Indonesia hopes new tools will boost appeal to foreign Islamic banks

07/07/2015 12:15 AST

Indonesian regulators are promoting new sharia-compliant financial tools and considering easing foreign ownership limits for domestic Islamic banks, seeking to make the sector more appealing to foreign lenders.

Indonesia is the world's most populous Muslim nation but its Islamic finance sector is domestically focused and still has only niche status, behind neighbouring Malaysia and several Gulf countries.

The government wants to change that, and this year the financial regulator, Otoritas Jasa Keuangan (OJK), launched a five-year strategy that aims to triple the sector's market share to 15 percent by 2023.

Last month, President Joko Widodo threw his weight behind the drive by inaugurating a national campaign by the OJK to promote awareness of Islamic finance.

Attracting foreign capital is part of those plans; the OJK is considering easing foreign ownership ceilings for Islamic banks, now at 40 percent.

Abu Dhabi Islamic Bank said this week it was considering entering the market as part of its acquisition plans for 2016.

It joins Bahrain's Al Baraka Banking Group and Dubai Islamic Bank , which plan to expand their operations in Southeast Asia's largest economy.

Meanwhile, companies can raise cash in foreign currencies more easily with Islamic instruments, after the country's national sharia board approved sharia-compliant currency hedging tools in April.

The potential was illustrated in May when national flag carrier Garuda Indonesia became the first Indonesian corporate to tap the offshore market for Islamic bonds (sukuk) with a $500 million, five-year deal.

Garuda's sukuk attracted $1.8 billion in orders, with 56 percent going to Middle East investors.



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Last week, Indonesian Islamic banks launched a standard contract template for sharia-compliant repurchase agreements, allowing the use of government-issued sukuk as collateral.

But other foreign-currency tools still need to be developed to attract Islamic investors which operate predominantly in U.S. dollars.

Indonesia's central bank in 2010 helped establish the International Islamic Liquidity Management Corp (IILM), which regularly issues dollar-denominated sukuk for use as liquidity management tools.

But five years on, the IILM has made only modest headway in Indonesia. IILM sukuk have not yet been traded in the local money market and there are still no domestic primary dealer banks assigned to make that happen, Indonesia's central bank said in response to Reuters questions.

IILM sukuk have been classified as a 20 percent risk-weighted asset, equivalent to a corporate bond for capital adequacy purposes, the central bank said.

This falls short of the IILM's intended purpose of being a top-rated cash management tool, known as a high-quality liquidity asset (HQLA), that could be used to meet Basel III regulatory requirements.

The issue of classifying IILM sukuk as HQLA is still being discussed, the central bank said.

Reuters