Indonesia’s Islamic insurers are starting to favour gold over bonds amid the fastest inflation in almost two years, seeking to boost returns following a ruling that allows them to invest in the precious metal.
PT Asuransi Takaful Keluarga, the country’s largest Islamic insurer, is looking to cut holdings of short-term shariah- compliant bonds to shift into the commodity, Ernawan Priarto, head of finance and accounting, said in an interview in Jakarta on February 18. Indonesia’s two other takaful operators, PT Jaya Proteksi Takaful and PT Asuransi Syariah Mubarakah, are also considering purchases of gold. (source)
The yield on Indonesia’s dollar sukuk has climbed 21 basis points to 3.71 per cent since a February 1 report showed the fastest inflation since April 2009. The market’s regulator introduced legislation in January to let takaful companies buy gold as it seeks to boost the 100 trillion rupiah ($11.3 billion) Islamic finance industry, which is nine per cent the size of Malaysia’s.
“If you factor in inflation, the return from sukuk is hardly attractive so I’ll choose to buy gold,” Yudha Pratama, chief executive officer at Jakarta-based Jaya Proteksi Takaful, said in an interview February 9.
Insurance firms may sell sukuk and invest the funds in gold because it’s more widely traded and offers the potential for bigger returns, said Pratama, who is also the vice chairman of the Indonesian Shariah Insurance Association.
The yield on Indonesia’s 8.8 per cent Islamic bonds due April 2014 has climbed 106 basis points, or 1.06 percentage points, since reaching a record-low 2.65 per cent on October 14, according to prices from Royal Bank of Scotland Group.
The bonds are down 1.2 per cent this year after returning nine per cent in 2010. Gold rose 0.9 per cent to $1,411.70 an ounce yesterday and has climbed 29 per cent in the past year.
Islamic insurance assets in Indonesia, which has the world’s largest Muslim population, increased 50 per cent last year to $508 million, according to Pratama. In Malaysia, takaful assets were 12.4 billion ringgit ($4.1bn) at the end of 2009, according to Bank Negara Malaysia.
“Insurers will buy less sukuk,” said Priarto at Asuransi Takaful Keluarga. The company has yet to decide how much it will invest in gold, he said.
Takaful is based on the Koranic principle of mutual assistance, where policy holders contribute a sum of money to a common pool managed by the company. The funds are separated from the shareholders’ capital and are used to pay for claims.
Non-Islamic insurers in Indonesia still can’t invest in gold because regulators want bolster the shariah-compliant sector first, said Priyono, head of the shariah insurance unit at the Capital Market and Financial Institution Supervisory Agency. The policy may be reviewed, said Priyono, who goes by a single name.
Inflation accelerated to 7.02 per cent last month, the fastest annual pace since April 2009, according to a government report on February 1. Bank Indonesia then raised its benchmark lending rate to 6.75 per cent from a record-low 6.50 per cent on February 4 to curb consumer prices. Consumer price data for February are due March 1.
“We want more instruments to invest in, not just stocks, sukuk and fixed deposits so that we can diversify our portfolios,” said Priarto at Asuransi Takaful Keluarga.
Global sales of sukuk, which pay asset returns to comply with Islam’s ban on interest, declined 15 per cent to $17.1bn last year, according to data compiled by Bloomberg. Offerings in 2011 total $3bn.
The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed 0.4 basis point on Wednesday to 316.7, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. Average yields fell three basis points to 5.22 per cent and are up 49 basis points this year.
The yield on Malaysia’s 3.928 per cent dollar sukuk due June 2015 rose five basis points to 2.96 per cent, RBS prices show. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s shrank five basis points on Wednesday to 337, according to data compiled by Bloomberg.
Shariah-compliant bonds have lost 0.1 per cent this year after returning 12.8 per cent in 2010, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. Debt in emerging markets fell 0.9 per cent after gaining 12.2 per cent in 2010, according to JPMorgan Chase & Co’s EMBI Global Diversified Index.
Indonesia’s new regulation, introduced on January 12, may not influence sukuk prices because of the relatively small size of the takaful industry in the country, Helmi Arman, an economist and bond strategist at PT Bank Danamon Indonesia in Jakarta, said in an interview February 22.
“The problem with gold is that the holder doesn’t get any cash unless they sell it, but with sukuk you get your coupon payments,” he said. The commodity is “attractive as a diversification tool,” Arman said.
Most takaful companies in Malaysia don’t invest in commodities such as gold, said Eric Ng, chief financial officer at HSBC Amanah Takaful (Malaysia) Sdn. The firm is a joint venture between HSBC Insurance (Asia Pacific) Holdings Ltd, Jerneh Asia Bhd and the Employees Provident Fund.
“The inherent high volatility in prices of such assets doesn’t suit the long-term nature of insurance liabilities,” he said.
Sales of rupiah-denominated Islamic bonds in Indonesia rose 56 per cent last year to 26.2trn rupiah, according to data compiled by Bloomberg. In Malaysia, the world’s biggest shariah-compliant Islamic debt market, issuance dropped 11 per cent to 28.5bn ringgit.
Indonesia sold 7.34trn rupiah of three-year Islamic bonds to individual investors this year, Rahmat Waluyanto, director general at the finance ministry’s debt management office, said on February 21.
Demand for the retail sukuk was the same as the amount sold, Waluyanto said. That compares with 8.03trn rupiah of Islamic debt sold for the whole of last year.
“The concept of shariah banking and investment is new,” Fauzi Ichsan, a Jakarta-based senior economist at Standard Chartered Plc, said in an interview on February 17. “Indonesians are more familiar with investing in gold and property because it is a tangible asset for people in rural areas, who aren’t familiar with financial assets. These have been the instruments of investment for a long time.”
Source : http://english.alrroya.com/content/insurers-buy-gold-over-sukuk-boost-returns - Feb 23, 2011
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