Zero Tax on Indonesia’s Bonds Seen Reviving Dying Sukuk Market
Indonesia’s plan to scrap a tax paid by bondholders on their interest payments looks set to inject new life into the nation’s ailing Islamic finance industry.
“Zero tax will definitely encourage more participation by government funds in the Indonesian sukuk market,” said Abas A. Jalil, chief executive officer of consultancy Amanah Capital Group Ltd. in Kuala Lumpur. “Having reputable government funds as investors in the sukuk market would create ‘ride-along’ interest among foreign investors.”
The government is considering cutting the levy to zero for all local-currency sovereign bonds from 15 percent for domestic investors and 20 percent for international ones, said Scenaider Siahaan, director of debt portfolio and strategy at the finance ministry’s budget financing and risk management office. The move should mean holders of the securities would accept lower yields, compensating for the loss to the treasury from the tax reduction.
The proposal is the latest measure by the world’s most-populous Muslim nation to revive Islamic banking after the industry shrank to 3.5 percent of total financial assets in March, from 5 percent a year earlier. Only one Indonesian company has issued rupiah sukuk in 2016 for the equivalent of $7.3 million compared with $5.9 billion worth of ringgit sales in Malaysia, the biggest Shariah-compliant debt market.
Indonesia needs to spend $500 billion over the next five years to build roads, railways and power plants, and the state budget is only capable of contributing 30 percent, Sofyan Djalil, head of economic planning body Bappenas, said in November. Much of the shortfall could be financed through bonds or sukuk, giving a boost to the $2 trillion global Islamic finance industry.
Indonesia’s bond yields are the highest in Southeast Asia, making it more costly for the government to raise funds to spend on infrastructure. Even so, the premium makes the debt attractive to overseas investors in an environment of low or negative interest rates.
The president is chairing a new committee tasked with bringing fragmented regulations under one roof. Financial products governed by religious tenets currently have to comply with the regulations of Bank Indonesia, the Financial Services Authority and the National Ulema Council of Shariah scholars.
Switching Pockets
“Right now, we pay higher yields but get revenue from the withholding tax, so we’re only moving money from our left pocket to our right pocket,” Siahaan said in an interview in Jakarta.
While the plan alone isn’t enough to rejuvenate Indonesia’s Islamic finance industry, bond issuers should at least consider sukuk as a viable alternative, said Raj Mohamad, managing director at Singapore-based consultancy Five Pillars Pte.
“Indonesia needs to work towards standardization and harmonize the Islamic financial regulatory framework,” said Raj. It needs to also “explore offering some incentives which most countries would offer to kick-start new initiatives,” he said.
Growth in Shariah banking assets picked up to 4 percent last year, after contracting 15 percent in 2014, government data show. That’s down from 48 percent in 2010. PT Bank Nagari issued five-year Shariah-compliant notes in January. Bank Syariah Mandiri, PT Bank Maybank Syariah Indonesia and consumer finance company PT Adira Dinamika Multi Finance Tbk are also gearing up to sell Islamic debt.
“Clearly, the move is a step in the right direction,” said Johar Amat, head of Treasury at OCBC Al-Amin Bank Bhd. in Kuala Lumpur. “If the plans come to fruition, this initiative will serve as yet another landmark endeavor by the Jokowi administration to catalyze the development of Islamic finance.”
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