The Indonesia government issued its largest-ever sovereign green Sukuk tranche in May 2022 worth US$1.5 billion. The Indonesian sustainable Sukuk market has been championed primarily by sovereign issuances. While the sovereign issuances are increasing, the corporate green Sukuk market is lagging behind. What is driving this phenomenon in the Indonesian Islamic capital market? Growing government funding needs may be the main factor driving sustainable issuances for the government while the underdeveloped capital market could be holding corporate issuances back, according to experts.
According to the Green Sukuk Allocation and Impact Report 2022 issued by the Indonesian Ministry of Finance, the nation issued US$3.5 billion in global green Sukuk and US$809 million in green retail Sukuk cumulatively as at the end of 2021.
Like many governments doubling down on their sustainability strategies, the Indonesian government is moving into gear in implementing its net-zero 2060 commitment. As a country with a very narrow revenue base and relatively constrained domestic capital markets, tapping global markets is a core part of its financing strategy. Green Sukuk issuances are a tool for the sovereign’s emissions financing.
“Indonesia is one of the few countries in ASEAN that has an articulated green bond and green Sukuk framework where they have identified specific projects, specific taxonomies that they are using, they do the impact reporting, they provide a picture to the market as to what they are using the money for. In that sense, there’s a bit more transparency.
I think investors are attracted to the idea that there’s an existing program that the government is mobilizing to raise these funds and that there is a clear and transparent use of proceeds that the funds are going to,” Nishad Majmudar, the sovereign risk and credit strategy analyst at Moody’s Investors Service, tells ISFI.
The combined factors of Indonesian sovereign securities being investment grade, its active participation in foreign capital markets as well as its existing frameworks and reporting practices put it at a relative advantage.
While we are seeing sovereign issuances lead the way for green Sukuk for Indonesia, corporate issuances are lagging. A shallow and underdeveloped domestic capital market may explain why corporates are still dependent on the banking sector for financing. Additionally, a recent report from Fitch Ratings highlighted the added regulatory and compliance complexities of issuing Sukuk compared with bonds as a key challenge for ESG Sukuk.
“If the government gives fiscal incentives, I think more corporates will be attracted to issuing green Sukuk,” Farouk Abdullah, CEO of Alwyni International Consulting, tells ISFI.
According to Farouk, creating a level playing field and adding incentives are crucial to encourage more corporate green Sukuk issuances in Indonesia, citing Malaysia as an example of how incentives can stimulate green corporate issuances.
The fact that green bank financing in Indonesia has not increased proportionately to sovereign green issuances suggests that not only are green initiatives policy-driven and championed, there may be a lack of incentives put in place for Islamic green financing in the corporate space.