Indonesia is set to co-found a new cross-border Islamic (sharia-compliant) infrastructure bank together with Turkey and Saudi-based Islamic Development Bank (IDB), a multilateral lender. Indonesian Finance Minister Bambang Brodjonegoro said that Indonesia will contribute more than USD $300 million as start-up capital for the establishment of the new bank, named Islamic Investment Infrastructure Bank (IIIB), which aims to boost infrastructure development in various countries.
The Islamic Investment Infrastructure Bank, which is set to be established in the second half of 2015, is to act as a sharia-compliant global infrastructure bank (sharia-compliant means that it meets all requirements of shariah law as well as the principles articulated for Islamic finance).
One of the main priorities of Indonesian President Joko Widodo is to boost infrastructure development as the current lack of quality and quantity of infrastructure in Indonesia causes high logistics costs (hence reducing competitiveness of Indonesian companies) and makes investors think twice before investing in Indonesia as - besides the core investment - they are often required to invest in costly additional infrastructure development. According to the Indonesian Ministry of National Development Planning (Bappenas), the country needs IDR 5.5 quadrillion (about USD $416.5 billion) worth of funds for infrastructure development in the 2015-2019 period. However, in the first state budget created by the Widodo administration (approved by the House of Representatives in February 2015), ‘only’ IDR 195 trillion (USD $15 billion) was allocated for infrastructure spending and therefore the government needs private sector participation and foreign loans to achieve its infrastructure development targets.
Muliaman D, Chairman of the Financial Services Authority (OJK), recently stated that Indonesia and Turkey are competing to become host of the Islamic Investment Infrastructure Bank’s headquarters.
Indonesia is also among the 57 prospective founding members of the China-led Asian Infrastructure Investment Bank (AIIB) founded in late 2014. This international financial institution, which aims to support infrastructure development in the Asian region, has been regarded as China’s strategy to reduce the influence of the International Monetary Fund (IMF), Asian Development Bank (ADB) and World Bank.
Last week, Jim Yong Kim (President of the World Bank) visited President Widodo in Jakarta and offered the Indonesian government a total of USD $12 billion in additional funds up to 2019. The World Bank is currently Indonesia’s largest development partner as loans from the World Bank account for about 60 percent of Indonesia’s total debt from multilateral institutions.