Sharia Banking and the Financial Industry

Prime reverse repo auction of sharia securities was to assist in the deepening of financial markets in sharia banking industries. The auction was absorbed Rp100 billion. Director of the Directorate of Monetary Management of Bank Indonesia, Hendar said that from this auction prime interest of Islamic banks is quite good, because the bid price was greater than the ceiling price. Target of Rp100 billion from incoming bid reached Rp110 billion. However, the central bank won the auction for 100 billion from the offering. Yields are given, by 4.6% with a period of 1 month. BI deputy governor Halim Alamsyah said earlier in the reverse repo Islamic financial markets need to encourage sharia banks, especially in managing liquidity through monetary operations. Reverse repo is used to describe the occurrence of reverse repo transactions. If the sale of securities with repurchase agreements called repo transactions, then the reverse repo is the purchase of securities offered in the transaction for resale. These terms can be called a buy / sell back, because the reverse repo is a repo sale transaction when viewed from the standpoint of the buyer. In order to smooth out the plan’s central bank reverse repo Islamic Bank to revise Regulation (PBI) No.13/24/PBI/2011 about the Second Amendment to Bank Indonesia Regulation Number 10/36/PBI/2008 on Monetary Operations Sharia. This PBI was made in improving the effectiveness of monetary control and fulfillment Shariah principles in the execution of transactions, especially transactions which have the second leg. The provision is mainly in the context of improving the provision of Sharia Monetary Operations (CSO); especially Article 18 on sanctions related to the operation of monetary transaction is declared void sharia. In terms of the transaction CSO canceled, participants subject to additional sanctions. In a reverse repo, BI scheme was to repo / sell securities sharia state (SBSN) owned to the bank (first leg) with the promise of buying back at a later date (second leg) at a price that was agreed upon. If the price of first leg in December 100 and agreed a month longer to be repurchased on the second leg with a price of 100 at repo rate 4.7%. On the second leg in January SBSN price to 120, but his bank could not return to BI SBSN means the bank defaults and there was outright sale to the bank, the central bank will impose additional sanctions to the bank for the difference in price is 20.

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The government’s successful selling of US dollar-denominated Islamic bonds known as sukuk at a cheaper rate signals declining risks of investing in Indonesia. The sukuk sales came amid global financial market uncertainty, bringing the country closer to an investment grade rating. The selling of the nation’s second-ever sharia-compliant global sukuk was oversubscribed by 6.5 times, and the government collected US$1 billion, according to Finance Ministry debt management office Director General Rahmat Waluyanto on Tuesday. Yield — the annual return that indicates investment risk — has been set at a relatively low level of 4 percent for the seven-year government debt papers. The first sukuk issuance in 2009 forced the government to offer an 8.88 percent yield with five-year maturity, with proceeds of $650 million. A smaller yield means lower costs of borrowing for the government. The lower yield will also be a benchmark for local companies to issue similar bonds. The cheaper yield also beat out investment grade-rated Italy earlier this week when the country sold five-year bonds worth ¤3 billion with a 6.29 percent yield. Top international rating agencies Standard & Poor’s (S&P), Fitch Ratings and Moody’s Investors Service upgraded Indonesia’s sovereign credit rating to one notch below investment grade earlier this year. An investment grade rating confirms a nation’s ability to buy back debt papers it issues, reducing risks for investors. Lower risks translate to lower yields, easing borrowing costs that strain state budgets to pay back the bonds. Indonesia’s condition is getting better while, relatively, global conditions — especially in developed nations — are worsening. Our debt ratio and sustainability improved and our credit rating prospects are increasing while many other countries are declining. The global financial market has not yet fully recovered from the August-September turmoil, which saw trillions of dollars of investors’ funds wiped out, as signs were clear that the world’s economy was headed for a slowdown due to the debt-stricken eurozone and stalling economic recovery in the US. However, Indonesia still attracted $6.5 billion in orders from 250 investors, Rahmat said, citing HSBC Holdings Plc., Citigroup Inc. and Standard Chartered Plc. as selling agents for the global sukuk issuance. Investors from Asia and the Middle East dominated the purchase by 32 percent and 30 percent, respectively, while Indonesian investors accounted for 12 percent, European for 18 percent and the US for 8 percent. The global sukuk is part of the government’s Rp 124.7 trillion net bond issuance program this year to plug state budget deficit and finance development projects.

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Issuance of global sukuk, might not run smoothly as expected the government. This may happen especially if associated with the domestic political situation that occurred recently. According to economic analysts sharia, Wahyu Dwi Agung, the country’s political stability can not be denied is one reason investors are willing to invest their funds. Managing Director of MC Consultin said that investors certainly will also see that there is risk. If it turns out great because of political risks, of investing in global sukuk now will not be profitable for investors. In addition, Revelation admitted competitive returns will also be another determinant in the global sukuk sales. Thus, it should be considered correct.
However, hopes for the success of this instrument to raise funds is still open. Economic conditions are not good in the United States and Europe, making investors from the Middle East will inevitably have to channel funds to other countries that are relatively stable.
Investor especially from Middle East need to allocate the finance portfolio. Asian countries, including Indonesia, could become a favorite destination of investors.

Sukuk Bond

Indonesia plans to sell dollar-denominated Islamic bonds by the end of December, the second sale of the securities in two years, and it is looking to Persian Gulf investors to purchase the debt. Finance Department were targeting Middle East investors to buy Indonesia global Islamic bonds. Islamic bonds, known as sukuk, comply with Shariah law by using asset returns to pay investors instead of offering interest. When Indonesia sold $650 million of its first-ever Islamic dollar bonds in April 2009, buyers from the Middle East bought 30 percent of them, while Asian investors bought 40 percent, Americans bought 19 percent and Europeans bought the remaining 11 percent. Back then, the Indonesian government received orders valued at $4.7 billion, which was seven times more than the $650 million in securities on offer, according to data from the Ministry of Finance. The government set the coupon rate at 8.80 percent, higher than the current interest on other government securities. Indonesia’s 10-year bond, which has a 8.25 percent coupon rate, yields 6.91 percent. The US 10-year bond, by comparison, yields 2.15 percent. Overseas investors continue to chase high-yielding assets in emerging markets, including Indonesian bonds. As of Aug. 23, foreign holdings of Indonesian bonds rose 26 percent to Rp 246 trillion ($28.8 million), up from Rp 195 trillion at the end of 2010. Finance Minister Agus Martowardojo said on Aug. 23 that the government had planned to raise as much as $1 billion from global sukuk sales by the end of September. Sukuk bonds account for 22 percent of Indonesia’s dollar-denominated debt offerings. In April alone, the government raised $2.5 billion by selling dollar-denominated non-sukuk bonds.

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Indonesia will launch up to US$1 billion in dollar-denominated Islamic bonds (sukuk) in the third quarter, according to a senior official. Finance Minister Agus Martowardojo said on Tuesday evening that the government would soon appoint three underwriters for Asia, the US and Europe for the global sukuk issuance. Finance Departement will conduct a roadshow to better introduce Indonesia to investors. Financial markets were not in prime condition due to recent worldwide turmoil on fears of an economic slowdown. Finance Minister optimistic that the dollar-denominated sukuk papers would be absorbed by investors as Indonesia’s fundamental remained strong and the country offered higher returns than developed nations. The potential underwriters have also expressed indications of interest from the market or their clients. Indonesia plans to issue a net of Rp 124.7 trillion (US$14.58 billion) in different types of government bonds this year to plug the budget deficit and finance development programs.

source: the jakarta post

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The Indonesian Ministry of Finance raised IDR 810 billion ($95.7 million) in a Sukuk auction on 2 August, missing its IDR 1 trillion target. The Ministry has so far sold IDR 15.76 trillion of debt in Q3 auctions in the third quarter, against an IDR 45.5 trillion target. In H1 it raised only 54 per cent of gross issuance target of IDR 201.6 trillion. The Debt Management Office statement said that the Ministry of Finance sold IDR 570 billion of six-month Sukuk at a yield of 3.80 per cent; IDR 40 billion of 14-year bonds, due 2025, at a yield of 7.78 per cent; and IDR 200 billion of 25-year Sukuk, due 2036, to yield 8.63 per cent. Cover multiples were 2.1 on the 25-year paper, 1.24 on the 14-year bonds and 14.49 on the short-term Sukuk.

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