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.