Enhancing Islamic finance to fund infrastructure
Islamic finance can offer Indonesia an additional pool of liquidity to help fund its huge infrastructure requirements
Cecep Maskanul Hakim
assistant director, Islamic economic and finance department, Bank Indonesia
Matthew J. Martin
founder, Blossom Finance
Mauldy Rauf Makmur,
chief marketing officer, CIMB-Principal Asset Management
Dato’ Paduka Syed Mashafuddin
CEO, CIMB-Principal Islamic Asset Management
head, Islamic capital market division, Indonesia Stock Exchange
Fitri Lindawati Lubis
head, fixed income, PT Asuransi Allianz Life Indonesia
Y Bayu Wirawan
head, product development, PT Indonesia Infrastructure Finance
finance director, PT Jasa Marga
chief operating officer, Tropical Landscapes Finance Facility
director, Sharia capital market, Indonesia Financial Services Authority (OJK)
managing editor, The Asset
There are several ways Indonesia can finance its infrastructure projects, including raising funds in the sukuk market.
Y Bayu Wirawan, head of product development at PT Indonesia Infrastructure Finance (IIF) says project sponsors should explore Shariah-compliant financing for toll roads and power plants. They can use the Shariah principles of istisna and musharaka, for instance. Once a project the project is completed, it can be refinanced in the sukuk market.
Wirawan says the IIF management has given the company’s project team the greenlight to prepare a Shariah window that will allow them to raise Islamic financing. IIF is a private national company providing infrastructure financing and advisory services, focusing on commercially-viable infrastructure projects.
“We would like to be a catalyst in infrastructure financing using the Islamic scheme,” he says. “What we need to do now is to educate the investors about sukuk, including the risks associated with this instrument.”
Wirawan notes that Shariah-compliant investors such as the takaful need long-term paper for their portfolio. “We need to add more of these assets into the market,” he adds.
The state-controlled toll road operator Jasa Marga has demonstrated during the past two years that there are various ways of funding the projects, apart from the traditional financing sources. At present, the company has 13 toll road concessions at the parent level and 20 toll road concessions being operated through its subsidiaries.
Jasa Marga has implemented Shariah banking loans both at the parent and subsidiary level through musharaka financing scheme, using toll revenue sharing. This enables potential investors to invest in Jasa Marga either at the parent level or directly at project level with the same musharaka financing scheme.
Jasa Marga finance director Donny Arsal says the company’s total funding requirement at the parent level is more than 10 trillion rupiah in the next three years. At the project level, the total investment requirement is 140 trillion rupiah, of which 70% will be funded through debt.
Jasa Marga has arranged a number of conventional financing schemes during the past two years, according to Arsal, including a securitization deal involving the Jagowari toll road revenue and the pricing of the first ever Komodo bonds amounting to 4 trillion rupiah in December 2017.
This year, it introduced more innovative funding schemes, namely the limited investment fund, known locally as RDPT, and the infrastructure investment fund, or DINFRA. RDPT is an equity financing facility designed to reduce Jasa Marga’s reliance on debt for funding. “If these financings work we can perhaps replicate them in Shariah-compliant format, with some adjustments,” Arsal points out. “We are keen to explore any kind of financing schemes that give benefits to both issuers and investors.”
In structuring its funding requirements, Arsal notes that they have to consider the fact that it takes a longer time for a toll road project to ramp up its revenue as they pay the bank, usually on a quarterly basis, not just the interest on the loan, but the principal as well.
“There is a mismatch in the cash flow. The funding structure is more of a corporate financing rather than a project financing,” Arsal points out. “That is why we explore and introduce a step-up coupon bond and a zero-coupon bond to fit our cash flow.”
Fadilah Kartikasasi, director for Shariah capital market at Indonesia Financial Services Authority (OJK), says Shariah capital market development must take into account the country’s infrastructure requirements. Based on the mid-term national development plan, about 5,519 trillion rupiah is required to support these activities.
“State funds can only meet 40% of that number, hence, private sector involvement is pivotal,” she says. “In recent years, Islamic finance has played a notable contribution in supporting national projects. From the capital market side, several corporate sukuk are issued by various infrastructure-related issuers such as in telecommunication, airport and electricity.”
Dato’ Paduka Syed Mashafuddin, CEO of CIMB-Principal Islamic Asset Management, suggests that in other countries in the region, one can issue equity to partly fund a power project and other infrastructure initiatives. “If you need to raise equity, it can be done through a listing of the company,” he says.
There are suggestions that while Indonesia is the world’s most populous Muslim country, it lags behind other jurisdictions in terms of developing its Islamic finance industry.
As Cecep Maskanul Hakim, assistant director for the Islamic economic and finance department at Bank Indonesia explains, Islamic finance started in Indonesia only in 1992 with the establishment of Bank Muamalat, while the first sukuk was arranged 10 years later in 2002 for PT Indosat.
Sukuk issuance has surged since 2008 and the Republic of Indonesia arranged its first global sukuk in 2009 amounting to US$650 million, structured as sukuk al-ijara.
“The development of Islamic finance was slow at the beginning, but now it has become an important financing aspect of the Indonesian government,” says Hakim. “The penetration deepen with the development of different Islamic products.”
Matthew Martin, founder of Blossom Finance, is also optimistic about Islamic finance. “Indonesia is developing rapidly and people are becoming more educated,” he notes. “As people become more educated about their religion as practicing Muslims, they want to embrace and demand Islamic financial products. This will create a huge demand for retail Islamic investment products and on the issuance side, the SMEs will demand for new types of Islamic instruments to raise funds.”
For now, the investor base of Indonesia’s Islamic finance is still small, says Mauldy Rauf Makmur, chief marketing officer at CIMB-Principal Asset Management. He notes that there are about 1.6 million capital markets’ investors in Indonesia, of which only 96,000 are Shariah-compliant investors.
“This is something that we need to figure out,” he says. “While the supply side of Islamic finance is important, we also need to think about the demand side. We are working on how to make the Islamic investor base bigger. We are trying to educate the people on how to invest and how to achieve their goals. We need to broaden the Islamic investor base, particularly the retail.”
Irwan Abdalloh, head of Islamic capital market division at Indonesia Stock Exchange, echoes this view. Indonesia has the biggest Muslim retail population in the world that it can tap its people to grow the market. “Indonesia offers a huge potential as more than 64% of the population are considered productive and technology-minded,” he says. “People should be aware of it when penetrating the Indonesian market.”
Fitri Lindawati Lubis, head of fixed income at PT Asuransi Allianz Life Indonesia believes “the key to broaden the penetration rate as well as the appetite in Islamic finance in Indonesia is education,” she says. “Most the population are still not aware of Islamic finance. But while the investor base is relatively small, it is growing.”
As an investor, Lubis says there is a sufficient supply of sukuk and Shariah-compliant stocks available for them, but she is open to investing in alternative instruments such as infrastructure-related sukuk. “One way to attract demand for Islamic infrastructure offerings is to introduce simple products which investors can easily understand,” she argues.
Hakim says that while the liquidity situation in the sukuk market is improving, the government is not happy with the pace of the market’s growth. He attributes it to the investors’ practice of buy-and-hold. He also notes the slow development in corporate sukuk as issuances were few during the past two years. “The market liquidity will definitely improve if there is a regular issuance of Islamic paper,” he says. “The corporates can issue infrastructure sukuk.”
Bryan Taylor, chief operating officer at Tropical Landscapes Finance Facility (TLFF), says the future of Islamic financing may lie in green financing for infrastructure development. He notes there a lot of opportunities for greening the cities in Indonesia.
The TLFF aims to create innovative and collaborative financing mechanisms to bring private capital at scale and with good governance and risk management principles to fund long-term sustainable development projects.
In February 2018, TLFF announced its inaugural deal – a US$95 million corporate sustainability bond, a first in Asia.