The government will start offering the first Islamic retail bonds (retail sukuk) on Friday in an attempt to diversify its bonds to small and Muslim investors while plugging the 2009 budget deficit.

Finance Ministry director general of debt management Rahmat Waluyanto said during the weekend the retail sukuk would be offered from Jan. 30 to Feb. 20.

He said the bond would have a three years maturity period with a yield probably ranging between 10.5 percent and 11.2 percent, trailing the yield of the three-year government bond benchmark.

"The yield will be more competitive than an average deposit rate in state-run banks," Rahmat said, adding the Finance Ministry would officially announce the yield and the amount of the unloaded sukuk this week.

The budget deficit is estimated to reach Rp 132 trillion, or 2.5 percent of the gross domestic product (GDP), as the government boosts spending to stimulate the economy.

The ministry has been promoting the retail sukuk to cities nationwide, including Medan, Balikpapan, Semarang, Surabaya and Makassar.

Rahmat said the sukuk would complement other sharia products.

"The retail sukuk is important to build the sharia-based financial market. If the market grows, the national financial market will strengthen."

Religious Affairs Ministry's director general of Islamic community development Nasaruddin Umar said Muslim investors should not hesitate to purchase the sukuk.

"The doubt of Muslim Indonesians to invest, because there is riba (interest) and maisir (speculation), can be accommodated by the sukuk."

"We are launching something that is Islamic, but is useful for the economy," he added.

Sukuk complies with the Islamic Shariah law by using asset returns to pay investors instead of interest.

So far, the government has only issued sukuk to institutional investors. With the retail sukuk, small investors can buy the bonds from 13 institutions appointed by the Finance Ministry. The retail sukuk is offered from Rp 5 million and its multipliers.

The retail sukuk can be traded at the secondary market despite carrying higher risks, Rahmat said.

"If the price of the retail sukuk plunges, investors should wait until it is matured for redemption."

Investors will get the yield transferred into their account, in banks or in securities, every month.

The yield will be subject to a 20 percent final tax.

If investors fail to report to the stock exchange authorities their sukuk purchases, there will be an additional 15 percent tax, included in their annual tax report.

"It is aimed at boosting transparency. Investors who report to the bourse will get tax incentives," Rahmat said.

If investors sell their retail sukuk, the sales will be subject to taxes.

Danareksa Sekuritas analyst Edwin Syahruzad said sukuk was the most secured investment product existing.

"Our research concludes that sukuk is more resilient to economic crisis than stocks."

He said the retail sukuk with a yield between 10.5 percent and 10.2 percent would attract investors, particularly due to slowing inflation.

When asked over the planned global sukuk, Rahmat said he could not give exact timing due to global uncertainties.

Indonesia, with the world's largest Muslim population, delayed its first-ever Sukuk issue scheduled for last October.

Global Islamic bond sales may fall for a second straight year after hitting a record $30.8 billion in 2007 on lower demand from their target market, oil-rich Middle East Muslims, according to Bloomberg.