Bank Indonesia is weighing the use of sukuk issued by other countries in its monetary operations as demand for sharia-compliant securities surge among lenders in the world’s largest Muslim-majority country.
The Indonesian central bank is discussing whether to add more foreign sovereign sukuk to its reserves to be used as an underlying asset for Sukbi, a monetary instrument for liquidity operations, according to deputy governor Dody Budi Waluyo.
Bank Indonesia’s efforts to deepen the financial market and ensure stability are hampered by inadequate sharia securities at its disposal, he said.
A sukuk is an Islamic financial certificate, similar to a bond in Western finance, that complies with sharia, or Islamic religious law.
Bank Indonesia is increasingly relying on its money-market operations to ensure liquidity for banks after raising rates by a total of 175 points since May to counter a sell-off in its currency triggered by rising United States interest rates.
With the risks of a prolonged United States-China trade war lingering, the Indonesia’s central bank has been intervening in the currency and bonds market to quell volatility. The central bank began offering sovereign sukuk-backed securities, known as Sukbi, to conventional and sharia banks from last year and the instrument has found favour with the banks.
Bank Indonesia sold 4 trillion rupiah of seven- and 14-day tenors in its latest auction on Wednesday. The purchase of foreign global sukuk would be limited to top-rated securities, said Nanang Hendarsah, executive director for monetary management at Bank Indonesia.
“We have some in our foreign reserves and we are waiting for an endorsement from the National Shariah Board” to approve the plan to use them as underlying assets in Sukbi, he said.
Despite the fact Muslims make up almost 90 percent of Indonesia’s 265 million population, sharia financial products have struggled to gain much ground as conventional banks dominated the financial industry. However, that may be about to change as the government and central bank drive the promotion of sharia banking and other financial instruments among the followers of Islam.
The central bank’s comments came as Indonesia this week posted a trade deficit for a fourth straight month — the longest streak of shortfalls since 2014 — as the intensifying trade war between the United States and China hurt its exports.
Source Financial Review