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Dwi Irianti Hadiningdyah
Deputy Director of Directorate of Islamic Financing Debt Management Office
Ministry of Finance – Republic of Indonesia
IIFM Industry Seminar on Islamic Capital and Money Market - Jakarta, May, 2014
>> Sukuk Negara: Moving Forward
Sukuk Structures
Project Financing Sukuk & Pricing
Market Development
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Road Map of Sukuk Negara
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Legal certainty for investors:
Principal amount and
coupon payment are
guaranteed by the GoI as
Obligor
Comply with sharia principles
A conscious effort to support
and develop the Islamic
financial market
The Government of Indonesia
regularly issues Sukuk Negara in
both the domestic and global market
as a form of commitment to support
the development of the global
Islamic financial market.
Investing in the viability and
sophistication of Islamic
banking by providing
alternative products
The Issuance of Sukuk Negara
provides an alternative Sharia
compliant instrument for fast
growing Islamic financial institutions
in Indonesia to invest in.
2008 2009 2010 2011 2012 2013
Strong government support a
primer for success
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2008
Law
No.19/2008
Sukuk Negara
(IFR) debut
issuance
2009
Retail Sukuk (SR)
Debut of Global
Sukuk (SNI)
Hajj Fund Sukuk
(SDHI)
Debut Auction of
Sukuk Negara (in
October)
2010
Regular Auction
of Sukuk Negara
2011
Islamic T-Bills
(SPN-S)
First Auction of
Project Based
Sukuk (PBS)
2nd Global Sukuk
2012
Regular Auction
(PBS & SPN-S)
Green Shoe
Option – Auction
3rd Global Sukuk
2013
Project Financing
Sukuk
Islamic Savings
Bonds (on
progress)
Buyback & Sukuk
Switching (on
progress)
The development of Sukuk Negara has expanded the possibilities for Islamic
finance
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Sukuk Negara: Financing Instrument
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Sukuk Negara is issued for the purpose of financing the State Budget, including to finance infrastructure projects (Article 4 Law No.19/2008)
State Budget Financing
Project Financing
Sukuk increasingly
gain popularity
as the preferred financing
option due to many
competitive advantages:
• Fatwa & sharia endorsement Sharia Compliance
Instrument
• Lower rate of income tax
•Tax neutrality for SPV Tax incentives (for both issuers and investors)
• Flexibility in portfolio management Flexibility
•Broader investor base, both local & global
• Islamic & conventional Diverse investor based
•Obligation of full disclosure to investors
•Prohibition of excessive leveraging Greater transparency
•Guaranteed by Government (principal & coupon payment)
Enhanced security for investors
General Financing
Objectives
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Sukuk Negara as Islamic Investment Instrument
• No financial transaction should be based on the payment or receipt of interest
• Profit from indebtedness or the trading of debts is seen to be unethical
Uncertainty in the terms of financial contract is considered unlawful, but not risk per se
Financial derivative are not permissible under sharia compliant finance
No financial transaction should be directed towards economic sectors considered unlawful
Any financial transaction should be based on tangible, identifiable underlying asset
As Islamic financial instrument, sukuk must be structured and in compliance with Islamic principles
Parties to a financial contract should share in the risks and rewards derived from such financing or investment transaction
MAIN PRINCIPLES OF ISLAMIC
FINANCE
Prohibition
of interest
(riba)
Prohibition of
uncertainty
(gharar)
Prohibition on
speculation
(maysir)
Prohibition
on unlawful
(haram) asset
Profit and
loss sharing
obligation
Asset
backing
obligation
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>>
Sukuk Negara: Moving Forward
Sukuk Structures
Project Financing Sukuk & Pricing
Market Development
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Fatwa & Sharia
endorsement Issuer Perspective
Sukuk Structure Determinants
SUKUK STRUCTURE
Sharia Compliance
Return (fixed/variable )
Locally and Globally accepted
Tenor (short/long term)
Tradability
Positive Law Compliance
Underlying
Jurisdiction/Regulatory Framework
Simplicity and Transaction Documents
Investor Perspective
Sukuk Structure based on Sharia Contracts
Sale Based Ijarah Based Partnership Based
a. Murabahah
b. Istishna
c. Salam
a. Sukuk of existing leased assets/ asset to
be leased
b. Sukuk of existing/Future usufruct
c. Sukuk of Existing/future Services
a. Musyarakah
b. Mudharabah
c. Wakalah
d. Muzara’ah
e. Mugharasah
f. Musaqah
Risk Appetite Utilization of Proceeds
(general financing/projects)
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Fatwa Number 69 Year 2008 on Indonesia Sovereign Sukuk
Fatwa Number 70 Year 2008 on Issuing Methods of Sharia State Securities
Fatwa Number 71 Year 2008 on Sale and Lease Back
Fatwa Number 72 Year 2008 on Sharia State Securities Ijarah Sale and Lease Back
Fatwa Number 76 Year 2010 on Ijarah Asset to be Leased Based Sovereign Sukuk
Fatwa Related to Sukuk Negara
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National Sharia Board – Indonesian Council of Ulama have issued
Fatwa related to the Sukuk Negara issuance. Those fatwa not only for
domestic issuance but also for international issuance.
Sharia Compliance
Dr. Hussain H. Hassan, Sheikh Nizam Yacouby,
Dr. Mohamed Ali Elgari, Dr. Abdul Sattar Abu Ghuddah
Sharia Advisors for Global Sukuk
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Indonesia Sovereign Sukuk Structures :
Classification on
AAOIFI Sharia
Standards 17
Certificates of
ownership in leased
assets (3/1)
Certificates of
ownership of described
future services (3/2/4)
Certificates of
ownership of assets
to be leased (3/1)
Underlying asset State-Owned Assets Hajj Services Infrastructure
Projects
Coupon Fixed rate Fixed rate Fixed rate
Tradability Tradable Non-tradable Tradable
Issuance method Bookbuilding,
Auction
Private placement Auction
Series of Sukuk
Negara IFR, SNI, SR, SPN-S SDHI PBS, SR
Ijarah Sale and Lease Back
Ijarah al-Khadamat
Ijarah Asset to be Leased
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Domestic & International
Ijarah Sale and Lease Back
SPV (Issuer/ Trustee)
Investors
1a. Sales of Asset (Beneficial Title)
1d. Proceeds
2a. Lease of Asset
1b.Sukuk issuance
1c. Proceeds
3. Sales of Asset
2b. Periodic Lease Payment
4. Sukuk Redemption
5. Sukuk
Paying Agent
Investors
MoF - GoI (Obligor/Originator)
MoF - GoI (Obligor/Originator)
SPV (Issuer/ Trustee)
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Ijarah al-Khadamat
This structure is used for Indonesia Hajj Fund Sukuk (SDHI) issuance
SPV A. Service Provider
B. Issuer
C. Trustee
D. Muwakkil
INVESTORS
PROVIDERS Services :
• Flight
• Catering
• Housing
Proceeds
Sukuk
Proceeds
Wakalah
1 Services
9 Service Payment (Ujrah)
Services Procurement
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6
7 Procurement Report
2 3
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INVESTORS
Sukuk Payment
11 10
Sukuk
GOI ( User )
A. Aqad Ijarah Al-Khadamat
B. Terms and Conditions
C. Aqad Wakalah
8 Signing on Procurement Report
GOI ( Wakeel)
Ijarah Asset to be Leased
1. Lease Order
3. Sukuk issuance
4. Proceeds
2a. Wakalah Agreement on project
construction
2b. Purchase agreement on
Lands/Buildings (if required)
Project construction
5. Proceeds
8. Periodic
payment
10. Purchase agreement (at maturity)
12. Sukuk
redemption
9. Project handover at
completion
7. Periodic lease payment
SPV
A. Issuer B. Trustee C. Principal D. Lessor
INVESTOR
6. Ijarah Asset to be Leased Agreement
11. Purchase payment
: Contract/Agreeement
: Cash flow
GoI
- Lessee
- Buyer
GoI
Wakil/ Agent
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>>
Sukuk Negara: Moving Forward
Sukuk Structures
Project Financing Sukuk & Pricing
Market Development
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Issuance Program
Bookbuilding
• Issued annually
• USD denominated
• 144A/Reg-S issue format
• Joint lead managers
International Market
Auction Bookbuilding Private Placement
• IFR, Islamic T-Bills, PBS.
• Conducted regularly 1-2
times a month based on
annual calendar of issuance
• Auction participants
• Conducted regularly once a
year Ritel Sukuk issuance
• Selling agents (commercial
Banks and securites
companies)
• SDHI series (Hajj Fund
Sukuk)
• Billateral agreement
• Non-tradable
Domestic Market
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Since 2012, GoI has frequently issued Project Based Sukuk (PBS). The objectives are product diversification, utilization of potential underlying, and accelerating project development
The Sukuk structure is Ijarah Asset to be Leased, approved by National Sharia Board (Fatwa No.76/2010)
The underlying is government projects including infrastructure.
PROJECT BASED SUKUK
Major requirement of project to be financed by sukuk:
• Allocated on State Budget
• Central Government projects.
• Project construction preparation must be 100% ready before Sukuk issuance.
• Parliament’s approval.
• Part of Medium Term Development Plan.
• Compliant with sharia principle.
• Support economic growth acceleration.
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Investors
GoI - Seller
- Lessee
1.
Declaration of trust &
issuing sukuk
1. Proceeds
4. Ijarah agreement (rental of SOA) 3. Proceeds (49%)
4. Ujrah (rental payment)
5. Periodic
distribution
5. Project Delivery
6. Purchase of Sukuk Assets
(SOA [50]+Projects[50]) at
maturity
6. Purchase price
(SOA+Projects) = nominal
sukuk
7.
Redemption
Sukuk
GoI Wakil
GoI Obligor
SPV
Issuer Trustee Buyer Lessor Principal
Building projects thru EPC contracts
3. Wakalah agreement (appointment of
wakeel) to:
- Maintenance service of SOA
- Build projects
2. Purchase of State Owned Asset
(SOA)
2. Proceeds (51%)
Akad
Cash flow
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Pricing for Project Based Sukuk
Domestic Issuance
Analyzing yield curve of government securities;
Yield data analysis: major sources, i.e. Bloomberg, IDMA, IBPA, etc.;
Observing recent and future condition of financial market and macro economic data;
Analyzing yield data of government securities’ benchmark series of the same tenor (using spread analysis)
International Issuance
Timing of pricing is crucial;
Analyzing yield data of peer countries;
Analyzing yield curve of GoI Global Bonds/Sukuk;
CDS (Credit Default Swap);
New issue premium;
US Treasury spread or LIBOR;
Whisper price;
Size of incoming bids (over/under subscribe);
Price tightening;
Final price.
Some Considerations
• Cirebon Kroya Double Track Railway
Project.
• Railway Electrification and Double
Tracking of Java Main Line Project.
• Hajj Hostel Revitalization Project.
• Urgently needed infrastructure
financing.
• Project identification (list of
project).
• Coordination with Bappenas &
other line Ministries.
• Readiness criteria and sharia
compliance.
• Diversification of Sukuk
structure (aqad).
• Size of infrastructure project.
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>>
Sukuk Negara: Moving Forward
Sukuk Structures
Project Financing Sukuk & Pricing
Market Development
1
1I
1II
1V
The Importance of Sukuk Market
Sukuk
Market
Diversified funding sources
Financial sector
stability
Basis for financial products
Corporate governance
Choice for investors
Finance infrastructure
Liquidity management
Price discovery
mechanism
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Internal Perspective
Regular Issuance (calendar of issuance)
Issuance methods (auction, bookbuilding, private placement, GSO)
Infrastructure (Auction Participant/Selling Agent, Trading System, Repo)
Product Development
Sukuk Negara Market Development Programs
Sukuk Market
Deep
Active
Liquid
External Perspective
Investor relationship (investor/dealers meeting)
Publication (exhibition, public expose, brochures)
Broadening Investor Base (socialization, Marketing, Pre-marketing of Retail Sukuk)
Building benchmark series and yield curve 21
IFR SR SNI SDHI PBS
Series Islamic Fixed
Rate (IFR)
Retail Sukuk
(SR)
Sukuk Negara
Indonesia (SNI)
Islamic T-Bills
(SPN-S)
Hajj Fund Sukuk
(SDHI)
Project Based
Sukuk (PBS)
Aqad Ijara Sale & Lease Back
Ijara al-
Khadamat
Ijara Asset to be
Leased
Underlying State Owned Assets
Hajj Services Government
Projects
Coupon Rate Fixed Rate
Tradability Tradable Non-Tradable Tradable
Issuance
Methods
- Bookbuilding
- Auction
Bookbuilding Bookbuilding Auction Private
Placement
Auction
Characteristics IDR Sukuk for
wholesale
investors. Mid
to long term
tenors, semi
annual coupon
IDR Sukuk for
retail
Indonesian
investors,
monthly
coupon
payment
USD
denominated
Sukuk, issued in
international
market, semi
annual coupon
IDR Sukuk,
mature in 6
months,
discounted
basis
Private
placement, short
term, monthly
coupon
IDR Sukuk, mid to
long term tenors,
semi annual coupon
SPN-S
Sukuk Negara Product Development Programs
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Tradable,
IDR139.23T (79.67%)
Non-
tradable, IDR35.53T (20.33%)
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Distribution of Sukuk Negara (as of April 30, 2014)
Distribution by Tradability
IFR, IDR16.59T
(9.49%)
PBS, IDR29.53T (16.89%)
SR, IDR47.91T (27.41%)
SNI, IDR40.36T (23.09%)
SPN-S, IDR4.89T (2.79%)
SDHI, IDR35.53T
(20.33%)
Distribution by Series Distribution by Currency
IDR,
IDR134.44T (76.91%)
USD, IDR40.36T (23.09%)
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2027 2029 2030 2036 2037 2043 TOTAL
Total 16.08 19.96 15.97 22.49 22.74 20.30 6.67 5.00 16.09 - - 1.55 3.40 - 2.18 4.11 10.15 7.12 174.80
SPN-S 4.89 - - - - - - - - - - - - - - - - - 4.89
SDHI 11.19 1.00 1.00 2.00 2.50 3.00 5.50 5.00 3.34 - - - - 1.00 - - - - 35.53
SNI - - - - 11.53 17.30 - - 11.53 - - - - - - - - - 40.36
SR - 13.61 14.97 19.32 - - - - - - - - - - - - - - 47.91
PBS - - - - 6.73 - 0.91 - 1.22 - - - 3.40 - - - 10.15 7.12 29.53
IFR - 5.35 - 1.17 1.99 - 0.25 - - - - 1.55 - - 2.18 4.11 - - 16.59
-
5
10
15
20
25
30
35
40 1 USD = Rp 11,532
(IDR Trillion)
INVESTORS Dec-12 Dec-13 Feb-14 Mar-14 30-Apr-14
Bio (IDR) % Bio (IDR) % Bio (IDR) % Bio (IDR) % Bio (IDR) %
TRADABLE 63,035 63.79 87,174 73.44 77,154 69.08 96,764 73.14 98,904 73.57
Total Bank 25,254 25.56 37,855 31.89 32,895 29.45 32,757 24.76 40,902 30.42
Conventional
20,419 20.66
30,673 25.84
26,150 23.41
26,720 20.20
34,161 25.41
Islamic
4,835 4.89
7,182 6.05
6,746 6.04
6,038 4.56
6,741 5.01
Bank Indonesia - - 230 0.19 400 0.36 840 0.63 157 0.12
Insurance 12,281 12.43 18,427 15.52 18,800 16.83 19,568 14.79 20,737 15.43
Pension Fund 4,845 4.90 4,572 3.85 4,323 3.87 4,346 3.28 4,353 3.24
Individual 9,055 9.16 8,828 7.44 6,602 5.91 25,838 19.53 14,954 11.12
Mutual Funds 3,189 3.23 2,428 2.05 1,952 1.75 2,327 1.76 2,479 1.84
Foreign 5,213 5.27 11,120 9.37 8,820 7.90 7,726 5.84 10,787 8.02
Others 3,199 3.24 3,712 3.13 3,363 3.01 3,362 2.54 4,535 3.37
NONTRADABLE 35,783 36.21 31,533 26.56 34,533 30.92 35,533 26.86 35,533 26.43
Ministry of
Religious Affairs 35,783 36.21 31,533 26.56 34,533 30.92 35,533 26.86 35,533 26.43
TOTAL 98,818 100.00 118,707 100.00 111,687 100.00 132,297 100.00 134,437 100.00
Ownership of Domestic Sukuk Negara (as of April 30, 2014)
Source : DGDM - MoF
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Wassalamu’alaikum
Any queries please contact:
Directorate of Islamic Financing Directorate General of Debt Management
Ministry of Finance - Republic of Indonesia
Phone: (62) (21) 351-6296; Fax: (62) (21) 351-0728 e-mail: [email protected]
website: www.djpu.kemenkeu.go.id
