Jakarta Eyes Islamic Finance
Image Credit: Flickr / ~ezs

Jakarta Eyes Islamic Finance

 
 

Indonesia is firmly on course to expand on its entrance into the Islamic finance market with the issue of its second sukuk in two years. The move will take it a step closer to rival Malaysia, and provide the country’s coffers with an alternative source of income amid the international financial turmoil.

The final timing hasn’t been confirmed. Fluctuating fortunes in the financial markets are no doubt playing a part over the issue, which is expected to raise more than $500 million, mainly from the Middle East. According to reports, the plan has been mandated by HSBC, Citigroup and Standard Chartered.

The sukuk has been given a BB+ long term foreign currency rating by Standard and Poor’s, while Moody’s Investors Services have attached a Ba1 provisional rating that is essentially designed for Muslims who are prepared to pay what’s been dubbed a piety premium.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

S&P said the ratings reflected Indonesia’s continued improvement in the government’s balance sheets and a resilient economic performance, while rating constraints included high inflation, low per capita income and institutional impediments to higher economic growth.

Islamic finance in the modern era is a latecomer compared with the varying styles of Western capitalism. It emerged in the early 1970s with the establishment of Gulf banks on the back of an earlier oil boom. However, the philosophies of Islamic finance go far deeper and back to the times of the Prophet Muhammad and the beginnings of sharia law in the seventh century.

Under sharia law speculation, the payment of interest – and complicated derivative products like those that brought Wall Street to its knees – are prohibited.

In addition, loans can’t be sold. Companies that are considered heavily in debt are shunned, and those that deal in gambling, alcohol, pornography or illicit products like pork are strictly off limits.

As opposed to a mortgage, Islamic finance operates more along a lease basis. Officially, the lender owns the property, while the borrower makes a substantial down payment and enters a rental agreement. Ownership is transferred once the total value is paid out.

Islamic banks and insurance companies also profit share among customers, and are much more geared towards spreading risks compared with their Western counterparts.

Such bonds cost more, but the in-built piety premium is to ensure their investments measure up to the moral standards imposed by the sharia code and the demand is there amid a shortage of premium paper in the world’s financial markets.

The Malaysians found this out, having led Muslim countries in establishing a global bond market. And Indonesia’s foray follows the successful issue of a three-year benchmark offshore Renminbi 500 million sukuk, which was issued in Hong Kong by Malaysia’s sovereign wealth fund Khazanah Nasional Berhad.

Known as the ‘dim sum Sukuk,’ it was 3.6 times oversubscribed, heartening Indonesia’s finance ministry and the Perusahaan Penerbit SBSN Indonesia, a vehicle dedicated to issuing the sukuk.

Indonesia issued its first ever sukuk in April 2009, with $650 million worth of securities on offer, which closed seven times oversubscribed. Middle East investors took up 30 percent of that, and Asians acquired 40 percent. However, this time around, Jakarta is pinning its country’s fortunes on an improved take-up from Arab states.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief