This paper questions whether Islamic fiscal instrument contributes to capital or debt formation. Such inquiry is part of assessing the functional efficiency of financial markets, especially when dealing with asset-backed securities like in the Sukuk market. This paper uses three indicators -capital formation, indebtedness, and cointegration between Sukuk and bonds- to measure the functional efficiency of the sukuk market. Conducted using ARDL and bound test models, the findings reveal that the Indonesian Sukuk is vital in promoting capital formation and efficient to reduce indebtedness in the long run. In the short term, there is a reverse relationship between Sukuk and capital formation. The study also highlights a positive correlation between Sukuk and bonds. These findings indicate that the Indonesian Sukuk market supports the real economy sectors. Therefore to facilitate deficits, the government could deepen the market, issue more Sukuk than bond, and present Sukuk as participation asset-backed securities. When dealing with non-infrastructure projects, the government could issue Cash Waqf Linked Sukuk, Sukuk Mudharaba, GDP-linked Sukuk as viable options.