Strengthening Bahrain and Indonesia bilateral relationship through Islamic Finance
01-Apr-2018


Bahrain and Indonesia are two Muslim majority countries that have been in a good bilateral relationship for many years. Both countries have been trying to enhance their bilateral relationship in many aspects including the economic sector. One of the potential sectors that can be used by both countries in enhancing their relationship is Islamic finance.   

As the largest Muslim country in the world, Indonesia has the potential to develop Islamic finance. For example, Indonesia is a country with the largest number of Islamic financial institutions in the world with more than 5000 institutions consisting of 34 Islamic Banks, 58 Takaful Operators, 7 Islamic Venture Capital Companies, 163 Islamic Rural Banks, 4,500-5,500 Sharia Cooperatives or Baitul Maal wat Tamwil, and 1 Islamic pawn institution. Indonesia is also the home to the largest Islamic retail customers in the world with a total of more than 23 million bank accounts holders. Nevertheless, the overall development of Islamic finance in Indonesia is still far away from its potential. This is reflected in the relatively small share of Indonesia’s Islamic finance.  For example, Islamic banking is currently representing only around 5.3 percent of the national banking industry. The achievement is far below other countries such as Bahrain which has reached the market share of around 29 percent.

Kingdom of Bahrain is also known as one of the world’s Islamic financial hubs. Based on the report released by Thomson Reuters, the State of Global Islamic Economy, Bahrain has been ranked in the 2nd position for Islamic finance sector for many years. This has been achieved because of good governance, better level of awareness, comprehensive regulatory framework, and significance percentage of Islamic financial assets in the country. In addition, Bahrain is also the host to several Islamic finance infrastructure organizations such as the AAOIFI, IIFM and CIBAFI. Therefore, with the upcoming visit of some members of Indonesian parliament to Bahrain scheduled in the first week of April 2018, both countries can explore ways to strengthen their bilateral relationship through Islamic finance.

Actually, both countries can learn from each other. For instance, Indonesia can learn from Bahrain on how to develop its main stream Islamic finance sector. In 2017, Bahrain was in the 2nd position, while Indonesia was in 10th position for Islamic finance sector as per the Thomson Reuters’s report. In the year, Indonesia was still behind Bahrain in all four criteria used to rank the countries namely financial, governance, awareness, and social scores. For financial score, Bahrain scored 54, while Indonesia scored 27. This is mainly due to the percentage of market share of Islamic finance assets in each respective country. Obviously, Bahrain has a much bigger market share than Indonesia. For governance score, Bahrain scored 112, while Indonesia scored 73. This means Bahrain has more comprehensive regulatory framework for Islamic financial industry than Indonesia. For awareness score, Bahrain scored 134, while Indonesia scored 43. It indicates citizens and residents of Bahrain have higher level of awareness than Indonesian citizens and residents in general. For social sector, Bahrain scored 53, while Indonesia scored 27. It means Bahrain has higher value of Zakat, charity, and CSR disclosure index than Indonesia.

On the other hand, Bahrain can learn from Indonesia on how to develop a robust Islamic microfinance system. Indonesia has been well known as one of the world’s leading countries for Islamic microfinance. Islamic microfinance institutions (IMIs) in Indonesia has been very successful in supporting the development of micro, small and medium enterprises in the country. Based on the above discussion, it is clear that both countries can enhance their bilateral relationship via Islamic finance. As an Indonesian living in Bahrain, the author really hopes the upcoming visit of Indonesian lawmakers to Bahrain will put Islamic finance as one of their discussion agenda with their Bahraini counterparts.  

The author is Head of Business Administration Department, University College of Bahrain.


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