Indonesian Islamic bonds big success May 2, 2009Posted by informationmedia in finance.
Tags: bond, capital, islam, islamic, market, sukuk
IN this guest column piece, DR TERRY LACEY argues that the Indonesian Government has just launched a dollar denominated retail Islamic bond with resounding success, and vastly over subscribed; despite the global economic crisis. He argues that there are doubts over Western banking and finance and fears that Islamic banking and finance may be affected by some of the same problems.
The Indonesian dollar sukuk, and a second sukuk in local currency issued to improve management of Haj Trust Funds shows that the Indonesian Government is using Islamic bonds to clean up public administration as well as to raise funds for the state budget.
This was despite the global economic and financial crisis and question-marks over poor Western banking and finance practices, with possible repercussions for Islamic banking and finance. Bond proceeds will be used to finance government debt.
Islamic banking and finance remain underdeveloped in Indonesia with only 3.79 million customers in 2008 and just over 589,000 loans, compared to 512,000 in 2007, in a country with a population of 230 millions. The industry only has about 1,500 outlets compared to 6,500 conventional banking outlets and needs substantial investment plus up to 25,000 new staff if it is to increase its share from 3 percent of banking assets up to the targeted 5 percent.
Ahmad Riawan the chairman of the Indonesia Sharia Bank Association noted in a recent Jakarta seminar on the sharia economy that the central bank (Bank Indonesia) was confident the sharia economy could contribute to Indonesian development without leading to inflationary pressures, since it forbade transactions involving derivatives and high leverage. (Jakarta Post 29.04.09).
The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, or AAOIFI, led by its secretary-general Dr. Mohamed Nedal Alchaar, recently said it will launch a global study to see how Islamic financing markets are adhering to benchmarks, with a view to standardizing products, to remove a key barrier to the growth of Islamic finance. (Jakarta Globe and Reuters 29.04.09).
AAOIFI sets accounting, auditing and governance standards for the plus $1 trillion Islamic finance sector, but the chairman of its board of scholars shocked markets in 2007 by declaring that 85 percent of Islamic bonds were not Sharia compliant as they included repurchase undertakings. These remarks reportedly contributed to a big drop in issuance of Islamic bonds in 2008.
The Indonesian Finance Ministry pointed out that “The issuance is the largest [recent] straight issuance of dollar denominated sukuk, outside of the Gulf Cooperation Council (GCC) and it is the first benchmark of dollar denominated sukuk in Asia since 2007”. (Jakarta Post 18.04.09).
The global sukuk were ordered by investors from Asia (32 percent) Middle East (30 percent) US (19 percent) Europe (11 percent) and Indonesia (8 percent). Orders were made via fund managers (45 percent), banks (37 percent) retail investors (14 percent) and insurance and pension fund companies (4 percent).
Meanwhile in Jakarta the Finance Ministry has also introduced the Indonesian Haj Funds Sukuk (SDHI), overseen by the central bank and the Supreme Audit Agency (BPS), offering a one year Islamic bond with a fixed coupon of 8.52 percent on maturity, backed by 100 percent government guarantee and underlying assets.
The current holdings of trust funds by the Religious Affairs Ministry amounted by April 2009 to about $1.6 billion in Haj Trust Funds and Ummah Trust Funds, mostly held in Indonesian Rupiah, with about $650 millions coming in annually.
The SDHI bonds mean a higher return on funds and lower risk of mismanagement. Public officials and politicians are alleged to have embezzled the interest on Haj and Ummah trust funds. ( Jakarta Post 23.04.09).
The Religious Affairs Ministry will buy Rp 9 trillion of sukuk this year (about $830 millions).
In Indonesia Islamic bonds are also being used by government to clean up public administration as well as to finance the state budget.
Although sukuk proceeds will be used to help plug a forecast $12.8 billion gap in the 2009 state budget, (to counter the global economic crisis), the success of the dollar-denominated retail issue reflected its good terms, the strength of underlying assets and the outstanding reputation of Indonesia for political and economic stability, relative to most countries in ASEAN and globally.
*Dr Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking. Comments and suggestions can be sent via: firstname.lastname@example.org