CAPITAL MARKETS - Indonesia set to introduce derivatives to hedge rate rise

Indonesia’s Sharia board plans to introduce derivatives that for the first time will enable the nation’s Islamic banks and investors to protect themselves against fluctuations in interest rates and currencies.

“We are working on the details with the central bank,” Ma’ruf Amin, chairman of the National Sharia Council, said in an interview on Jan. 27 from Jakarta. (source)

“A fatwa, or Sharia law, should be positive for the industry because we want to open up the market and have more variety of products.”

Indonesia is also preparing legislation to offer tax cuts on Islamic investment accounts as it develops the Rp 100.2 trillion (US$11 billion) industry, which is 9 percent the size of Malaysia’s.

The lack of hedging tools is forcing lenders to charge fees of 1 percent to 2 percent more than non-Sharia compliant banks, making them less competitive, Hendiarto, the chief financial officer at PT Bank Muamalat Indonesia said in an interview Jan. 27.

Speculation is forbidden under Islamic law, and derivatives are limited to hedging. Derivatives are
contracts whose value is derived from stocks, bonds, currencies and commodities, or events such as interest rates or the weather.

The products contributed to the global financial crisis, which resulted in $2 trillion of credit losses and write downs.

“An increase in borrowing costs reduces profits because lenders cannot change rates on existing loans but have to give higher returns to depositors,” U Saefudin Noer, head of Islamic banking at CIMB Niaga Syariah, a unit of PT Bank CIMB Niaga, said in an interview Jan. 28.

“Otherwise companies, which are sensitive to rate movements, will withdraw their funds.”

Payment of interest is forbidden under Islamic law. To comply banks use contracts such as Murabahah, where lenders buy an asset on behalf of the customer and sell it back at a mark-up. Another type is Ijarah, where the bank retains ownership and repayments are made in installments.

Bank Indonesia will raise Friday its benchmark interest rate by 25 basis points, or 0.25 percentage point, from a record-low 6.5 percent, according to Prakriti Sofat, a Singapore-based economist at Barclays Capital, who is among six of 22 analysts surveyed by Bloomberg that predict a quarter-percentage point increase.

The rest forecast no change. Policy makers have kept the reference rate, the highest in Southeast Asia, on hold since August 2009, when borrowing costs were cut by 25 basis points.

Suryani Omar and Soraya Permatasari, Bloomberg, Jakarta / Kuala Lumpur | Fri, 02/04/2011 2:37 PM | Business
Source : http://www.thejakartapost.com/news/2011/02/04/indonesia-set-introduce-derivatives-hedge-rate-rise.html  -Feb 7, 2011