“The government needs to play a more active role,” Andi Buchari, a director at Bank Muamalat Indonesia, the nation’s oldest Islamic bank, said on Monday.
“We need more incentives, things such as a tax holiday, or perhaps an incentive for people to put their money in Shariah banks.”
Malaysia has the largest market for sukuk and is a global hub for the Islamic finance industry that manages $1 trillion worth of assets.
The government will cut taxes on Shariah-compliant transactions next year to promote “innovation in Islamic securities,” Prime Minister Najib Razak said in his Oct. 15 budget speech.
Indonesia, which has the world’s biggest Muslim population at 192 million, had Rp 75 trillion ($8.4 billion) of Shariah-compliant banking assets in 2009, or about 3 percent of the total, according to the central bank.
The amount compares with 337.6 billion ringgit in Malaysia, or 20 percent of banking assets, the Finance Ministry said in the 2010-2011 economic report released in Kuala Lumpur last week.
In Malaysia, 60 percent of the 28 million people are Muslim.
Indonesia failed to sell all of the government sukuk it offered in an auction on Oct. 5, even after suspending sales for two months because investors demanded higher yields than the government was willing to offer.
The government raised 382 billion rupiah less than the targeted 1 trillion rupiah, the 12th consecutive sale that fell short of plans this year.
Investors sought yields as high as 9.37 percent for the five-year sukuk and 8.5 percent for the 10-year notes, according to the Indonesian central bank’s Web site.
The government raised Rp 3 trillion from an auction of conventional bonds on Sept. 28 with yields of 7.3 percent for the six-year notes and 7.72 percent for the 11-year securities.
“Indonesia presents exciting prospects for the Islamic banking business,” Mudassir Amray, head of Asia Pacific Islamic banking at Citigroup Inc. in Hong Kong, said in an e-mail on Oct. 15.
“With the largest Muslim population in the region and gross domestic product of over $670 billion, the growth potential is enormous.”
Global sales of sukuk fell 23 percent to $12 billion in 2010 from the same period a year earlier, according to data compiled by Bloomberg.
Issuance totaled $20.2 billion last year, up from $14.1 billion in 2008 and was a record $31 billion in 2007, the data shows.
The extra yield investors demand to hold Indonesia’s dollar sukuk rather than Malaysia’s has narrowed 24 basis points, or 0.24 percentage point, to 24 since the start of the third quarter, according to prices from the Royal Bank of Scotland Group Plc.
Shariah-compliant bonds returned 12.5 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 16 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.
The difference between the average yield for emerging-market sukuk and the London interbank-offered rate has narrowed 22 basis points this month to 351, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
Malaysia’s Najib said last week tax cuts would apply to certain types of bai bithaman ajil and murabahah contracts.
Bai bithaman is a product with an agreed profit rate, while murabahah is a transaction involving the sale and purchase of goods in which payment is deferred.
The government will start selling debt to individual investors that pays asset returns to comply with the religion’s ban on interest, he said.
Malaysia in the past year has issued permits to global investors including Aberdeen Asset Management Plc and Franklin Templeton Investments to start Islamic fund management.
The funds, which will invest in ringgit and non-ringgit denominated assets, will be exempt from paying taxes until 2016, according to the central bank.
Sukuk sold just in Malaysia have reached $83.5 billion, accounting for 65 percent of the entire global total, according to the ministry’s report.
To spur demand for sukuk, Indonesia may negotiate rates with potential investors in the so-called book-building process, Dahlan Siamat, director of the Islamic financing unit at the Ministry of Finance, said in a telephone interview yesterday.
It will also widen the range of assets from which returns are paid, in compliance with Islamic law that bans interest payments.
“In addition to auctions, we are considering issuing sukuk through book-building,” Dahlan said from Jakarta.
“Government-linked companies can propose projects to be funded with sukuk,” allowing that to be used as the underlying asset for the debt, he said.
Source : http://www.thejakartaglobe.com/bisindonesia/bankers-urge-indonesian-incentives-for-sukuk-bonds/402186 - Oct 19, 2010
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