Financing the SDG Agenda: The Potential of Sukuk The Indonesia Case

By Dalal Aassouli and Ebi Junaidi

Indonesia, the largest Muslim population country claims to first issue green Sukuk worth USD 1.25B, significantly contributing to the country’s national economic development and putting Indonesia as the world centre for Islamic economics and finance. “Sukuk” is a Shariah compliant, growing source of funding for development with key principles in financing projects that target climate change, women empowerment, agriculture, education, poverty alleviation, and accountability – seen to have a natural connection to the Sustainable Development Goals (SDGs). The authors discuss here how Indonesia, the first of the two countries to promote Sukuk transformed its economy and the vital role that Islamic finance plays in achieving the SDGs and market stability.


The Sukuk market is one of the fast growing segments in the Islamic financial industry with 24.2% of Islamic finance global assets in 2018 and a compound annual growth rate (CAGR) of 30.6% – between 2003 and 20181. The Accounting and Auditing Organisation for Islamic financial Institutions (AAOIFI) defines Sukuk as certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity.  Since its inception in 2001, the market witnessed new entrants from non-Islamic sovereigns and corporates, increasing cross border transactions and has become an important source of funding for several countries in Asia, Europe and Africa. As a result, global Sukuk issuance is expected to reach $783 billion by 20232.

Sukuk, often qualified as Islamic bonds, present two key features that position them as a viable option for financing sustainable development projects. First, the asset-backing requirement facilitates their link to the real economy and therefore widens the scope of sectors that can be financed. Indeed, Real asset backing is one of the key principles of Islamic finance whereby financing is based on real economic activities rather than pure financing. These could include financing projects that target climate change, refugees, women empowerment, agriculture, education, poverty alleviation, etc.

Second, Sukuk can be structured in various ways using single or hybrid Islamic contracts such as wakala, musharaka, mudaraba, ijara, etc. This flexibility offers tremendous opportunities for innovation and for addressing specific financing needs, even though this complexity may lead to a lack of standardisation and therefore higher transaction costs.

However, the analysis of the global Sukuk market shows the lack of sector diversification. At end of 2018, governments led the total Sukuk outstanding (54.96%), followed by financial services (24.17%) and utilities (6.19%), with the three sectors representing more than 85% of Sukuk issuances. On the other hand, sectors such as healthcare and energy represented only 0.54% and 1.87% respectively of the global Sukuk issuances.


The Sustainable Development Goals (SDGs) Financing Gap

A report by the United Nations Conference on Trade and Development (UNCTAD) argues that about $2-3 trillion of additional investments per annum are required to meet the SDGs, which according to the United Nations Development Programme (UNDP) could open up $12 trillion of market opportunities in food and agriculture, cities, energy and materials, and health and well-being alone.

The private sector can play a pivotal role in meeting this financing gap. In this regard, Islamic finance – as put forward at the Third International Conference on Financing for Development in Addis Ababa in July 2015 – can both complement and provide an alternative to traditional sources of funding to realise the SDGs. Sukuk have played a key role in infrastructure financing for public and private projects. An estimated $73.1 billion worth of infrastructure Sukuk were issued by more than 10 countries between 2002 and the third quarter of 20153.


The Sukuk market witnessed several innovations in the past years in the form of green and Socially Responsible Investment (SRI) Sukuk to meet the SDGs with dedicated local frameworks.

Recent innovations in the Sukuk market and the Potential for SDG financing

The Sukuk market witnessed several innovations in the past years in the form of green and Socially Responsible Investment (SRI) Sukuk to meet the SDGs with dedicated local frameworks. These include green and SRI Sukuk issuances in Malaysia between 2015-2018 under the SRI Sukuk framework4, the republic of Indonesia green Sukuk in 2018 under the green bond and green Sukuk framework and the International Finance Facility for Immunisation (IFFIm) debut Sukuk in 2014 targeting vaccination programmes and health system strengthening in poor countries. These issuances are expected to influence the future developments of the Sukuk market and direct efforts towards ethical and responsible finance as it is the case in the bond market. It is important to note that themed bonds such as green, water, vaccine, microfinance and green banking on women were developed since 2000, aiming to meet specific financing needs and development objectives.

There are several developments that could enhance the contribution of the Sukuk market to sustainable development financing and thus comply with the “maqasidi”5 approach of development. First is the development of green Sukuk for climate and environmentally friendly projects. The potential of green Sukuk has long been discussed in recent months and dedicated frameworks were developed by countries like Malaysia and Indonesia to promote standardisation and investor confidence. The Malaysian SRI Sukuk framework distinguishes two key categories of eligible SRI projects (i) green projects and (ii) community and economic development and waqf properties/assets whereas the Indonesia green bond and green Sukuk framework highlights nine eligible sectors. These are renewable energy; resilience to climate change for highly vulnerable areas and sectors/disaster risk reductions; sustainable transport; waste to energy and waste to management; green tourism; sustainable agriculture; energy efficiency; sustainable management of natural resources and green building.

Second, greater development of retail Sukuk could reduce the dependence on foreign investors for infrastructure financing and promote retail participation in sustainable development financing while enabling investors to diversify their investment portfolio, thus facilitating a transition from savings-oriented societies to investment-oriented societies. This is the case for example in Indonesia where retail Sukuk have been used for infrastructure financing since 2009. This was facilitated by the improving investment conditions of the Sukuk market in general.

Greater development of retail Sukuk could reduce the dependence on foreign investors for infrastructure financing and promote retail participation in sustainable development financing.

However, Green, SRI and retail Sukuk require a large ethical investor base that is conscious about Environmental, Social and Governance (ESG) factors. This means greater emphasize on transparency, traceability and impact assessment. Furthermore, tremendous education and marketing efforts are still required in spreading a sustainable investment culture among retail investors, and in some cases a financial and investing culture. Sukuk innovations could be labeled as new asset classes that target both SRI and Islamic investors. Given the global development challenges and their impact especially on the poorest populations as well as the magnitude of the sustainable development investments needed across various sectors, investor activism reuniting both SRI and Islamic investors could drive the transformation towards sustainable economies in the future.

Finally, promoting these themed issuances cannot be achieved without multilateral development banks (MDBs) support. In the case of the themed bonds market, for example, the role of the World Bank and the other MDBs like the Asian Development Bank (ADB) and the African Development Bank (AfDB) was instrumental in the development of these markets. Their inaugural issuances gave a good signal to the market, which subsequently attracted other issuers and investors. MDB’s support can take the form of technical assistance, credit enhancement or inaugural issuances. In fact, MDBs have the ability to leverage their status, rating and expertise to provide policy guidance, technical assistance and financial support. Their unique business model enables them to leverage their limited capital in order to mobilise private sector financing as well to support sustainable development projects.


The Indonesia case 

Indonesia has indeed been widely claimed to be among the first two countries – together with Malaysia – who issued green Sukuk. It was back in February 2018, that the government of Indonesia, through its Ministry of Finance, issued the first world sovereign green Sukuk worth USD 1.25 billion. The green projects to be financed are twenty-three green projects consisting of 727 kilometers of train double lines, 121 units of solar power plants as well as waste management facilities for around 3.4 million households.

A year after, Indonesia issued the second global sovereign green Sukuk. This time, the issuance proceeds amounted to USD 2 billion divided into 5,5 years USD 750 million and ten years 1.25 billion Sukuk. It is important to note that both issuances were oversubscribed, securing around 146 investors on the first green Sukuk and 183 institutional investors on its second issuance. This has shown that targeting an institutional investor base might not be a big deal in Indonesia. As for the government, in line with Deloitte and ISRA’s “sustainable finance report”, the use of green Sukuk was done as it allows the government to raise funds at low cost, promote green financing as well as develop the sharia-compliant market and broaden alternative sources for state budget funding.

Following the national news coverage of the global green Sukuk issuance, many Indonesian retail investors contacted banks to invest in the instruments. Retail Sukuk is indeed a success story of Indonesia which started offering them to the public in 2009. Retail Sukuk have been instrumental in achieving the government’s objectives of domestic financial markets deepening, financial inclusion as well as the transformation of Indonesia from a saving-oriented society into an investment-oriented one.

Following Indonesia’s success in retail Sukuk, the government is now initiating the possibility of issuing retail green Sukuk, taping the potential of retail investors, especially the millennials. During the previous Indonesia’s Annual Islamic Finance Conference (AIFC) in Surabaya, East Java, the Ministry of Finance has indicated that a study over this plan has been requested through United Nations Development Program (UNDP) Indonesia. This optimistic move was indeed reasonable as investors in recent retail Sukuk issuances were dominated by the millennials.

While we witnessed the exemplary role from the government side in Indonesia, the private companies are unfortunately not keen enough to follow suit. This point has already been identified by key Islamic finance stakeholders in Indonesia.  Junino Yahya, for instance, former finance director of PT. Indonesian Satellite Corporation (Indosat), in the seminar held by Indonesian Islamic Economics Society in Durham University Business School several months ago, indicated that the high cost of Sukuk issuance compared to conventional bonds has contributed to the low interest of corporations in using Sukuk for fund raising. As the man behind the first corporate Sukuk issuance in Indonesia, back in 2002, he stressed the need to create the same level of playing fields for both financial instruments. He argued that the “infant-industry argument”, the rationale to justify the incentives given to a new established company/industry to promote its growth and ability to compete against established companies/industries, might be used for the case of Sukuk against conventional bonds.

The expectation of corporations of a better conducive environment for Sukuk has been captured by the Indonesia National Islamic Finance Committee (KNKS). This newly launched institution led directly by the President of Indonesia, Joko Widodo, aims to accelerate the development of Islamic finance in contributing to Indonesia’s national economic development as well as to be the world center for Islamic economics and finance. In achieving this objective, KNKS then developed the Indonesia master plan for a sharia economy of 2019-2024. Aside from the fundamental strategy, programs and targets, the master plan also set several quick wins of each sectors of Islamic economics and finance. These quick wins are targets to be reached within short time periods.

For capital markets, quick wins number three (out of 5 points), the committee has developed several solutions to promote Sukuk issuance by proposing a greenlane or fast tract for corporate Sukuk. This proposal is expected to shorten the time needed for Sukuk issuance as well as cutting the bureaucracy by facilitating the issuance license for Sukuk.

Another interesting quick win in line with SDGs that needs to be noted in this masterplan, is the effort made to tap into sovereign social Sukuk of waqf-linked Sukuk. This is, in fact, the number one quick win for sharia capital markets. Waqf is a charitable endowment that plays a great role throughout the history of Muslim civilisation. In this initiative, Indonesia Waqf Board (BWI), a state independent institution in charge of revitalizing Indonesia waqf potential, together with ministry of finance will utilise idle temporary waqf fund for state budget funding through private placement. It is expected that projects in line with the SDGs as well as BWI’s mission of community empowerment, can be realised under this initiative.   

Waqf-linked Sukuk is not only interesting since it combines the classic financial instruments in Islam, waqf, together with the modern innovation financial instruments, Sukuk. It can also be regarded as a reminder that in the end, Sukuk, as part of the instrument developed in Islamic finance, cannot be separated with the idealism Islamic finance and economics, once initiated by the Islamic finance founding fathers, that is to create the welfare of the people, to empower them. As argued by Professor Mehmet Asutay (2013)6 the objective of Islamic finance is to achieve the human fallah; the walfare or prosperity. Above all, the Qur’an (Surah Al-Baqarah/2.30) mentioned that the human was created as the khalifatul ardh; the steward, the care taker or those who give prosperity in this universe. In this case, as targets in SDGs are in line with Islam, therefore Islamic finance should play an important role in achieving them.

About the Authors

Dr Dalal Aassouli is currently an assistant professor of Islamic finance and Program Coordinator at Hamad Bin Khalifa University (HBKU) in Qatar. She is also an Islamic finance trainer and advisor. Previously, she was a visiting academic at the Durham Centre for Islamic Economics and Finance, Durham University Business School. Prior to that, she worked at the International Islamic Liquidity Management Corporation (IILM) in Malaysia where she assisted with the establishment of the IILM’s Sukuk programme. Before that, she held several positions in Europe where she had exposure to the African, European and Latin American markets.
Her areas of research interest include Islamic finance in general and its implications for corporate finance, ethical finance, development finance, green finance, sustainable development and socially responsible investing.

Ebi Junaidi is School of Economics Lecturer at Universitas Indonesia. He is currently pursuing his PhD in Islamic Finance at Durham University Business School. Prior to his academic career, he was researcher in ING – Baring Securities, Indonesia. His research area are Waqf, Trust, Venture Capital, Sukuk, Risk, Time Preference and Financial Decision Making. He is the Chairman for Indonesia Islamic Economics Society-United Kingdom Chapter (MES UK) 2017-2019.

1. Islamic Financial Services Board (2019). Islamic Financial Services Industry Stability Report 2019. Kuala Lumpur: IFSB.
2. Thomson Reuters (2018). Islamic Finance Development Report Building Momentum.
3. Malaysia International Islamic Financial Centre (2015). Role of Islamic Finance in Infrastructure Financing. Presentation at the Sub-Regional Expert Group Meeting for South-East Asian Countries. Kuala Lumpur.
4. These include Tadau Energy Sdn Sukuk, Quantum Solar Park Sdn Bhd Sukuk, PNB Merdeka Ventures Sdn Bhd Sukuk, Sinar Kamiri Sdn Bhd Sukuk, UiTM Solar Power Sdn Bhd and Sukuk Ihsan.
5. The term “maqasid” in plural means objective. It is a science that analyses the purpose behind the rules and prescriptions of Islamic law.
6. Islamic moral economy as the foundation of Islamic finance, in Islamic Finance in Europe: Towards a Plural Financial System, edited by Valention Cattelan, Edward Elgar, Cheltenham, UK.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.