Indonesia hopes new hedging rules will attract sharia-compliant investors

[JAKARTA] Indonesia's central bank, in a bid to expand the country's Islamic finance industry, has issued a regulation that allows the use of Islamic foreign exchange hedging tools by banks.

The regulation, backed by rulings by Indonesia's National Sharia Board, specified that both Islamic and conventional banks can now offer deferred sale of foreign exchange under a muwa'adah scheme, or under a promise from both sides of a transaction.

Such a transaction has to have an underlying real need, which could be export and import payments, Islamic bonds transaction in foreign currencies or hajj payments, among others.

This is to ensure it is not used for speculation, a key principle in Islamic finance. It will not be tradable and will have to be fully settled upon maturity or cancellation.

The new rules will help Islamic banking and sharia-compliant customers to mitigate market risks, Edi Susianto, Bank Indonesia's director for financial market deepening, said on Wednesday.

"We hope that with this new regulation we can increase sharia investors' confidence to invest their money in Indonesia. Adequate infrastructure will make it more convenient for them to come here," Susianto told reporters in a briefing.

The rulings backing the new regulation stipulate that forward agreement is only allowed if absolutely necessary. They also said swap and option transactions are not in line with Islamic rules.

Islamic profit rate swaps and other options are found in other countries with more mature Islamic capital markets.

Indonesia has the world's biggest Muslim population but Islamic finance assets represent only a small portion of the country's overall financial industry.


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