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Sunday, 20 April 2008

Islamic bonds help Indonesia beat Turkey in investment race

Today's Zaman, 20 April 08

Indonesia's latest step in reinforcing the legal foundation for sukuk -- also called Islamic bonds or participation certificates -- has further strengthened its global position in Islamic finance, while Turkey falls further behind.

Sukuk has risen as one of the fastest-growing asset classes in the modern financial industry. It is often used both by governments and corporations for project finance and large-scale real estate developments, sectors that are booming in Turkey, too.
Unlike conventional interest-based finance, this form of financing is interest averse and is derived from fundamental economic transactions, also referred to as the real economy.
After two years of preparation, on April 9 the Indonesian government endorsed the long awaited Sukuk Law, regulating this fast-growing form of finance. They aim to sell these new financial instruments this year in the domestic markets, and the government intends to issue up to $1.6 billion of sukuk in the second half of this year. Pension funds and insurance firms are expected to be interested.
It is no secret that the domestic Turkish market has for some time been longing for these instruments, and several large investor groups from the gulf are ready to inject more financial resources into the Turkish economy, provided the right regulatory and tax environment is set in place.
The Indonesian government has rightly noticed the growing sukuk market, largely fuelled by petrodollars, and has decided to use these instruments both in local Indonesian rupiah and US dollars. It wants to tap both local and international financial resources better in order to diversify the debt instruments available and lure international investment.
Worldwide, the sukuk market more than doubled in 2007 to exceed $60 billion, and is moving towards $100 billion by the end of 2008. It has maintained explosive growth since 2001, when it accounted for less than $500 million. Two-thirds of the total Islamic bonds outstanding worldwide last year were issued in Malaysia.
For the moment, sukuk are most typically "ijara" (lease financing) or "musharaka" (profit-sharing venture-capital financing), but the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), located in Bahrain, has already approved 14 different structures.
According to the Jakarta Post, two investors from the United Arab Emirates have announced to their intention to seek a second chance to finance the Jakarta Monorail (JM) project after learning about the new law.
JM Director Sukmawaty Syukur is reported to have said that several foreign investors previously withdrew when their financial schemes were found not to conform to the existing Indonesian regulations. The $480 million JM project was scheduled for completion in 2010, but has been delayed for years because of financial difficulties.
(by Paul Wouters, first published at Today's Zaman, Turkey)

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