Indonesia is taking aim at one of the biggest weaknesses of the global Islamic finance industry – the lack of an ample, reliable supply of sharia-compliant bonds – with one of the most ambitious schemes to boost issuance so far.
Although sukuk are a common funding tool across the Middle East and Southeast Asia, with sovereign and quasi-sovereign issues representing around two-thirds of total sales, supply is irregular, in particular for U.S. dollar-denominated deals.
Year-to-date, global sukuk issuance in all currencies totals $39.5 billion, Thomson Reuters data shows, down from $47.5 billion in 2015 – a year when it was cut by a sudden decision by Malaysia’s central bank to stop issuing short-term sukuk.
Shrinking issuance can put Islamic banks at a disadvantage, limiting instruments needed to manage their money profitably and meet liquidity requirements. The International Monetary Fund has urged governments to ensure regular issuance by incorporating sukuk into national debt management strategies.
Indonesia is doing just that with an industry masterplan, unveiled last month, that envisages sovereign sukuk issuance rising to around 50 percent of total debt issuance over the next 10 years from around 13 percent last year.
Sovereign sukuk issuance would increase by around 5 percent year-on-year, with government agencies encouraged to use sukuk to fund infrastructure, agriculture and educational projects.
Anita Yadav, head of fixed income research at Emirates NBD in Dubai, said Jakarta’s target is ambitious but there would be a natural incentive among issuers to meet domestic banks’ appetite for Basel III instruments.
“The growth in domestic market may be easy to achieve but the growth in the international market will likely be slower.”
Global sukuk issuance is lacklustre despite a surge in sovereign debt in the Middle East, where governments are scrambling to cover budget damage inflicted by low oil prices.
Fresh supply may come in the next few months from Kuwait, which plans to raise up to 3 billion dinars ($10 billion) from international markets via bonds and sukuk.
Generally, however, governments have disappointed investors looking for more sukuk. In April, Abu Dhabi returned to the international market after a seven-year absence with a $5 billion conventional bond; Qatar raised $9 billion in May, the biggest bond offer ever seen in the Gulf.
Saudi Arabia, home to the world’s largest Islamic banks, plans a debut sale of dollar bonds this year that could raise over $10 billion, but it is unclear whether sukuk would be included. In April, Riyadh raised $10 billion via an international bank loan.
Khalid Howladar, global head of Islamic finance at rating agency Moody’s, said many Gulf governments were reluctant to fund deficits with sukuk because of less standardised and more complex structures, leading to higher issuance costs.
This conflicts with the mandate of government Treasuries to raise funding in a cheap and efficient way, he said.
Some foreign investors also prefer conventional bonds over sukuk for simplicity and familiarity of structures, said Yadav at Emirates NBD.
Indonesia hopes regular issuance can mitigate such concerns and provide benchmarks to encourage local firms to follow suit.
Unlike the Gulf, Indonesia is an established issuer of dollar-denominated sukuk; it raised $2.5 billion in February in a dual-tranche deal that was three times oversubscribed.
Jakarta is also expanding the investor base for its sukuk. Last week it sold 2.6 trillion rupiah ($197.2 million), more than targeted, using a new non-tradable savings sukuk aimed at retail investors.
Indonesia’s drive may influence other countries seeking to develop their own sukuk markets. Last November, Pakistan’s Ministry of Finance said it would reduce use of conventional debt by between 20 to 40 percent of total financing in favour of Islamic modes, though it did not specify a timeframe.