T

he government will boost the issuance of project-based sukuk (Islamic bonds) fourfold next year, with the Finance Ministry planning to use various infrastructure projects as the bonds'€™ underlying assets.

The government plans to issue new project-based sukuk worth Rp 6.9 trillion (US$603 million) in the 2015 state budget, pending approval from lawmakers, according to Dahlan Siamat, the director of Islamic bonds at the Ministry'€™s debt management office.

The target is higher than the recent issuance of project-based sukuk worth Rp 1.6 trillion.

The government raised the funds using underlying assets such as the double-track railway project from Cirebon (West Java) to Kroya (Central Java).

For its project-based sukuk next year, the government will use at least seven infrastructure projects as underlying assets, including the double-track railway from Muara Enim to Lahat in South Sumatra; the monorail project in Surabaya, East Java; roads in Jayapura and Raja Ampat in Papua; and the revamp of haj dormitories in six provinces.

'€œMinistries and institutions like this kind of financing because of its degree of certainty,'€ Dahlan said in Jakarta on Thursday, when asked about the reason for boosting the issuance of project-based sukuk.

By relying on project-based sukuk, ministries would not have to rely on state budget for financing their projects, he explained.

'€œIf they depend on the state budget, there are fears that the government may not prioritize their projects, with the funds eventually not being earmarked there.'€

Sukuk, or sharia-based bonds, comply with Islamic principles where the bondholders have a share in the ownership of tangible assets that act as collateral.

This is different to conventional bonds, which do not offer ownership in certain collateral, but instead offer bondholders profits from the interest rates paid by the issuers.

Despite its status as the largest Muslim-majority country in the world, Indonesia continues to lag behind in sukuk market development. For instance, government sukuk only accounts for 9.2 percent of total bonds issued by the Finance Ministry this year, according to data from the Financial Services Authority (OJK).

'€œThe potential of sukuk to be developed is actually very high, as many investors are longing [to invest in] sharia-compliant debt papers,'€ OJK commissioner Nurhaida said on Thursday.

'€œAs its issuance has to be followed by underlying assets, sukuk development is positively related to real sector development,'€ she added.

The underdevelopment of Indonesia'€™s fixed-income market means that many companies in the country still rely on banking loans to finance their projects, with the overreliance on the banking industry consequently driving up borrowing costs in the economy.

It also created liquidity mismatches, as many banks have to finance long-term projects, though their funding sources mostly come from short-term deposits.

'€œUnder the Basel-3 regulations, it would be more difficult for banks to lend to long-term projects, such as infrastructure,'€ warned Thiam Hee Ng, a senior economist with the Asian Development Bank (ADB), referring to new international banking regulations that have stricter capital rules.