Despite it being the world’s most populous Muslim nation, Indonesia is still lagging behind neighbor Malaysia when it comes to non-sovereign Sukuk as Indonesian corporates still rely mostly on banks for financing, analysts say. VINEETA TAN has the story.

Indonesian corporates raised US$2.1 billion from the Sukuk market in 2020, less than 2% of the US$142 billion Malaysian corporates raised over the same period. While a global powerhouse when it comes to sovereign Sukuk offerings, corporate Islamic papers account for less than 10% of total private sector capital market debt outstanding, according to Fitch Ratings. In contrast, in Malaysia, the proportion is over 80%.

Apart from a heavy reliance on banking financing, corporates in Indonesia are generally reticent about tapping the Sukuk market due to the usual suspects: cost premium due to the lack of Shariah standardization and the legal treatment of Sukuk in distress remain untested in Indonesia.

The effects from this lack of legal clarity and Shariah cohesion have perhaps manifested themselves more prominently in 2020 shrouded by COVID-19 challenges as corporates exhibited a greater aversion toward Islamic instruments: new Sukuk offerings in the Republic plunged by 60% while new domestic bond issuance fell by only 25%.

Addressing structural barriers beyond the domestic corporate debt market is necessary to spur rapid growth,” Fitch noted in a statement. “These changes include developing the Islamic finance ecosystem that supports Sukuk issuance, building an effective regulatory framework, providing additional incentives for corporate Sukuk issuers and investors and raising awareness of debt capital market funding and of Islamic finance in particular. The development of the foreign-currency Sukuk market will take much more time than for the local-currency market, due to the limited record and more complex requirements.”

Indonesian authorities including Otoritas Jasa Keuangan, the Indonesian Stock Exchange and National Islamic Economy and Finance Committee have in recent years assertively pushed for the development of the Islamic capital markets. Measures include active promotion and public awareness campaigns as well as policy changes. These have translated into a boost in Islamic funds, a larger retail investor base into Islamic stocks and the introduction of new instruments such as green and Waqf Sukuk.