Indonesia trails Malaysia in sukuk on taxes

Indonesia is under pressure from banks to match tax breaks and product offerings announced by Malaysia last week to catch up in developing Islamic finance, reports Bloomberg (Oct 19, 2010).

The report quoted Andi Buchari, a director at PT Bank Muamalat Indonesia, the nation’s oldest Islamic bank, in a telephone interview from Jakarta as saying: "The government needs to play a more active role. We need more incentives, things such as a tax holiday, or perhaps, an incentive for people to put their money in Syariah banks."

The report added:

Malaysia has the largest market for sukuk and is a global hub for the Islamic finance industry that manages US$1 trillion of assets. The government will cut taxes on Syariah-compliant transactions next year to promote “innovation in Islamic securities,” Prime Minister Datuk Seri Najib Razak said in his Oct. 15 budget speech.

Indonesia, which has the world’s biggest Muslim population at 192 million, had 75 trillion rupiah (US$8.4 billion) of Syariah-compliant banking assets in 2009, or about 3 per cent of the total, according to the central bank. The amount compares with RM337.6 billion (US$109 billion) in Malaysia, or 20 per cent of banking assets, the Finance Ministry said in the 2010-2011 economic report released in Kuala Lumpur last week. In Malaysia, 60 per cent of the 28 million people are Muslim.

Indonesia failed to sell all of the government sukuk it offered in an auction on Oct. 5, even after suspending sales for two months because investors demanded higher yields than the government was willing to offer. The government raised 382 billion rupiah less than the targeted 1 trillion rupiah, the 12th consecutive sale that fell short of plans this year.

Investors sought yields as high as 9.37 per cent for the five-year sukuk and 8.5 per cent for the 10-year notes, according to the Indonesian central bank’s website. The government raised 3 trillion rupiah from an auction of conventional bonds on Sept. 28 with yields of 7.3 per cent for the six-year notes and 7.72 per cent for the 11-year securities.

“Indonesia presents exciting prospects for the Islamic banking business,” Mudassir Amray, head of Asia Pacific Islamic banking at Citigroup Inc in Hong Kong, said in an e-mail on Oct. 15. “With the largest Muslim population in the region and gross domestic product of over US$670 billion, the growth potential is enormous.”

Global sales of sukuk fell 23 per cent to US$12 billion in 2010 from the same period a year earlier, according to data compiled by Bloomberg. Issuance totaled US$20.2 billion last year, up from US$14.1 billion in 2008 and was a record US$31 billion in 2007, the data show.