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`Sukuk' success stories in Indonesia and beyond
Today, the Islamic financial system has evolved significantly to become more dynamic and competitive in the global financial system
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oday, the Islamic financial system has evolved significantly to become more dynamic and competitive in the global financial system. In the last five years, the Islamic financial system has recorded dramatic growth and has a presence in more than 75 countries in both Muslim and non-Muslim dominated communities.
The more significant development of Islamic finance is the development of the sukuk (bond) market. Beginning modestly in 2000 with three sukuk issuers collectively worth US$336 million, this figure doubling in 2008 to exceed $75 billion, and it is expected to surpass $100 billion in the next few years.
Issuance of sukuk - both in domestic and foreign currencies - has been quite common in some countries. The most active issuers of sukuk in the past year include Malaysia, the UAE, Saudi Arabia, Pakistan, Kuwait and Bahrain.
Based on the data of Standard and Poor's Rating 2009, Malaysia accounted for 45.03 percent of the total sukuk issuance in 2009. Meanwhile Indonesia has fewer than Saudi Arabia with 16.05 percent and 22.03 percent respectively.
Indonesia, which has the largest Muslim population in the world and the largest economy in Southeast Asia, has the potential to become the largest indigenous Islamic financial market and, in particular, the largest Islamic debt capital market in the world.
In 2008, the House of Representatives (DPR) passed the law No. 9/2008 on State Sharia Securities (SBSN) and the then government issued SBSN using the sukuk ijarah scheme for the first time. The sukuk law enables sukuk schemes as an alternative source of financing for the government and corporations. The government could use such schemes as instruments to seek sovereign debt from domestic or international market, especially the rich Gulf countries that are reaping windfall profits from the soaring oil prices.
Currently, the billions of US dollars that come from Middle East have begun to leave the US and UE stock markets to seek new target investments that are based on sharia schemes. Indonesian government and domestic company can take this opportunity by issuing sukuk schemes.
The success story of the issuance of SBSN for the first time in 2008, which experienced oversubscription and reached Rp 8 trillion ($874 million) proved that sukuk schemes are in huge demand with both domestic and foreign investors.
This first SBSN issuance used the sukuk ijarah sale and leaseback scheme in which one party solely acts, or through its representative, sells or leases its benefit right of an asset to the other party based on an agreed price and period, without the transfer of asset ownership. In this case the government will sell the beneficial title of the assets to a special purposes vehicle (SPV) and then SPV will issue sukuk to investors.
The government has already issued sukuk three times, which were collectively worth Rp 4.699 billion (August, 2008), with ritel (retail) sukuk worth Rp 5.559 billion (February, 2009) and global sukuk worth $650 million (April, 2009). Furthermore, some Indonesian corporations also have already used sukuk as source of financing with about 20 sukuk schemes.
Sukuk has considerable potential to grow in Indonesia as an investment and financing instrument. Indonesia will become a destination target for the excessive capital from Middle Eastern countries. As it is well-known, Indonesia is one of the few countries around the world that has managed to endure the current global financial crisis relatively well. Indonesia still survives with its more than 6 percent of annual economic growth in 2008, while the world experienced a significant decline of economic growth and some countries now have negative economic growth.
It means Indonesia has good fundamental economy that can become a selling point to attract global capital through the issuance of sovereign sukuk schemes.
The issuance of sukuk schemes in the future is predicted to increase more, especially as seen from the demand of domestic and foreign investors of its issuance. By utilizing the success stories of retail sukuk and global sukuk, Indonesian corporations should focus on issuing sukuk schemes for financing rather than conventional bonds.
Another reason for the bright future of sukuk in Indonesia is that there are many infrastructure projects across the country that could be financed by sukuk schemes.
Diversification of sukuk is also an important thing, like sukuk istishna, which can finance those projects, and also a few regions in the country that experienced serious damage from serial earthquakes.
The government needs to boost its action to maximize the potential of sukuk in order to absorb more capital from both domestic and foreign investors. Thus, sukuk in Indonesia will be more dominant in bond markets and increase its contribution to the national economy as well as the Malaysian government, which issued sovereign bonds (sukuk) with 45.03 percent profit in 2009, significantly improving its economy.
The writer is the Secretary General of ISEFID (Islamic Economics Forum for Indonesian Development) and currently studying a Master of Economics at International Islamic University Malaysia.
