Indonesia should utilize Islamic finance to address dire infrastructure needs, says S&P (By IFN)

INDONESIA: Despite its booming economy, Indonesia continues to suffer from lacking infrastructure; and ratings agency S&P believes that its crucial infrastructure needs can be addressed by utilizing Islamic finance. In a report, the ratings agency noted that like its neighbor, Malaysia, Indonesia can also rely on Islamic financing for infrastructure development, given its needs, the government’s willingness to attract private capital to fund infrastructure investment and the growing demand for investable assets for the country’s expanding local Islamic finance market. While Indonesia’s economy has shown rapid growth, accelerating 6.4% in the second quarter of this year, S&P noted that the poor state of the country’s infrastructure is holding back its growth potential. Nonetheless, the government has plans to spend over US$200 billion to upgrade and expand it infrastructure, with between 30-40% of that spending expected to be contributed by the private sector. The government however is still considering alternatives to finance the remainder. Of factors creating a challenge for Indonesia to utilize Islamic finance for its infrastructure needs, Allan Redimerio, a credit analyst at S&P, said that: “We believe the lack of recognition for beneficial ownership and tax incentives is impeding the growth potential of this funding source. Ways to generate interest in this sector include offering a range of products to the population with support from the country’s political, corporate and financial institutions.” The country can also take a page from Malaysia, whose finance ministry set up funding vehicle Dana Infra Nastional to finance the country’s infrastructure program. Among its main mandates has been the establishment of a RM8 billion (US$2.55 billion) Sukuk program to part-finance a mass rapid transit project. Like Dana Infra, Indonesia has already set up Indonesia Infrastructure Finance, a government-backed investment firm designed specifically for the country’s infrastructure developments. Indonesia has also already made a name for tapping the global Sukuk market to fund its budget, including a US$1 billion Sukuk issued in November last year. The government is also reportedly planning to issue another global Sukuk offering by the end of this year. Given its large infrastructure needs and room for Islamic finance to channel investments and funds towards the requirements, all signs seem to point to the title role the Shariah compliant financial industry can play in Indonesia’s sizzling economic growth.