The Indonesian government will issue rupiah-denominated sukuk Islamic bonds to finance state projects next year, a move welcomed by analysts as a breakthrough in the development of the country’s undersized Islamic finance sector.
The Finance Ministry plans to borrow up to Rp 1 trillion (US$103.5 million) through sukuk issuance to finance state projects next year, according to the 2013 state budget financial note. Sukuk should be seen as alternative source of financing for the government’s infrastructure projects, the note adds.
Islamic banks are set to expand as they compete increasingly with conventional lenders in attracting mainstream customers, according to a report by consultancy Ernst & Young released on Monday.
The total of all commercial banks' Islamic assets is estimated to reach $1.55 trillion this year, $1.8 trillion in 2013 and over $2 trillion mark, the report said. Gulf-based Islamic banks now have $450 billion in assets, about 30 percent of the total.
International Islamic Liquidity Management Corp., backed by a group of central banks located mainly in Asia and the Middle East, will launch its first sukuk of $300 million to $500 million "in a matter of months", its chief executive said.
Kuala Lumpur-headquartered IILM, established last year, aims to issue short term sukuk, or Islamic bonds, to help sharia-compliant banks manage liquidity and create a liquid cross-border market for Islamic instruments.
Sukuk have played a crucial role in the infrastructure sector over the past decade, with proceeds raised from issuances being utilised for both low and high profile projects. The very nature of sukuk combined with their flexibility allows them to be structured in various different ways which has attracted corporate and sovereign entities to choose Islamic bonds as a viable alternative financing instrument. The infrastructure sector has seen a large portion of the raised sukuk funds directed to development projects around the globe.
Indonesia will let Shariah-compliant banks hedge against exchange-rate movements to spur growth in Islamic financial assets and narrow the gap with Malaysia’s industry, which is seven times larger.
Bank Indonesia, the National Shariah Board and the Indonesia Institute of Accountants have approved the instruments, available in Malaysia since 2006, Adiwarman Azwar Karim, Jakarta-based vice chairman of the board’s Islamic capital market working committee, said in an Aug. 3 interview. The central bank said it is working on regulations, declining to say when they would be finished.
The Islamic finance industry will grow 15% annually in the next decade, after syariah- compliant banking assets surged in Asia in the past year, according to a global standards-setting body.
Holdings in Malaysia rose 27% to RM344bil in the 12 months to April 30, according to the central bank. In Indonesia, they climbed 43% to 144.3 trillion rupiah (US$15.2bil), official data show.
S&P Indices announced Friday the launch of the S&P/OIC COMCEC 50 Shariah Index, which is designed to measure the performance of 50 leading Shariah-compliant companies from the member states of the Organization of Islamic Cooperation (OIC). The Index has been designed in partnership with the OIC.
Yields on Indonesia’s Islamic bonds posted their first weekly decline this month on speculation supply will wane after the government rejected bids at an auction for the first time since March.
The yield on the 5.45 percent sukuk due January 2022 fell one basis point this week to 6.72 percent, the first drop since the period ending April 29.
The rapid international expansion of Islamic finance reflects its ability to remain competitive and to increasingly meet the complex requirements of the global financial community.
With various countries now intensifying efforts to develop their respective Islamic financial capabilities, it is becoming increasingly vital to build deeper relationships between the key markets for Islamic finance and also between the leading industry players in each of these jurisdictions.
Central banks from seven Muslim countries yesterday launched a regulatory body to oversee the booming Islamic investment market. The Islamic Financial Services Board (IFSB) was inaugurated here by founding members Malaysia, Saudi Arabia, Indonesia, Iran, Kuwait, Pakistan, Sudan and the Islamic Development Bank.