1

CAPITAL MARKET STRATEGY TO ENHANCE INFRASTRUCTURE FINANCING

AND FINANCIAL INCLUSION:THE CASE OF INDONESIA

SARJITO

Deputy Commissioner of Capital Market Supervisory I

1st Annual Islamic Finance Conference JCC, May 17th, 2016

OUTLINE

2

MILESTONES OF SUKUK DEVELOPMENT

SUKUK STATISTICS

PROSPECTS AND CHALLENGES IN SUKUK DEVELOPMENT IN INDONESIA

REGULATORY FRAMEWORK

UPCOMING INITIATIVES

1

2

3

4

5

3

MILESTONES OF SUKUK DEVELOPMENT1

• First SukukIssuance: MudharabahIndosat

• Fatwa regarding MudharabaIslamic Bonds

• Fatwa regarding Guidance forIslamic Principles Implementation in Capital Market

• Fatwa regarding Ijara IslamicBonds

• Rule regarding Issuance ofIslamic Securities

• Rule regarding Akad Used in Issuance of Islamic Securities

• Fatwa regarding Convertible MudharabaIslamic Bonds

• Law No. 19/2008 regarding Islamic Government Securities

• First Government Sukuk Issuance

• First Government Retail SukukIssuance

• Announcing 2015 as The Year of Sharia Capital Market

• Launching Sharia Capital Market Roadmap, Logo and Tagline

• Launching of OJK Regulation on Islamic Securities (Sukuk)

MILESTONES

4

2003 – 2004

2006 - 2007

2008 - 2009

2014 - 2015

2012

5

SUKUK STATISTICS2

718

1.200

45

87

0

10

20

30

40

50

60

70

80

90

100

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

2010 2011 2012 2013 2014 2015 4th May 2016

6

718Million USD

Of Outstanding

Value

290million USD Mudharabah

Aqad

428million USD

IjarahAqadCORPORATE SUKUK

IN INDONESIA(Million USD)

As per 4th May 2016

Outstanding Value Accumulation Value Outstanding Number Accumulation on Issuance

7

2011 2012 2013 2014 2015 4th May 2016

Outstanding Sukuk 0,45 0,52 0,57 0,54 0,75 0,72

Outstanding Bonds 17,24 13,61 16,46 17,51 19,03 19,64 Market Share of Outstanding Sukuk 2.59% 3.84% 3.49% 3.08% 3.95% 3.68%

Outstanding Corporate

Sukuk(USD Billion)

0,45 0,52 0,57 0,54

0,75 0,72

2011 2012 2013 2014 2015 4th May2016

Outstanding Sukuk

8

OUTSTANDING CORPORATE SUKUK BY INDUSTRY

Industry Outstanding Value (USD)

Consumer Goods 41.521.969

Finance Industry 229.880.718

Infrastructure, Utility and Transportation 352.634.757

Mining 15.098.897

Property, Real Estate and Contstruction 79.269.213

Total 718.405.555

6%

32%

49%

2%11%

Consumer GoodsFinance IndustryInfrastructure, Utility and TransportationMiningProperty, Real Estate and Contstruction

Outstanding Sukuk as of 4th May 2016

9

Foreign2,27%

Mutual Fund

31,69%

Insurance19,25%

Financial Institution18,14%

Pension Fund

17,51%

Corporate8,63%

Foundation1,72%

Individual0,60% Securities

Company0,17%

Others0,02%

Corporate Sukuk Holder by Investor Type

as of May 4th, 2016

OUTSTANDING CORPORATE SUKUK HOLDERS

Investor Type Value (Million USD)

Foreign 16.306.809 Mutual Fund 227.680.054 Insurance 138.271.931 Financial Institution 130.303.488 Pension Fund 125.796.467 Corporate 61.988.525 Foundation 12.343.349 Individual 4.340.933 Securities Company 1.223.011 Others 150.989

TOTAL 718.405.556

10

PROSPECTS AND CHALLENGES IN SUKUK DEVELOPMENT IN INDONESIA3

PROSPECTS

11

Indonesia Infrastructure Financing Needs 2015-2019

12

PROSPECTS

Financing needs for infrastructure developmet

The projected financing needs of National Mid-Term Development

Plan:• Government 47%

• Private 33%• SOEs 20%

Large number of SOEs and their subsidiaries

Number of SOEs: about 119 companies

Number of SOE subsidiaries: about 600 companies

Relatively stable economic growth

• Indonesia economy experience ± 6% annual growth rate

• In 2013-2015, middle income people increased significantly

from 37,7% to 70% of population

Momentum for development

• Increased government support on Islamic economy

• Trend of positive growth in Islamic finance

• Low utility rate of capital market products (national survey 2013)

CHALLENGES

13

Banking Insurance FinancingCompany

Pension Funds

Capital market Pawnshop

Well Literate 21,80% 17,84% 9,80% 7,13% 3,79% 14,85%

Sufficient Literate 75,44% 41,69% 17,89% 11,74% 2,40% 38,89%

Less Literate 2,04% 0,68% 0,21% 0,11% 0,03% 0,83%

Not Literate 0,73% 39,80% 72,10% 81,03% 93,79% 45,44%

Source:Strategi Nasional Literasi Keuangan Indonesia, Otoritas Jasa Keuangan 2013

http://sikapiuangmu.ojk.go.id/public/content/files/SNLKI.pdf

Financial Literacy Survey

14

CHALLENGES

Awareness

Lack of understanding• Few market players understand well about

concept of sukuk.• Most investors especially individual investors are

not familiar with sukuk.

Market Players’ Perception • Issuing sukuk needs extra efforts and costs. • Sukuk only can be issued by sharia-compliant

companies.

15

CHALLENGES

Legal Issues (Taxation)• Market players doubt about taxation policy due to

no explicit regulations about tax neutrality for sukuk, even though in practice sukuk is not charged double taxes.

Liquidity IssuesSukuk in secondary market is illiquid, because :• Investors tend to hold to maturity• No sukuk market makers• The central bank is only willing to buy sukuk repo

issued by government rather than corporate sukuk

16

REGULATORY FRAMEWORK4

REGULATION RELATED ISSUANCE SUKUK

17

Rule No. 18/POJK.04/2015 regarding Issuance and Requirements of Sukuk

Requirements for issuance of sukukThe obligation to have Sharia Expert’s OpinionTrust deed of sukuk

18

UPCOMING INITIATIVES5

19

Market Infrastructure1. Coping with corporate sukuk liquidity problem:

• To encourage the establishment of a sukukmarket maker

• To develop sukuk based – sharia mutual funds• To develop sharia repurchase agreement and

sharia hedging

2. Developing the standardized methodology of sukuk rating

20

IncentivesProviding OJK fees discount to make sukuk more attractive

* 4th May 2016 rate USD1=IDR13,246

Sukuk Bonds

Registration fees

0.05% of issuance valueand maximum of IDR150 million (USD11,324.17)*

0.05% of issuance valueand maximum of IDR750 million (USD56,753.69)*

21

Promotion and Education• Encouraging SOEs to issue sukuk for

infrastructure financing.Number of SOEs: about 119 companiesNumber of SOEs on infrastructure: about 53 companies

• Capacity Building for market players involved in sukuk issuance (e.g. Issuer, underwriter, and trustee)

22

Strong Governmental Support• Ministry of Finance

• Directorate General of TaxesSpecific rule or amendments of Law to make tax regulation crystal clear to sukuk issuers

• Directorate General of Budget Financing & Risk ManagementSpecific regulations that will allow Investment Managers to invest in Sovereign Sukuk for Sukuk-based Islamic Mutual Fund

Ministry of State Owned EnterprisesTop-down policy approach to encourage State-Owned Enterprises to issue Sukuk

23

Enlarging investor base by encouraging institutional and individual investors to invest in sukuk, eg.:• Workshop for institutional investors• Public lecturing in universities • Seminar and socialization for high school students,

journalist, and other communities.

Providing investment facilities, eg.:• Broader access of investment for public in rural area

24