Theoretically Investigating the Limitations, Regulation, and Development of Islamic Mutual Funds in Indonesia

Although the number of Islamic mutual funds (IMFs) in Indonesia has grown in recent years, the market remains relatively small compared with countries such as Malaysia and Saudi Arabia. This study explores the key drivers and barriers influencing IMF development and Indonesian investors’ attitudes toward these products. Drawing on 21 semi-structured interviews with investment managers, regulators, and policymakers, the study identifies major constraints, including regulatory complexity, a limited and illiquid pool of Shariah-compliant securities, suboptimal fund performance, tax limitations, low product awareness, limited Islamic financial literacy, and moderate investor risk orientation. Simultaneously, several factors support potential growth, such as robust investor protection regulations, a large and youthful population, opportunities for product innovation, and strong government backing. The findings offer practical guidance for enhancing product offerings, improving the regulatory framework, and promoting financial literacy, while underscoring that fund performance, investor awareness, and financial literacy remain central determinants of investment behavior.