Indonesia may have found a solution to mobilise the hundreds of billions of dollars of investment it needs to emerge as the world’s fifth-largest economy by 2045 – the idle Islamic endowment assets.
Bank Indonesia is developing a model of hybrid financial product combining the Islamic charitable endowment, known as waqf, with sukuk that can be invested in public or private projects, said M Anwar Bashori, head of Shariah economic policy at the central bank.
With the World Bank estimating Indonesia’s infrastructure investment requirement at $500bn by 2022, the government is turning to private and foreign investors for funds. The renewed efforts to tap idle Islamic endowment funds will also ease pressure on state companies to raise funds at high interest rates from a market rattled by a slumping currency and soaring bond yields. Indonesian Waqf Board has more than 4,000sq km of land spread across the archipelago and the central bank’s financing model will look to put that to more productive use, according to Bashori.
Waqf typically consists of cash or assets, including land and buildings, donated by individuals or institutions for charitable and religious purposes. Indonesia is also looking to mobilise the cash waqf to finance various projects through sukuk.
“The projects can either be government owned or private owned but they must surely be secure,” Bashori said. “Financing can vary from three years to five years.”
The financing model, which is being discussed with other institutions, including Indonesian Waqf Board, religious affairs and finance ministries and the Islamic Development Bank, can eventually become a model for global Shariah financing, Bashori said.
The waqf fund can lower financing costs because they offer no interests. The waqf board is collecting data on the amount of cash it holds, which may be in trillions of rupiah, chairman Mohammad Nuh said. “The number of Muslims in Indonesia is very large. Imagine if everyone donates 100,000 rupiah.”
Once the waqf-linked sukuk is launched they could also become attractive avenues for foreign institutions looking for Shariah-compliant tools, said Bashori. “We can attract waqf funds from overseas for investments in Indonesia. This will trigger capital inflows.”
Indonesia will be the world’s fifth largest economy by 2045 with a population of 309mn and per-capita income of $29,300, according to official estimates.
Bashar al-Natoor, global head of Islamic finance at Fitch Ratings, says while Indonesia’s plan looks interesting, it needs more clarity.
“A key question is whether it’s going to follow a similar structure to the asset-based sukuk or the structure of an actual asset-backed sukuk through profit and loss sharing,” al-Natoor said. “Whatever the initiative, having the backing of the sovereign is essential because it provides the ability to push through the regulatory and legislative system to allow things to happen.”
Loto Srinaita Ginting, director of government securities at the Finance Ministry, said the government was finalising the features and infrastructure of the waqf-linked sukuk and would introduce it soon.
Traffic moves along a bridge across the Kapuas river in this aerial photograph taken in Pontianak, West Kalimantan, Indonesia, on May 5, 2018. With the World Bank estimating Indonesia’s infrastructure investment requirement at $500bn by 2022, the government is turning to private and foreign investors for funds. The renewed efforts to tap idle Islamic endowment funds will also ease pressure on state companies to raise funds at high interest rates from a market rattled by a slumping currency and soaring bond yields.
