Indonesian Central Bank Sets Rules For Islamic Forex

JAKARTA — Indonesia’s central bank has issued new rules authorizing shariah-compliant hedging in the country, citing the rapid growth of Islamic foreign exchange transactions and the rupiah’s volatility.

The new regulations are intended to “avoid potential losses from currency fluctuations” in Islamic financial institutions’ financing activities, the central bank said.

Derived from these principles, the Bank Indonesia rules allow both shariah-compliant and conventional banks to offer deferred sales of foreign exchange through the shariah-based forward agreement.

The conventional banks’ role in the new system is limited to acting as hedge suppliers. Only shariah-compliant lenders and businesses are allowed to make purchases. Edi Susianto, director for financial markets at Bank Indonesia, on Wednesday said conventional banks are allowed to participate because local Islamic banks have limited forex capacity.

The regulations, created through consultations among the central bank, the Financial Services Authority and the Indonesian Ulema Council’s National Shariah Board, took effect Feb. 26 but were only announced to the media on Wednesday.

Get real

The Islamic prohibition on speculation means a “real” underlying transaction is required for every hedge. The transactions should be in the form of domestic or foreign investment, or trades in goods or services, which in turn, must comply with Islamic law.

Under the new rules, those who fail to comply with the terms of forward agreements will be subject to sanctions, including written reprimands and fines. Cancelling an agreement requires full repayment to the other party.

Susianto said forex transactions by shariah banks in Indonesia have been growing rapidly since 2010, spurred by the growth of the Islamic banking industry’s investment and trade finance portfolios, as well as increasing payments for the hajj pilgrimage to Mecca that all Muslims who can afford the trip are required to make once in their lives.

Originally published on www.asia.nikkei.com