Time to Issue Regional Sukuk

The financial relationship between the central government and regional governments in Indonesia is comprehensively regulated through Law Number 1 of 2022 on Financial Relations between the Central Government and Regional Governments (UU HKPD).

Its main instrument is the Transfer to Regions (TKD), which is an important pillar in Indonesia’s fiscal decentralisation concept, functioning to bridge the vertical fiscal imbalance between the central and regional governments, as well as the horizontal fiscal imbalance between regions.

The implementation of Law No. 1 of 2022 on HKPD has not been able to erode regional governments’ budget dependence on the central government. In fact, based on a 2025 study by the Regional Autonomy Implementation Monitoring Committee (KPPOD), around 60%-70% of regional governments still depend on central transfer funds, and in some regions the proportion reaches 80%-90% of total regional budget (APBD) revenue.

This reality cannot be separated from the fact that almost 90% of regional governments are trapped in the low fiscal capacity category. Problems arise when the central government adopts a budget efficiency policy, which automatically forces regional governments to bear the impact due to the reduction in transfer fund allocations.

In the 2026 State Budget (APBN), Transfer to Regions (TKD) is set at Rp693 trillion. This figure is far lower than the 2025 APBN TKD ceiling of around Rp919.9 trillion. In nominal terms, there is a decrease of around Rp226.9 trillion, or about 24.6 percent.

This adjustment in the TKD allocation portion has been proven to directly trigger severe pressure on regional financing aspects. Due to not having a strong cushion of Regional Own-Source Revenue (PAD), some regions are experiencing acute financial constraints, ranging from the inability to pay employee expenditure—such as salaries for civil servants (ASN) and government employees with work agreements (PPPK)—to operating the wheels of government at the most minimal level. The dependence of regional budgets on TKD creates a structural vulnerability that triggers systemic risk when the central government tightens fiscal policy.

Several regions with relatively strong fiscal capacity, such as DKI Jakarta Province and West Java Province, are now preparing to issue regional bonds. This creative financing step is being taken to anticipate limited fiscal space and cover budget deficits, so that strategic infrastructure projects and public services can continue. The DKI Jakarta Provincial Government itself has proposed a plan to issue its first regional bonds worth Rp3.5 trillion.

The issuance of regional bonds and sukuk already has a legal basis through Law No. 33 of 2004 on Fiscal Balance between the Central Government and Regional Governments. This regulation was then strengthened with a number of technical rules, including Minister of Finance Regulation (PMK) Number 147/PMK.07/2006 on Procedures for Issuance, Accountability, and Publication of Information on Regional Bonds.

Provisions regarding regional loans were also updated through Government Regulation (PP) Number 30 of 2021 on Regional Loans. The legal basis for issuing regional bonds was further strengthened through Law No. 23 of 2014 on Regional Government and Law No. 1 of 2022 on HKPD.

Considering the Issuance of Regional Sukuk

One source of financing to overcome regional budget limitations is Regional Sukuk. Regional Sukuk are sharia-compliant securities issued by regional governments as evidence of participation in regional assets, which function as an alternative source of creative financing to fund infrastructure development, encourage local economic growth, and improve the quality of public facilities without directly burdening the regional budget capacity.

The issuance of regional sukuk is considered more suitable for regional financing needs in Indonesia compared to conventional bonds because this instrument has a direct link to real assets (underlying asset), a much broader investor base, and more measurable fiscal governance risk.

It represents proof of ownership of a portion of a specific infrastructure project asset. Regional governments utilise Regional Property (BMD) or new construction projects as the underlying asset. The public funds collected are strictly locked and may only flow directly to finance these real assets.

This sukuk characteristic is expected to minimise the risk of corruption and ensure that investor money truly materialises into regional public infrastructure. Sukuk generally use contracts such as Ijarah (lease) or Mudharabah (profit-sharing).

Investor returns are paid from the income or economic benefits generated directly by the project object. Unlike the fixed coupons of conventional bonds that directly burden the regional budget expenditure regardless of the project’s success, the sukuk structure reduces pressure on regional cash liquidity because payments are aligned with the performance or utilisation of the related asset.

Momentum to Build Regional Fiscal Independence

The requirements for issuing Regional Sukuk are quite strict. PMK No. 87 of 2024 on Procedures for Issuance and Buyback of Regional Bonds and Regional Sukuk groups these requirements into three main aspects: administration, finance, and activity feasibility.

From the financial side, the total remaining regional debt financing plus the debt financing to be drawn must not exceed 75% of the previous year’s regional budget revenue that is not designated for specific use. In addition, the regional government’s financial capacity ratio to repay debt financing (DSCR) is set at a minimum of 2.5.

Therefore, the issuance of Regional Sukuk should not merely be viewed as a temporary alternative instrument when the TKD budget declines. More than that, this instrument must be integrated as part of a long-term strategy in building regional fiscal independence.

The Audit Board of Indonesia (BPK) in 2026 is still highlighting various fundamental problems in TKD management. Through these fiscal notes, BPK emphasises the importance of strengthening the structure of fiscal independence and sustainably improving the quality of regional spending.

In achieving fiscal independence, regional governments need three main pillars simultaneously: strong Regional Own-Source Revenue (PAD), efficient spending governance, and healthy financing. Regional Sukuk is only one financing instrument, so it must not be used as a shortcut to replace PAD reform or regional budget efficiency.

On the contrary, the sukuk issuance plan must act as a catalyst for fiscal discipline. Through this instrument, project feasibility must be rigorously tested, financial risks must be carefully calculated, payment obligations must be reserved in the regional budget, and public transparency must be upheld so that the public knows how the funds are being used.

Closing

Ultimately, Regional Sukuk must not simply be viewed as a lifeboat when the central transfer fund tap shrinks. This instrument is the embodiment of a long-term regional government strategy towards sustainable fiscal independence.

Its issuance does not negate the need for reforms to increase PAD and regional budget efficiency, but rather becomes a compass for enforcing new budget discipline. Through the risk tightening regulated in the prevailing laws and regulations, Regional Sukuk demands regional governments to transform, to be more transparent, more measurable, and more fully responsible for the future development of their own regions.