Pertamina set to sign Islamic finance deal: Report

State oil company Pertamina is expected to sign today what bankers say is the country's first global Islamic finance facility, in a move that could open the door to a fresh source of much-needed foreign funds for Indonesian companies, The Financial Times reported Tuesday.

Islamic banking is a growing phenomenon worldwide with countries with large Muslim populations such as Malaysia and Pakistan either offering or exploring offering Islamic sovereign bonds. Indonesia, home to the world's biggest Muslim population, is often mentioned as a major potential growth market for Islamic banks, which abide by the Koran's ban on the paying of interest. Yet Islamic banks still only hold less than 1 per cent of the total assets in Indonesia's banking system.

The Pertamina deal, however, could mark change from this pattern, bankers say. Brokered by the local unit of HSBC Amanah, HSBC's Islamic banking subsidiary, the state oil company is expected to secure up to $250m in Islamic trade financing to fund the purchase of crude oil from the Middle East.

The facility involves large Islamic financing institutions such as the Kuwait Finance House, Dubai Islamic Bank, and Egypt's Faisal Islamic Bank, which have never done substantial business with Indonesian companies, according to bankers. The deal is seen as a vote of confidence in Indonesia by Middle Eastern investors, many of which have been looking for places other than the United States to invest their funds because of Washington's deteriorating image in the Islamic world.

But it is also "the first international Islamic facility to come out of Indonesia", said Mahmoud Abu Shamma, the head of HSBC's local Islamic banking division.

"The Islamic finance market in Indonesia is very young in comparison to Malaysia or in comparison to the Middle East where Islamic banking has been used for years," he said.

Islamic banking has only been allowed in Indonesia since 1998, Shamma said.

The facility to be signed today is the result of a road show of Middle Eastern Islamic banks to Indonesia organised by HSBC, which, in October 2003, became the first foreign bank to gain a licence to offer Islamic services in the country. The Islamic facility is just one of three credit deals to be signed by Pertamina in a ceremony today, the state oil company said.

But according to bankers it could pave the way for future corporate Islamic financing deals and eventually an Islamic sovereign bond.

Because the Koran prohibits the payment of interest, in Islamic trade financing banks typically act as middlemen, buying the commodity in question and selling it on for a fee. (*)