Time to Issue Regional Sukuk

The financial relationship between the central government and regional governments in Indonesia has been comprehensively regulated through Law Number 1 of 2022 concerning Financial Relations between the Central Government and Regional Governments (UU HKPD). The main instrument lies in Transfers to Regions (TKD), which is an important pillar in the concept of fiscal decentralisation in Indonesia, 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 UU No. 1 of 2022 on HKPD has not been able to erode regional government budget dependency on the central government. In fact, based on a 2025 study by the Regional Autonomy Implementation Monitoring Committee (KPPOD), around 60 to 70 per cent of regional governments still depend on central transfer funds, with the proportion reaching 80 to 90 per cent of total Regional Budget (APBD) revenue in some areas. This reality cannot be separated from the fact that almost 90 per cent 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), Transfers to Regions (TKD) are set at Rp693 trillion. This figure is much lower than the 2025 APBN TKD ceiling of approximately Rp919.9 trillion. Nominally, there is a decrease of around Rp226.9 trillion, or about 24.6 per cent. This adjustment in the TKD allocation portion has directly triggered heavy pressure on regional financing aspects. Due to the lack of 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. APBD dependency on TKD creates a structural vulnerability that triggers systemic risk when the centre implements fiscal tightening. Several regions with relatively strong fiscal capacity, such as DKI Jakarta Province and West Java Province, are currently finalising plans 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 for an inaugural regional bond issuance worth Rp3.5 trillion. The issuance of regional bonds and sukuk already has a legal basis through Law No. 33 of 2004 on Financial Balance between the Central Government and Regional Governments. This regulation was subsequently strengthened by 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 basis for issuing regional bonds is further strengthened through Law No. 23 of 2014 on Regional Government and Law No. 1 of 2022 on HKPD. 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, serving 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 APBD 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 assets), a much broader investor base, and more measurable fiscal governance risks. Representing 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 collected public funds are strictly locked and may only flow directly to finance these real assets. This characteristic of sukuk 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 APBD expenditure items 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. 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 per cent of the previous year’s APBD revenue that is not designated for specific uses. In addition, the regional financial ability 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 TKD budgets decline. More than that, this instrument must be integrated as part of a long-term strategy to build regional fiscal independence.