Indonesia’s Bank Syariah Mandiri to hedge up to $30 mln to protect haj and umrah funds

JAKARTA - Indonesia’s largest Shariah-compliant bank by assets, Bank Syariah Mandiri, plans to hedge $20 to $30 million in liabilities to protect haj and umrah funds from foreign exchange fluctuations, Kusman Yandi, its director of wholesale banking told Salaam Gateway. 

The bank will use a Shariah-compliant hedging facility based on muwa’adah, which commits two parties to a future transaction at a spot rate, as outlined in central bank regulations released in March. 

The state-owned company has finalized its standard operating procedure for the new facility and has called for new additional lines from correspondent banks. 

According to Kusman Yandi, demand for the Shariah hedging facility comes from the religious affairs ministry, which deposits pilgrimage funds with Shariah-compliant commercial banks, and partially from wholesale customers for export and import transactions and foreign exchange contracts.

“We hope to launch it during this quarter. We are preparing it for an estimated 10 percent of our hedging exposure capital, equivalent to $20 to $30 million. Of course, the final amount depends on the market,” he added. 

Indonesia’s Islamic banks’ exposure to foreign exchange has increased since 2003 in line with the rise in business activity, according to Deputy Governor of Bank Indonesia, Hendar.

Foreign exchange transactions by Indonesia’s Shariah-compliant banks has doubled to 14 trillion Indonesian rupiah ($1.1 trillion) in 2014 from around 7.5 trillion rupiah in 2012. There is a clear need to match Shariah-compliant foreign exchange hedging with currency risk and liquidity mitigation. 

“In the global economic uncertainty, especially in currency volatility, we need to manage risk by hedging forex liabilities to gain sustainable asset growth. We have seen asset growth of many Shariah lenders slowing down to only single digits and our Shariah-compliant banks at the present still only hold 4.9 percent of total banking assets,” Hendar said.

He added that Maybank Indonesia will be the first financial institution to use the Islamic foreign exchange hedging tool when it launches a facility of $45 million this month.

NO PLANS TO HEDGE THIS YEAR: HAJ AGENCY

However, Ramadhan Harisman, director of Indonesia’s Haj Fund Management Agency at the religious affairs ministry told Salaam Gateway that the agency currently has no plans to use the Shariah-compliant hedging facility this year as it had already met its foreign exchange needs.

It will consider using  the facility next year as pilgrimage funds increase, according to Harisman. 

Outstanding haj funds stand at 89.9 trillion rupiah and is expected to grow by an average 8 to 9 trillion rupiah each year over the next four years. 

“We have raised 1.2 billion Saudi riyals ($320 billion), equivalent to 5 trillion rupiah, in funds for haj operational needs so we aren’t looking to raise any more forex. We have raised the amount  from auction and we will pay in instalments. When the Saudi Riyal weakens,  we will buy,” said Harisman.

He added that the agency would require more time to familiarize itself with all aspects of the central bank’s new Islamic hedging regulations.

“In the coming years there is indeed a need to use the Shariah hedging facility … the use of the facility will depend on the foreign exchange reference rate from the house of representatives (DPR). We can’t hedge more than the indicative [exchange rate] as set by the DPR,” he said.

($1 = 13,109 Indonesian rupiah)

© SalaamGateway.com 2016