Indonesian banks are expected to be cautious boosting credit disbursement because the non-performing loan (NPL) ratio is currently high with the gross NPL ratio hovering above 3% since mid-2016. Banks are now more selective in terms of credit disbursement, but this undermines the pace of the nation's macroeconomic growth. Although Indonesia managed to end the five-year economic slowdown in 2016, it is still far away from Indonesian President Joko Widodo's ambitious 7% GDP growth pledge. In fact, he revised his projection for Indonesia's 2018 GDP growth to 5.6% from a previous projection of a 5.4 - 6.1%. Thus, it should basically be impossible to see a 7% growth rate by 2017.
The government of Indonesia plans to sell another series of sharia-compliant government retail bonds (Sukri). The offering period is planned for 4 February-2 March 2017. In last year's Sukri issuance the Indonesian government set an indicative target of IDR 30 trillion (approx. USD $2.2 billion) for its SR-008 series. However, due to robust demand authorities raised a total of IDR 31 trillion. The three year SR-008 bonds carry a fixed coupon of 8.3% per year. It was the government's biggest ever sale of Sukri bonds. In 2017 the Indonesian government plans to sell IDR 597 trillion worth of bonds, mostly rupiah-denominated government bonds. Robert Pakpahan, Head of the Debt Office within Indonesia's Finance Ministry, earlier said Indonesia will offer retail bonds twice this year, consisting of Sukri and Indonesian Retail Government Bonds.
There is strong demand for Indonesia's sharia-compliant government retail bonds (in Indonesian: Sukuk Negara Ritel, abbreviated Sukri). Since the launch of series SR-008 on Friday (19/02), a number of sales agents have run out of quota. These financial institutions now request additional quota from the government. The three year SR-008 series carries a fixed coupon of 8.3 percent per year and is tradable on the secondary market. The government of Indonesia targets to collect up to IDR 30 trillion (approx. USD $2.2 billion) in funds from the issuance. Sukri bonds are only available to Indonesian citizens.
Indonesia's Finance Ministry sold rupiah-denominated Islamic bonds on Tuesday, 26/01. The ministry set an indicative target of IDR 4 trillion (approx. USD $288 million). Proceeds from the bond sale will be used to finance the government's budget deficit. This deficit is estimated to reach 2.15 percent of gross domestic product (GDP) in the 2016 State Budget. Despite having the world’s largest Muslim population and forming a dynamic emerging economy, Indonesia plays a minor role in the global Islamic banking industry. Not only does Indonesia's Islamic finance industry lag far behind Islamic finance industries in other countries that contain a big Islamic community, but it also lags far behind the country's domestic conventional banking industry.
In 2016 investors will be able to purchase about IDR 13.7 trillion (approx. USD $1.4 billion) worth of Islamic bonds to be issued by the Indonesian government. Indonesia will use proceeds from next year's bond sales to boost the nation’s infrastructure development. Government-led infrastructure development is regarded as key to overcome the current process of slowing economic growth that has been plaguing Indonesia since 2011. Demand for Islamic bonds may in fact be stronger than demand for conventional bonds. Indonesian sukuk is also less volatile compared to conventional bonds as investors tend to hold sukuk until maturity.
Indonesian financial authorities are considering to ease foreign ownership limits for local Islamic banks and to promote new sharia-compliant financial tools in an effort to make the Islamic finance industry more attractive to foreign investors and the Indonesian population. The current low market share of Islamic banking in Indonesia in combination with the recent high growth pace and government support implies that there is plenty of room for further growth of the Islamic banking industry in Indonesia. In this context, Indonesia’s Financial Services Authority (OJK) developed and launched a five-year roadmap earlier this year, which aims to triple the market share of Islamic banks to 15 percent by 2023. The OJK also announced that it considers to ease ceilings on foreign ownership for Islamic banks.
Indonesia is set to co-found a new cross-border Islamic (sharia-compliant) infrastructure bank together with Turkey and Saudi-based Islamic Development Bank (IDB). Indonesian Finance Minister Bambang Brodjonegoro said that Indonesia will contribute more than USD $300 million as start-up capital for the establishment of the new bank, named Islamic Investment Infrastructure Bank (IIIB), which aims to boost infrastructure development in various countries. The bank is set to be established in the second half of 2015. Muliaman D, Chairman of the Financial Services Authority (OJK), recently stated that Indonesia and Turkey are competing to become host of the Islamic Investment Infrastructure Bank’s headquarters.