Experts call for Islamic REITs, modern rules and more Sukuk if Indonesia wants to be taken seriously as an Islamic investment destination

At the closed-door Chatham House-styled IFN Indonesia Dialogue on Islamic investments held at the Indonesia Stock Exchange recently, familiar challenges were discussed, but there was a real sense that Indonesia needs to act sooner rather than later.

Despite it being the world’s most populous Muslim nation and one of the most active sovereign Sukuk issuers with a progressive regulator, and a Hajj Fund large enough to influence markets, Indonesia is still not a top destination for many global Islamic investors.

One issue is the lack of product diversity. Around 80% of Islamic mutual fund assets are concentrated in money market and short-term fixed income products, with another 15% in capital-protected structures. Equity and alternative investments remain underrepresented.

The problem, according to dialogue participants, is not investor demand. Indonesian Shariah investors tend to be loyal, well-informed and long-term oriented. The challenge is regulation. Current mutual fund rules require daily liquidity, making it difficult to create balanced Sukuk-equity products because Sukuk cannot settle as quickly as equities. Regulations designed to improve access have unintentionally limited innovation.

Another key challenge is Shariah screening standards. Indonesia’s criteria are not yet aligned with AAOIFI standards, which are widely used across the Gulf. Indonesia currently allows a 45% debt ratio, compared with the 30-33% threshold used by many international Islamic investors. Although tighter standards are planned, the transition extends to 2034.

For many Gulf-based asset managers, that timeline is simply too long. Institutional investors often have strict governance requirements and cannot invest in markets that fall outside their approved Shariah frameworks. Aligning with AAOIFI standards would remove a significant barrier to international capital.

The most immediate issue, however, may be a shortage of Sukuk supply. Indonesia’s corporate Sukuk market remains relatively small, and recent issuances have been heavily oversubscribed. Demand clearly exists.

One practical solution discussed was requiring state-owned enterprises and government-linked companies to fund a portion of their borrowing through Islamic instruments. This approach has worked before and could quickly increase supply, improve market depth and provide more investment opportunities for institutions such as the Hajj Financial Management Agency.

Indonesia is also missing an important asset class: Shariah compliant REITs. Real estate is one of the most straightforward and globally attractive Islamic investment sectors, and many international investors actively seek Shariah compliant real asset exposure. With no Islamic REITs, Indonesia currently has little to offer them.

The discussion also highlighted underutilized sources of Islamic capital. Cash waqf structures remain underdeveloped, despite strong domestic potential, while concessional financing facilities from institutions such as the IsDB are often overlooked. The challenge is less about regulation and more about awareness, promotion and execution.

Ultimately, Indonesia’s ambition to become a regional Islamic finance hub depends on solving practical issues rather than relying on demographics alone. The reform agenda is clear: align Shariah standards, expand Sukuk supply, launch Shariah REITs, modernize fund regulations, attract international expertise and engage global capital more effectively.