BI issues measure to allow hedging for Islamic banks

Jakarta—Bank Indonesia (BI) has issued a regulation to provide a hedging facility for Islamic banks to mitigate potential losses due to exchange rate fluctuations. BI director for financial market broadening program Edi Susianto said the 2016 BI Regulation (PBI) on sharia hedging was issued as a result of increasing demand for foreign exchange (forex) services at Islamic banks, amid a low forex offer. It consequently led to rupiah fluctuations.
“In this context, there must be a hedging instrument to control foreign currency demand to be more restrained through sharia hedging,” Edi said at the Bank Indonesia office in Jakarta on Wednesday. Moreover, he continued, there was growing number of sharia institutions that had high exposure to foreign currencies in import-export transactions, offshore financing, haj and minor haj services and forex trading.
“Financing activities using forex continue to rise, including the need to cover the haj cost, which is projected to increase in the next eight to 17 years from Rp 52 million [US$3,930] to Rp 81 million per person,” Edi explained. Based on BI supervision, he continued, forex exposure in sharia banking showed a very sharp increase but remained below that of conventional banking. Without proper measures to manage the risk through hedging, the Islamic banking business could be hindered. “Without proper control, there could be potential losses from exchange rate fluctuations, both for sharia banking and businesspeople,” Edi said.—Agencies

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