Sharia Banking and the Financial Industry

The government sold Rp 4.25 trillion (US$467.5 million) worth of sukuk (Islamic bonds) Monday  (May1 7, 2010) in a private placement method to the Religious-Affairs-Ministry-managed Haj fund, the Finance Ministry said in a statement. The sale is one part of the government’s servicing of the national budget deficit, estimated to reach Rp 133.7 trillion or 2.1 percent of the gross domestic product, based on the 2010 state budget revision.
The placement was a follow-up of the memorandum of understanding signed between the Religious Affairs Ministry and the Finance Ministry on April 22 last year. The sukuk have a 7.55 percent coupon per year, and will mature on May 17, 2013. They cannot be traded. Assuming that 700,000 potential pilgrims are on waiting list, there will be about Rp 16 trillion deposited in banks, yielding massive interest, he said. Speculations were rife the fund may be used to finance the Haj pilgrimages of ministry officials. Religious Affairs Minister Suryadharma Ali said the interest would be used for passport and visa services, Haj accommodation and transportation and the embarkation and food needs of pilgrims. He said he would follow-up the issue within the month, and that it would take two years to improve such weaknesses.

The government plans to sell Rp 1 trillion (US$100.4 million) of Islamic bonds (sukuk) next month through an auction mechanism, the Finance Ministry’s debt management office stated.
The bonds auction will be held every month throughout this year, but the amount issued will likely depend on the market. In mid-August, the government will auction the sukuk at a reasonable level of Rp 1 trillion. and the auction mechanism would be more efficient than the bookbuilding method – in which an underwriter attempts to determine the amount of shares investors want and the price they are willing to pay. The government want to show the auction is more transparent.
Through the auction, the debt management office also expects to create the benchmark series of sukuk, which will be useful to determine the yield and price of Islamic bonds to be issued in the future. The government first sold Islamic bonds in August 2008, amounting to Rp 4.7 trillion. It then issued its first retail sukuk in February, with an order of Rp 5.56 trillion. The first-ever international sale of dollar-denominated sukuk was carried out in April, raising US$650 million, with a yield of 8.8 percent for the five-year Islamic bonds maturing in 2014.
The government earlier this year launched a new type of sukuk, dubbed the Indonesian Haj Funds Sukuk (SDHI), designated to tap the Haj and Ummah Trust funds that are vulnerable to embezzlement by corrupt officials of the Religious Affairs Ministry.
Danareksa Research Institute chief researcher Purbaya Yudhi Sadewa said the auction mechanism would help the government obtain a more favorable yield, which would reduce the cost of borrowing. The auction method will be more dynamic. It will create a more favorable yield for the government.

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…)

Incoming search terms:

• 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

Indonesia’s first sale of dollar-denominated sukuk was seven times oversubscribed, with orders received totaling US$4.7 billion. The demand recorded was around seven times higher than the $650 million of Islamic bonds offered by the government, according to a Finance Ministry statement.
Investors’ appetite to buy the dollar-denominated global sukuk was so high, be it sharia investors or conventional investors. The five-year sukuk bonds maturing on April 23, 2014, have a 8.8 percent yield, or 7.04 percent more than US Treasuries with similar maturity. The yield will be paid every six months, on April 23 and Oct. 23. In February, the government sold $2 billion of regular 10-year bonds overseas, with a yield of 11.75 percent, or 8.76 percent more than US debts.
The issuance is the largest straight issuance of dollar-denominated sukuk, outside of the Gulf Cooperation Council (GCC). And it is the first benchmark of dollar-denominated sukuk in Asia since 2007.
The global sukuk were ordered by Asian investors (32 percent), Middle East investors (30 percent), US investors (19 percent), European investors (11 percent) and Indonesian investors (8 percent). The orders came from fund managers (45 percent), banks (37 percent), retail investors (14 percent) and insurance and pension fund companies (4 percent).

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