www.thejakartaglobe.com - Indonesia will let Shariah-compliant banks hedge against exchange-rate
movements to spur growth in Islamic financial assets and narrow the gap
with Malaysia’s industry, which is seven times larger.
Bank
Indonesia, the National Shariah Board and the Indonesia Institute of
Accountants have approved the instruments, available in Malaysia since
2006, Adiwarman Azwar Karim, Jakarta-based vice chairman of the board’s
Islamic capital market working committee, said in an Aug. 3 interview.
The central bank said it is working on regulations, declining to say
when they would be finished. (source)
Bank Muamalat Indonesia, the
nation’s second-largest Islamic lender, will be able to hold more global
bonds and issue more dollar loans once it can hedge, Finance Director
Hendiarto said in an Aug. 2 interview in Jakarta, adding that it
expected to increase foreign-currency lending by 50 percent this year.
The rule change will help Indonesia reach its target of lifting
Shariah-compliant financial assets to 10 percent of the total by 2015
from 4 percent, Edy Setiadi, executive director of Islamic banking at
the monetary authority, said in a July 30 interview.
“With
this product, Islamic banks will be more comfortable with increasing
their foreign-currency portfolios and managing the mismatch between
financing and funding,” said the National Shariah Board’s Karim. “It
will also open up the possibility for foreign banks to supply dollars to
local banks and multifinance companies, who can then disburse loans in
rupiah.”
Lending growth
Investors
and companies take out hedges to protect themselves from exchange-rate
swings that may erode the value of earnings or investments denominated
in foreign currencies.
Indonesia’s Islamic banking assets
total Rp 147.9 trillion ($15.7 billion), trailing Malaysia’s 355 billion
ringgit ($114 billion), central bank data show, even though the former
nation has 12 times as many Muslims. Shariah lending in Indonesia
increased by an average of 38 percent each year over the last five,
compared with 21 percent in Malaysia.
Worldwide sales of
bonds that comply with Islam’s ban on interest reached $28.9 billion in
2012 from $17.4 billion in the same period last year, data compiled by
Bloomberg show. Offerings totaled a record $36.7 billion in 2011.
The
average yield on worldwide Islamic notes declined two basis points, or
0.02 percentage point, to a record low of 3.14 percent on Aug. 3, the
HSBC/Nasdaq Dubai US Dollar Sukuk Index show. The spread between the
average and the London interbank offered rate, or Libor, narrowed six
basis points to 208 basis points.
Foreign requests
Indonesian
authorities started looking at allowing hedging after receiving
requests from overseas Islamic banks, including CIMB Group Holdings Ltd.
and HSBC Holdings Plc, that wanted to tap higher returns on loans in
Southeast Asia’s largest economy, Karim said. The average financing rate
offered by Indonesian Shariah lenders was 10.38 percent in June,
compared with 6.24 percent in Malaysia, central bank data show.
“It
is important to develop new products to be able to compete with the
conventional banks,” Mohamad Safri Shahul Hamid, the deputy chief
executive officer at Kuala Lumpur-based CIMB Islamic Bank Bhd., a unit
of CIMB Group, wrote in an emailed response to questions on Aug. 3.
“Through hedging, Islamic banks could reduce potential losses arising
from sudden shocks and might be able to pass on some of the savings to
the investors.”
Religious decrees
The
introduction of hedging requires two religious decrees, or fatwas, from
the National Shariah Board. The first will allow Islamic banks to do
Murabaha transactions, sale contracts with deferred payments, in
different currencies at exchange rates previously agreed on by both
parties, Karim said. The second will prescribe a swap based on the Waad
scheme, a promise to undertake a certain action that is binding for both
banks, he said, adding the decrees would take about two months to
draft.
Malaysian lenders held 5.32 billion ringgit of
Shariah- compliant deposits in currencies other than the ringgit at the
end of June, amounting to 2 percent of total Islamic deposits, data from
Bank Negara Malaysia show. They had 7 billion ringgit of
foreign-currency financing outstanding, representing 3.2 percent of the
total.
“Islamic banks are not living in isolation and they
conduct cross-border transactions which would naturally be exposed to
currency risks,” Asyraf Wajdi Dusuki, chairman of Kuala Lumpur-based
Affin Islamic Bank Bhd.’s Shariah Committee, said in a Aug. 2 phone
interview. “This is also in line with the objective of Shariah to
preserve and protect wealth.”
‘More prudent’
Global
Islamic bonds returned 6.5 percent this year, according to the
HSBC/Nasdaq Index, while emerging-market debt gained 12.6 percent,
according to the JPMorgan Chase & Co.’s EMBI Global Composite
Index.
The premium investors demand to hold Indonesia’s
dollar-denominated 8.8 percent sukuk due April 2014 over Malaysia’s
3.928 percent global Islamic bonds due June 2015 narrowed one basis
point to 50 basis points, data compiled by Bloomberg show.
HSBC
Amanah, the Shariah-compliant unit of HSBC Holdings, will offer
cross-currency hedging and foreign-exchange forwards after receiving
central bank approval, Herwin Bustaman, the Islamic lender’s Indonesia
head, said in June. The new rules will help Indonesia achieve 50 percent
annual growth in Islamic loans through 2015, Bank Indonesia’s Setiadi
said.
“If banks were cars, conventional lenders are running
at full speed with all the hedging products at their disposal while
Islamic banks are not growing optimally,” Bank Muamalat’s Hendiarto
said. “This product will make us more prudent and reduce our risk in
conducting multicurrency transactions.”
Bloomberg
Source: http://www.thejakartaglobe.com/business/indonesia-to-allow-currency-hedging-for-banks-islamic-finance/536154 - August 7, 2012
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