Islamic banking in Indonesia to grow as demand for Sharia-compliant bonds rises

Year-to-date sales of retail sukuk have been oversubscribed.

According to BMI Research, on the back of growing demand for Islamic bonds, strong government initiatives, and positive reforms, we believe that Indonesia's Islamic banking sector is poised for strong growth over the medium-to-long term.

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Indonesia boasts the world's largest Muslim population, at approximately 218mn (87% of its total population of 250mn), but Islamic banking has lagged behind conventional banking domestically, accounting for only about 5.0% of the country's total banking assets, compared to a quarter in Malaysia, and around half in Saudi Arabia.

At a time when conventional investment instruments are losing their appeal due to relatively low yields, global investors are increasingly turning to sukuk issuances, a type of bond that complies with Islamic law (Sharia).

This has resulted in a robust appetite for Sharia-compliant bonds, and according to Indonesia's Finance Ministry, year-to-date sales of retail sukuk have been oversubscribed.

According to data compiled by Bloomberg, the yield on Indonesia's Sharia-compliant sovereign debt due January 2025 has been 46 bps higher on average over the past year than that on the non-Islamic notes due September 2024. The growing global demand for sukuk therefore presents a great opportunity for Indonesia to capture a greater share of the global market.