I thought the op-ed from Josh Franken, the editorial manager for the Oxford Business Group laid out a good opportunity for Islamic finance to grow in Indonesia, both domestically and internationally. His main premise is that the growing Islamic finance sector domestically and policy reforms to attract international investors can combine to help finance the public-private partnerships needed to complete the infrastructure projects the government is planning.
The article says that $140 billion of infrastructure projects are planned over the next five years and the government can only fund one-third of those projects directly. That leaves about $19 billion to be funded annually and Islamic banks only reported assets of $11.2 billion last year (albeit growing at 45% over the previous year). Some of that--the bulk of it--will be financed by conventionally-financed loans. But even if one-quarter is financed through sukuk (either directly from government sukuk or from public-private partnership-issued sukuk), there will be a gap between what Islamic banks can finance and what is issued (or could be issued).
The short-term T-bills sukuk planned (which I wrote about in my latest newsletter) will help allow Islamic banks be able to invest in more longer maturity sukuk than they otherwise could. However, other investors with long horizons will need to fill in the gaps. This could come from global investors, in particular from investors in the GCC looking for diversification. It could also come from non-bank sources within Indonesia.
The most logical non-bank source would be takaful funds (and also some pension funds). There has been an acute shortage of longer-dated sukuk for takaful funds to invest in. Infrastructure-based sukuk with government involvement (and the other government-issued debt from its directly financed infrastructure projects) would provide an investment for takaful funds. This would be particularly beneficial for the local industry because most sukuk from Indonesia are denominated in rupiah and domestic investors don't have to be worried about currency risks like international investors do (accentuated by an appreciating rupiah).
These infrastructure projects coupled with the short-term liquidity management tools forthcoming from the government could help international investors some, but most likely they would benefit the domestic Islamic finance industry. This would be a positive for Indonesia, where the domestic industry got a late start, particularly compared with neighboring Malaysia. With such a large population compared to Malaysia (not to mention a GDP of about 2-1/2 times as large), the Islamic finance industry in Indonesia has the potential to be equally as significant in Indonesia as it is now in Malaysia. It may just take a decade to develop.