UPDATE 2-Indonesia plans retail sharia bonds, T-bills

Wed Apr 30, 2008 3:19pm IST


By Adriana Nina Kusuma

JAKARTA, April 30 (Reuters) – Indonesia’s finance ministry said on Wednesday it planned to issue sharia-compliant bonds for retail investors as well as Islamic T-bills to help develop the local Islamic finance industry and plug its budget deficit.

It would also issue separate Islamic bonds, or sukuk, to finance government projects, the ministry said in a statement.

Last week the government said it would raise up to $2 billion this year by selling its first Islamic bonds to fund the budget deficit. It plans two bonds in the second half of 2008 in domestic and overseas markets.

Sukuk comply with sharia, or Islamic law, which bans lending for interest. Bond holders are paid income derived from assets such as rent from property, or from commercial transactions such as trade in goods and services.

Analysts said news of the latest planned issuance should be well received and the debt could help the government overcome problems raising funds in the traditional bond market, which has been hurt by the subprime crisis.

It needs the money: with crude oil near $120 a barrel, compared with a 2008 budget estimate of an average $95, fuel and energy subsidies are expected to cost more than $20 billion, a fifth of total government spending.

“The local sharia players are certainly pleased about the rupiah issuance, as it will give them zero-risk-weighted assets on their balance sheet,” Mahmoud Abushamma, the head of sharia operations at HSBC in Indonesia told Reuters.

“The asset management companies, on the other hand, are contemplating the next generation of sharia mutual funds, where the sukuk will form one of the main ingredients,” he added.

But Wiling Bolung, head of trading at ANZ Bank in Jakarta, said the government still needed to iron out tax questions on the securities, especially if investors wanted to trade the paper in the secondary market.

Indonesia will set aside 18.8 trillion rupiah ($2 billion) of underlying assets for the sukuk, allowing the government to raise as much as 18 trillion rupiah from the bonds, which will have a 5-to-10-year maturity.

The government has been trying to push forward billions of dollars of infrastructure projects such as toll roads, railways and airports to speed up growth in Southeast Asia’s top economy.

The sharia-compliant bonds for retail investors will have a maturity of 3-4 years. The ministry did not say when they would be issued.

Indonesia has lagged neighbours such as Malaysia in developing markets that comply with Islamic law. But with Muslims making up 85 percent of its 226 million people, the country is a huge potential market for the Islamic finance industry.

Legislators passed a bill on Islamic sharia debt earlier this month, paving the way for the government to sell its first Islamic bond and allowing it to tap a wider array of investors to finance the budget deficit. ($1=9,215 rupiah) (Additional reporting by Harry Suhartono, Muhamad Al Azhari and Tyagita Silka; Editing by Ed Davies and Alan Raybould


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