finance products,” Zuhdi said. “Today, Sharia-based investment products are still fairly limited.”

Indonesia's total Sharia-based assets are currently worth 33 trillion rupiah ($3.5 billion), compared to more than the 1.7 trillion rupiah reached in 2000.

The government expects the market share for Sharia-based banking compared to the conventional banking sector to grow by up to 5% this year from 1.71% last year.

Muhammad Syafii Antonio, an Indonesian Islamic finance analyst told Jakarta News that the sukouk law was beneficial globally.

"Sharia-based investors from Middle Eastern countries, Singapore and London can now be sure that the (Indonesian) government is willing to develop its Sharia industry - it is a very positive signal," Antonio said, quoted Jakarta News.

The government could now draw funds from Middle East investors to build costly infrastructure projects and help reduce the state budget deficit by issuing sukouk, Antonio added.

Indonesia lawmakers approve bill on sharia debt

JAKARTA - An Indonesian parliamentary commission and the government agreed to pass a new bill on Islamic sharia debt into law, a legislator said on Monday, allowing the government to issue its first Islamic bond to help finance the budget deficit.

The approval came as the government is finding it harder to raise debt through the conventional bond market amid volatile global financial markets. Indonesia needs to increase its debt issuance to finance a higher budget deficit target this year.

The finance ministry had delayed issuing its planned sovereign Islamic bonds due to delays in passing the new bill on Islamic debt.