"This is due to Indonesia's large infrastructure development needs, the government's willingness to attract private capital to fund these investments, and the rising demand for investable assets of a growing domestic Islamic finance market," S&P's credit analyst Allan Redimerio was quoted as saying.

The report assesses the successful contribution of Islamic finance in Malaysia's infrastructure development and obstacles of adopting a similar system in Indonesia.

"We believe the lack of recognition for beneficial ownership and tax incentives is impeding the growth potential of this funding source," the S&P statement said.

"Ways to generate interest in this sector include offering a range of products to the population with support from the country's political, corporate, and financial institutions," Redimerio said in the statement.

S&P says Indonesia's poor state of infrastructure is obstructing growth and ambitious plans have been drawn up for a major infrastructure development drive.

Indonesia plans to spend more than 200 billion dollars to upgrade and expand its infrastructure during 2010-2014. S&P says the private sector is likely to meet 30 to 40 percent of the investment while the government is mulling alternative ways to fund the rest.