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he government, through the Finance Ministry, recently offered retail sukuk (sharia-compliant debt paper) to the public to raise funds to help plug a gap in the state budget.

The issuance of government sukuk, which was started in 2008, not only allows the government to have more financing options to solve budgeting problems, but also gives an opportunity for Indonesian people to participate in development projects.

Sukuk are often referred to as “Islamic bonds” and are widely known in the global market. From 2008 to 2017, the Indonesian government issued retail sukuk to tap into the country’s growing middle class.

The retail sukuk has received a positive response from individual investors since it was first introduced in the country. With a competitive rate of return, the issuance of the retail sukuk has been always oversubscribed.

In 2017, Indonesian retail sukuk became the highest sukuk issuance in the world, with a total value of Rp 31.5 billion (US$2.37 million). Indeed, Indonesia shows an anomaly by having a high positive growth of sukuk issuance while the global market experienced the contrary this year.

Despite its success, the total value of retail sukuk, corporate sukuk and conventional bonds is still considered small compared to the amount needed to finance priority infrastructure development projects.

Finance Minister Sri Mulyani Indrawati recently said that those infrastructure projects would require Rp 4.7 quadrillion for the next two years, of which only 41.3 percent can be provided by the government.

With the lack of a government budget, the offering of diversified and specified portfolios to the potential investors needs to be explored. Those include new instruments for particular types of projects like infrastructure projects. Currently, countries like the United Arab Emirates, the United Kingdom and Malaysia are offering an Islamic investment instrument called a green retail sukuk. It is intended to preserve the environment and natural resources through energy conservation, the promotion of renewable energy and the reduction of greenhouse gas emissions. The green sukuk itself is a subset of sukuk that finances green assets.

Knowing the investment purposes of green sukuk, we can say that it can be an alternative source of funds for some Indonesian national development projects.

As stated in Presidential Regulation No. 2/2015, which is about the National Medium Term Development Plan (RPJMN) 2015-2019, the national development for the forthcoming five years needs to prioritize food sovereignty, energy self-sufficiency and the governance of maritime resources.

Infrastructure development will be among the most important parts of the program. President Joko “Jokowi” Widodo, for example, plans to build 15 new airports, 25 new seaports, 3,258 kilometers of new railways, 30 new dams and reservoirs, 33 hydroelectric power plants, two new oil refineries with 300,000-barrel capacities and so on. It is important to note that, according to the Grantham Research Institute on Climate Change and the Environment UK, the RPJMN 2015-2019 indicates that the green economy is the basis of Indonesia’s current development program.

Indeed, the Finance Ministry and the Financial Services Authority (OJK) put the issue of the green sukuk on the table in 2015. However, we have found few concrete programs for introducing this type of investment instrument.

The most striking potential projects in Indonesia are in the development of renewable energy. The Energy and Mineral Resources Ministry has aimed to increase the use of new and renewable energy by up to 23 percent in the national energy mix by 2025 as mandated by the National Energy Plan, in which geothermal became the main focus for development in Indonesia.

It is important to note that Indonesia has the biggest geothermal potential in the world. According to research of the Geological Agency, there are 312 potential geothermal sites with a total capacity of 29,910 MW and 16,524 MW of total reserves. However, the installed capacity of geothermal power plants by 2014 reached 1403.5 MW, 4.9 percent of the existing potential. The targeted capacity of geothermal power plants in 2019 is 3,195 MW.

The report of a global investor study by Schroders shows that Asia is concerned more about environmental, social and governance issues when making investment decisions compared to Europe, particularly about the positive impact on the environment, such as climate change policies. Indonesian investors are the ones most likely to consider these issues when investing.

Highlighting the need for more funds to reach our national development objectives and the priority agenda of President Jokowi, it is indeed the moment for the government to embrace green sukuk as an alternative sharia portfolio instrument. As green projects are relatively new in Indonesia, they need time to set up and engage with the nation’s development plans.

One of the five sharia objectives set by Al-Ghazali in the year 505 is progeny, which can be translated as sustainability. It implies that Islam acknowledges sustainability in every aspect of life, especially in matters of development. In that manner, green sukuk will appeal both to Muslim investors and environment-aware investors.
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Lathifa Hapsari and Yodi Izharivan are both Master’s of science students in Islamic finance and management at Durham University, UK.