Indonesia’s central bank hopes to attract a local bank to sign up as primary dealer for short-term sukuk, or Islamic bonds, issued by the International Islamic Liquidity Management Corp (IILM), a body it helped establish in 2010 to address a lack of highly-liquid sharia compliant money market instruments.
Bank Indonesia is one of 10 shareholders in the Malaysia-based institution, but it still lacks a local dealer bank for IILM sukuk, bonds designed to help Islamic banks manage their short-term liquidity – a longstanding industry challenge.
Indonesia is Southeast Asia’s largest economy and the world’s most populous Muslim nation, but that potential has yet to translate into the country’s Islamic banking sector which remains underdeveloped.
“There are no Islamic banks in Indonesia that have used or bought IILM paper,” Yati Kurniati, director of macroprudential policy at Bank Indonesia told Reuters.
Since August last year, the IILM has issued three-month sukuk from a $1.35 billion programme but secondary trading for the paper has yet to fully develop, even though there are now nine primary dealers globally to make a secondary market.
“IILM sukuk just got issued recently, with limited outstanding, its illiquid and does not have secondary market. Hence, IILM sukuk is not yet well known by Indonesia-based primary dealers,” Kurniati said.
A domestic primary dealer could help address this problem, even though other dealer banks have an indirect presence in the country, such as CIMB Islamic, Maybank Islamic and Standard Chartered Bank.
Increased uptake of ILM sukuk could help the central bank justify its $5 million shareholding in the IILM, the minimum under the body’s rules, as well as boost the prospects of the country’s Islamic financial sector.
Indonesia has 11 full-fledged Islamic banks and several conventional banks have Islamic windows, which held combined assets of 229.5 trillion rupiah ($18.9 billion) as of October, central bank data showed.
The central bank estimates growth of Islamic banking assets will slow this year due to rising pressure from trade deficits and a depreciation in the rupiah.
AWARENESS
Authorities in Indonesia are keen to develop Islamic banking, which accounts for 4.8 percent share of total banking assets. This compares to over 20 percent in more mature Islamic banking markets such as Malaysia and some Gulf Arab countries.
Indonesia’s regulators are rolling out an array of policies to boost the sector, including the introduction of Islamic repurchase agreements to allow overnight transactions, which the IILM sukuk can help facilitate.
The IILM has also launched an awareness programme across the markets it serves, with a session scheduled in Jakarta on March 21 to introduce its sukuk to prospective primary dealers and the wider market, said Kurniati.
“As a new instrument, the promotion of IILM sukuk will be increased by the management. Currently, IILM is still trying to increase the number of primary dealers and improve the secondary market as well as repo (repurchase agreements).”
Last month, the IILM established a working group to help drive such efforts, said Kurniati, adding that the body was also considering issuing sukuk with different tenors.
The IILM programme, rated A-1 by Standard and Poor’s, can issue sukuk with maturities under one year although until now it has only sold three-month paper.
Current shareholders of the IILM are the central banks of Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Turkey and the United Arab Emirates, as well as the Jeddah-based Islamic Development Bank.
