UPDATE 1-Indonesia sets coupon rate for retail sukuk

JAKARTA, Jan 28 (Reuters) - Indonesia has set a coupon rate of 12 percent for its first retail Islamic-compliant bonds, which are due to be issued on Feb. 25, the finance ministry said on Wednesday.

The ministry said in a statement that the retail sukuk would have a three-year maturity, but did not immediately provide more details.

The government expects to finance its higher budget deficit this year by capitalising on demand for Islamic-compliant products in the world's most populous Muslim nation.

The finance ministry in January raised its 2009 budget deficit to 2.5 percent of gross domestic product from 1.0 percent, allowing more room for spending needed to spur economic growth.

Indonesia has a huge domestic market for sharia products and it wants to catch up with neighbours such as Malaysia and Singapore in developing an Islamic market. The domestic Islamic market had lagged behind due partly to a weak regulatory framework.

Islamic bonds do not pay interest, which is banned as usury under Islamic law, and are structured as profit sharing or rental agreements underpinned by physical assets.

(Reporting by Adriana Nina Kusuma; Writing by Sonya Angraini; Editing by Ed Davies) Keywords: INDONESIA ECONOMY/SUKUK ([e-mail]; Reuters Messaging: [e-mail]; [phone] ext 911) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.