Government mulls Islamic global bond offer

Government mulls Islamic global bond offer

Urip Hudiono, The Jakarta Post, Jakarta

Following its successful issuance of rupiah- and dollar-
denominated global bonds, the government is looking into the
possibility of issuing bonds based on the Islamic principles of
sharia.

Minister of Finance Jusuf Anwar told reporters on Monday that
the government was currently considering the legal aspects needed
for a sharia bond offering on the international market.

"The sukuk, or sharia-based bonds, are expected to fulfill the
recently strong interest by investors from the Middle East," he
said.

Jusuf, however, did not want to speculate on the amount, the
denomination or the exact timeframe of the bond offering, except
to say that it would be done "within the year."

He explained that the legal aspects that were being studied
included the provision of the underlying assets for the bonds to
fulfill the sharia principle of profit-sharing -- rather than
interest -- in conducting business.

"The bonds must comply with the sharia principle that money
alone may not produce money, but toil that produces money," he
said.

As interest is prohibited in Islam, sharia-based promissory
notes are usually offered as zero-rate coupon bonds and sold at a
discount price.

Investors get the profit in the form of installments derived
from the bonds' underlying assets, such as rental payments of
land property or other approved investments.

Giving the international financial market a taste of Islamic
financial principles, sharia-based bonds are growing in
popularity with their issuance tripling to US$6.7 billion as of
last year, attracting investors worldwide, not only from the
Middle East.

The Indonesian government apparently does not want to miss out
on this new trend, amid its need to raise funds through bond
offerings to plug the state budget deficit and the country's
recently improved credit rating.

Global rating agency Standard and Poor's rates Indonesia's
long-term local currency debt at BB, or two levels below
investment grade, while Moody's puts it at B2, five levels below
investment grade. Both credit agencies give their Indonesia
ratings a positive outlook.

The government plans to issue a total of Rp 43 trillion
(US$4.53 billion) in domestic and global bonds this year. So far,
the government has issued Rp 11 trillion in domestic bonds, in
addition to $1 billion worth of global bonds in April.