Several projects that are to be financed through the state-budget (using proceeds from this sukuk retail issuance) include the revitalization of roads, development of a double-track railway on Java, and the revitalization of hajj boarding houses. The underlying assets for the sukuk are projects in the 2015 state-budget.

By issuing sukuk retail bonds (with retail customers as the target market), the government seeks to lure funds away from deposit accounts while reducing dependence on overseas investors. Currently, about 40 percent of Indonesia’s sukuk and non-Islamic debt are held by foreign investors. This high degree of foreign ownership makes the country vulnerable to capital outflows in times of global economic shocks, particularly after Indonesia’s central bank (Bank Indonesia) surprized analysts by cutting its benchmark interest rate (BI rate) by 25 basis points to 7.50 percent last week. Apart from reducing foreign ownership in Indonesian debt papers, the sukuk sale also enhances awareness of Islamic finance.

Based on data from Indonesia’s Finance Ministry, total outstanding sukuk in the country’s secondary market stands at IDR 151.6 trillion, significantly below the IDR 1.2 quadrillion worth of outstanding (government) conventional bonds. This shows that there is ample room for growth in Islamic finance in Southeast Asia’s largest economy (and the country which contains the world’s largest Muslim population).

Read Analysis: Islamic Finance in Indonesia: Sharia Banking is Large Untapped Potential

Robert Pakpahan, Director General at the Financing and Risk Management Office, said that the Indonesian government aims to sell IDR 79 trillion (USD $6.1 billion) worth of Islamic bonds in 2015 (this includes the retail sukuk and a dollar-denominated offering in the first half of 2015). Pakpahan added that the government is currently studying using state-owned goods and services as the underlying assets for future sukuk issuances (So far, it has only sued infrastructure projects as underlying assets/collateral).

Contrary to conventional bonds, Islamic bonds comply with Islamic principles. This includes a ban on fixed income interest payments, instead applying a profit-sharing mechanism. Individuals can obtain the sukuk debt paper through various banks including Bank Rakyat Indonesia (BRI), Bank Mandiri, Bank Negara Indonesia (BNI), Bank Central Asia (BCA), Bank Mualamat, OCBC NISP, ANZ, Bank Permata, HSBC, Bank Mega BRI Syariah, Bank Internasional Indonesia (BII), Bank Tabungan Negara (BTN), Standard Chartered, CIMB Niaga and Bank Danamon. The government of Indonesia sold a record IDR 19.3 trillion worth of sukuk retail bonds at its last offering in February last year, exceeding the target of IDR 18.5 trillion. The latest sukuk sale is the country’s seventh sukuk issuance since its debut in 2008.