Despite the US$65 million allocation to Indonesia under the IsDB’s Awqaf Properties Investment Fund (APIF), Waqf projects in the country have yet to successfully leverage the fund due to regulatory challenges as well as forex risk, Dr Hurriyah El Islamy, CEO of HGC Firm and a previous member of APIF’s supervisory committee, told ISFI.
“In Indonesia, there has always been an issue with the structure of the financing because of the difference between the common law and the civil law … Due to the nature of Waqf in Indonesia, the Waqf asset cannot be put as a security [for the financing],” Dr Hurriyah explained.
In addition to regulatory constraints, Dr Huriyah shared that forex risk is a major concern for funding applicants as APIF generally extends financing in US dollars. The forex risk and cost of Shariah compliant hedging are such that it may not be worth the funding applicants’ while to tap the fund under the current terms.
While foreign currency risk is a major concern, the APIF documentation, in principle, allows it to provide financing in local currencies. So, rather than a structural issue with the fund, the challenge in Indonesia with regard to foreign currency risk is the lack of forex risk-hedging instruments to enable APIF to extend rupiah-denominated financing.
As such, Indonesian prospective funding applicants are unable to securitize their Waqf properties nor are they comfortable with the level of forex risk exposure they will be exposed to should they receive financing from the fund, thereby effectively making the APIF Indonesia allocation inaccessible to applicants.
According to Dr Hurriyah, ironically it is the jurisdictions with the more developed Waqf infrastructure that will have the most difficulty in tapping the fund as the regional legal provisions on Waqf as well as the Waqf authorities are such that they often conflict with the funding requirements of APIF.
Since the US$65 million allocation in 2020, several Indonesian projects have applied for APIF funding including a hospital project in Bandung and a high-value real estate project in Jakarta’s golden triangle.
While the fund was established specifically to develop Waqf properties, Dr Hurriyah shared that APIF is currently looking at diversifying the fund to include a small portion of the financing to be channeled toward commercial-driven projects.
According to the previous supervisory board member, the diversification of the fund is driven by the hope to increase the competitiveness of the fund’s return on investment.
APIF was established in Indonesia in 1997 based on the approval of the 6th meeting of Awqaf Ministers of Member Countries of the Organization of Islamic Cooperation to finance the development of Waqf real estate, representing one of the few IsDB sources of financing that does not require a sovereign guarantee.