Sukuk Invigorate Indonesia Economy

CAIRO — Indonesia is passing a legislation that will allow the issuance of sukuk, Islamic bonds, for the first time in the world's most populous country to ease economic woes, diversify debt instruments and lure Islamic investments.

"We'll consider both the domestic and international environments when deciding whether the sukuk will be institutional and mainly international, or domestic retail," Finance Minister Mulyani Indrawati told the Financial Times on Wednesday, April 9.

The parliament is set to pass on Thursday, April 10, a legislation, which the government has been working on for two years, allowing it to sell Islamic bonds at home and abroad.

Mulyani said the government intends to issue up to $1.6bn in sukuk in the second half of this year, once the law is put into force.

Officials hope the sukuk will open up a new funding source for both the government and companies by luring Middle Eastern investors, many of whom only use Islamic products.

They believe that the Islamic bonds will also help to cover a ballooning state budget deficit.

Indonesia's need for the funding alternative has increased recently, with the government set to run a wider-than-expected 27 percent budget deficit this year.

Like other forms of Islamic financing tools, sukuk do not receive or pay interest.

It typically operates through actual transactions such as profit-sharing or leasing.

Companies that have issued Islamic bonds make payments to investors using profits from the underlying business, instead of paying interest.

Promising

The government hopes that by allowing sukuk, the country will tap into a booming global market.

"I'm optimistic that Indonesia will be able to compete," said Minister Mulyani.

Bankers are also optimistic that sukuk would bring good news for Indonesia amid the budget deficit and the soaring inflation.

Rakesh Bhatia, the head of HSBC in Indonesia, sees the sukuk legislation as "extremely positive".

"The law will give the government and the country access to additional capital," he told the FT.

"We're already in advanced talks with companies that are just waiting for the government to take the lead."

Abiprayadi Riyanto, head of Mandiri Investasi, a subsidiary firm of Indonesia's largest lender PT Bank Mandiri, doubts the country could compete with Asia's Islamic finance hub Malaysia "in the near future".

"The Malaysian government's commitment to develop sukuk is so high, while in Indonesia there are so many bureaucratic hurdles."

Southeast Asian giant Malaysia has the world's largest Islamic bond market.

It issued about 47 billion dollars or two-thirds of the total Islamic bonds outstanding worldwide last year.

Sukuk are increasingly popular and saw a growing market around the world in recent years.

They are already available in the US, Britain and Japan through corporate issuers, but never by a Western state.

Some countries, like Thailand, are contemplating the issuance of Islamic bonds of their own.

The British government has launched a comprehensive study to analyze the feasibility for the government to issue Islamic bonds to enhance London's standing as an Islamic finance hub.