Indonesia's Islamic finance industry is expected to expand further in the second half of 2026 and through 2027, supported by strong government backing and a resilient operating environment, according to Fitch Ratings. The industry was valued at more than $200bn at the end of May.

Fitch expects Indonesia to remain one of the world's largest issuers of sukuk, with the instruments playing a central role in sovereign funding. Islamic banks also have significant room to grow, supported by the country's Muslim-majority population and large underbanked market. However, limited distribution networks at present as well as low public awareness and product gaps have continued to constrain wider adoption despite improvements over the past decade.

Sukuk account for 67% of the Islamic finance industry, while Islamic banking assets make up 30%. The remainder comprises Islamic funds and takaful.

Government measures are expected to support further growth. The Financial Services Authority has capped sukuk registration fees at IDR150mn ($8,331), well below the IDR750mn charged for conventional bonds, excluding small and medium-sized enterprises. Islamic banks also benefit from lower reserve requirements. Since February, only Islamic banks and sharia business units have been permitted to receive Hajj pilgrimage cost deposits.

Sukuk represented 33% of Indonesian debt issuance in the first five months of 2026, up from 26% a year earlier. Outstanding sukuk grew 13% year on year during the period, compared with 6.3% for conventional bonds, with the sovereign remaining the dominant issuer. Sovereign issuance is expected to stay robust because of continued funding needs. Following strong corporate issuance in the first half, elevated policy rates are likely to slow growth during the remainder of the year. Bank sukuk issuance is not expected to increase in 2026 because of limited refinancing demand and higher interest rates.

Fitch rates almost all Indonesian US dollar sukuk, all issued by the sovereign and carrying a BBB rating. The sovereign remains on Negative Outlook, while a prolonged conflict involving Iran could create additional risks through higher energy prices. Rupiah-denominated sukuk account for around 2% of Fitch-rated Indonesian sukuk outstanding. These comprise 31 issues rated between AAA(idn) and A-(idn), mostly with Stable Outlooks and no recorded defaults.

Islamic banking assets exceeded IDR1,000 trillion at the end of the first quarter and accounted for 8% of total banking system financing, and Fitch expects sector assets to grow by about 10% in 2026, supported by consumer lending, financial inclusion initiatives and new products such as bullion banking. Indonesia's economy is forecast to expand by 5.1% in 2026 and 5% in 2027, supporting continued banking sector growth. Consolidation in the Islamic banking sector is also expected to remain strong over the next few years, largely for regulatory reasons.