RPT-UPDATE 1-Indonesian lawmakers approve sharia debt bill

(Repeats story filed late on Monday with no changes to text)

JAKARTA, April 7 (Reuters) - Indonesian legislators agreed to pass a new bill on Islamic sharia debt on Monday, paving the way for the government to sell its first Islamic bond and allowing it to tap a wider array of investors to finance the budget deficit.

Indonesia’s borrowing requirement will increase this year as rising fuel and food subsidies push up the budget deficit, but volatile global financial markets are making it harder for the Indonesian government to sell conventional bonds.

Analysts said the new bill should help to attract wealthy Middle Eastern investors and pave the way for the Islamic financial market to take off in Indonesia, where around 85 percent of the population of 226 million are Muslim.

The government, which is expected to sell its first Islamic bond, or sukuk, in the international markets this year, is likely to follow that with a similar sukuk aimed at retail investors.

The new bonds would help to develop Indonesia’s debt market by providing a wider array of instruments for local and foreign investors such as banks and pension funds.

Last month, the government said it would raise its budget deficit target to 2.1 percent of GDP, from 1.7 percent previously, due to soaring fuel subsidies, with a deficit estimated at around 94.5 trillion rupiah ($10.3 billion).

Southeast Asia’s biggest economy needs around $140 billion to finance infrastructure projects, including new roads, ports and railways, in the next few years, and is keen to attract funding from the oil-rich Middle East.

“Factions in the House have agreed to approve the sharia debt bill into law,” said Awal Kusumah, the chairman of the commission at the House of Representative which handles financial issues.

The bill was approved by 9 out of 10 factions in the commission, he added.

The finance ministry had postponed issuing its planned sovereign Islamic bonds due to delays in passing the new bill on Islamic debt.

Under Islamic or sharia law, interest is banned and income must instead be derived from a fundamental economic transaction such as trade in goods and services, direct investment in a business, or renting out property.

Indonesia has missed out on the chance to attract investment from the Middle East because it lacked the necessary laws.

Moody’s Investors Service said in a report on February that the global Islamic finance market, which includes Asia Pacific, has grown by about 15 percent in each of the past three years, partly as a result of the increased wealth in Islamic countries, driven in turn by high oil prices.

“Islamic finance is now estimated to be worth around $700 billion globally, while sukuk are the fastest-growing segment with volumes worldwide reaching $97.3 billion up through 2007,” the report said.

Indonesia’s central bank said in July that it expects total assets of Islamic banks to more than triple to 91.57 trillion rupiah ($9.95 billion) by the end of 2008.

But, even after that increase, the proportion of Islamic assets would only be about 5 percent of total banking assets. (Writing by Muhamad Al Azhari, editing by Sara Webb)