Indonesia Sells $1.5 Billion of Sukuk at Top Rate Since 2009

Indonesia sold $1.5 billion of dollar-denominated Islamic bonds at the highest yield since 2009 as it seeks to bolster its foreign-exchange reserves to support the plunging rupiah.

The nation issued the notes due in 5.5 years to yield 6.125 percent, according to Dahlan Siamat, Islamic financing director at the debt management office. That was the highest rate for global Shariah-compliant securities since Indonesia paid 8.8 percent on its debut dollar sukuk in 2009. The country last offered global Islamic paper in November, selling $1 billion of 10-year securities at a record-low yield of 3.3 percent.

Bank Indonesia has burned through $19.8 billion of foreign-currency reserves this year to stem declines in the rupiah, which has weakened 14 percent against the dollar. Investors submitted $5.6 billion of bids, more than three times the amount offered, Siamat said, compared with a bid-to-cover ratio of 1.9 times at a sale of non-Islamic 10-year dollar bonds in July.

“We succeeded in tightening the yield significantly as demand from investors was extremely large,” he said in an interview in Jakarta today. “Our financing position is now very secure for this year.”

The government hired Standard Chartered Plc, Citigroup Inc. and Deutsche Bank AG to arrange the sale, Robert Pakpahan, director general at the debt management office in Jakarta, said in July. Indonesia allocated 15 percent of the notes to local investors, 25 percent to the rest of Asia, 24 percent to the U.S., 16 percent to Europe and 20 percent to Islamic and Middle Eastern funds, according to a person familiar with the matter who asked not to be named as the details are private.

Shorter Tenor

The nation follows South Korea in tapping the global debt market, after Asia’s fourth-biggest economy drew bids for five times the $1 billion of bonds it offered last week. The 10-year notes were sold at 4.02 percent, 115 basis points more than similar-maturity Treasuries, the Finance Ministry said.

Indonesia’s dollar bonds are the worst performers in 2013 among 11 Asian emerging markets tracked by HSBC Holdings Plc indexes, declining 18 percent. The nation’s new dollar sukuk was sold at a premium of 436 basis points, or 4.36 percentage points, over similar-maturity Treasuries.

“We are compromising by taking a shorter tenor with a hopefully reasonable yield,” Siamat said yesterday. “While the government wants a longer-term horizon, we have to consider market appetite, especially the preference for shorter tenors, and secondly the cost.”

Current Account

Standard & Poor’s rates the offer at BB+, the top junk level, to reflect the “weak policy environment and external pressures,” it said in an Aug. 22 statement. Moody’s Investors Service ranks the debt at the lowest investment grade along with Fitch Ratings, which cautioned last month that Indonesia’s widening current-account deficit may destabilize the economy and lead to a rating downgrade.

The shortfall in the broadest measure of trade was $9.8 billion in the second quarter, the largest in data compiled by Bloomberg going back to 1989. Foreign-exchange reserves fell 18 percent this year to $93 billion last month, central bank figures show.

“The government must have decided that supporting foreign reserves is worth paying a steep price to sell global sukuk,” Angky Hendra, Jakarta-based head of fixed income at PT Batavia Prosperindo Aset Manajemen, which oversees 13 trillion rupiah ($1.1 billion), said last month. “The concern is that if reserves keep falling, then investor confidence will worsen.”

Sales Target

The average yield on emerging-market sovereign dollar notes was 6.2 percent yesterday, near the 6.27 percent reached on Sept. 5, which was highest since October 2011, according to JPMorgan Chase & Co. index data. The rate has climbed 182 basis points this year.

The average yield on global bonds that pay returns on assets to comply with Islam’s ban on interest rose 148 basis points this year to 4.29 percent on Sept. 6, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

Southeast Asia’s largest economy raised its 2013 net debt sales target to 231.8 trillion rupiah in June, from 180.4 trillion rupiah, as it seeks to fund an estimated budget deficit of 2.38 percent of gross domestic product this year, which would be the largest in data compiled by Bloomberg going back to 2004.

(Bloomberg / 11 Sept 2013)

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Fatwa and transaction costs in Islamic finance

LONDON: 

Shariah advice on structures of Islamic financial products and on compliance of such products with the Islamic law are a necessary pre-requisite and a regulatory requirement for financial institutions in many countries, including Pakistan. Consequently, Shariah costs are included in the transaction costs associated with Islamic financial products.

Financial fatwas play an integral part in the development of Islamic financial products, as without an explicit endorsement from a Shariah viewpoint such products cannot be successfully marketed.

A fatwa in the context of Islamic banking and finance is a religious opinion by a qualified Shariah scholar on structure of an Islamic financial product, like a mortgage, the conduct of management, like a fund manager, and operations of an Islamic financial institution, like an Islamic bank, determining their compliance or otherwise with the Islamic law.

Fatwa, if issued by an individual scholar or jurist, is non-binding and therefore, its utility is rather limited in this sense. However, if a collective body of scholars issues a fatwa under an enforcement regime, like a government or another such authority, it could be made binding on the market participants.

Legislation in Malaysia makes it compulsory, not only for all market players (Islamic banks and Takaful companies) but also for the judges hearing the cases related with Islamic banks and finance in Malaysian courts, to abide by the fatwas and Shariah rulings publically issued by the Shariah Advisory Council of Bank Negara Malaysia, the central bank.

In Pakistan, the Shariah Advisory Board of the State Bank of Pakistan issues fatwas to govern Islamic banking operations in the country. The legal standing of such fatwas has yet to be tested in a court of law.

Many observers of Islamic finance frequently refer to what is now rather cynically known as “Fatwa shopping.” Those who use the term, refer it to the process of an institution approaching a number of Shariah scholars (simultaneously or one after one) to solicit their Shariah advice on an individual basis and then choosing the one, which is the least restrictive or most liberal. This notion of Fatwa shopping is considered as bad and in fact most Shariah scholars discourage this practice.

If this is what people mean by Fatwa shopping then it should not be entirely wrong, as long as the quality of Shariah advice thus obtained fulfils strict Shariah requirements. This indeed has cost implications for the party seeking Shariah advice but if one is willing to pay relatively high costs of procuring Shariah advice, it should be left to the individual to do so.

In the absence of the Islamic law in most countries (including the ones with majority Muslim population), it is important that there is an independent Shariah verification of the products, practices and operations of Islamic financial institutions and other institutions offering Islamic financial services.

Ideally, this verification should come from a government authority like a central bank or any other financial regulator.

The best option remains a government authority, as it has enforcement power. Other organisations are ineffective unless the governments accept their Shariah Standards and make them binding on the institutions offering Islamic financial services.

In a less ideal scenario, the Shariah verification function must be offered by professional Shariah advisory firms registered with a regulator (like the Securities and Exchange Commission of Pakistan or the State Bank).

It is important to note that a new fatwa is required only when there are no clear guidelines available on a product. Thus, now that setting up an Islamic equity or mutual fund has received mainstream relevance in a number of countries, there is no need for obtaining a new fatwa from a Shariah board or a Shariah scholar. However, it remains important that the fund/transaction is supervised and monitored by a competent body to ensure its strict adherence with Shariah.

There is sometimes an over-emphasis on the importance of fatwa. For instance, there are some training providers in Islamic finance, who advocate the issuance of a fatwa on the Shariah authenticity of the training materials and their delivery. While importance of Shariah authenticity of the content and delivery of Islamic finance training cannot be underestimated, this is nevertheless needlessly stretching the concept of fatwa and its modern applications.

The writer is an economist and a PhD from Cambridge University

Published in The Express Tribune, September 9^th,  2013.

(The Express Tribune / 08 Sept 2013)

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Lack Of Governance Affects Islamic Finance Growth In Middle East

Lack of proper governance and regulation for Islamic finance can affect future growth and confidence of the sector in the region, industry experts have warned.

“The bigger you grow, the more transparent an industry needs to be in order to gain confidence. This happens only when there is proper governance and regulation,” said Ashruff Jamal, partner and global Islamic finance leader at PwC, Dubai.

Middle East banks are yet to agree on a centralised board of governance and regulation for Islamic finance seen in countries like Malaysia, which is obstructing the region from tapping the sector’s potential.

Jamal said that culture plays a major role in the lack of common governance in the region where every bank has its Sharia standards and regulations.

“Here each bank started out with its own board which sets out Sharia regulations and now finds it hard to give up that control.”

According to PwC’s report, global Islamic finance assets are valued at $1.2 trillion with Middle East constituting a large part of that market.

Jamal said that the Islamic finance industry is estimated to grow rapidly and more than double in the next four years.

The world’s Islamic population is projected to grow by 30 per cent by 2030, significantly boosting the demand for Islamic finance. The current demand for Islamic finance is expected to grow mainly in Africa and Asia, which hold 95 per cent of the world’s Islamic population, the report said.

Experts said that there is an attractive market among the emerging middle class for Islamic deposits, lending, protection and payment products. The growth in the retirement market is further creating demand for Islamic pension and asset management products.

However the Middle East will be unable to cash in on the boom experienced by Islamic finance due to its lack of regulation.

Jamal said that due to the lack of common governance and regulation, various banks in the region have the same Sharia scholars. He said that research showed around 20 Sharia scholars are part of as many as 619 boards creating room for conflict.

The expert also said that the pace at which the Islamic finance industry has been expanding is equally challenging. These institutions are traditionally small compared to their conventional banking counterparts making them unprepared for this quick growth.

Jamal said that the industry should have more Sharia scholars in the region in order to reduce conflicts and arrive at a common governance board.

“Speculation around the future of Islamic finance is over. Larger global forces are ensuring that Islamic finance is here to stay and grow particularly in view of the need to satisfy the rapidly increasing Islamic financial service needs of South America, Africa, Asia and Middle East region,” he said.

( Gulf Business / 09 Sept 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com