Sharia Banking and the Financial Industry

Indonesia raised Rp 950 billion ($102.6 million) from sales of sukuk, or Islamic bonds, on Tuesday, the Finance Ministry said. That was less than the Rp 1 trillion the government originally sought.
The government sold Rp 55 billion of the notes, known as sukuk, due September 2015 to yield 8.69 percent, Rp 105 billion due in January 2017 to yield 9.19 percent and Rp 790 billion due in January 2025 at a yield of 10.51 percent.
The government is selling debt to fund a budget deficit. The Islamic bonds sold today were of the Ijarah type. Muslim Shariah law forbids interest payments, so Ijarah sukuk are based on a leasing contract and pay a profit distribution to investors rather than interest. The government also plans to sell Rp 3 trillion of three-year Islamic bonds to retail investors on Feb. 10, said Rahmat Waluyanto, director general of the Ministry of Finance’s debt-management office, last month. The notes will be on offer from Jan. 25 to Feb. 5.
PT Bank Mandiri, PT Bank Rakyat Indonesia, PT Danareksa Sekuritas and PT Mandiri Sekuritas were among 16 primary dealers appointed to help sell the Islamic bonds, according to a Finance Ministry document.
The government planned to propose an increase in the targeted state budget deficit this year to the House of Representatives. The target would be raised to Rp 128.7 trillion, equivalent to 2.2 percent of the projected GDP, from Rp 98 trillion, or 1.6 percent of GDP, partly because of an expected increase in spending on fuel and electricity subsidies.

SBSN-Indonesia

The use of Sukuk or Islamic securities have become increasingly popular in the last few years, both as a means of raising government finance through sovereign issues, and as a way of companies obtaining funding through the offer of corporate sukuk.
Beginning modestly in 2000 with total three sukuk worth $336 millions the total number sukuk by the end of 2006 has reached to 77 with over US$ 27 billion funds under management. By the end of 2007 the total figure is expected to exceed US$35 billion. (more…)

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• islamic sukuk
• certificates of equal value representing after closing subscription receipt of the value of the certificates and putting it to use as planned common title to shares and rights in tangible assets usufructs and services or equity of a given project or equit
• differentiation of sukuk and bond
• sukuk and bond differentiation

In April this year, Law No.19/2008 regarding State Shariah Securities or Surat Berharga Syariah Negara (SBSN) was passed by the House of Representatives, and this week the government issued SBSN for the first time. The response from investors has been good and demand from domestic investors reached Rp 8 trillion (US$874 million) in last week’s book building process.
Yet despite the strong interest from investors, the government only accepted Rp 4.69 trillion of orders, or close to the indicative target of 5 trillion after rejecting higher yield bids. The government stated that the SBSN will yield 11.8 percent for the seven-year tranche and 11.95% for the 10-year tranche. This first SBSN issuance uses the sukuk ijarah sale and leaseback scheme in which one party solely acts, or through its representative, sells or leases its benefit right of an asset to the other party based on an agreed price and period, without the transfer of asset ownership. In this case, the government shall sell the beneficial title of the assets to a special purpose vehicle (SPV).
The establishment and administration of the SPV for this SBSN is regulated by Government Regulation No. 56 and 57 (2008). Subsequently, the SPV will sell sukuk to the investors. The government shall obtain funds from the sale of assets to investors through the SPV. Assets bought by investors are then leased to the government.
During the SBSN period, the government pays a rental lease periodically to investors. Sukuk that are owned by investors can be traded in the secondary market at the market price. At maturity, the government will buy back the assets sold to the SPV through a payment agent. Sukuk certificates held by investors are returned to the SPV.
Under this scheme (the ijarah sale and leaseback), investor cash flow is no different than that for conventional bonds that offer fixed or variable rate coupons.
Investors receive income periodically in the form of lease rental stemming from the beneficial right of the assets. For conventional bonds, the lease rental is equivalent to the bond interest that is paid periodically.
In the secondary market, just as for conventional bonds, investors may attain capital gains from sukuk. At maturity, investors will receive payment for the nominal SBSN amount in the form of payment from the government that is equivalent to the debt principal in conventional bonds. However, sukuk under the ijarah sale and leaseback scheme must comply with shariah principles in which there is no interest (riba), no uncertainty (gharar) and no speculation (maysir).

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