Indonesian law on Sovereign Sukuk


Financier Worldwide Magazine

December 2015 Issue

December 2015 Issue

In 2008, Indonesia promulgated its law on Sovereign Sukuk, Law No. 19 of 2008 (the Sukuk Law), followed shortly thereafter by the issuance of the country’s first Sovereign Sukuk. The law was welcomed warmly with hopes that it would open up a new and potentially lucrative funding source for the government of the world’s fourth most populous nation. The aim was to make the archipelago more attractive to Middle Eastern investors, many of which use only Islamic products. The development of a Sharia-based financial market in Indonesia has been growing for some time; however, the availability of secured Sharia-based instruments for institutional investors had been in short supply and thus the issuance of the law was intended to fill this gap.

Information recently released by the Ministry of Finance indicates a consistent positive trend in the issuance of Sovereign Sukuk. The total accumulated value of the Sukuk from 2008 until 6 October 2015 was recorded at approximately $26bn, 76 percent of which is denominated in US dollars. Sukuk may be issued under various structures and secured by differing underlying assets.

In September 2015, the Minister of Finance listed four Sukuk valued at $6bn on the Nasdaq in Dubai. The listing was seen as a milestone for the Indonesian Sovereign Sukuk in the global market, marking Indonesia’s advancement towards becoming the world’s leading Sovereign Sukuk issuer, and serving to further strengthen the links between Indonesia, the UAE and the wider Middle East.

This short article attempts to give an overview of the Indonesian Law on Sovereign Sukuk, and to highlight its specific features from a legal perspective.

Based on underlying transactions

Sukuk (plural of Sak) are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct, projects, or other special investment activities. Sovereign Sukuk are sovereign securities, based on Sharia principles, issued by the government of Indonesia in either Indonesian rupiah or a foreign currency, in order to finance the Indonesian state budget. As in corporate Sukuk, there is no actual interest payable. It typically operates through other transactions such as profit-sharing or leasing. The law on Sovereign Sukuk provides that the underlying transactions on issuing Sukuk can be in various forms, as long as these do not conflict with Shariah principles.

The introduction of the beneficial rights concept

Law No. 1 of 2004 prohibits the sale or transfer of state-owned assets. The Sukuk Law thus introduced the concept of separation of legal title and beneficial rights, so that now, consistent with Islamic Law, the government may ‘sell’ the beneficial rights of state-owned assets, while retaining the legal title, thereby complying with Law No. 1 of 2004 while allowing for such assets to underlie financial obligations, as long as legal title remains with the government. The government may transfer to a financing party the beneficial rights of use and enjoyment of state property, provided such property is in no way harmed. This is generally known as right of usufruct.

The Sukuk may be based upon ‘transfer’ or ‘lease’ of the beneficial ownership of such state-owned assets as land, buildings, projects, seagoing vessels or other state-owned assets. Sukuk holders, as the owners of the beneficial right of state-owned assets, may lease their beneficial rights back to the government against an agreed lease price (coupon), with the understanding that the government will repurchase these rights at the end of the lease period. This type of Sukuk is based on the Ijarah (lease) principle, which has been the dominant mechanism thus far.

Another possibility would be for the financing party to purchase the usufruct with the terms of the Sukuk making it clear that such a sale shall not reduce the right of the government’s institutions to continue using such an asset for their daily operations. So the transfer is only on paper, while the asset itself is not really affected. In either case, at the expiry of the Sukuk, the government should buy back the beneficial rights of the state-owned assets.

Other mechanisms might be based on Musharaka, or partnership, where the revenue would be shared between the government and the Sukuk holders, or Istisna, a form of finance for construction of a new asset. No Sukuk have been issued on these bases as yet.

Clearly it would be difficult to enforce such obligations in case of default. But given that they are government obligations and default is highly unlikely (unless the entire world economy were to collapse) it is proving very attractive to investors.

Issuer and trustee

The law provides that the government may issue a Sukuk directly or through a state-owned special purpose vehicle company, Perusahaan Penerbit SBSN Indonesia (PP SBSN), established by government regulation, and each Sukuk issuance requires prior approval from parliament in keeping with the state budget.

PP SBSN acts as both issuer and trustee. Thus PP SBSN securitises the Sukuk and sells it to investors, and holds the beneficial ownership of the collateral on behalf of the Sukuk holders, in effect representing the government with respect to the investors and the investors with respect to the government. The management organ of PP SBSN is its board of directors, appointed by the minister of finance. Unlike other Indonesian companies there is no supervisory board.

Paying agent

The paying agent for the Sukuk is the Indonesian central bank, Bank Indonesia (BI), appointed by the minister of finance. The Minister of Finance may appoint another party as paying agent with prior coordination with BI. The paying agent has the authorisation and obligation to receive payment from the government in connection with the issuance of Sukuk (such as rental payment, revenue sharing or margin) and then distribute such payments to Sukuk holders.


The Sukuk Law also allows PP SBSN to appoint a separate company as its ‘delegate’ to act as trustee in the event that foreign investors are not comfortable with a state-owned entity playing that role as well as the role of issuer.

Requirement for fatwa from the Ulema Council

Implementing regulations regarding the Sukuk Law shall be issued by the minister of finance. The minister shall also request a fatwa (opinion) on ‘Shariah compliance’ from the Ulema Council of Indonesia (Majelis Ulama Indonesia) in order to give assurance to investors that investment in Sovereign Sukuk, including purchasing and trading thereof, does not violate Sharia principles.


Ilman Rakhmat, Mirza Karim and Karen Mills are members of Karim Syah. Mr Rakhmat can be contacted on +62 21 2966 0001 or by email: Mr Karim can be contacted on +62 21 2966 0001 or by email: Ms Mills can be contacted on +62 21 2966 0001 or by email:

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Ilman Rakhmat, Mirza Karim and Karen Mills

Karim Syah

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