Jakarta: Indonesia's plan to raise up to $1 billion in its first sovereign Islamic bond will boost the domestic market for such products and highlight the need for better tax treatment, a senior banker at HSBC said.
Indonesia is seen as a huge potential market for Islamic financial products, both because of its large population - it is the world's most populous Muslim nation - and because it needs about $140 billion to pay for new roads, ports, railways, and other infrastructure in the next few years.
"Indonesia has the potential of becoming the centre for Islamic finance in Asia," said Mahmoud Abushamma, head of HSBC's sharia division in Jakarta.
But the government needs to urgently address the tax treatment of sharia-compliant financial products, such as bonds and other financings, in order to tap into a global market worth an estimated $1 trillion and drive the growth of Indonesia's financial sector.
"If you want to be a hub, you have to free the market and offer an equal footing" for Islamic financial products, Abushamma said.
"If the government changes the regulation and offers a level playing field to Islamic, in comparison to conventional, financial products, there's a huge opportunity here."
Darmin Nasution, Indonesia's director-general of tax, told Reuters earlier this week that he wants to promote Indonesia's capital markets by improving the tax treatment of Islamic financial products.
In June, a finance ministry official said its sovereign Islamic bond issue, or sukuk, could be postponed until the fourth quarter or early next year, pending parliamentary approval. The relevant law is being discussed in parliament.
While the government needs to raise the money for its budget, it also hopes the sukuk will help to develop the local debt and Islamic financing market, and it is expected to follow up with a similar sukuk aimed at retail investors.
Indonesia is already missing out on the opportunity to attract investment from the Middle East because of the tax treatment for Islamic financings.
Dubai Islamic Bank had expressed its interest in financing Jakarta's $650 million monorail project, but could not participate in the end because of the tax issue.
"If Indonesia was to issue the sukuk, the first thing that would happen is you would have immediate recognition, because it will be predominantly targeted at the Middle East," Abushamma said, adding that there would be a prospectus and roadshow, with the finance minister briefing investors on Indonesia's economic outlook.
The sukuk would attract investors such as the Islamic Development Bank, raising Indonesia's profile among Islamic investors, he said, and paving the way for more such products.
"Once you have the sovereign bond, that will lead to growth of other products like mutual funds, the takaful [insurance] market."
Indonesia's central bank said in July that it expects total assets of Islamic banks to more than triple to 91.57 trillion rupiah ($9.95 billion) by the end of 2008.
But, even after that increase, the proportion of Islamic assets would only be about five per cent of total banking assets.