Indonesia Plans Sukuk Backed by Roads, Rail: Islamic Finance.

Jan. 13 (Bloomberg) -- Indonesia plans to increase
the type of assets that can be used to pay returns
on Islamic bonds to road and rail projects in a bid
to support its $140 billion development program.
The government is seeking approval from the
country ’s Shariah board to use future fees from
transport facilities to be constructed over the next
three years as the underlying asset for sukuk,
Rahmat Waluyanto, director general of the
finance ministry ’s Debt Management Office, said
in an interview in Jakarta on Jan. 11. The cash
flows that back Islamic bonds are currently
restricted to state-owned property and land, he
said.
Islamic banking assets in the nation with the
world ’s largest Muslim population were 9 percent
of Malaysia’s in 2010, according to central bank
data. The government also plans to offer tax cuts
on Shariah-compliant investment accounts, while
Bank Indonesia is streamlining the approval
process for new products to expand the industry.
“Once they allow infrastructure projects to be
used to issue the debt, investors will have more
choice and that will improve liquidity, ” Akbar
Syarief, a Jakarta-based fund manager at PT
Bhakti Asset Management, who helps oversee
700 billion rupiah ($77 million), said in an
interview yesterday. “Right now, we can’t find
new options, so we can’t trade the papers we
hold.”
Ijarah Structure
Sukuk backed by finances from construction of
highways are often based on Istisna, a purchase
order for an underlying asset that will be
delivered at a future date. Investors can also be
co-owners through an agreement known as
musyarakah, where buyers of the debt and the
government contribute funds in cash or in kind.
Islamic debt with real estate as the underlying
asset is known as Ijarah sukuk, or a sale and
lease agreement.
Indonesia’s government can issue up to 30 trillion
rupiah of Ijarah debt this year and total offerings
of Islamic bonds may climb more next year once
legislation is approved to sell Istisna sukuk, said
Waluyanto.
“The government is preparing regulations to
enable projects as the underlying asset and we’ve
made some progress, but we also need to get
approval from the Shariah board and get the legal
framework in place, ” he said.
Indonesia, home to 209 million Muslims
according to Central Intelligence Agency
estimates, had 86 trillion rupiah of Islamic
banking assets as of October 2010, or about 3
percent of the total, central bank data show. The
amount compares with 337.6 billion ringgit ($110
billion) in Malaysia, or 20 percent of banking
assets, according to the Finance Ministry.
Indonesia Sukuk
Sales of sukuk, which pay asset returns to
comply with the religion ’s ban on interest, rose
56 percent in Indonesia to 26.2 trillion rupiah in
2010, according to Bloomberg data. The
government has sold 42 trillion rupiah of the debt
since 2008. In Malaysia, issuance dropped 11
percent to 28.5 billion ringgit, while global sales
declined 15 percent to $17.1 billion.
Shariah-compliant bonds returned 12.8 percent
last year, the HSBC/NASDAQ Dubai US Dollar
Sukuk Index shows, compared with 19.8 percent
the previous year. Debt in emerging markets
gained 12.2 percent, from 29.8 percent in 2009,
according to JPMorgan Chase & Co. ’s EMBI Global
Diversified Index.
The difference between the average yield for
sukuk in developing nations and the London
interbank offered rate narrowed seven basis
points to 282 since Dec. 31, according to the
HSBC/NASDAQ Dubai US Dollar Sukuk Index. The
spread narrowed 178 basis points, or 1.78
percentage points, last year.
Project Failure
The yield on Malaysia’s 3.928 percent sukuk
maturing in June 2015 rose one basis point to
2.84 percent today, according to prices from
Royal Bank of Scotland Group. The extra yield
investors demand to hold Dubai ’s government
sukuk rather than Malaysia’s narrowed two basis
points to 322, Bloomberg data show.
Investors in Indonesia are “comfortable” with the
existing Ijarah sukuk because they know there’s a
physical asset and they will get their money back,
said Marciano Herman, president director at PT
Danareksa Sekuritas, in an interview in Jakarta
yesterday.
“If the laws can ensure that investors will be
protected should the project be uncompleted,
then people will buy such sukuk, ” said Herman.
“It will take some time before investors get used
to such structures because what happens if the
project fails ?”
Savings Account
Indonesia plans to sell 200.6 trillion rupiah of local
and foreign-currency debt in 2011, including
sukuk, to fund a budget deficit estimated to reach
124.7 trillion rupiah, or 1.8 percent of gross
domestic product, said Waluyanto.
The government may issue dollar-denominated
Islamic and non-Islamic bonds in the first half and
also plans to sell sukuk to individual investors
next month, he said. Indonesia sold 8.033 trillion
rupiah of so-called retail notes in February last
year, more than the 3 trillion rupiah it targeted.
The yield on Indonesia’s 8.8 percent dollar sukuk
maturing in April 2014 was little changed today at
3.26 percent, according to RBS prices. The debt
returned 9 percent last year.
“The government is probably pushing to sell debt
early before any possible interest-rate increase,”
said Syarief at PT Bhakti Asset. “Yields for the
retail sukuk have to be more than the average 7
percent that depositors get if they leave their
money in a savings account. ”


Source: Http://www.businessweek.com/news/2011-01-13/indonesia-plans-sukuk-backed-by-roads-rail-islamic-finance.html