Sharia Banking and the Financial Industry

A yearlong drought in the sales of corporate sukuk in Indonesia is ending as falling yields spur offers by Bank Muamalat Indonesia and Mayora Indah. Bank Muamalat, the nation’s second-largest Islamic lender, will offer as much as Rp 800 billion ($87.2 million) of Shariah-compliant notes in June. Mayora Indah, a biscuit maker, will sell Rp 250 billion of debt in May. The average yield on Indonesian corporate dollar-denominated debt has fallen 34 basis points to 4.87 percent since Jan. 17, the day before Moody’s Investors Service gave the country an investment-grade rating. Corporate sukuk sales will hit Rp 8 trillion this year, from Rp 5.4 trillion at the end of March, the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) estimated this month. The regulator is working to approve so-called musharakah and istisna sukuk.

The nation’s companies sold a total of Rp 200 billion of sukuk last year, according to government data. Bapepam-LK, is in discussions with the Indonesia Stock Exchange (IDX) to lower listing fees for Islamic bonds and is proposing to add two new types to its list of approved Shariah-compliant securities. Musharakah is based on sharing profits and losses in a joint enterprise while istisna is a contract to buy an asset on an agreed schedule.

Director of Accounting Standards and Disclosure Bureau at the agency said that allowing istisna may prompt infrastructure companies to issue sukuk, while musharakah can support various industries. Indonesia seeks Rp 4.012 trillion of investment for its 15-year development plan, with about Rp 1.786 trillion allocated for highways, ports and power stations. Bank Muamalat sold its first Shariah-compliant debt in 2003 to mature in seven years with a variable coupon rate and indicative yield of 17 percent. This year’s offer will be its second sale. The lender was rated A, the sixth-highest investment-grade, by Fitch Ratings in 2008. Mayora Indah spokeman said it plans to offer yields as high as 9 percent on its five-year Islamic bonds. That compares with a coupon of 13.75 percent for its debut sukuk, of the same tenor, issued in 2008. The instrument is rated AA-, the fourth-highest investment-grade level, by Pefindo Credit Rating Indonesia, a local risk assessor.

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Manufacturers of processed foods, PT Mayora Indah Tbk, public expose in order to organize a public offering of sukuk mudaraba Mayora Indah II in 2012. The emission value of PT Mayora sukuk mudaraba is Rp 250 billion. Director General and Operations PT Mayora, David Atmadja, yesterday (9 April 2012) said that “Sukuk Mudharabah is offered without papers,”. Sukuk Mudharabah has offered a five-year tenor. Revenue sharing for sukuk will be paid every three months. By PT Indonesia Rating Agency (Pefindo) sukuk is ranked AA-(Double A minus). As executor, PT Mayora has appointed PT Danareksa Securities and PT Mandiri Securities. For the trustee, PT Mayora appointed PT Bank CIMB Niaga.

The issuance of sukuk funds will be used for working capital of the company consisting of raw materials, packaging materials, machinery and spare parts to support the performance of the company. Not only that, at the same PT Mayora also issue bonds worth Rp 500 billion, bringing total debt securities issued by PT Mayora to Rp 750 billion. Tenor is set for conventional bonds is seven years old, two years longer than mudaraba sukuk.

About 70 percent of the proceeds of the bonds will be used for the development of a biscuit factory and supporting facilities which are located in Tangerang. A total of 20 percent will be used for routine asset finance division of the company, the wafer, chocolate, and candy. “The rest is used for the development of cocoa processing plant in the child entity, namely PT Kakao Mas Gemilang,” said David.

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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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