Investment in sharia bonds expected to surge

The Jakarta Post, Jakarta

Investment in the form of Islamic syariah bonds in the country is forecasted to grow robustly to around Rp 1.27 trillion (about US$144 million) this year from Rp 130 billion last year, a consultant specializing in the sector said.

Analyst Adiwarman A. Karim from Karim Business Consulting said that syariah bonds were an attractive investment alternative as they offered high returns with a coupon rate averaging 16 percent compared to the 14 percent to 16 percent offered by conventional bonds.

"With such a sweetener, the market will react positively to this form of investment," Adiwarman told reporters on Monday.

Investment in the form of syariah means that investments have to be carried out according to Islamic law, which bans, among other things, the receipt of interest from loans.

Adiwarman explained that a high growth was possible as investors were basically running out of other investment options amid the overall unfavorable investment climate here.

The country's equity market is losing its attraction given the prevailing bearish sentiment, he said.

Moreover, investors are also reluctant to invest in the real sector given the prevailing high risk and weak economic growth.

Investing in bank deposits is not so attractive either amid declining interest rates as Bank Indonesia has been steadily lowering its benchmark interest rate since early last year.

The benchmark interest rate on Bank Indonesia one-month promissory notes is currently 11.39 percent, from over 17 percent at the beginning of last year.

Karim hinted that in the third quarter of this year, three giant companies engaged in financing, transportation and food processing were expected to issue syariah bonds that could be worth at least Rp 700 billion.

Two companies have already issued syariah bonds this year, namely telecommunications firm PT Indosat (Rp 175 billion) and shipping firm PT Berlian Laju Tanker (Rp 100 billion).

Investment in syariah bonds is still in its infancy, but market players predict that it will soon emerge as an important investment option as most Islamic countries had adopted this investment form, particularly Malaysia whose bond portfolio is dominated by syariah bonds rather than conventional bonds.