Using Islamic Bonds to Boost Infrastructure Development in Indonesia
In 2016 investors will be able to purchase about IDR 13.7 trillion (approx. USD $1.4 billion) worth of Islamic bonds (known as sukuk) to be issued by the Indonesian government. This amount is nearly double the amount of planned sharia-compliant sovereign debt paper this year (IDR 7.14 trillion). Indonesia will use proceeds from next year's bond sales to boost the nation’s infrastructure development (such as roads, ports, power plants, rail lines, bridges and Islamic universities).
Suminto, Islamic Financing Director at the Debt Management Office of the Indonesian Finance Ministry, said the issuance of sukuk is a good strategy to finance much-needed infrastructure development in Southeast Asia’s largest economy. Moreover, with nearly 90 percent of the total population adhering to Islam, Indonesia contains the world’s largest Muslim population.
Government-led infrastructure development is regarded as key to overcome the current process of slowing economic growth that has been plaguing Indonesia since 2011. Direct private sector involvement in infrastructure projects remains sluggish as Indonesia’s investment climate contains bottlenecks (for example land acquisition remains a big obstacle to infrastructure projects). Moreover, large-scale infrastructure projects are usually not favored by investors as it usually requires huge capital while it can take many years before projects are completed and revenue is generated.
The issuance of debt paper is one of the strategies to collect funds for these projects. Demand for Islamic bonds may in fact be stronger than demand for conventional bonds as sukuk usually offers a yield advantage (with a relatively identical risk). Indonesian sukuk is also less volatile compared to conventional bonds as investors tend to hold sukuk until maturity.
Read Analysis: Islamic Banking in Indonesia Explained: New Rules & Foreign Ownership
It is remarkable that the market share of sharia banking (Islamic finance) in Indonesia remains low while roughly 210 million Indonesians are followers of the Islam. Assets controlled by Islamic financial institutions account for only about five percent of the nation’s total banking assets (in Malaysia this figures stands at 20 percent while ‘only’ 61 percent of the Malaysian population is Muslim). As such, there is still ample room for growth in Indonesia’s sharia-compliant financial services. Recently, the Indonesian government has started to raise efforts to promote Islamic banking (for example the ‘I Love Sharia Finance Program’ launched in June 2015), thus deepening the country’s financial markets and make Indonesia less vulnerable to the effects of global economic turmoil.