Weak private sector appetite hampers Indonesia’s Islamic finance growth

Sovereign issuance accounted for 97 per cent of sukuk in the South East Asian country this year, Indonesian ministry of finance says

In this photograph taken on January 27, 2013, the Jakarta skyline is seen at dusk. Indonesia is expected to grow 6.3 percent in 2013 after expanding this year by 6.1 percent, the World Bank said in their December 18, 2013 report.  AFP PHOTO / ROMEO GACAD

Indonesia, a top issuer of Islamic bonds this year, is struggling to convince its private sector to follow its lead and raise debt through sukuk, making it difficult for the country to achieve its target of being the biggest global Islamic finance hub in the next five years, a senior finance ministry official said.

The country has issued sukuk worth $18.2 billion (Dh66.8bn) as of June this year. However, sovereign issuance accounted for about 97 per cent of the total amount raised while the rest was raised by private sector bonds, said Luky Alfirman, director general of budget financing and risk management at the country finance ministry. Although the country is "optimistic" it can still achieve its goal of becoming the top Islamic finance destination by 2024, the lack of appetite on part of the private sector to raise debt through sukuk market is too stark to ignore, he said at the 2019 London Sukuk and FinTech Summit on Wednesday.

Indonesia will continue to develop its sukuk market and Islamic finance sector but it is facing several challenges including a lack of liquidity in the secondary market for Islamic bonds and difficulties developing the market infrastructure at a quick enough pace to meet demand.

Encouraging the non-government entities to adopt Sharia-compliant financing structures as their preferred way of raising funds is one of the biggest challenges. The ministry of finance is ready to change the mismatch in the proportion of sovereign and non-sovereign issuers in the country.

“How do we encourage other [non-government] sectors, as well as enterprises, to consider sukuk as part of their financing alternatives? That is one of the challenges,” Mr Alfirman said, adding that he was prepared to tackle it by “opening up and incentivising investments” in the Sharia-compliant finance market.

Mr Alfirman also pointed to Indonesia’s “economic masterplan”, which includes strengthening the "halal value chain" and Islamic financial sector, the digital economy including its e-commerce industry and mobile banking by 2024.

The Indonesian authorities, he said, established a National Committee for Islamic Finance in January. The committee, which is chaired directly by the Indonesian president and the vice president, will also consist of a steering council comprising 10 representatives from the government and other related bodies, Mr Alfirman noted.