Indonesia sold $650 million of its first dollar-denominated sukuk, or Islamic bonds, on the international market to help cover a widening budget deficit, a senior official said Friday.
"The issuance was performed to meet our funding target for the 2009 budget, to diversify our funding instruments and widen the investor base for sukuk on the international market," finance ministry official Rahmat Waluyanto said.
Waluyanto said the five-year Islamic bond, which matures April 23, 2014 and pays a fixed 8.8 percent rate of return, was about seven times oversubscribed when it went on the market Thursday.
Middle Eastern and Islamic investors snapped up 30 percent of the issuance while buyers from Asia, including Indonesia, accounted for 40 percent.
United States investors bought 19 percent and European investors 11 percent.
Funds were the largest investor class, accounting for 45 percent of demand, while banks bought 37 percent. Retail investors bought 14 percent and insurance and pension funds four percent.
Sharia finance comprises only one to two percent of all finance in Indonesia although Muslims account for 90 percent of the country’s 234 million people.
Sukuk conform to Islamic sharia law in which charging interest is forbidden.
Returns on Indonesia's bonds are generated from the value of government-owned land and buildings that are securitized and effectively leased to the lender.
Indonesia's shariah financing market still lags far behind nations like Malaysia in magnitude but Waluyanto said Indonesia was likely to issue more benchmark-size Islamic bonds, possibly on an annual basis.
"The debut sukuk was very well received and the government is very firm in (its commitment to) developing that market," Waluyanto told Dow Jones Newswires.
"We might be committed to issue on an annual basis depending on the availability of the underlying assets."