T

he Indonesian government plans to broaden the underlying assets used for its Islamic debt papers (sukuk) as it seeks improve liquidity in the sharia-compliant bonds market in the world'€™s most Muslim-populated nation.

The government is studying using state-owned goods and services as underlying assets for sukuk issuances, which have normally used infrastructure projects as collateral, says Robert Pakpahan, the head of the Finance Ministry'€™s financing and risk management office (DJPR).

'€œSo far, sukuk has utilized only infrastructure projects as its underlying assets, and now we are studying the possibility of utilizing the procurement of goods and services such as tables, chairs, computers and cars,'€ he said at his Jakarta office recently.

Sukuk adhere to Islamic investing principles, which forbid interest rate payments but instead offer bondholders ownership in various government assets and infrastructure projects as collateral.

Muslim-majority Indonesia is considered to be lagging in the development of its Islamic financial market, especially when compared to its neighbor Malaysia.

The latest data from the Finance Ministry shows that total outstanding sukuk bonds in the secondary market in Indonesia stood at
Rp 151.6 trillion, a far cry when compared to Rp 1.2 quadrillion for government conventional bonds.

'€œIf we can broaden underlying assets, then hopefully our sukuk issuance size could be bigger,'€ said Robert.

Among the government'€™s infrastructure projects currently used as collateral for sukuk is the double-track railway in West Java, railway development in Kualanamu International Airport in North Sumatra and the building of haj dormitories and Islamic universities throughout Indonesia, said Suminto, the head of Islamic financing at the DJPR.

The utilization of goods and services as sukuk'€™s underlying assets, Suminto said, may use the principle of murabaha, a sharia-compliant financing structure where the ownership of collateral assets is shared between the government and third-party investors.

On Friday, the DJPR officially opened the sales of retail sukuk that mature in three years and offer a fixed-return coupon of 8.25 percent. The government targeted to raise Rp 20 trillion from the sales, according to Robert.

Retail sukuk that used the Islamic asset-leasing ijara principle, would be sold to individual investors only, with a minimum holding period of one month, meaning that the bonds could not be transferred to a different owner within one month after they were sold.

Last year, the sales of three-year retail sukuk notes with a yield of 8.75 percent successfully raised Rp 19.3 trillion, exceeding the Rp 18.5 trillion goal set by the government.

The sales of retail sukuk this year have been oversubscribed, with the government already receiving at least Rp 37 trillion of bids from prospective investors, according to Robert from the DJPR.

'€œInvestors see retail sukuk as very attractive, given the declining trend of interest rates locally,'€ noted Elina Wirjakusuma, the senior vice president of wealth management at Bank Mandiri, which acts as one of the selling agents for retail sukuk.