The Potential of Municipal Sukuk Issuance in Indonesia - A Review of Theoretical Research

The main objective of this study is to provide local authorities with municipal Sukuk as an alternative to financing local infrastructure and developing areas. This study reviews the previous literature examining contemporary municipal sukuk and Discussed issues related to restrictions on the issuance of municipal sukuk. The research shows that the barriers to municipal Sukuk issuance are: Regional Barriers, Credit risk, Political Risk, Credit Weakness among stakeholders, Lack of through understanding of Shariah and financing and implementation. It was an exploratory study and aimed to identify barriers to becoming municipal bonds. Blocks of municipal Sukuk are listed from all possible sources. The study proposes some practical ways to overcome the obstacles to the provision of municipal sukuk in order to promote more municipal sukuk in various regions of the country to support sustainable development through equitable infrastructure distribution.


Introduction
Indonesia, as we know, is an archipelagic country and is also called a maritime country (Ardiansyah & Lubis, 2018). Many potential natural resources have not been optimized (Darus et al., 2017). The main problem is inequality in Infrastructure (Santoso et al., 2021). We can see that in remote areas such as Papua, the interior of Kalimantan, or Sulawesi, many are not as complete as the Infrastructure in the city. of course, this is because the natural resources are not optimally managed, and the lack of the quality of human resources (Aladdin et al., 2020).
The obstacles that occur are also a challenge for local governments in allocating their regional revenue and expenditure budgets or APBD to be more effective and efficient (Baita & Mustafa, 2019). However, with the limited APBD, the government can look for other financing sources to overcome this problem. Infrastructure inequality in the regions (Abrorov, 2020). Islamic financial instruments are currently experiencing very rapid development, especially Islamic capital market instruments (Ridwan & Mayapada, 2020); one of the financing instruments in the Islamic capital market is Sukuk which has similarities to bonds. Sukuk has experienced rapid development in Indonesia starting in 2002 with a total issuance of Rp. 175 billion (Majumdar & Puthiya, 2021) until January 2022 has reached Rp. 35.02 Trillion. Suppose the Covid -19 pandemic that occurred in Indonesia and the world in 2019 has not reduced the trend of increasing total issuance of Sukuk issuances in Indonesia (Santoso et al., 2021). In that case, this reflects that investors in Indonesia have begun to understand that the instrument is This investment provides an attractive return. Even in research (Muharam et al., 2019) about 58% of current Sukuk investors are millennials.
The impact of the demographic surplus occurs by generations with a birth year range of 1990-2000. Addressing the problem of equitable development, especially Infrastructure, is essential to paying attention to the pillars of sustainable development (Keshminder et al., 2022).
Some of the pillars of the SDGs in infrastructure development that we can adapt to are healthy and prosperous lives, quality education, clean water, proper sanitation, clean energy, affordable, innovative, and infrastructure industries. These five things become the basis for overcoming the equitable distribution of infrastructure development so that Indonesia becomes a developed and developing country fairly and equitably (Ahmed, 2019).
No region has issued Sukuk (Smaoui et al., 2020). This is due to several obstacles, including legal barriers, namely the regulation of the Financial Services Authority Regulation Number 63/POJK.04/2017 of 2017. sufficient for local governments to issue sharia bonds or local government Sukuk (Mawardi et al., 2022). It is just that there is still additional work that needs to be done for the issuance of regional government sharia bonds, namely the issuance of special regional regulations related to the issuance of regional government sharia bonds or Sukuk to regulate the types of assets that will be used as underlying and securitized in order to obtain a valuation-managing the issuance of Islamic bonds, from selling to buying back Islamic bonds. Furthermore, coordinating with the National Sharia Council regarding sharia supervision is necessary to maintain sharia compliance (Ibrahim & Shirazi, 2020 In addition, the Supreme Audit Agency (BPK) and Public Accountants regarding reporting procedures will be difficult to bridge between the two supervisory institutions. Because usually, in the issuance of bonds, the authority that handles the capital market requires the examination of a Public Accountant, while the BPK must examine government institutions. One of the states in Germany, namely the state of Saxony-Anhalt, issued a municipal Sukuk with a valuation of 100 million Euros in July 2004 (Lin et al., 2021). In Malaysia, the municipal government of Pasir Gudang Municipal Council in Johor in 2005, has also issued Municipal Sukuk worth 80 million Malaysian Ringgit (Cornaggia et al., 2022). Therefore, the discourse on the development of regional Sukuk potential begins with the development of retail Sukuk, which are always oversubscribed, and the discourse on the issuance of regional Sukuk, which already has a legal basis in terms of laws, government regulations, and regulations of the ministry of finance.
The combination of market potential and legal basis has given rise to a new discourse to issue Sukuk issued by the regions as a solution to the needs of regional infrastructure development, which has reached USD 424.57 billion (RPJMN 2015(RPJMN -2019. According to early projections, the amount of infrastructure spending needed to reach GDP growth in the medium term, objective from 2020 to 2024 is anticipated to be IDR 6,421 trillion, or an average of 6.08% of GDP. Therefore, it is anticipated that the infrastructure capital stock will rise. By 2024, it will account for 50% of GDP. However, recent data indicate a significant financing shortage for Infrastructure, with a figure of only 3.46% of GDP. The government must therefore find financial source of this support national development programs and provide the representing an undivided share of ownership of tangible assets and services or special projects or special investment activities and services. Sukuk is officially recognized as an Islamic investment trust certificate. In contrast traditional bonds are loans made by the issuer to the bondholder. A Sukuk is a sukuk asset business that represents an investors ownership interest in a company or scheme. (Utami & Irawati, 2021).
Modern Sukuk should not always be seen as a substitute for traditional interest- Riba includes paying off debts which is forbidden in Islam. Sukuk investors are not considered money lenders as they are entitled to compensation. The best investors in sukuk are those who invest their money and benefit from capital gains and dividends even if they are willing to risk their stake and hold their funds until the project is completed. Its the same. This is the main difference between sukuk and conventional bonds. Asset return sukuk and traditional bonds but sukuk can only be backed by tangible assets while traditional bonds can accept financial and physical assets as collateral. When Sukuk are issued for trading or trading they usually have a fixed term __ 297 Original Research Article

The Potential of Municipal Sukuk Issuance in Indonesia -A Review of Theoretical Research
Indar Fauziah Ulfah allowing the holder to receive a final payment and a permanent source of income when they mature. Neither the sukuk nor the ownership requirements nor the return on the stake share are guaranteed so the sukuk must always be tied to a specific service asset or program. Sukuk a bond-like instrument with Islamic qualities has grown in popularity as wealthy Muslim investors are increasingly interested in ensuring that their holdings comply with Shariah principles.

Sukuk Versus Conventional Bond?
With the advent of Sukuk, the argument that Islamic financial instruments are designed to mimic the cash flows of conventional bonds has gained new life. The issuing of Sukuk will affect the stock market in several ways. According to (Khan et al., 2020), the stock market reacts negatively to announcements of Sukuk issues but is indifferent to announcements of current issues. Many authors have looked at whether they are dealing with two different types of securities or the same product in a new flavor to reach a previously unattainable market because of this variance in stock market activity. The structure of these securities is where the main distinction lies. The underlying assets produce Sukuk returns, but interest-bearing obligations work together with their traditional counterparts to generate returns. Sukuk appears to have many characteristics with traditional bonds and structural differences. (Kahf & Al-Saudi, 2016) argues that financiers approach sukuk in the same way as traditional securities to assess the risks of new investments to new investors.
Islamic scholars object to this mirroring activity because of its potential to create Islamic financial instruments similar to traditional interest-based products to please foreign investors (Abrorov, 2020). An alternative viewpoint was presented by (Wong & Bhatti, 2019 Currently, the regional administration (Pemerintah Daerah/PEMDA) has three legal organizations to help it when it issues regional bonds. The Financial Services Authority (Otoritas Jasa Keuangan/OJK) is responsible for developing the following three regulations (Peraturan Otoritas Jasa Keuangan/POJK): BOY NO.
62/POJK.04/2017 regarding the format and content of the maps and the presentation of the general presentation. OJKs efforts to help and encourage local governments to find sources of financing for local infrastructure included three laws on local bonds.
This supports equitable economic growth across Indonesia and increases national competitiveness. The issuer of regional bonds and Sukuk must file Register with OJK in relation to the POJK. The Regional Representative Council, the Ministry of Home Affairs, and the Ministry of Finance are also required to issue permissions to the local government (DPRD). Regional governments have the right to issue municipal bonds to cover their fiscal deficits as stated in Article 300 of Law no. 23 of 2014. The sources of funds of these regional governments for budgeting are the regional budget (APBD) and other acceptable regional sources such as loans from banks and other financial institutions. The development of sukuk market in Indonesia.  Academic, Cambridge Core, and Taylor and Francis Online. Additionally, searches for "municipal sukuk" and "municipal bond" in the Google Scholar search engine and the scopus engine returned a combined total of 3.709 hits. 33 papers have been chosen at the first stage based on relevance and citation. Another fourteen papers were gathered after looking through the references of the first papers that were retrieved. Specific criteria were used to include 36 publications that had been gathered and published in high impact, peer-reviewed international journals. Articles that covered at least one sort of municipal sukuk in depth were included.
Eight papers that covered various municipal sukuk were produced as a result of this process.
These publications underwent a thorough review since they were the most pertinent to the study's subject. There was also a series of articles discussing the differences between sukuk __ 301 Original Research Article

The Potential of Municipal Sukuk Issuance in Indonesia -A Review of Theoretical Research
Indar Fauziah Ulfah and traditional bonds. Discussions related to these questions were included in the study but not in the evaluation.
Eight papers out of 36 were chosen for the study. The features of a few journal articles that were chosen for content analysis are shown in Table I. The ratings of these papers highlighted a few aspects of the papers. The majority of the papers are conceptual and rely on a methodological approach based on case studies. There aren't many research that have employed databases to acquire data for an empirical analysis.

The Potential of Municipal Sukuk Issuance in Indonesia
Indonesia can see the advantages and disadvantages of issuing regional sukuk based on the following review articles, among others : Based on (Odusami & Mansur, 2022) find that Investors can account for the economic risk of the mitigation policies-which were put in place to stop the virus from spreading further within each state-by looking at how municipal bonds perform. The majority of states experienced a significant to drop in economic activity as a result of the mitigation programs, which also caused significant employment and income losses. This, in turn, resulted in a significant decline in tax revenue for the state governments.
The negative effect may be the result of the investor expectations that a decrease in state revenues will lead to a deterioration in the credit quality of bonds issued by entities in that state because municipal bonds are bonds that flow through the expectation of future cash flows. (Mawardi et al. 2022) Local government representatives used the Analytical Network Process (ANP) approach with four groups of respondents including university academics industry experts and regulators. The issuance of regional sukuk is supported by four components namely the issuer (local government or city government) market investors and infrastructure. The biggest hit is the reluctance of local governments to issue municipal sukuk due to the change of leadership every five years. To encourage regional governments to issue regional sukuk the ratification and amendment of special laws and regulations requires support from the central government.
(Bintarti & Fahamsyah, 2018) state The regional administration is in charge of enhancing the quality of tourism to boost regional income and citizen welfare. Additionally, Accountability Index (FAI). Using Bekasi district as an example it can be seen that the region has great potential to issue municipal sukuk that can serve as a major source of finance to improve the level of tourism. In this case the focus is on the welfare and quality of life of the people as the increase in the number of tourists increases the regional income. (Siswantoro & Surya, 2021) discussed French green bonds are in great demand and have a lower yield than other bonds. Furthermore, the distinctive features of green bonds are comparable to those of climate bonds. Additionally, the market for green bonds resembles that of regular bonds. The possibility for investors is therefore comparable, although the green bond is less liquid than others. Investors want green bonds at a competitive price. Additionally, they have a particular preference because sovereign green bonds are not strict. Municipal green bonds perform better than standard municipal bonds in other situations. This component also involves the concern of sustainability. The duration of climate bonds is unrelated to the bond's amount. Siswantoro added that in order for green bonds to be understood by investors, they should be standardized. Since the SDGs included distinct standards for each green bond, this also covered the objective determination of the SDGs. (Noordin et al., 2018) states The Social Impact Bond (SIB) Act 2014 in the USA is unique from a conventional bond in a number of respects. The term "bond" is actually a "misnomer," according to Pasi (2014, p. 4), This is because SIBs are not structured like traditional municipal bonds or other fixed income debt instruments without guaranteed capital or returns. Here the investors return is based on the success of the social initiatives rather than being guaranteed by the underlying assets, the SIB is more akin to an equity investment vehicle.
As a result, it entails a certain amount of investment risk in that, in the event that the projects fail, the investors could lose all of their money. Contrary to equity, SIB investors don't own any equity or shares in the company. The SIB shares certain characteristics of bonds, despite not being a conventional bond. For instance, it has a set duration, its returns are based on pegged rates, and its upside is limited.
(Cuny, 2018) states Municipal bonds are more expensive for small investors to purchase than for large investors, in part because retail investors' negotiating leverage is constrained by the high cost of counterparty discovery and information. Therefore, the municipal bond market offers a singular environment that is conducive to analyzing how much fundamental information affects investors' bargaining power. Retail investors can now easily access basic Perisai, 7 (2), Oktober 2023, 293-311 E. ISSN. 2503-3077 Journal Homepage: https://perisai.umsida.ac.id/index.php/perisai DOI Link: http://doi.org/10.21070/perisai.v7i2.1664 information through the creation of the Free Central Repository for Municipal Transparency (EMMA). My findings show that EMMA has greater bargaining power of retail investors compared to institutional investors despite the dissimilarity of seasonality and municipal exposure. A reduction in the premium paid for bonds by small investors relative to large investors indicates an adjustment in bargaining power. (Wang & Yang, 2021)  We have seen that financial households often choose low-value closed-end funds to cross-trade to provide liquidity which has implications for burgeoning local government debt markets in emerging markets such as China. This is consistent with cross-subsidization and rising household values. Attracting large numbers of secondary market investors is key to reducing the primary market borrowing costs needed to create a thriving primary market that provides key financing to local governments. In illiquid markets investment vehicles such as mutual funds offer investors in particular retailers an excellent option for gaining exposure to the local government debt market. Our article emphasizes the significance and mechanisms of liquidity management in such markets.
Based on the results of the review of the above research, then Indonesia as an island country has a great potential in the success of the issuing of municipal sukuk, at least there are four things that will be the benefit of issuing municipal sukuk in Indonesia: 1. The complex demographic spread will make infrastructure demands in various areas need to be optimized.
2. Many islands in Indonesia cause regional development gaps because not all areas can be monitored with maximum and the APBD area can not be reliable completely.

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Original Research Article well as obtain a return from the growth of the industrial sector so that in addition to profit, also participate in the construction of the region.
5. The local government can optimize the productivity of the SDA sector by not relying entirely on APBD, and is also carried out in synergy between the state community and the local government. Risk requires issuers to trade off market-based disclosure incentives and reputational incentives to deter negative information. The outcome of this trade-off depends on the nature of the risk.

Conclusion
In this article, we make an effort to add to the existing literature regarding the implications of Islamic finance for various industries and to draw Indonesian policymakers' attention to the significance of adopting a new type of Sukuk, which we refer to as Municipal Sukuk, as a distinct financial instrument between the current interest-based municipal bonds and the Shari'ah-compliant Sukuk that are readily available in the financial markets as there is a gap in financing municipals. An important goal of the current structural economic reform in Indonesia is In order to fund national development plans and build the necessary infrastructure, the government must locate funding sources. This master plan's focus on the financial markets and creating new tools for them is one of its primary elements.