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Jakarta Post

Sukuk unattractive because of higher cost of funds: Official

Anton Hermansyah (The Jakarta Post)
Jakarta
Tue, May 10, 2016

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Sukuk unattractive because of higher cost of funds: Official The Financial Services Authority (OJK) has called on the Finance Ministry to issue new regulations to provide incentives for sukuk, given the fact that the market share of the Islamic debt papers is currently below 4 percent. (Antara/Handry Musa)

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span style="letter-spacing: 0.1px; background-color: rgb(255, 255, 255);">Compared with government Islamic sukuk securities, which are currently being developed intensively, corporate sukuk are lagging behind, as the cost of funds entailed is much higher than for conventional bonds, according to a Finance Ministry official.

Sukuk issuance is more complicated and requires more documents as there is a particular process to go through, namely transfer of assets. This leads to additional cost, said Finance Ministry sharia financing director Suminto.

"In reality, the cost structure between government and corporate sukuk is the same. However, the corporate sukuk issuance is not as great as government issuance, so the cost is significant compared with the issuance value," Suminto told thejakartapost.com in Jakarta on Monday.

Currently, outstanding government sukuk stand at Rp 377 trillion (US$ 28.3 billion), while corporate sukuk are at just Rp 9 trillion.

Financial Services Authority (OJK) chairman Muliaman Hadad argued that the problem with the corporate sukuk was the limited market makers and investor knowledge.

"Beside the cost structure, sometimes it is difficult to buy sukuk in primary markets. We need more promotion, as many investors lack knowledge of sukuk," he said.

According to Bahana Securities chief economist Budi Hikmat, the limited supply of corporate sukuk leads to ambiguous market prices, which traders usually solve by using government sukuk as the price benchmark.

"However, the maturity of the government Sukuk is mostly short term, or otherwise, too long by more than 20 years. The government should issue more sukuk with mid-term tenor to provide an ideal benchmark price," Budi suggested. (ags)

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