February 10, 2011
Indonesia’s plan to offer tax
incentives for Islamic finance may spur sukuk issuance, which
was 32 percent that of Malaysia last year.
Sales of Shariah-compliant debt rose 56 percent to 26.2
trillion rupiah ($2.9 billion) in Indonesia in 2010, compared
with an 11 percent drop to 28.5 billion ringgit ($9.3 billion)
in Malaysia, data compiled by Bloomberg show. The central bank
plans to submit proposals, including tax cuts for mudarabah
investment accounts, Mulya Siregar, director of Islamic banking
at Bank Indonesia, said in a Dec. 30 interview in Jakarta,
without saying when. A mudarabah is a partnership in profit, in
which each party provides either capital or labor.
HSBC Holdings Plc and Citigroup Inc., the third- and
eighth-biggest sukuk underwriters in 2010, said the plan will
boost sales of Islamic debt from the nation with the world’s
biggest Muslim population. Lebanon, Afghanistan and Australia
have announced plans to revise laws to avoid excess levies on
financial products that involve transfers of assets to comply
with the religion’s ban on interest payments.
“The Indonesian authorities are looking at facilitating
their corporate sector to issue sukuk,” Rafe Haneef, Kuala
Lumpur-based managing director of global markets for HSBC Amanah,
the Shariah-compliant unit of Europe’s largest bank, said in a
Dec. 23 interview. “Though there is significant demand for the
country’s corporate sukuk, there will be resistance in issuance
until tax implications are clear.”
Indonesia had 86 trillion rupiah of Islamic banking assets
as of October 2010, or about 3 percent of the total, according
to the central bank. That compares with 337.6 billion ringgit in
Malaysia, or 20 percent of banking assets, according to the
The government failed to raise the targeted amount in 12
consecutive local-currency sukuk auctions in 2010 as investors
demanded higher yields than the government was willing to offer,
saying the debt was riskier to hold because of a lack of
secondary market trading volume. It raised 382 billion rupiah,
less than the targeted 1 trillion rupiah at its last sale Oct. 5.
“Once the tax issues are resolved, we expect a strong
pipeline of corporate sukuk from Indonesia,” Singapore-based
Mudassir Amray, head of Asia Pacific Islamic banking at
Citigroup, said in a Dec. 29 interview. “At present, the law
supports sovereign issuances. The applicability of the law to
the companies will also help the corporate sector tap the
international Islamic capital market.”
Global sales of sukuk, which pay returns based on asset
flows, dropped 15 percent to $17.1 billion in 2010, according to
data compiled by Bloomberg. Issuance reached record $31 billion
Indonesia, which sold its first global Islamic bond in
April 2009, will tap the international sukuk market in the first
half of 2011, Rahmat Waluyanto, director-general of the Debt
Management Office, said in an interview in Jakarta on Sept. 29.
PT Bank Muamalat Indonesia, the nation’s oldest Islamic lender,
aims to sell Islamic debt in 2012 depending on its business plan,
Andi Buchari Fathoeddin, its director of compliance and
corporate planning, said in an interview yesterday from Jakarta.
Indonesian companies haven’t announced any other plans to sell
sukuk, Bloomberg data show.
The yield on Indonesia’s 8.8 percent sukuk maturing in
April 2014 fell one basis point to 2.86 percent today, according
to prices from Royal Bank of Scotland Group. The yield was as
high as 8.77 percent in its first month after issuance.
The yield on Malaysia’s 3.928 percent Islamic note due June
2015 fell one basis point to 2.94 percent today, according to
RBS data. It has dropped 97 basis points since June 3. The extra
yield investors demand to hold Dubai’s government sukuk rather
than Malaysia’s widened three basis points to 331 today,
according to data compiled by Bloomberg.
Shariah-compliant bonds returned 12.8 percent last year,
the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in
emerging markets gained 12.2 percent, according to JPMorgan
Chase amp; Co.’s EMBI Global Diversified Index.
The difference between the average yield for emerging
market sukuk and the London interbank offered rate narrowed 178
basis points to 290 last year, according to the HSBC/NASDAQ
Dubai US Dollar Sukuk Index.
Bank Indonesia is also streamlining the approval process
for new Islamic banking products, Siregar said in the interview
last month. A 10-member joint committee including
representatives from the central bank, the national Shariah
board and the Indonesian Association of Accountants will start
work from January, he said. Under the existing system, products
have to be first reviewed for compliance with Shariah law by the
panel of scholars and then Bank Indonesia.
An increase in Islamic savings would help support demand
for sukuk. Bank Indonesia is proposing reducing income tax
imposed on returns earned from mudarabah accounts to 10 percent
from 20 percent for customers and banks, Siregar said.
“Indonesia needs to move its timetable for tax reforms
more quickly,” Arfat Selvam, an Islamic finance lawyer and
managing director of Arfat Selvam Alliance LLC, said yesterday
in an interview from Singapore. “There is so much
infrastructure development that could benefit from Islamic
finance. They have to eliminate double stamp duties so that the
cost for Islamic finance is not more than in the conventional.”
To contact the reporter on this story:
Khalid Qayum in Singapore
Suryani Omar in Jakarta at
To contact the editor responsible for this story:
Sandy Hendry at firstname.lastname@example.org.