Indonesia is taking aim at one of the biggest weaknesses of the global Islamic finance industry – the lack of an ample, reliable supply of sharia-compliant bonds – with one of the most ambitious schemes to boost issuance so far. (Reuters)
Although sukuk are a common funding tool across the Middle East and Southeast Asia, with sovereign and quasi-sovereign issues representing around two-thirds of total sales, supply is irregular, in particular for U.S. dollar-denominated deals. Year-to-date, global sukuk issuance in all currencies totals $39.5 billion, Thomson Reuters data shows, down from $47.5 billion in 2015 – a year when it was cut by a sudden decision by Malaysia’s central bank to stop issuing short-term sukuk.
Shrinking issuance can put Islamic banks at a disadvantage, limiting instruments needed to manage their money profitably and meet liquidity requirements. The International Monetary Fund has urged governments to ensure regular issuance by incorporating sukuk into national debt management strategies. Indonesia is doing just that with an industry masterplan, unveiled last month, that envisages sovereign sukuk issuance rising to around 50 percent of total debt issuance over the next 10 years from around 13 percent last year.
Sovereign sukuk issuance would increase by around 5 percent year-on-year, with government agencies encouraged to use sukuk to fund infrastructure, agriculture and educational projects.
Anita Yadav, head of fixed income research at Emirates NBD in Dubai, said Jakarta’s target is ambitious but there would be a natural incentive among issuers to meet domestic banks’ appetite for Basel III instruments. “The growth in domestic market may be easy to achieve but the growth in the international market will likely be slower.”