Dr. Sutan Emir Hidayat
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Contemporary Issues and Developments in Islamic Finance Thoughts of an Indonesian Diaspora in Bahrain Dr. Sutan Emir Hidayat The Embassy of the Republic of Indonesia Manama, Kingdom of Bahrain i Copyright © 2016 by Dr. Sutan Emir Hidayat. All rights reserved Published by the Embassy of the Republic Indonesia in Manama, Kingdom of Bahrain. No part of this publication may be reproduced, stored in retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except as permitted under article 72, Act of the Republic of Indonesia number 19 year 2002 on Copyright, without either the prior written permission of the author, or authorization through the Chancery of the Embassy of the Republic of Indonesia in Manama, Bahrain. Hidayat, Sutan Emir, Contemporary Issues and Developments in Islamic Finance, Thoughts of an Indonesian Diaspora in Bahrain Printed in Kingdom of Bahrain, 2016 Publishing Committee: Chairman of the Committee: Chilman Arisman Ambassador of the Republic of Indonesia in the Kingdom of Bahrain Editor: Chilman Arisman Hardiyono Kurniawan Nur Fitria Layout: Addi Sahwani Abdul Manik ISBN: 978-9958-946-0-3 443/ع.د/Deposit Public Library Number: 2016 ii FOREWORD As the Minister of Foreign Affairs, Republic of Indonesia, I am very grateful to see a young Indonesian diaspora, Dr. Sutan Emir Hidayat, who continuously writes articles in international newspapers, magazines and reports. When I got this news from the Indonesian Ambassador in Bahrain and his plan to compile Dr. Sutan Emir Hidayat’s articles into a book certainly I offer my full support to this brilliant idea. I am also excited to know that Dr. Sutan Emir Hidayat has been listed by ISFIN, a leading advisory for the Islamic Markets, as one of the world’s top 50 influential personalities to the Islamic economy in 2015. Obviously, this prestigious award has been given to him due to his significant contribution to the Islamic economy through his multiple articles published in local and international newspapers, magazines, journals, reports and conference proceedings. I have gone through the book and found it very interesting and compelling. The book discusses the up to date developments and issues within Islamic financial industry covering all areas within the industry such as Islamic banks, Takaful and Sukuk and in many cases I also found the contents are very much relevant to Bahraini context. Therefore, I can say that the book is an example of how an Indonesian diaspora contributes to his country of resident. In addition, I also believe that Dr. Sutan Emir Hidayat’s works help us in enhancing the bilateral relationship between Indonesia and Bahrain. I hope the publication of this book will motivate Dr. Sutan Emir Hidayat and others to contribute more to the development of their field of specialization. Congratulations. Retno L. P. Marsudi Minister of Foreign Affairs of the Republic of Indonesia iii PREFACE It is my pleasure to welcome the publication of Dr. Sutan Emir Hidayat’s latest book which entitles “Contemporary Issues and Developments in Islamic Finance: Thoughts of An Indonesian Diaspora in Bahrain". The book covers almost all segments within Islamic finance including the principles of Islamic finance, Islamic banks, Sukuk, Takaful, Islamic finance education and other issues which are very relevant to the current development of the industry. As the First Resident Ambassador of the Republic of Indonesia to the Kingdom of Bahrain I realize that Bahrain is one of the international hubs for Islamic financial industry. Since the late 70’s, the government of Bahrain has considered Islamic finance as one of its main economic sectors that can be developed to differentiate itself from other countries. For that reason, in order to sustain the development of the industry, fresh ideas and thoughts from the industry stakeholders including the academician like Dr. Sutan Emir Hidayat becomes very important. As an academician in a local university in Bahrain, Dr. Sutan Emir Hidayat has shown his role in supporting the development of Islamic financial industry through his multiple articles published in renowned local and international newspapers, magazines and reports. Therefore, as the representative of the government of Republic of Indonesia in Bahrain, I took the initiative to compile his articles, which he published during his stay in Bahrain, into a book as an appreciation to his contribution to the Islamic financial industry and for his role in promoting Indonesia to the people of Bahrain and the world through his active participation in the development of Islamic financial industry. I hope this book will serve its purpose and I would like to congratulate Dr. Sutan Emir Hidayat for this achievement. Chilman Arisman Ambassador of the Republic of Indonesia to the Kingdom of Bahrain iv ACKNOWLEDGEMENT Islamic banking and finance has become a global inevitable phenomenon in the present era. It has been well widen both in Muslim and non-Muslim countries and has become a subject of concern of many Muslims and non-Muslims around the world. As a result, Islamic financial industry has been growing significantly for the last decades. However, being a relatively new industry especially when it is compared to conventional financial industry, there are several issues that should capture the attention of Islamic finance stakeholders in order to propagate the industry to a higher realm of development. This book aims to highlight several contemporary developments and issues within Islamic finance which consists of 6 parts. The first part of the book deliberates the principles of Islamic finance and the current economic and financial developments. In this part, issues such as the original wisdom behind the establishment of Islamic banking and finance, an overview of debt from Islamic perspective, Riba awareness, and common misconceptions about Riba among Muslims are discussed in relation to the current economic and financial context. The second part of the book discusses contemporary issues and developments in Islamic banking. Being the major segment within Islamic financial industry, Islamic banking is relatively more developed than the other segments. However, there are several issues such as liquidity management, expensive financing and corporate social responsibility that still essentially to be tackled in order to ensure sustainable growth of the segment. In the third part of the book, contemporary issues and developments in Sukuk market are elaborated. Sukuk market is a segment within Islamic finance with a remarkable progress. However, there are several issues such as risks behind Sukuk issuances, assets based vs asset backed Sukuk and the important role of Sukuk in Basel III era that need to be well understood by investors related to the Islamic security. The fourth part of the book discusses some contemporary issues and developments in the field of Takaful. Takaful is considered as the smallest segment within the Islamic financial industry. However, this segment has a lot of potential to be explored and developed. Several issues and trends within the segment such v as misconception about family Takaful, lower public awareness, Takaful student based finance and expansion of Takaful business are highlighted in order to provide inputs for industry stakeholders in making their decisions to boost the development of the segment. The fifth part of the book discusses the modern-day issues and developments in Islamic finance education. In order to enhance the development of Islamic financial industry, sufficient number of talents is to be available and moulded. However, the current situation exhibits that the number of talents is still far away from the expected levels of expertise. Issues such as talent development and skill mismatch exist within Islamic financial industry and must be overcome through collaborative efforts between Islamic finance qualification providers and other industry stakeholders. The sixth part of the book or the last part discusses other progresses and concerns within Islamic finance. Issues such as the adoption of a common Shariah standard, the benefits and challenges in the adoption of international accounting standards for Islamic finance, Islamic microfinance and challenges in maintaining the growth of Halal products are discussed and the importance of addressing these matters in order to support the development of Islamic financial industry and Islamic economy in general are elaborated. This book is a compilation of my articles published in Islamic Finance News (IFN), Thomson Reuters, Islamic Finance Today Magazine, Global Islamic Finance Magazine, the Bahrain Banker and Daily Tribune Newspaper. Some of these articles are co-authored. In part 1, the interest-based economy and public debt: An analysis of the US economy was co-authored with Dr. Ugi Suharto. In part 2, Islamic banking in Saudi Arabia: Grasping the non-Muslim segment was co-authored with Nouf Khalid Al-Bawardi while corporate Social Responsibility for Islamic banks was co-authored with Suliman Abdulrahman Al- Hur. In part 3, the risks behind Sukuk issuances was co- authored with Muhammad Musa Abu Bakar while understanding investor behavior from the variation of Sukuk spreads was co-authored with Dr. Maya Puspa Abdul Rahman, Dato’ Prof. Dr. Mohd Azmi Omar and Dr. Salina H Kassim. In part 4, issues surrounding the management of Takaful surplus vi was co-authored with Delil Khairat while MicroTakaful opportunities in the growing Indonesian Islamic banking sector was co-authored with Dr. Raditya Sukmana. There is no co- authored article in part 5. In part 6, there are several co- authored articles. Islamic microfinance: Challenges and the way forward and revitalization of Shariah compliant syndicated financing were co-authored with Dr. Ronald Rulindo, partnership through Islamic finance: Bahrain and Indonesia was co-authored with Imam Buchari, the Indonesian financial service authority (FSA): A new hope to boost the performance of Islamic finance was co-authored with Dr. Raditya Sukmana and challenges in advancing the growth of Halal products was co-authored with Dr.