Indonesian Financial Services Authority (OJK) is calling for 53 out of 119 state-owned firms operating in the infrastructure sector to issue more Islamic bonds or sukuk. The lower yield, lower risk investment instrument is still merely seen as an alternative source of funds by private companies in the world’s largest Muslim nation, with an amount well below its counterparts Malaysia and Saudi Arabia.
OJK deputy commissioner Sardjito revealed that the amount of corporate sukuk in the country is still minimum. From 2011 to May 4, 2016, the outstanding of corporate sukuk is only $720 million or about 3.68 per cent from the total outstanding bonds, which is dominated by conventional corporate bonds at a value of $19.6 billion.
“We are missing out on the potential to build the infrastructure (dream) using Islamic bonds. That’s why OJK is now calling for the 53 state-owned infrastructure companies to be more active in using this instrument,” Sardjito said.
While corporate sukuk is not a popular choice among Indonesian SOEs and private firms, the government has been relying heavily on the instrument. Since its debut, total issuance of lndonesia’s sovereign sukuk in dollar denomination has reached $10.15 billion, with current outstanding sukuk at $9.5 billion.
In total, sukuk issuance is recorded at Ro593 trillion ($38 billion), making the country one of the leading sovereign sukuk issuers in the world.
“As of May 10, total outstanding of Sukuk Negara (sovereign Islamic debt paper) was Rp 380 trillion or around $29 billion. Outstanding sukuk accounts for 15 percent of total government securities,” Finance Minister Bambang Brodjonegoro said in remarks at the annual Islamic Finance Conference of the Islamic Development Bank ( IDB ) in Jakarta.
To accelerate the development, Indonesia has focused on the issuance of sukuk to finance infrastructure projects since 2012.
At the early stages, Indonesia issued only ljara, Musharaka and Mudaraba sukuk. Today, various types of sukuk have been developed into murabaha, salam, wakala and other types of sukuk such as hybrid sukuk, exchangeable sukuk, green sukuk, perpetual sukuk and voucher sukuk.
Tax on sovereign bonds to be removed
To attract more foreign investors, as well as boosting the issuance of Islamic notes, the Indonesian government is studying whether to remove the income tax on sovereign bond, which is currently set at 15 percent for Indonesia-based investors and 20 percent for non-resident investors.
The removal will affect coupons for sovereign bonds, which in turn will influence Indonesia’s corporate bond yields as investors are not interested in corporate bonds that carry a significantly lower coupon rate compared to the government bonds.
Currently, the government has to offer expensive coupons for its sovereign bonds in order to attract investors’ interest as they have to pay income tax between 15 and 20 percent (undermining investors’ earnings).
Officials said the removal will be proposed in the revision of the Income Tax Law (that is to be proposed to the House of Representatives in early 2017). Other revisions include a lower corporate income tax and a higher non-taxable income rate for individuals.