Indonesia Looks to Islamic Finance to Help Build Its Next Wave of Infrastructure

Indonesia’s infrastructure agenda is vast—and increasingly complex to finance amid tighter global liquidity, higher borrowing costs, and growing climate constraints. In this environment, Islamic finance is no longer a niche alternative in Jakarta’s policy toolkit. It is emerging as a practical mechanism to diversify funding sources, align financing with long-lived assets, and tap both domestic and international pools of Shariah-compliant capital.

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Why Islamic finance aligns with infrastructure

At a structural level, infrastructure and Islamic finance are a natural fit. Roads, airports, ports, power plants, water systems, and public buildings are tangible, income-generating assets. These characteristics align closely with Shariah-compliant structures that require financing to be linked to real economic activity rather than interest-based lending.

For governments, this alignment offers several advantages. Asset-backed Islamic instruments can be tied directly to specific projects, making them easier to justify to investors and the public alike. They also broaden the investor base by attracting institutions that operate under Shariah mandates. When supported by credible pipelines and functioning capital markets, these instruments can also support longer maturities—an essential feature for infrastructure that takes decades to repay.

Indonesia has spent years building the regulatory and institutional foundations for this ecosystem. Rather than treating Islamic finance as a parallel system, authorities have integrated it into the broader financial architecture through roadmaps, regulatory guidance, and market development initiatives.

Sovereign sukuk as the backbone of infrastructure-linked financing

The most concrete evidence of Indonesia’s progress lies in its sovereign sukuk programme. The government has become one of the world’s most consistent issuers of Islamic bonds, including thematic instruments designed to fund environmentally sustainable projects.

Indonesia’s green sukuk programme, launched in 2018, has positioned the country as a global reference point for combining Islamic finance with climate-focused infrastructure. Proceeds from these issuances are allocated to eligible public projects, with formal processes in place to track and report how funds are used. This framework has helped establish credibility, improve investor confidence, and create a repeatable model for future issuance.

While sovereign sukuk are often used for budget financing, their design directly supports infrastructure spending. By linking funds to specific sectors and reporting on outcomes, the government has shown how Islamic finance can move beyond abstract principles and into concrete development outcomes.

Infrastructure priorities and the energy transition

Indonesia’s infrastructure needs are increasingly intertwined with its energy transition. Upgrading electricity grids, expanding renewable energy capacity, strengthening transport networks, and improving industrial infrastructure all require sustained, long-term investment.

These sectors are particularly well suited to Shariah-compliant instruments because they combine physical assets with predictable cash flows. As climate and sustainability considerations become central to infrastructure planning, thematic sukuk—such as green or sustainability-linked structures—offer a way to align financing with national development and environmental objectives at the same time.

Constraints that still shape the market

A balanced assessment must acknowledge the limits. Despite steady growth, Islamic finance in Indonesia is not without structural challenges.

Islamic banks continue to rely heavily on short-term deposits, while infrastructure projects require long-dated funding. Managing this mismatch requires careful structuring, syndication, or capital-market takeouts, which can increase complexity and cost.

Market depth and standardisation also vary. While sovereign sukuk issuance has helped establish benchmarks, secondary market liquidity is uneven, and long-tenor corporate or project sukuk remain less common. This can raise execution risks for complex infrastructure deals.

Innovations in Islamic social finance, such as cash waqf-linked instruments, have attracted attention but remain limited in scale. While valuable for social programmes, they have yet to become major funding channels for large infrastructure projects.

Where Nusantara fits—and where it does not

Any discussion of Indonesian infrastructure must address Nusantara, the planned new capital city in East Kalimantan. Nusantara is one of the country’s most ambitious and symbolic projects, encompassing transport systems, housing, government buildings, utilities, and digital infrastructure.

Current, verifiable public information indicates that Nusantara is being funded primarily through state budget allocations alongside efforts to attract private investment. While Islamic finance is often cited as a potential tool, there is limited evidence that large portions of Nusantara’s financing have already been executed through sukuk or other Shariah-compliant structures at scale.

This distinction matters for credibility. Indonesia’s strongest, most documented use of Islamic finance for infrastructure remains in sovereign sukuk issuance and broader public-sector financing—not yet in flagship mega-projects like Nusantara.

A pragmatic path forward

Indonesia’s approach to Islamic finance in infrastructure is best understood as pragmatic diversification rather than ideological shift. Sovereign sukuk, including green sukuk, have proven effective in mobilising capital with transparency and discipline. As infrastructure needs grow—particularly in energy, transport, and climate-related sectors—these tools offer a way to spread funding risk and attract a broader investor base.

The next phase will depend less on innovation and more on execution. Deepening market liquidity, improving standardisation, and building a credible pipeline of bankable projects will determine how far Islamic finance can go in supporting Indonesia’s long-term development.

If those foundations continue to strengthen, Islamic finance is likely to become a durable pillar of Indonesia’s infrastructure funding mix—standing alongside conventional debt, public-private partnerships, and budget financing as a practical tool for building assets meant to last generations.