1
DEVELOPING SOVEREIGN SUKUK MARKET:
THE EXPERIENCE OF INDONESIA
MINISTRY OF FINANCE
REPUBLIC OF INDONESIA
IIFM Specialized Sessions on Islamic Finance: Sukuk, Islamic Hedging and Liquidity Management
ISEF 2017: Surabaya, 7th November 2017
Suminto Ph.D
Director of Islamic Financing
Directorate General of Budget Financing & Risk Management
Ministry of Finance of the Republic of Indonesia
Section 1 The Development of Sovereign Sukuk
Section 2 Indonesia: A Leading Sovereign Sukuk Issuer
Section 3 Infrastructure for Sukuk Negara Issuance
Section 4 Sukuk Negara: Challenge & Prospects
2
Total GLOBAL Sukuk Issuances (Jan 2001 – September 2017) All Tenors, All Currencies, in USD Millions
Total Global Sukuk Issuances as September 2017 USD 918,913 Millions
Source: IIFM Sukuk database
3
The Rise of Sovereign Sukuk Issuances
Apart from financing government spending,
governments in nascent Sukuk markets have issued
Sukuk to establish a benchmark for future
issuances
The issuance of the Hong Kong, UK and Luxembourg debut
sovereign Sukuk created new benchmarks and would help
develop their domestic Sukuk markets
As the regulatory, tax and Shariah frameworks are assimilated, the market
becomes active with sovereign issuances.
Corporate issuance are likely to emerge soon after
The challenge moving forward is to extend the success of
sovereign issuances to corporate issuances
Government support in providing a level-playing field and sovereign issuances will
attract corporate participants into the market
Sovereign and quasi-sovereign issuers are expected to drive growth in the global sukuk
market
Top-down Approach = THE Preferred Approach
Sukuk can also provide ‘diversification’
opportunities for investors
Sukuk appeal to both sets of investors – the conventional
fixed-income investors, as well as the vast Islamic financial
community in search of “quality” papers
Source: CIMB Islamic for Indonesia MoF
4
3
The Importance of Sovereign Sukuk Issuances to the Growth of the Sukuk Market
Several factors are driving sovereigns to participate in the Sukuk market, including: the desire to establish a benchmark and to encourage the development of a corporate Sukuk
market in the relevant country or territory the need to develop a legal and regulatory framework that recognizes and facilitates the
issuance of Sukuk - especially in jurisdictions where Islamic principles are not enshrined in national law
As a result of these drivers, sovereign issuers constitute a greater proportion of the global Sukuk market than of the conventional bond markets The value of international bond issuances reached around US$6.4 trillion in 2014, only around
10% of which was issued by sovereign and quasi-sovereign entities In comparison, the value of international sukuk issued in 2014 reached US$114 billion, of
which 85% was issued by sovereign and quasi-sovereign entities Despite the dearth of corporate issuances, the entrance of new issuers to the Sukuk market, particularly those governments representing strong credit, will nevertheless support growth in the Sukuk market over the longer term and help attract new investors to the sector, providing additional depth and liquidity to the Sukuk market
5
Source: CIMB Islamic for Indonesia MoF
Sukuk Market Growth Drivers
Tax Neutrality Cost Neutrality Legal and
Regulatory Frameworks
Key Success Factors
6
Source: CIMB Islamic for Indonesia MoF
4
Sukuk Market Growth Drivers (cont’d)
Tax Neutrality
Globally acceptable Sukuk structures, namely Ijara and Wakala, typically involve the transfer of beneficial interest in assets such as land and buildings
Such transfers tend to attract taxes and/or stamp duty under national land laws/regulations
To provide a level-playing field for Sukuk transactions, such transfers should be viewed as part of financing and therefore exempted from taxes and/or stamp duty that would otherwise be applicable
Cost Neutrality
Having a level-playing field from a tax angle, so that a Sukuk issuer does not have to bear extra costs when compared to issuing conventional bonds
Transaction advisers, including legal, tax and accounting advisors, do not charge a premium for advising on Sukuk transactions - this would take place when Sukuk transactions become a norm in particular jurisdictions and advisors become familiar with the workings and documentation involved
Legal and Regulatory Frameworks
The existence of frameworks that recognize and facilitate the issuance of Sukuk from a local perspective
This should extend to remedies available for Sukuk investors in the event of default, which should be as comprehensive as that available for investors in conventional bonds
7
Source: CIMB Islamic for Indonesia MoF
Conditions for successful sovereign deals
a) Administrative considerations - initial structuring and issuance costs of sukuk may be higher than a standard conventional bond - since Islamic principles require direct underlying assets to facilitate sukuk transactions, specific cash
flows from real assets need to be identified to support the structure, which is likely to be related to particular government projects
- despite the apparent costs, Sukuk issuance can offer a straightforward capital cost advantage for sovereign issuers due to a potentially broader investor base and its asset-backed structure
b) Sukuk structure considerations
- an extra point to consider for sovereign issuers relates to the sukuk structure chosen to facilitate the transaction
- this is even more crucial should the issuance be a global issuance since there are stricter guidelines to comply with regards to international standards (such as Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) standards), where the likes of Ijara and Wakala are very much favorable underlying contracts
c) - Sukuk issuance entails obtaining an opinion from a panel of Shariah jurists or scholars (Shariah
board) - a feature that may require more nuanced regulatory oversight in some countries - Shariah compliance of the Islamic structures along with its respective jurists opinion is paramount
to the success of the sovereign sukuk issuance
8
Source: CIMB Islamic for Indonesia MoF
5
Conditions for successful sovereign deals (cont’d)
d) - the market development driven by recent sovereign issuance activity will allow experienced
seasoned issuers/arrangers to provide valuable insights for sukuk issuance by sovereigns, especially those outside the Islamic world
- the lessons from recent sovereign issuers may assist new issuers innovate and adapt their infrastructure and regulation to ensure Shariah compliance
e) - a conducive regulatory framework is also fundamental to the issuances’ success - the success of sovereign issuances also hinges on how strong the support is in terms of the
infrastructure, legal and regulatory frameworks - tax neutrality is needed in order to create a “level playing field” when compared to conventional
bonds
9
Source: CIMB Islamic for Indonesia MoF
Section 1 The Development of Sovereign Sukuk
Section 2 Indonesia: A Leading Sovereign Sukuk Issuer
Section 3 Infrastructure for Sukuk Negara Issuance
Section 4 Sukuk Negara: Challenge & Prospects
10
6
11
Consistent Growth in Sukuk Negara Issuance
Composition of Outstanding by Currency
Composition of Outstanding by Tenor
• Total issuance of Sukuk Negara = IDR 745.8 trillion (from 2008 to October 26, 2017)
• Total outstanding of Sukuk Negara = IDR 547.8 trillion (as of October 26, 2017)
• Denomination = IDR and USD
• Issuance method = auction, book building, and private placement
Sukuk Negara Issuance: 2008 – October 26, 2017
Source: Ministry of Finance, ROI, data as of October 26, 2017
IDR378.26Tn (69.06%)
IDR169.5Tn (30.94%)
0 100 200 300 400
IDR
USD
IDR314.40Tn
(57.40%)
IDR132.37Tn
(24.17%)
IDR100.99Tn
(18.44%)
0 100 200 300 400
0 – 5
years
6 – 10
years
>10 years
4.7 16.6
27.0 33.3
57.1 53.2
75.6
118.5
179.9 180.0
0
20
40
60
80
100
120
140
160
180
200
2008
2009
2010
2011
2012
2013
2014
2015
2016
26-O
ct-
17
Issu
an
ce v
olu
me (
IDR
tri
llio
n)
IFR SR SNI
12
Establishing an Islamic
Global Medium Term
Notes (GMTN) for more
flexible issuance in
terms of timing, size
amount, and product.
Pioneered continued
innovation in Global
Sukuk Structuring
through Wakala sukuk
structure.
Considered as the
largest international
sovereign sukuk issuer
with total issuance of
USD13.15 billion.
Leading in International Sovereign Sukuk Issuer
500
1,250
2,625
3,000
3,149
4,044
5,238
6,231
6,256
7,000
8,219
9,000
13,150
- 3,000 6,000 9,000 12,000 15,000
South Africa
Emirates of Sharjah
Emirates of Ras Al Khaimah
Hongkong
Oman
Pakistan
Bahrain
Qatar
Turkey
Malaysia
Emirates of Dubai
Saudi Arabia
Indonesia
million USD
International Sovereign Sukuk Issuance (Oct 26,2017)
7
13
RoI Committed as Frequent Issuer in International Market
Issuance and Demand Amount of Indonesia US Dollar Global Sukuk
650 1,000 1,000 1,500 1,500
2,000 2,500
3,000
4,760
6,500
5,300 5,700
10,000
6,800
8,600
10,840
0
2,000
4,000
6,000
8,000
10,000
12,000
2009 2010 2011 2012 2013 2014 2015 2016 2017
Am
ou
nt Is
su
ed
(U
S$m
n)
Amount Issued (US$mm) Orderbook (US$mm)
SNI0322 due 2022 SNI0327 due 2027
43%
40%
12% 3% 2%
Fund Managers
Banks
SWF/CBs
Insurance/PFs
Private Banks
Distribution by Investor Type
28%
27%
21%
14% 10%
Asia (excl. Indonesia & Malaysia)
Middle East & Islamic
US
Europe
Distribution by Geography Distribution by Investor Type
Distribution by Geography
23%
29%
29%
9% 10% Asia (excl. Indonesia & Malaysia) Middle East & Islamic
US
Europe
Indonesia 48%
39%
8% 4%
1%
Fund Managers
Banks
SWF/CBs
Insurance/PFs
Private Banks
Demonstrates the
ROI’s commitment
to enhance its
Islamic finance
credentials and to
continue setting
liquid and on-the-
run benchmarks in
the global Sukuk
arena.
Highly diversified orderbook across geography and investor type
(Case Study ROI Global Sukuk 2017)
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Continue to Build Sukuk Negara Supply in Domestic Market
Incoming bids of Sukuk Negara auction has increased significantly during the last 3 years.
On-the-run series are Islamic Treasury Bill (SPN-S) and Project Based Sukuk (PBS).
During 2017, as of October 2017 total incoming bids has reached IDR350.44 trillion with total
awarded bids of IDR122.69 trillion.
11.46 21.59
33.71 56.08
71.21 67.75
146.03
241.09
350.44
1.28 6.15 5.93 18.49 20.97 21.62
56.29
104.82 122.69
0
50
100
150
200
250
300
350
2009 2010 2011 2012 2013 2014 2015 2016 Oct-2017
Incoming Bids Awarded Bids
(IDR Trillion)
8
2009
2010
2011
2012
2013
2014
2015
2016
2017
15
“Indonesia has been very successfully issued retail sukuk regularly in domestic market"
Retail Sukuk for Promoting Financial Inclusion
Number of Retail Sukuk investor (total)
225,442
Investors diversified from
34 Provinces Jakarta
Middle
East
West Indonesia (Ex. Jakarta) 58%
34.2%
7.2%
0.6%
(case study SR-009 Year 2017)
9 Retail Sukuk Series Issued 2009-2017
Issuance Statistics 2009-2017 (IDR Billion)
Investor Statistics 2009-2017
in Indonesia
2009
2010
2011
2012
2013
2014
2015
2016
2017
16
Domestic Secondary Market Performance
Sukuk Negara Average Daily Trading
Sukuk Negara Secondary Market Transaction Volume
In overall, Sukuk
Negara secondary
market performance
is gradually
increasing over the
years.
Sukuk Negara is
used by Indonesia
Central Bank for
monetary operation.
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Double Track Railways (Cirebon – Kroya route in middle Java)
• Double Track railways (Cirebon – Kroya); Double-Double Track railways (Manggarai – Bekasi)
• Revitalization and Development of Hajj Dormitory IDR800 Billion
2013
IDR1.57 Trillion
2014
IDR7.13 Trillion
2015
• Double Track railways (Cirebon – Kroya, Martapura – Baturaja); Double-Double Track railways (Manggarai – Bekasi); Elevated Track railways (Medan – Kualanamu)
• Roads and bridges (Sumatera, Jawa, NTB, Kalimantan, Sulawesi, Maluku & Papua).
• Building and facilities development of the State Islamic Higher Education.
Financing Infrastructure Project Through Sukuk Negara
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IDR16.76 Trillion
2017
IDR13.67 Trillion
2016
• Double Track, Double-Double Track & Elevated Track Railways (Jabodetabek, Central Java, East Java & Sumatera).
• Roads, flyover, underpass, tunnel, bridges development (Sumatera, Java, NTB, Kalimantan, Sulawesi, Maluku & Papua).
• Revitalization and Development of Hajj Dormitory, Religious Affairs Office, and Development of the State Islamic Higher Education building and facilities
• Elevated & Double Track Railways (Jabodetabek, Central Java, East Java, Sumatera & Sulawesi).
• Roads, flyover/underpass/ tunnel & bridges development (Sumatera, Java, NTB, Kalimantan, Sulawesi, Maluku & Papua)
• Flood and lava control, management of urban main drainage and coastline security, management of dams, embung, and other water containers buildings, raw water supply and management.
• Revitalization and Development of Hajj Dormitory, Development/rehabilitation of Religious Affairs Office, Development of the State Islamic Higher Education building and facilities.
Financing Infrastructure Project Through Sukuk Negara
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Section 1 The Development of Sovereign Sukuk
Section 2 Indonesia: A Leading Sovereign Sukuk Issuer
Section 3 Infrastructure for Sukuk Negara Issuance
Section 4 Sukuk Negara: Challenge & Prospects
Infrastructure for Sukuk Negara Issuance
Legal infrastructure provides certainty:
Legal basis of issuance Special Purpose Vehicle
Legal Infrastructure
Variety of Instruments
Structure & Sharia
Compliance
Issuance Method
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Sukuk Negara
In compliance with Sharia principles:
6 Fatwa & several Sharia endorsement
4 sukuk structure applied: o Ijarah Sale and Lease Back o Ijarah Asset to be Leased o Ijarah Al Khadamat o Wakalah
Instrument Diversification for distinct investors:
Islamic Fixed Rate (IFR) Project Based Sukuk (PBS) Indonesia Hajj Sukuk(SDHI)
Issuance methods:
Auction Bookbuilding Private placement
Indonesia Global Sukuk (SNI) Islamic Treasury Bills (SPN-S) Retail Sukuk(SR)
Underlying assets Tax neutrality
11
Legal Basis
Legal basis of Sukuk Negara issuance:
• Providing mandate for the government to issue Sukuk Negara
• Establishment of the Special Purpose Vehicle
• Utilizing state-owned assets and government projects as
underlying
Legal certainty for investors:
• Principal amount and coupon payment are guaranteed by the
GoI as Obligor
• Comply with sharia principles
Tax treatment parri passu with Government Debt
Securities (Bonds)
Law Number 19 of 2008 on the Sovereign Sharia Securities
(Sukuk Negara)
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Technical Regulations
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Special Purpose Vehicle (SPV)
The issuance of Sukuk Negara may be conducted
directly by the Government or by the Sukuk Negara
Issuing Company/Perusahaan Penerbit SBSN (act as
SPV) [Law no 19/2008 article 6].
Perusahaan Penerbit SBSN (Sukuk Negara issuing
company) is the SPV in Sukuk Negara issuance.
Special Purpose Vehicle (SPV)
is an independent legal entity
incorporated solely for the
purpose of issuing bond/sukuk.
SPV Perusahaan Penerbit SBSN
Legal Form Role in Sukuk Issuance Characteristics
SPV can be established in the
form of a corporation , trust,
partnership, limited liability
company, subsidiary, or a
separate entity.
Issuer of sukuk.
Acting as Trustee.
Acting as Counterpart in
transactions of underlying
assets.
Appoint other parties as
co - trustee to help carry
out the tasks as trustee
Small capital, comes from
sponsoring company that is
100% owned SPV.
Established in the country or
tax heaven country, for a
specific purpose;
Not having management or
employee (ex-officio)
Bankruptcy remote
Off-balance sheet
Single SPV vs. one-off SPV.
22
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
12
Underlying Assets of Sukuk Negara
Government activities allocated in state budget:
- Infrastructure Projects
- Procurement of Goods
- Services
• Lands and buildings
• Purchased or obtained under state budget or other legitimate sources
• Subject to the parliament approval
Types of Underlying Asset in Sukuk Negara Issuance
State Owned Assets Financing Project/ Government Activities
• Land and air transportation • Accommodation (housing) • Logistic (catering, health, etc)
Hajj Service Procurement
Beneficial Right
• The Beneficial Right is the right to
own and to obtain the full right to the
usage of an asset without requiring
registration for such ownership and
right. (Law no 19/2008 article 6).
• The utilization of SOE as underlying
asset is within the framework of
beneficial right/ ownership
Terms/Condition of State Owned Asset
/SOA (as underlying asset):
• Economically valueable
• in good condition/ feasible
• listed in the Document Administration
• not the main weaponry system
• not in dispute
• not associated with symbols of statehood
• not being used as another underlying
asset
23
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Tax Neutrality (1)
• Tax is a hidden cost in any funding structure, potential tax liability and tax inefficiencies will affect any financing structure
• In Islamic Finance, due to the underlying asset within each transaction, tax neutrality as well as the tax treatment of profits need to be resolved
SPV Company A (2) Ijarah (Lease)
(1) Sale of asset
(1) Funds (1) Sukuk issuance
Investors (2) Funds
(2) Ijarah payments
IJARAH SUKUK:
• Due to the additional underlying asset transactions required for Syariah financing, tax neutrality rules would mean that the underlying transactions would be ignored for tax purposes
• This will mean that the Sukuk will be treated to be similar as any conventional bonds so that it is not treated worse off
Underlying Asset Transaction
24
13
Tax Neutrality (2)
Tax neutrality would mean that the profits from Sukuk (coupon payment) is treated as “interest” for tax purposes
Therefore, all tax rules relating to “interest”, such as interest tax deduction, withholding tax or exemptions will equally apply on the “profits”
Stamp duty or VAT treatment would also need to be in line with conventional financing
This ensures that Islamic financing is provided with the same treatment as conventional financing
Treatment of the Profit
Impact of Tax Neutrality
No Tax Neutrality Tax Neutrality
Disposal of asset/properties may be to income tax or capital gains tax
Underlying disposal of the asset/properties requires for Islamic transactions will be disregarded for income tax subject purposes. Therefore, no additional tax impact on the sale and lease back required in Islamic transaction
Double stamp duty for the sale and lease back of assets/properties
Stamp duty excemption on the underlying sale and disposal will mean that no additional stamp duty will be applicable compared to a conventional transaction
Uncertainty in respect of what a company can take as a tax deduction
Profit element will be treated as “interest” for tax purposes. Tax deductability on the expenses incured available so long as test of tax deductibility have been met.
25
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Sharia Compliance
Advising on proposed Sukuk structure and suggesting a Sharia structure
Review and approve the documentation of sukuk to ensure that the legal documents are in line with Sharia requirements
Issuing Fatwa and Sharia Endorsement
As mentioned in Article 25 of Sukuk Law No. 19/2008, Sukuk Negara issuance requires Fatwa or Sharia Endorsement (Sharia Opinion) from National Sharia Board – Indonesian Council of Ulama or prominent Sharia Scholars to ensure its compliance with Islamic principles,
The role of Sharia Supervisory Board in Sukuk Issuance
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
AAOIFI was established in 1990 in Algiers under an Agreement of Association between a number of Islamic financial institutions (IFIs). Now it is based in Bahrain.
Its objectives primarily include development of accounting, auditing, governance and Shariah standards for Islamic financial institutions.
AAOIFI issues: o Accounting, Auditing and Governance Standards (AAGS) o Shariah Standards.
26
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
14
Fatwa & Sharia Endorsement of Sukuk Negara
Fatwa :
Number 69/DSN-MUI/VI/2008 on Sovereign Sharia Securities
Number 70/DSN-MUI/VI/2008 on Issuing Methods of Sovereign Sharia
Securities
Number 71/DSN-MUI/VI/2008 on Sale and Lease Back
Number 72/DSN-MUI/VI/2008 on Sovereign Sharia Securities Ijarah
Sale and Lease Back
Number 76/DSN-MUI/VI/2010 on Sovereign Sharia Securities Ijarah
Asset to be Leased
Number 95/DSN-MUI/VIII/2014 on Sovereign Sharia Securities
Wakalah
Provision :
Number 01 /DSN-MUI/III/2012 on Criteria of Project which Comply with
Sharia Principles
Sharia Endorsement:
Sharia endorsement on every Sukuk Negara issuance
From National Sharia Board – Indonesian Council of Ulama
27
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Sukuk Structure Determinants
Fatwa & Sharia
endorsement
Issuer Perspective
SUKUK STRUCTURE
Sharia Compliance
Return (fixed/variable )
Globally accepted
Tenor (short/long term)
Tradability
Positive Law Compliance
Underlying Asset
Jurisdiction/Regulatory
Framework
Simplicity and Transaction
Documents
Investor Perspective
Sukuk Structure based on Sharia Contracts
Sale Based Ijarah Based Partnership Based
a. Murabahah
b. Istishna
c. Salam
a. Sukuk of existing leased assets/ asset to
be leased
b. Sukuk of existing/Future usufruct
c. Sukuk of Existing/future Services
a. Musyarakah
b. Mudharabah
c. Wakalah
d. Muzara’ah
e. Mugharasah
f. Musaqah
Risk Appetite Utilization of Proceeds
(general financing/projects)
28
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
15
Ijarah – Sale and Lease Back
Classification on AAOIFI
Sharia Standards 17
: Certificates of ownership in
leased assets (3/1)
Underlying asset : State-Owned Assets
Coupon : Fixed rate
Tradability : Tradable
Issuance method : Bookbuilding, Auction
Instrument of Sukuk
Negara
: IFR, SNI, SR, SPN-S
29
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Ijara Sale and Lease Back - Structure
SPV (Issuer/ Trustee)
Investors
1a. Sales of Asset (Beneficial Title)
1d. Proceeds
2a. Lease of Asset
1b.Sukuk issuance
1c. Proceeds
3. Sales of Asset
2b. Periodic Lease Payment
4. Sukuk Redemption
5. Sukuk
Paying Agent
Investors
MoF - GoI (Obligor/Originator)
MoF - GoI (Obligor/Originator)
SPV (Issuer/ Trustee)
30
16
Ijara Sale and Lease Back - Description
I. ISSUANCE:
1a. Sales of beneficial title of state-owned asset from MoF-GoI to SPV as underlying
asset of GoI Sukuk (Bai’)
1b. GoI Sukuk issuance by SPV. The Sukuk represent investors’ share on GoI Sukuk
asset
1c. Proceed fund of GoI Sukuk issuance from investors to SPV
1d. Proceed fund of the purchase of underlying asset’s beneficial title from SPV to
MoF-GoI
II. COUPON PAYMENT:
2a. Lease of asset by MoF-GoI to be used in daily operational government activities
(Ijarah)
2b. Periodic lease payment on lease of asset by MoF-GoI as lessee (Musta’jir) to
Investors as Lessor (Mu’jir) through Paying Agent.
III. MATURITY:
3. Purchase of asset by MoF-GoI from investors through SPV (Bai’)
4. Payment of asset purchasing by MoF-GoI to investors through Paying Agent for
sukuk redemption
5. GoI Sukuk maturity
31
Ijarah – Al Khadamat
Classification on AAOIFI
Sharia Standards 17
: Certificates of ownership of
described future services (3/2/4)
Underlying asset : Hajj Services
Coupon : Fixed rate
Tradability : Non-tradable
Issuance method : Private placement
Instrument of Sukuk Negara : SDHI
32
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
17
Ijara Al Khadamat - Structure
SPV A. Service Provider
B. Issuer
C. Trustee
D. Muwakkil
INVESTORS
PROVIDERS Services :
• Flight
• Catering
• Housing
Proceeds
Sukuk
Proceeds
Wakalah
1 Services
9 Service Payment (Ujrah)
Services Procurement
4
6
7 Procurement Report
2 3
5
INVESTORS
Sukuk Payment
11 10
Sukuk
GOI ( User )
A. Aqad Ijarah Al-Khadamat
B. Terms and Conditions
C. Aqad Wakalah
8 Signing on Procurement Report
GOI ( Wakeel)
33
Ijara Al Khadamat - Description
1. Hajj services procurement agreement between Perusahaan Penerbit SBSN and GoI (aqad
Ijara al-khadamat)
2. Sukuk issuance (Sukuk Dana Haji Indonesia/SDHI) by Perusahaan Penerbit SBSN
3. Proceeds fund of sukuk issuance from investors
4. Wakala agreement between Perusahaan Penerbit SBSN and GoI for Hajj services
procurement
5. Proceeds used to fund hajj services procurement.
6. Hajj services procurement by GoI (Wakeel)
7. Procurement report from GoI (Wakeel) to Perusahaan Penerbit SBSN (Muwakkil)
8. Signing on procurement report
9. Payment from GoI (service user) to Investor through paying agent
10. Sukuk redemption
11. GoI Sukuk maturity
34
18
Ijarah – Asset to be Leased
Classification on AAOIFI
Sharia Standards 17
: Certificates of ownership of
assets to be leased (3/1)
Underlying asset : Infrastructure Projects
Coupon : Fixed rate
Tradability : Tradable
Issuance method : Auction
Instrument of Sukuk
Negara
: PBS, SR
35
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Ijara Asset to be Leased - Structure
1. Lease Order
3. Sukuk issuance
4. Proceeds
2a. Wakalah Agreement
(project construction)
2b. Sale/Purchase agreement
(Lands/Buildings)
Project construction
5. Proceeds
8. Periodic paym
ent
10. Purchase agreement (at maturity)
12. Sukuk redemption
9. Project handover at
completion
7. Periodic lease payment
SPV
A. Issuer
B. Trustee
C. Principal
D. Lessor
INVESTOR
6. Ijarah Agreement
11. Purchase payment
: Contract/Agreeement
: Cash flow
GoI
- Lessee
- Buyer
GoI
Wakil/ Agent
36
19
Ijara Asset to be Leased - Description
I. Sukuk Issuance:
1. Lease order from Government of Indonesia (GoI) to the Perusahaan Penerbit SBSN (SPV) on specified assets. The ijarah assets consist of infrastructure projects and lands/buildings.
2a. SPV appoints GoI as Wakeel on project construction (wakala agreement).
2b. Sale of state owned assets (lands/buildings) from GoI to SPV.
3. Sukuk Issuance by SPV.
4. Proceeds fund of sukuk issuance from investors to SPV.
5. Proceeds fund of asset purchasing and project construction from SPV to GoI.
II. Periodic Payment
6. Ijarah Agreement between GoI (Lessee) and SPV (Lessor).
7. Periodic lease payment from GoI (Lessee) to SPV (Lessor).
8. Periodic payment (coupon) to investors through paying agent.
9. Project handover at completion, from GoI (Wakeel) to SPV (Principal).
III. Sukuk Redemption:
9. Purchase of assets by GoI (buyer) From investors through SPV.
10. Payment of asset purchasing by GoI (buyer) to Investors, through paying agent.
11. Sukuk Redemption.
37
Wakalah Sukuk
Classification on AAOIFI
Sharia Standards 17
: Investment agency sukuk (3/1)
Underlying asset : Infrastructure Projects, state
owned asset (may also use:
procurement of goods/services)
Coupon : Fixed rate
Tradability : Tradable
Issuance method : Bookbuilding
Instrument of Sukuk Negara : SNI
38
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
20
Wakala - Structure
39
Wakala - Description
40
21
Legal Documents (1)
1. Transaction documents (depends on the sukuk sctructure chosen):
2. Capital market documents:
Ijarah Sale and Lease
Back Ijarah Al Khadamat Ijarah Asset to be Leased
1. Purchase agreement
2. Lease agreement
3. Servicing agency
agreement
4. Sale undertaking
5. Purchase
undertaking
1. Wakalah agreement
2. Ijarah al-Khadamat
agreement
3. Procurement report
1. Lease order
2. Wakalah agreement
3. Ijarah Asset to be
Leased agreement
4. Servicing agency
agreement
5. Sale undertaking
6. Purchase undertaking
Domestic Issuance:
Offering Memorandum (Prospectus)
41
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
Legal Documents (2)
No. Ijarah
Sale & Lease Back
Wakalah
Initial Issuance Drawdown
1. Master declaration of
trust
Amended and restated master
declaration trust
Supplemental declaration of
trust
2. Master purchase
agreement
Amended and restated master purchase
agreement
Supplemental purchase
agreement
3. - Master procurement agreement Supplemental procurement
agreement
4. Master lease agreement Amended and restated master lease
agreement
Supplemental lease
agreement
5. Servicing agency
agreement Wakala agreement -
6. Substitution undertaking Amended and restated substitution
undertaking -
7. Transfer undertaking Amended and restated transfer
undertaking -
8. Purchase undertaking Amended and restated purchase
undertaking -
9. Costs undertaking Amended and restated costs
undertaking -
10. Agency agreement Amended and restated agency
agreement -
International Issuance (under Islamic GMTN Program)
42
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
22
Instrument Development
• Sukuk Negara debut, issued in Aug 2008 by bookbuilding method.
• Underlying assets: State-Owned Assets.
• Regular issuance through auction since 2009 until 2012.
• For retail Indonesian investors.
• 3 years tenor.
• Using bookbuilding method with predetermined coupon.
• Min/max order: IDR5 million/ IDR5 billion for each individual.
• Foreign currency denominated Sukuk, issued in international capital market (Global Sukuk).
• To diversify investor base, specially to tap Middle East and Islamic investors.
• Private placement transaction with Ministry of Religious Affair for Hajj fund investment.
• Underlying assets: Hajj services.
• First time issued in May 2009.
• Non tradable securities.
SDHI • Islamic Treasury
Bills.
• 6-month tenor.
• Discounted basis.
• Regular auction since August 2011.
• Project Based Sukuk.
• Underlying assets: State Budget projects.
• Mid to long term tenors.
• Issued regularly since 2012.
43
PBS SPN-S
IFR
SNI
SR
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
• For retail Indonesian investors.
• 2 years tenor.
• Using bookbuilding method with predetermined coupon.
• Min/max order: IDR2 million/ IDR5 billion for each individual.
ST
Issuance Program
Bookbuilding
• For global sukuk (USD denominated / SNI series)
• 144A/Reg-S issue format
• By appointing joint lead managers (book runners)
Auction Bookbuilding Private Placement
• IFR, Islamic T-Bills, PBS.
• Conducted regularly twice
a month based on annual
calendar of issuance.
• Auction participants/
Dealers.
• Conducted for Retail
Sukuk & Savings Sukuk.
• By appointing selling
agents (banks & securities
companies).
• For SDHI series (Hajj
Fund Sukuk) and other
series based on market
demand.
• Bilateral agreement.
International Market
Domestic Market
44
Structure &
Sharia Compliance
Variety
of Instruments
Issuance
Methods
Legal
Infrastructure
23
Role of Involving Parties
House of
Representative Bank Indonesia National Sharia’ Board
• Approving list of specific
state-owned asset and
list of projects to be used
as basis of Sukuk
Issuance.
• Issuing Fatwa
• Providing sharia opinion
for specific issuance after
assessing issuance
documentation.
• As paying agent
• As settlement agent
• As auction agent
Section 1 The Development of Sovereign Sukuk
Section 2 Indonesia: A Leading Sovereign Sukuk Issuer
Section 3 Infrastructure for Sukuk Negara Issuance
Section 4 Sukuk Negara: Challenge & Prospects
24
47
Overall Prospects and Challenges of Sukuk Negara
Prospects
• Ongoing market development,
and relatively less liquid
secondary market.
• Buy and hold perspective.
• Higher yield expectation and
price discovery mechanism.
• Market infrastructure
development.
• Diversification of underlying
assets.
Challenges
• Faster Islamic financial institutions
growth.
• Larger potential investors: Islamic and
conventional.
• Limited of sukuk supply, overwhelming
demands.
• Authorities strong support:
Establishment of National Committee
for Islamic Finance.
• Projects financing sukuk: preparation
and availability is being improved.
Thank You
Wassalamu’alaikum Wr Wb
Inquiries, Information and Suggestions:
Directorate of Islamic Financing Directorate General of Budget Financing and Risk Management
Ministry of Finance of the Republic of Indonesia
Website : www.djppr.kemenkeu.go.id Telephone : 351-6296, Fax. 351-0728 E-mail : [email protected] [email protected]
