Indonesia: Govt encourages sharia banks to take reins in managing haj funds

Performing the haj or pilgrimage is one of the pillars of Islam for Muslims who are physically and financially capable. It is a huge annual undertaking, especially for Indonesia with 90 percent Muslim adherence among its population of 240 million.

The government believes that managing the huge amount of funds must be the responsibility of Islamic banks instead of conventional banks. It was an opinion reiterated recently at a seminar in Jakarta initiated by the Director General of Haj and Umrah (minor haj) Affairs Anggito Abimanyu. 

He said the funds reached around Rp 50 trillion in 2012. “Surely, the huge funds would be very useful to propel the Islamic economy,” he said. In addition, Islamic banks’ responsibility for overseeing the funds was in accordance with a 2008 law on the haj.

The one-day seminar, “Managing Haj Funds with Sharia Economic Principles”, was organized by the daily Pelita and sponsored by Bank Indonesia. Anggito said that efforts were underway to finalize the bill on managing haj funds in which the policy on haj funds will be separated from the haj management. 

“The management of haj funds in public service agency will be conducted in a professional, accountable, transparent and trustworthy manner,” he said. 

The government is striving to provide a direct investment opportunity from haj funds to raise the value, following the calculation of value gained from the placement of the funds in bank deposits and sukuk (Islamic bonds).

Under the 2008 law, haj funds cannot be used for direct investment but are only allowed to be invested in deposits and Islamic bonds. “So the regulation allows us to make a direct investment but in a limited amount,” he said. 

Executive Director of Bank Indonesia’s Islamic Banking Department Edy Setiadi said in his keynote address that the central bank would coordinate intensively with the Religious Affairs Ministry to seek ways to optimalize the haj management system to be beneficial for the public and Islamic banking. 

“The public can take advantage of haj savings deposited in Islamic banks for productive activities through financing by Islamic banks,” he said. The president director of Bank Syariah Mandiri, Yuslam Fauzi, disclosed that Islamic banks have conducted a discussion with the Deposit Insurance Agency (LPS) regarding the replacement of the haj funds in Islamic banks.

“The discussion is aimed to make sure that LPS can provide certainty about the insurance of the haj funds to be placed in Islamic banking institutions,” he said. According to him, the Religious Affairs Ministry drew upon the haj funds for the investment in Islamic bonds in early 2012, which led to the Islamic banking industry experiencing slow growth last year. Starting in mid-2013, the haj funds will be returned to Islamic banking in stages, he said. 

‘Wakaf’ funds

Edy Setiadi also disclosed in his address the significant potential for wakaf (money for religious purposes) as alternative financing to support the fund disbursement in Islamic banking. 

“If 10 million Indonesian people set aside wakaf of Rp 10,000 to Rp 100,000 each per month, then around Rp 5 trillion will be collected within a year,” he said. 

Data in the International Center for Education Islamic Finance (INCIEF) shows that wakaf funds in Indonesia are currently US$1.5 million, or about Rp 11.7 billion. Indonesia lags behind other nations in the sector. 

For example, Malaysia with a Muslim population of 17.3 million, collects wakaf funds of Rp 644 billion, or about 61.3 percent of its Muslim population. Funds in Turkey with a Muslim population of 73.9 million reach Rp 239 billion, or about 98.6 percent of the population. The United Kingdom, with a Muslim population of around 2.7 million, collects about Rp 31 billion in reaching approximately 4.8 percent of its Muslim population.

Growth

Edy said that Islamic banking assets in 2013 were projected to grow around 36-58 percent whether the situation was pessimistic, moderate or optimistic. 

A pessimistic scenario happens when the Islamic banking expansion encountered pressures, either from internal or external factors. The internal factors include the failure to collect funding as expected and the decline in the amount of third-party funds. External factor relates to the decline in national economic performance. 

Meanwhile, a moderate scenario takes into account the current acceleration of Islamic banks through continued financing expansion and the increase in third-party funds, he said. 

He further said that a positive scenario happens when, for example, more new Islamic banks are opened; Islamic business units are converted to Islamic banks and conventional banks are turned into Islamic banks

(The Jakarta Post / 06 Feb 2013)

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Shariah ‘megabank plan’ seeks to raise $1bn capital

The Islamic Development Bank is seeking partners to bring investment in a Shariah-compliant megabank to more than $1bn before the opening this year, allowing it to finance larger construction projects.

The financial institution, to be established with Riyadh-based Dallah Albaraka Group and the Qatari government, will issue securities that Islamic lenders can buy to manage excess funds, IDB president Ahmad Mohamed Ali said in a May 10 interview in Kuala Lumpur. The three parties signed a memorandum of understanding in April to set up the bank in Doha, Qatar, to fund roads, ports and power plants.

“An Islamic megabank will be a significant development,” Afaq Khan, Dubai-based chief executive officer of Standard Chartered’s Islamic unit, said in a telephone interview on Monday. “Such a bank would have the balance sheet, the capital and the underwriting capabilities to undertake significant projects of size.”

Sales of debt that pay returns on assets to comply with the religion’s ban on interest totalled $14bn globally this year, compared with $358bn issuance of non-Islamic bonds, according to data compiled by Bloomberg. Al Rajhi Bank, the world’s biggest Shariah-compliant lender based in Riyadh, Saudi Arabia, has a market capitalisation of $30bn, versus $159bn for HSBC Holdings, Europe’s largest bank.

“The main objective of this bank is to invest in big projects and to help Islamic banks manage their liquidity,” said IDB’s Ahmad. That is one of the biggest challenges facing lenders, he said.
In an effort to increase the range of Shariah-compliant instruments in the market, International Islamic Liquidity Management Corporation was established in October 2010 with a mandate to sell the industry’s first foreign-currency denominated bills. It was founded by 14 members including central banks in Malaysia, Saudi Arabia, and Qatar. The Islamic Development Bank, based in Jeddah, Saudi Arabia, and the Islamic Corporation for the Development of the Private Sector are also among them, according to the IILM website.
The IILM plans to kick-start the issuance with a sale of as much as much as $1bn of global Shariah-compliant dollar bills by the middle of this year, Bank Negara Malaysia governor Zeti Akhtar Aziz, who was previously chairman of the institution, said on March 21.

An initiative headed by Malaysia to set up Asia’s first Islamic megabank along with organisations in the Middle East has yet to materialise. Zeti said in an interview with Bloomberg in September that indications were that a licence would be granted in 2011. “The review of the applicants is still ongoing,” Bank Negara said in a statement on Friday.

There is no consensus that the industry needs a megabank, Megat Hizaini Hassan, a partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said in an e-mail on Monday.

“The megabank may not necessarily be the best or only solution to the existing problems and issues in Islamic finance,” Megat said. “Funding of large-scale projects may be done by syndication involving several Islamic banks or by sukuk sales, while liquidity problems may be resolved via more issuance of short- or medium-term papers.”

Assets in the $1tn Shariah-compliant industry are projected to almost triple to $2.8tn by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards setting body.

A shortage of sukuk has driven yields on global Islamic bonds down 30 basis points, or 0.30 percentage point, in 2012 to 3.69% on Monday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. That compares with an average of 4.16% last year, 5.87% in 2010 and 9.51% in 2009.

The difference between average sukuk yields and the London interbank offered rate, or Libor, widened two basis points on Monday to 252 basis points, the HSBC/Nasdaq index shows.

Global Shariah-compliant bonds returned 3.6% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets climbed 5.5%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

Malaysia’s $444bn development programme to build railways, power plants and roads over a decade is boosting issuance in the world’s biggest sukuk market this year. Sales rose to a record 13.2bn ringgit ($4.3bn), adding to last year’s all-time high of 75.6bn ringgit, according to data compiled by Bloomberg.

Qatar plans to spend $88bn on building facilities as it prepares to host the soccer World Cup in 2022, the government announced in May last year.

“A megabank would certainly need to have a credible credit rating internationally and this in turn would create another avenue for Shariah-compliant liquidity to be effectively deployed,” Syed Abdull Aziz Jailani Syed Kechik, chief executive officer at Kuala Lumpur-based OCBC Al-Amin Bank, the Islamic unit of Singapore’s Overseas-Chinese Banking Corp, said in an e-mail on Monday. “A credible megabank would have catalytic benefits for the overall market.


(Gulf Times / 15 May 2012)


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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com