Sharia Banking and the Financial Industry

Indonesia has postponed Islamic bond sales for the past eight weeks as legislators delay approvals needed for new securities. The government postponed auctions of rupiah sukuk due in five, 10 and 15 years on May 31 and June 14. Local companies have sold Rp 200 billion ($23 million) of Islamic bonds this year, compared with Rp 700 billion in 2010. Investors are asking for higher yields to hold the sukuk because of concern they will struggle to find buyers, said Helmi Arman, a bond strategist at Bank Danamon Indonesia. Indonesia cannot proceed with offerings until the House of Representatives approves the use of Rp 30 trillion of state-owned assets to back the securities, Dahlan Siamat, director of Islamic finance at the Finance Ministry’s debt management office, said on June 16. Officials were scheduled to discuss the matter on Tuesday, said Rahmat Waluyanto, director general at the ministry.

Foreign funds are buying Indonesia’s conventional bonds because they see the economic fundamentals are good. Indonesia’s 9.25 percent sukuk due in September 2015 yielded 6.82 percent on Monday, compared with 6.79 percent on the non-Islamic 9.5 percent bond maturing in June 2015, according to prices from the Interdealer Market Association. Local companies find it easier to issue debt that does not comply with religious tenets because of the lengthy process of getting approval from Shariah experts to ensure compliance, said Herbie Mohede, a fund manager at Samuel Aset Manajemen. Bank Nagari and Bank Pembangunan Daerah Sulawesi each sold Rp 100 billion of Islamic debt this year. Two companies completed sales of a combined Rp 700 billion of sukuk last year, including two sales by state utility Perusahaan Listrik Negara worth a total of Rp 500 billion, according to data from the Capital Market and Financial Institution Supervisory Agency (Bapepam LK). The government has raised Rp 18.84 trillion through sukuk auctions and private placements this year, according to data from the Finance Ministry and Bapepam LK. The government sold Rp 27.06 trillion of sukuk in 2010.

The House of Representatives approved on Tuesday the government’s proposal for the use of state properties worth a total of Rp 30.2 trillion (US$3.5 billioin) as underlying assets for state sukuk (sharia bonds) it issues this year. Finance Minister Agus Martowardodjo said underlying assets was a principle requirement for sukuk issuances, thus it was necessary to continue to support Indonesia’s promising sukuk market, citing the always “oversubscribed” status of the state sukuk the government had issued so far. He explained before lawmakers of the Comission XI overseeing financial affairs, however, that the to-be-issued sukuk were not intended for specific projects, but were intended to generally help the government cover the 2011 state budget deficits. Lawmakers requested that next time the government should issue project-based sukuk so as to enable evaluation of the financing. Agus added that state properties that would be used as the underlying assets were buildings and land belonging to ministries and other government institutions.

Indonesia’s Islamic bonds are rallying, sending yields to a five-month low, as slowing inflation and a strengthening rupiah allow the central bank to refrain from raising borrowing costs. The rate on the 7.36 percent rupiah note maturing in August 2014 dropped 58 basis points since Jan. 5 to 6.33 percent, near the low of 6.3 percent on June 6. The rupiah reached 8,499 per dollar on June 8, the strongest level since March 2004. It rose 5.9 percent in the past six months, the second-best performance among Asia’s 10 most-active currencies excluding the yen. Indonesia’s sukuk yields 283 basis points, or 2.83 percentage points, more than similar-maturity notes in Malaysia, making the debt attractive, according to Kuala Lumpur-based Asian Islamic Investment Management. Bank Indonesia said that inflation will range between 4 percent and 6 percent this year. The difference between the average yield for sukuk and the London interbank offered rate narrowed 51 basis points to 239. Investor sentiment in Indonesia is improving after the nation’s foreign-exchange reserves climbed to a record $118 billion in May.
Growth in the $540 billion economy, Southeast Asia’s largest, may reach the upper end of the central bank’s forecast of 6 percent to 6.5 percent this year. Gross domestic product increased 6.1 percent last year, the fastest pace in six years. That’s more than three times the 1.6 percent delivered by Malaysia, which has the world’s biggest market for sukuk. The Finance Ministry is awaiting approval from the legislature to use Rp 30 trillion ($35.2 million) of state-owned land and office buildings as underlying assets to back sukuk and increase issuance.

State electricity firm PT PLN is mulling the issuance of global bonds worth between US$1.5 billion and $2 billion to help finance its capital expenditure. The decision on whether to issue the bonds would be made by the end of June, PLN president director Dahlan Iskan said in Jakarta on May 1,2011. He added that it was possible the company would issue sharia-based bonds (sukuk), or seek loans from local banks. He said that PLN most definitely need loans, but whether the funding will come from local banks or through the issuance of bonds PLN will only decide in late June. As for the loan amount, Dahlan said that it would be between US$1.5 billion and $2 billion. We were continually evaluating the figure and we do not want extra unnecessary funds.

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Indonesia’s borrowing costs relative to Malaysia’s have narrowed to the lowest level since January ahead of a planned sale of global Islamic bonds in the second half of this year. The extra yield investors demanded to buy Indonesia’s 8.8 percent dollar sukuk compared with Malaysia’s 3.928 percent note shrank to 21 basis points on Friday from 71 basis points on March. The spread with similar-maturity US Treasuries was 176 points, down from 705 when the Southeast Asian nation sold the debt in April 2009, its first overseas sukuk offering.

Confidence in Indonesia is improving as the central bank projects economic growth this year will be the fastest since 2004, while currency reserves have climbed to $105 billion, almost double the holdings in 2009. Ratings agencies have raised the government one step short of investment grade, which may be reached by September, according to Hatta Rajasa, the coordinating minister for the economy. Fitch Ratings lifted its credit assessment to “positive” from “stable” on Feb. 24, citing favorable economic prospects, and kept the ranking at BB+. Moody’s Investors Service increased its rating to Ba1 on Jan. 17 with a stable outlook. The government needs at least three months to prepare the issuance, Dahlan Siamat, director of Islamic finance at the Finance Ministry, said on Wednesday.

Sales of Islamic bonds in Indonesia reached Rp 16.8 trillion ($1.9 billion) this year, according to data from the Finance Ministry’s debt management office and the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK). Issuance rose 45 percent to Rp 27.76 trillion last year. While Indonesia is home to the world’s largest Muslim population, its Rp 100 trillion of Islamic banking assets are 10 percent of Malaysia’s 351 billion ringgit ($116 billion) sector. Bank Indonesia aims to increase the market by up to 55 percent this year to try to close the gap.

Indonesia plans to start selling short-term treasury bills that comply with Islam’s ban on interest for the first time in the second half of the year.
Source : Bloomberg

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Yields on Indonesia’s Shariah- compliant dollar-denominated bonds dropped to a six-week low as Southeast Asia’s largest economy moved a step closer toward winning an investment-grade rating.The rate on the benchmark 8.8 percent Islamic note due April 2014 fell 7 basis points, or 0.07 of a percentage point, this week to 3.47 percent and reached 3.4 percent, the lowest level since Jan. 20, according to the Royal Bank of Scotland Group prices. That’s a turnaround from last month’s climb to a seven-month high of 3.84 percent as inflation accelerated to 7 percent in January, the fastest pace in more than two years. Consumer price gains eased to 6.8 percent last month. Fitch Ratings raised the assessment on Indonesia to “positive” from “stable” on Feb. 24 while keeping the ranking at BB+, a step below investment-grade, citing favorable economic prospects. Based on this rating, a lot of foreign money flowed into Indonesia and its currency appreciated strongly. The economy expanded 6.1 percent in 2010, the most in six years, and the central bank raised borrowing costs last month from a record low to temper inflation.

Sales of Shariah-compliant debt may rise this year and help ease a supply shortage. The government was waiting on House approval to allow Rp 30 trillion ($3.4 billion) of assets to be used to back sukuk, or Islamic bonds. Surging crude oil prices and concern the government will reduce fuel subsidies in a nation that’s a net importer are putting pressure on inflation. Core inflation, which excludes food and fuel, may climb to 5 percent this year from 4.28 percent at the end of 2010.