One of the puzzles of Islamic finance is how Indonesia, the world’s most populous Muslim nation, has been so utterly left behind in its development. Nearby Malaysia has evolved the most sophisticated regulatory environment for Islamic finance anywhere in the world and, after building an admirable domestic base, has now opened its doors to foreign entrants. Several Gulf states, notably Bahrain, have built centres of excellence around Shariah-compliant finance; and even less-developed nations such as Pakistan are making up for a slow start and witnessing a boom in this growing area.
So where is Indonesia? According to Bank Indonesia, the country’s Islamic banks have assets of Rp42 trillion ($4.5 billion), which is barely 2% of the industry. Its Islamic fund management industry is small, few companies bother launching Shariah-compliant debt, and its legal code for Shariah-compliant securities is patchy.
One reason commonly cited for the lack of progress is being redressed with some fanfare. Indonesia, unlike many other Muslim countries, had never issued a sovereign sukuk (the Islamic equivalent of a bond). Where others, notably Malaysia, have done so, these sukuks have served not only as benchmarks for the development of a corporate sector but have also presented the world with a clear signal of intent.
In April, the long-awaited Law No.19/2008 regarding state Shariah securities was passed by the house of representatives, and work finally began on an Indonesian sovereign sukuk.
The first step has been domestic, with a deal that raised Rp4.699 trillion (just over $500 million) in a seven- and 10-year deal led by domestic houses Danareksa Sekuritas, Mandiri Sekuritas and Trimegah Securities. The deal was launched on August 15, with the public offer closing on August 21. According to Indonesia’s finance ministry, total demand of Rp8 billion was received but much of it wanted higher yields than the government was willing to give; in fact, the seven-year bond will still yield 11.8%, and the 10-year 11.95%, although with inflation running at 11% in Indonesia this year that is perhaps not as generous as at first glance.
Although the deal notionally raised less than intended – market talk had been of Rp5 trillion – the overall book of demand and the state of world markets has meant the deal has been spoken of positively. But the real landmark comes next, when Indonesia launches a global sovereign sukuk. Roadshows are expected to start in October, and the three lead managers – Standard Chartered, HSBC and Barclays Capital – have been mandated. Market talk is of a deal worth about $1.5 billion. That’s much bigger than the last sovereign G3 Islamic issue, a $600 million five-year deal launched in January 2005, and will be a big step towards putting Indonesia on the map in Islamic finance.
The choice of leads, selected from an earlier list of 10 foreign banks, raised some eyebrows. "Three British banks. What’s that about?" said someone at one disappointed party. But the selection probably has less to do with their UK domicile than the excellent distribution presence they have in the Middle East: HSBC and StanChart are two of the most established banking brands on the ground in the region and Barclays has made great strides there in recent years. This appears to indicate where much of the investor appetite for the sukuk is expected to come from.
The emergence of an Islamic debt market is of particular importance to Indonesia because it faces a budget deficit, expected to be at least 1.8% of GDP this year.