Indonesia is currently competing against Turkey in a bid to host the World Islamic Infrastructure Bank (WIIB), which will act as the infrastructural project-encouraging sector of global Islamic finance.
Jointly started by Indonesia, Turkey, and the Saudi Arabia-based Islamic Development Bank (IDB), WIIB will handle agreements and use sukuk to fund projects in Muslim-majority countries around the world. Indonesia and Turkey is predicted to pledge around USD 300 million (IDR 4 billion) each, while the IDB will stake a starting capital of USD 1 billion. All three entities will then hold the title of founding members, and jointly hold the authority to invite other nations.
Islamic finance prohibits charging and giving interests, the primary source of profit in conventional banking. As such, the concept of sukuk, the Sharia-compliant equivalent of bonds, is used instead. The investors, instead of receiving interests, will have a share of ownership in the project funded from the sukuk money instead and is entitled to a share of income from that project. This is allowed under sharia law, and is also the reason why sukuk in particular, and Islamic finance in general, is ideal for Indonesia – a nation with loads of projects of all kinds to be developed.
“Having [WIIB] in Indonesia will help build infrastructure, bring in capital, and boost Islamic banking assets. Malaysia and Saudi Arabia may offer more sophisticated markets, but the greatest funding need is here,” said Achmad Kusna Permana, secretary-general of the Indonesia Islamic Banking Association, as reported by Bloomberg Business.
Furthermore, the plan is also in line with the government’s plan to boost Sharia finance in Indonesia. Although Indonesia has the largest Muslim population in the world, the prevalence of Sharia-compliant banking here pales compared to Malaysia. In 2014, Sharia banking assets climbed by 12 percent to a record high of IDR 272 trillion (USD 20.4 billion) according to the Financial Services Authority (OJK). However, Malaysia owns MYR 625 billion (USD 164 billion), more than 8 times what Indonesia has. Malaysia also houses the international organizations Islamic Financial Services Board and Islamic Liquidity Management Corporation.
The hosting plan enjoys strong support from Indonesia’s Ministry of Finance. “Indonesia will have a Sharia-based infrastructure bank which operates on a global scale. The target is that our Islamic finance can be competitive and Indonesia can become an Islamic finance hub. The growth of Islamic finance has to be supported by the government, it cannot progress on its own. It’s different compared to conventional banks, so government intervention is needed,” explained Bambang Brodjonegoro, Indonesia’s Finance Minister to Bisnis.com.
Indonesia has taken steps to improve the relatively low volume of Islamic finance activity within its territories. Last May, the government sold a USD 2 billion-worth of sukuk with a tenor of 10 years, the world’s largest ever single-tranche sukuk offering. The note was priced at 4.325%, and generated demands from 240 investors from many different countries. More recently in June, the OJK held a series of events designed to boost the people’s understanding of Sharia finance.
Other than the WIIB, Indonesia is also applying to become a founding member of the China-led Asian Infrastructure Investment Bank. AIIB is widely seen as a Chinese ammunition to dilute the significance of World Bank and the International Monetary Fund (IMF), two Western-led global financial organizations. Up until now, the World Bank has been Indonesia’s primary source of funding, with 60% of Indonesia’s international debt owned by the institution.
Indonesia is currently in need of a huge amount of money in order to fund its ambitious infrastructure development plan. World Bank’s president Jim Yong Kim offered President Widodo a loan of USD 12 billion in his visit to Jakarta, while Rini Soemarno, the minister of state-owned enterprises, has signed a USD 50 billion-deal with a Chinese state-owned bank. Ideally, once the WIIB starts operating, it would have viable projects right within its home country.
Originally published on www.globalindonesianvoices.com