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Tuesday, 12 April 2011

Indonesia: Islamic Banks Keen to Get Behind Government Infrastructure Projects

Indonesia’s Shariah-compliant banks are teaming up to take advantage of the government’s $40 billion annual budget for development projects, the biggest in five years.

Bank Muamalat Indonesia, the country’s second-largest Islamic bank, wants to boost syndicated loans five-fold this year to $250 million by funding two power plants, the bank’s president director, Arviyan Arifin, said on Wednesday.

Bank Maybank Syariah Indonesia, a unit of Malaysia’s biggest lender, estimates that shared financing to build toll roads, bridges and railways will rise to 60 percent of its total credit. Banks in Indonesia must limit loans for a single customer to 20 percent of their capital, putting Islamic lenders at a disadvantage because of their relatively small size.

Opportunities to invest deposits are limited, as four local companies sold sukuk bonds that comply with Islam’s ban on interest last year, compared with 37 in Malaysia, the world’s biggest market for such bonds.

“There are a lot of roads to be built; power, oil and gas plants,” Baharudin Abd Majid, president director of Maybank Syariah, the unit of Malayan Banking, said on Wednesday. “These are big projects and Islamic banks don’t have the capacity to fund them alone, so we need to come together.”

Indonesia passed a law in 2008 to allow financial institutions to offer Shariah-compliant services, 25 years after Malaysia. Lenders had total paid-up capital of Rp 5.97 trillion ($684 million) as of December 2010, compared with Rp 105.52 trillion at non-Islamic banks, according to data from the central bank.

Indonesia has 11 full-fledged Islamic lenders and 23 that offer services through tellers at bank branches. Islamic banking assets rose to Rp 100.3 trillion last year from Rp 67 trillion in 2009, about 3 percent of the total, according to central bank data.

“We need to look beyond the retail sector if we want to grow Indonesian Islamic banking assets,” Baharudin said.

Bank Muamalat is in talks with local and overseas Islamic banks to jointly finance two power plants, Arviyan said.

CIMB Niaga Syariah is looking for partners and allocating funds for projects, U Saefudin Noer, head of Islamic banking at the bank, said on Tuesday, declining to reveal how much it is setting aside.

Syndicated Islamic loans in Indonesia totaled $31 million last year, compared with $1.05 billion in Malaysia and $4.45 billion in Saudi Arabia.

“We’ll leverage our office in Malaysia to attract partners, the likes of Kuwait Finance House Malaysia, to participate in these projects,” Arviyan said.

“We’re also in discussions with the Islamic Development Bank and two local Shariah banks to fund these projects. We hope to close the deal by the third quarter,” he added.

There is a shortage of corporate Islamic bond sales in Indonesia because of a lack of understanding of the taxes applied to different types of structures, Etty Retno Wulandari, director of the Accounting Standards and Disclosure Bureau at the Capital Market and Financial Institution Supervisory Agency (Bapepam), said on Tuesday.

Total sales of Islamic bonds in Indonesia rose 56 percent to Rp 26.2 trillion last year.

The capital-market regulator is working on recommendations for two new types of Islamic bonds this year, which will bring the total number of sukuk structures to six in an effort to give companies more options, Etty said. The new regulations may boost sales to at least six, from four in 2010.

“Companies aren’t selling sukuk because they’re still not clear on what kind of taxes are imposed on certain structures, and the structures that are allowed are limited,” Baharudin said. “Let’s not just wait for sukuk to come in, but boost syndicated financing to support these construction projects.”

Indonesia’s government is inviting the private sector to bid for the projects as it seeks to boost economic growth to 6.5 percent this year.

Government spending to construct toll roads, airports, railroads, electricity generators and oil and gas plants may reach Rp 126 trillion in 2011, from Rp 108 trillion last year, Eric Alexander Sugandi, an economist at Standard Chartered, said.

The government will offer 16 projects for bids valued at $32.4 billion this year, local media reported on Feb. 24, citing Dedy Priatna, deputy minister at the National Development Planning Ministry.

“Companies will bid for these projects and they would need to raise funds by either selling bonds or through bank loans,” Sugandi said.
(Bloomberg/24March 2011) 

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