Bank Indonesia is weighing the use of sukuk issued by other countries in its monetary operations as demand for Shariah-compliant securities surge among lenders in the world’s largest Muslim-majority country.
The 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 Shariah securities at its disposal, he said.
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 selloff in its currency triggered by rising US interest rates. With the risks of a prolonged US-China trade war lingering, the central bank has been intervening in the currency and bonds market to quell volatility.
The central bank began offering a sovereign sukuk-backed securities, known as Sukbi, to conventional and Shariah banks from last year and the instrument has found favour with the banks. The bank sold 4 trillion rupiah of 7- and 14-day tenors in its latest auction on Feb. 13.
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.
Even with Muslims making up almost 90% of Indonesia’s 265 million population, Shariah financial products have struggled to gain much ground as conventional banks dominated the financial industry. That may be about to change as the government and central bank drive the promotion of Shariah banking and other financial instruments among the followers of Islam.