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1
INDONESIA’S ISLAMIC BANKING & FINANCE
DEVELOPMENT AND ROLE OF SOVEREIGN
SUKUK
Edy Setiadi Executive Director, Islamic Banking Department, Bank Indonesia
IIFM Industry Seminar on Islamic Capital and Money Market
Bahrain, December 3th 2013
OUTLINE
• Indonesia’s Economic and Financial
Profile
• Indonesia Islamic Banking Policy and
Direction
• Indonesia’s Sovereign Sukuk
• Indonesian Islamic Finance : Expecting
for the future
2
Indonesian Economy – Strong & Stable Growth
Global economy recorded lower growth in 2012 compared to the previous year. However, the Indonesian economy recorded a robust growth (6.2%) and inflation remained well under control at a low level (4.3%). The economic resilience has been supported by macroeconomic and financial system stability as well as domestic demand.
• However, Indonesia's economic growth in 2013 is revised down to 5.5-5.9% from 5.8%-6.2% previously as part of rebalancing the domestic economy with the global economic downturn and the impact of rising inflation. Looking forward, Bank Indonesia has also revised its economic growth projection for 2014 down from 6.0-6.4% previously to 5.8%-6.2% in harmony with the weaker global economic outlook.
GDP Growth Inflation Rate
Domestic Demand
Indonesia now “the 16th largest economies in the world” To be “the 10th largest economies in the world by
2025” (Government Projection/MP3EI)
Indonesia’s competitive advantage increased by World Economic Forum (WEF) from 50 into 38 (2013)
Natural resources available “major exporter of natural gas, world’s second largest of coal exporter, home to 40% of
geothermal world’s resources, and one of the world's largest exporter of crude palm oil”
Indonesia has relatively stable sovereign rating: S&P affirmed Indonesia’s sovereign credit rating, at
BB+ level for long-term and B level for short-term and revised its outlook to stable from positive (May
2, 2013), Fitch Ratings affirmed Indonesia's sovereign credit rating at BBB- level with stable outlook
(November 21, 2012) and Moody’s Investors Service upgraded Republic of Indonesia’s foreign and
local-currency bond ratings to Baa3 with stable outlook (January 18, 2012)
Economic growth relatively good compare to other emerging economies until Q2-2013 (5,81%) ,
while Russia (1,2%), India (4,4%), Brazil (3,28%), South Africa Afsel (2%) 2nd best after Cina
The 4th largest country in the world in term population (± 250 mio. with 85% Moslems) after China,
India, USA, with GDP per capita ±USD 3,500 and international reserves ±USD 92 billion (Aug 2013)
Indonesia’s economies still one of the best among emerging
economies
International Reserve
3
Indonesian Islamic Banking: Global Picture
Year 2013 Picture (Aug’2013) :
Indonesia has 11 full fledge
Islamic banks, 23 Islamic banking unit, and 160 Islamic rural banks. Office network has been rapidly increasing up to 16.7% yoy despite slow growth in number of banks.
Due to high GDP growth, Islamic Bank (BUS+UUS) assets grow as fast as 38.40% yoy due to higher financing demand. Total Asset is amounted to USD 22.4 billion with Financing up to USD17.45 billion.
Islamic Banks resilience is maintained as CAR keeps stable on 14.71% and ROA preserves at 2.01%.
• FDR of Islamic banks is around to 102%, while NPF net reach 2.00%.
Islamic Banking Network
Islamic Banking Growth
Islamic Banking CAR
Islamic Banking Performance
Indonesian Islamic Finance : Global Picture
Corporate Sukuk
Outstanding USD0.81 billion
Government Sukuk
Outstanding USD9.88 billion
Takaful Asset
Outstanding USD0.69 billion
Islamic Mutual Fund
Outstanding USD1.31 billion
Financing Company
Outstanding USD2.26 billion
Government sukuk outstanding USD 16.7 billion (Incl. Non tradable Hajj Sukuk USD 3.15 billion) (Sept’2013)
Year 2013 Picture (Q 2-2013)
With its impressive growth rate, Indonesia Islamic Banking industry has even extended its influence to other Islamic financial sectors
Islamic stock market capitalization value reach USD 275.14 billion (58% tot.market capitalization) with 307 stock.
Corporate sukuk outstanding reach USD 0.75 billion (3.53% total corporate bond)
Islamic mutual fund NAV reach USD 0.94 billion (3.7% total)
Takaful asset reach USD 1.497 billion (Q 1, 2013)
Islamic Financing company reach USD 2.87 billion (May’ 2013)
4
Indonesian Islamic Financial Infrastructure (until 30 Dec’2013)
National Sharia Board
IAI
Associations
Basyarnas/Court
Islamic Banking
Committee
Sharia Central Bank
Certificate
Islamic Money Market
(Sukuk) Market
Sharia Supervisory
Board
Baznas
Islamic Financing Companies/Islamic Insurance /
Takaful/Islamic Capital Market/BMT
Indonesia Deposit
Insurance
Corporation/LPS
(Protect only Bank’s
Depositor) Islamic Capital Market
Fund/Depositors
- Public
- Government
- Foreign (Limited)
Full Fledged iB
iB Unit/UUS
Islamic Rural Bank
BMT Real
Sectors
Medium &
Large
Business
Micro & Small
Business
Each sector regulator and supervisor need to establish intensive cross-sector coordination in order to create the sinergy of Islamic financial system.
Islamic Bank (iB)
Non Bank
Macroprudential Policies
MOF (Ministry of Finance)
Sovereign Sukuk Issuer
In order to narrow the supervisory gap and the variation in regulations, the implementation of cross-border (home-host) supervision is important. Regarding to this matter:
BI has enhanced cooperation between supervisory authorities, has actively involved in supervisory colleagues forum, has conducted regular home-host supervisory board meeting and has issued policy related to consolidated and cross-border supervision.
Bank Indonesia is on the track to fulfill the Basel requirements.
BI supports the FSAP implementation. The FSAP assessment results for Indonesia is encouraging whereas the banking sector, payment systems, and monetary policy is considered to have good adherence to international standards.
As Indonesia is a member of G-20 countries, BI has performed intensive monitoring on all regulatory reforms agenda set by Financial Stability Board.
BI has involved internationally to support islamic finance development through memberships in several international islamic organizations such as IFSB, IIFM and IILM and adopt the regulations standards set by international standard setter, such as IFSB, and AAOIFI.
From Cross-Sector to Cross Border Integration
In addition to effectiveness of cross-sector integration, the Islamic finance industry should also consider to strengthen the global interconnectivity. NEXT STEP
5
Indonesian Islamic Banks – Policy Direction and Prospect
Maintaining Strong Growth
• Innovation of genuine sharia Products and services : support the people need ,more broaden customer base and more productive activities
• Strategic alliance and strong infrastructure support : i.e. Government support, Optimization synergy with iB’s holding/Grup companies.
• More professionals & qualified HRD
• Intensified Education and Promotion
This strategy will attract more broaden
customers to use services from islamic
banks, and in the end this will have an
impact to strong growth
With Rp.228,8 trilion of iB (BUS+UUS+BPRS) asset in Aug’13 (eq US$ 23 billion) we only account for 4.9% of Indonesian banking industry, but annual growth in last 5 yrs ± 40% which double from global Islamic finance growth
6
BI Policy: Emphasis Financing in Productive Sector and Financial
Access
1. Bank Indonesia in its capacity will facilitate link and match program between islamic banks and industry which is prioritized by the government, such as infrastructure, agriculture, as well as others.
2. Focus Group Discussions and business match will be the main forum to match supply and demand between banks and productive sectors.
3. Linkage program and FINANCIAL INCLUSION program (i.e.
branchless banking) for SMEs and productive sector
In return, this will help promoting resilience of islamic banks, as well as generate higher asset growth, so that asset share of islamic banks compared to that of in conventional will gradually increase projection of 15-20% in the next decade
BI Policy: Support Adequate iBs Liquidity
Framework
• BI will support efforts to increase islamic money market transaction through enhancement the features of Interbank Mudharabah Certificate (SIMA) as underlying transactions,
• We are introducing sharia commodity trading scheme to add islamic money market instruments, and to increase the role of money broker in islamic money market transaction.
• Providing complete financial services to client, islamic banks can also provide financial services in the form of foreign currency , such as import payments or other foreign currency liabilities mitigate currency risks review the mechanisms and hedging instruments which comply with sharia principles.
• BI also support cross border liquidity instrument in foreign currency IILM initiatives issuing short term global sukuk in USD
Development in islamic
financial market,
especially money
market instruments, will
help banks to manage
liquidity lower liquidity
risk
Help Promoting Asset Growth
7
INDONESIA’S SOVEREIGN
SUKUK
Growth of the Islamic Capital Market o Good appetite for Islamic papers o GCC-based investors have invested over USD1,2 trillion in international assets. o ‘Islamic’ financial services industry size estimated around USD 1.6 trillion with a
growth rate projected above 10% p.a (2013).
Diverse investor base o Uniquely Islamic Investors, most of whom are buy and hold investors o Conventional investors, who are the traditional bond investors who would create
secondary market liquidity for the Sukuk.
Source of Funding Diversification
Islamic Financial Market Benchmarking
Investor base widening
Market instrument development
Large demand (Indonesian Case) :
o Lack of sharia compliant instrument
o Greater demand is expected with investment grade rating of Indonesia. •
The Reason why Government Should Consider
Issuing Sovereign Sukuk
8
State Budget financing, including project
financing.
Role of Sovereign/Government Sukuk (SBSN)
Sovereign securities issued based on sharia
principles, as evidence of the participation in
Sukuk Negara assets, issued both in Indonesian
Rupiah and foreign currencies (Law No.19 of 2008 on
the Sovereign Sharia Securities).
Definition
Issuance Objective
Benefits
• Diversifying State Budget financing.
• Financing government projects
• Developing alternative investment
instruments.
• Broadening investor base.
• Enhancing Islamic financial market.
• Creating Sukuk benchmark.
15
Support
Sukuk
Market
Development
SBSN make
sukuk market
more active
increasing
SBSN turnover
ratio from 1,22
(2011) to 1,78
(2012).
Turn over ratio = Transaction volume in secondary market / average outstanding volume
Direction on Indonesian government financing through Islamic instrument
16
Maintaining the decreasing ratio public debt to GDP
Issuing Sovereign Sukuk in domestic market regularly, with considering:
• Type of instrument and tenor that match with the investor need;
• Fair level of risk and cost for government;
• Enhance market deepening and good liquidity in the market.
• Issuing Global Sukuk in international market with a proper strategy considering global market condition, market liquidity and government liability in foreign exchange.
Source of financing diversification, including development of other Islamic instruments, i.e :
• Islamic T-Bills (SPN-S)
• Sukuk for Project Financing/Project Based (still in progress)
• Private Placement Sukuk (Sukuk Hajj Fund/SDHI)
Indonesia is
top 3
countries in
the world
(with
Malaysia &
Bahrain) that
active &
regularly
issuing
sovereign
sukuk
9
17
Debut of:
• Retail Sukuk (SR).
• Global Sukuk (SNI).
• Sukuk Hajj Fund (SDHI)
through private placement.
• Sukuk Negara auction.
Regular auction of
Sukuk Negara.
First issuance of
Islamic T-Bills (SPN-
S).
Regular auction of
SPN-S and PBS.
Instrument
diversification: study
on Wakala Sukuk.
GoI is regularly issue Sukuk Negara in domestic and global market. It shows GoI’s commitment to support development of Islamic financial market.
Sukuk Negara issuance provide alternative sharia compliant instrument for fast growing Islamic institution in Indonesia.
Law No.19/2008 on
Government Sukuk.
Debut of Sukuk Negara
(IFR) in domestic market
through bookbuilding.
Government Sukuk : The Milestone
Capital Market
Supervisioan Board
merges into Financial
Service Authority
Product Development
IFR SR SNI SDHI PBS
Series Islamic
Fixed Rate (IFR)
Retail Sukuk (SR)
Sukuk Negara Indonesia
(SNI)
Islamic T-Bills
(SPN-S)
Hajj Fund Sukuk (SDHI)
Project Based Sukuk (PBS)
Aqad Ijara Sale & Lease Back
Ijara al-Khadamat
Ijara Asset to be Leased
Underlying State Owned Assets
Hajj Services Government Projects
Coupon Rate Fixed Rate
Tradability Tradable Non-Tradable
Tradable
Issuance Methods
- Book-building - Auction
Bookbuilding Bookbuilding Auction Private Placement
Auction
Characteris-tics
IDR Sukuk for wholesale investors. Mid to long term tenors, semi annual coupon.
IDR Sukuk for retail Indonesian investors, monthly coupon.
USD denominated Sukuk, issued in international market, semi annual coupon.
Short term IDR Sukuk, mature in 6 months, discounted basis.
Private placement, short term, monthly coupon.
IDR Sukuk, mid to long term tenors, semi annual coupon.
SPN-S
18
10
19
Government Sukuk : Issuance
After Sukuk Negara debut in August 2008, in 4 years, Sukuk Negara issuance has rapidly develop with various instruments and issuance method.
Total outstanding is
IDR167.1 trillion or eq. USD16.7 bio**
IFR : Islamic Fixed Rate SR : Retail Sukuk SDHI : Sukuk Hajj Fund SNI : Global Sukuk SPN-S : Islamic Treasury Bills PBS : Project Based Sukuk
*As of April 30th, 2012 ** As of September 30th , 2013
2013**
16.83
35.92
31.53
48.2
9.58
25.04
(IDR Trillion)
4.7
16.5
26.9
33.3 35.16
Issues Related to Indonesian Sovereign Sukuk Market Development
Islamic financial institution participation relatively limited compare to conventional ones
in terms of sukuk bidding by participants, was dominated by conventional institutions.
The potential demand increasing from time to time, but still lower compare to conventional
sovereign bond in term of incoming sukuk bids from participants, still lower compare to
conventional sovereign bond bids.
Need to develop the market infrastructure more optimal and efficient need to develop more
of sukuk based project : underlying real & productive project/sector, improving market
information/sukuk trading infrastructure/product devlp & broaden acces to investor, etc
Increasing liquidity of secondary market, but in the other hand there’s Investor’s behaviour of
Hold to Maturity
Bank Konvensional
13%Bank
Syariah3%
Depag38%Asuransi
14%
Perorangan13%
Non Residen6%
Lainnya13%
Indonesia’s Sovereign Sukuk Investor (2011)
Bank Konvensional;
20,7%
Bank Syariah; 4,89%
Asuransi; 12,43%
Dana Pensiun;
5%Korporasi;
1%
Lemb. Keuangan;
3%Perorangan;
9,16%
Reksadana; 3%
Non Residen; 5,28%
Kemenag; 36%
Indonesia’s Sovereign Sukuk Investor (2012) Depag/Kemenag =
Ministry of Religious
Affair
Bank Konvesional =
Conventional bank
Bank Syariah = Islamic
bank
Asuransi = Insurance
Dana Pensiun = Pension
Fund
Perorangan = Individual
Reksadana = Mutual Fund
Lemb.Keuangan =
Financial Institutions
Korporasi = Corporation
11
Indonesian Islamic Finance : Expectation for the
future
• Actively and contribute more to the development of Islamic Financial Services Industry in the world (i.e involvement in various international organization:IDB, IFSB, IILM, IIFM)
• Maintaining the uniqueness of Indonesian Islamic Finance characteristic (i.e. Islamic microfinance, prudential & sharia fullfilment and real sector/productive financing framework) reference for Islamic banking/finance development in the world