Structural limitations and evolving investor behavior challenge Indonesian Shariah investment market

Islamic mutual funds and retail equities, once expected to scale rapidly on the back of Indonesia’s large Muslim population, have lagged expectations.  

Structural limitations continue to be a constraint as Indonesia’s Islamic capital market remains dependent on a concentrated domestic investor base, particularly in corporate Sukuk and Islamic funds. 

As capital largely circulates within the same pool, limiting depth and scalability, “the real challenge isn’t just the number of investors, but the risk appetite and education gap,” said Muhammad Gufran Pribadi, CEO at cooperative firm Asy-Syirkah ID. “Global investors need liquidity and globally recognizable structures before they commit.”

 As of September 2025, Indonesia’s Islamic capital market stood at IDR1,828.25 trillion (US$109.5 billion), with 255 Islamic funds in operation, according to the Financial Services Authority, or Otoritas Jasa Keuangan (OJK).

Beyond structural constraints, product positioning is also a challenge.

“Millennial investors prioritize seamless UI/UX and immediate returns above all else,” said Muhammad. “Shariah compliance is often treated as a baseline requirement, not the sole selling point.”

This shift is forcing a rethink in product design. Providers are moving away from structure-led offerings toward platforms that emphasize ease of use and competitive yields, with Shariah compliance embedded in the background. “If a Shariah product is clunky, users will bounce.”

At the retail level, perception remains a key barrier. Shariah compliant instruments are often viewed as complex or delivering lower returns, reinforcing the need for clearer positioning that balances value alignment with competitiveness.

Also, top-down initiatives from OJK and the National Committee for Islamic Economy and Finance, or Komite Nasional Ekonomi dan Keuangan Syariah, are the heavy lifters. Such efforts could result in a sustainable landscape if Indonesia’s investors transition from this ‘push phase’ to a ‘pull market’.

Muhammad said the gap in the capital market still exists because of a severe human capital deficit and low public financial literacy.

“We have been trying somehow to push sophisticated products, but the market lacks the deep, localized understanding of Shariah investing to ‘pull’ them organically. It might take a bit more time, but hopefully in the near future, we have strong faith that we are going to reach those Islamic financial achievements.”