MSCI-triggered Indonesian capital market reforms a boon for Islamic investors

Following MSCI’s consultation on free float assessment of Indonesian securities announcement on the 27^th January 2026, and an US$80 billion rout, Indonesia has unveiled new draft market regulations aimed at creating more transparency in stock holdings and trades.

The sell-off came when MSCI announced a temporary review freeze on Indonesia. “This treatment is intended to mitigate index turnover and investability risks while allowing time for the relevant market authorities to deliver meaningful transparency improvements.”

Chart 1: Jakarta’s Islamic Index as at the 6^th February 2026

Source: Indonesia Stock Exchange (IDX). The Jakarta Islamic Index consists of the 30 most liquid Islamic shares listed on the IDX.

MSCI had noted its annual review of concerns about Indonesia’s “ongoing opacity in shareholding structures and about possible coordinated trading behavior that undermines proper price formation”.

Warning that if insufficient progress is made by regulatory authorities for transparency enhancements by May 2026, MSCI could then reduce Indonesian securities weighting in emerging market indexes and reclassify Indonesia from ‘Emerging Market’ to ‘Frontier Market’ status.

A quick response came a week later, on the 4^th February 2026, when Indonesia’s Financial Services Authority or Otoritas Jasa Keuangan (OJK) announced draft proposals – doubling free float to a minimum of 15% for IDX-listed stocks. Together with the enforcement of ultimate ownership disclosure rules, these reforms mark a boon for Islamic investment principles – which seek transparency.

The new rules draft is to be published in March 2026, announced Hasan Fawzi, OJK interim chief supervisor of capital markets. He was appointed after the end-January 2026 exit of four senior OJK officials including Chairman Mahendra Siregar and IDX President Director Iman Rachman.

Welcoming the proposed regulatory changes, Indonesia capital markets professional Gamma Abdurrahman Thohir told IFN Investor: “The IDX has issued formal demands for listed companies to move beyond corporate-layer reporting and disclose individual-level ‘Ultimate Beneficial Owners’.”

Noting that foreign investors seek the elimination of corporate layering, Gamma said the IDX is now strictly defining a ‘Beneficial Owner’ as an individual who ultimately controls the corporation or acts as the true owner of funds, in line with Presidential Regulation No 13 of 2018.

Anticipating the initial ‘clean-up’ phase may take three to six months to stabilize, “the rebuilding of foreign institutional confidence typically follows a 12-24 month cycle, as enforcement becomes consistent and predictable”.

Should MSCI impose a downgrade, Gamma projected a large AuM gap between the ‘Emerging Market’ and ‘Frontier Market’ status – which implies a potential net forced outflow of US$15-25 billion. This change will result in increasing volatility and raising the cost of capital across the equity market and related financing channels.

Malaysia’s PMB Investment CEO Hang Tuah Amin Tajudin said the increase in Indonesian share free float won’t be absorbed overnight as foreign investors will be selective, with most purchases conducted by local funds.

Should the worst prospect of a MSCI downgrade occur, Indonesia would become a big, liquid name as a ‘Frontier Market’ for some niche investors. “But overall, it’s not positive. Frontier markets attract less capital and are more volatile. In the long term, staying a credible ‘Emerging Market’ is still better.”

To continue attracting foreign investors who want stability, transparency and trust, Hang Tuah noted the following key factors as being important:

• Clear and predictable government and regulatory policies;
• Strong protection for minority shareholders;
• Better corporate governance, especially in state owned enterprises; and
• Deeper markets (with forex hedging, derivatives and securities lending)