Indonesia Expands Sukuk to Malaysia, While Turkey Bonds Made Good Start

Jakarta, Indonesia | February 02, 2009 by D-8 Secretariat

Malaysia, Indonesia, and Turkey are making progress in promoting Islamic Finance among D-8 Countries

PT Bank Negara Indonesia, the nation’s third-largest state financial services company, plans its first Islamic debt sale in Malaysia, president director Gatot Suwondo said, as quoted by Bloomberg.

The Jakarta-based lender will raise US$50 million selling Islamic bonds, or sukuk, which comply with syariah law by using asset returns to pay investors instead of interest. The bank may sell five-year and 10-year bonds, Suwondo said. The bank is meeting investors to gauge demand, he said.

Malaysia, where 60 per cent of the population of 27 million is Muslim, is the Asia-Pacific region’s Islamic finance hub. Tax breaks and incentives for Islamic financial products have lured investors such as Kuwait Finance House, the world’s second- largest Islamic bank, and Qatar Islamic Bank.

“We are testing the market,” Suwondo told reporters in Jakarta today. “If the market is good and the price is right, we’ll go for it.”

Islamic-style bonds made good start: Turkey’s Capital Markets Board

Turkey’s revenue-index bonds, an Islamic-style debt issue, made a good start and the demand — much less than expected — should not be “belittled,” the head of the Capital Markets Board (SPK) said on Friday.

The Treasury sold only a quarter of 1.89 billion lira it expected to sell on Wednesday in the first issue of the bonds, an attempt to attract capital from the Gulf region and broaden its range of debt instruments during the global financial crisis.

SPK Chairman Turan Erol told reporters the board was working with the Treasury on the possiblity of trading the bonds on the secondary debt market and that relevant regulations would be created.

“The demand for the revenue-indexed bonds should not be belittled. For a start, it’s a good figure,” he said.

The bonds are indexed to the revenues of several state-owned companies instead of interest rates, and are designed to attract Gulf-area investment as Turkey turns toward the oil-rich region for funds during the global credit crunch, analysts say.

Turkey is in the process of negotiating a loan accord with the International Monetary Fund (IMF), but the talks have stalled due to disagreements over the terms of the deal.

The Treasury sold 420.7 million lira ($261 million) and $49.1 million of the bonds in a direct sale to banks on Wednesday, compared to Treasury expectations of 1.89 billion.

Foreign bankers said demand was nevertheless reasonable, given that the issue was not widely publicised and that the tradition of Islamic banking was only gradually developing in secular Turkey.

Islamic finance is derived from sharia, or Islamic law, and avoids interest-based financing.
The bonds are linked to revenues of Turkish Petroleum Corporation (TPAO), the State Airport Authority and other state bodies. The bonds have a maturity of three years.

D-8 Organisation is at highest awareness to Islamic finance issue, and paying a serious attention on the importance of this issue for supporting the member states cooperation in institutional developments of finance, banking and insurances. The organisation had organised its 1st Meeting on Financial Infrastructure Development in D-8 Countries, on November 26, 2007 in Cairo, Egypt.

Among the results taken during the 23rd D-8 Commissioner Meeting in Jakarta, Indonesia, was Malaysia’s confirmation of her readiness to host a Working Group on Islamic Finance. A distinctive issue that will be discussed in the working group is the importance of sukuk (Islamic Bond), as an instrument in Islamic Finance that recently gains a significant interest in the world of economy, and how the D-8 member countries can be benefited from this instrument to support infrastructure projects in their respective countries.

D-8 Economist, Esen Gonen, said that she hail these steps taken by Indonesia, Malaysia, and Turkey. Among D-8 member countries, Malaysia is the first member that issue global sharia bonds or sukuk, and now followed by Indonesia. Turkey is also doing exceptionally well in promoting the islamic bonds their market. She said that the organization hopes that the rest of the memberstates could learn and follow from these both countries that has studied to optimize the use of sukuk to fund their infrastructure development programs.

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