Lecture 10: Islamic Capital Market 1

Lisa Listiana, PhD Tika Arundina Aswin, PhD

@lisalistianaica @tikarundina

Outline

• History of Islamic Capital Market
• Concept, Characteristics and Functions of Islamic Capital Market
• Differences between Conventional and Islamic Capital Markets
• Transactions that are prohibited in the Islamic capital market
• Islamic Capital Market Instruments and Products
• Islamic Mutual Fund (UnitTrust)
• Screening Islamic Stock
• Stock Market Index

Islamic Economics and Finance Ecosystem in Indonesia

4

Financial Markets

Islamic Capital Market in Indonesia Structure of the Indonesian Capital Market

• A good capital market structure should separate the regulator from the market operator.
• Preventing conflicts of interest between the roles of regulator and market operator.
• Ensuring that both functions (regulation and operation of the market) are carried out effectively.
• In Indonesia and several other countries, the market operator is managed by the SRO (Self Regulatory Organization) - an institution or agency authorized by law to regulate its members.
• In the Indonesian Capital Market, the SRO consists of three organizations:

1. Indonesia Stock Exchange (BEI)

2. Indonesian Central Securities Depository (KSEI)

3. Indonesian Clearing and Guarantee Corporation (KPEI)

​

Indonesia Financial System

https://www.imf.org/en/Publications/fandd/issues/Series/Analytical-Series/aging-is-the-real-population-bomb-bloom-zucker

Structure of the Indonesian Capital Market

https://www.elibrary.imf.org/

In general, capital market literacy and inclusion in Indonesia is still very low….

Banking

2013

2016

Pawnshop

2013

2016

Capital Market

2013

2016

21.8%

28.94%

14.85%

17.82%

3.79%

4.4%

LITERACY

Banking

2013

2016

Pawnshop

2013

2016

Capital Market

2013

2016

57.28%

63.63%

INCLUSION

5.04%

10.49%

0.11%

1.25%

Including Islamic capital market inclusion, it only reached 0.02%...

Islamic Capital Market

• The capital market involves public offering and trading of securities, public companies related to the securities they issue, as well as institutions and professions related to securities.
• The Islamic Capital Market refers to capital market activities that are in accordance with Sharia principles.
• The capital market is a mechanism for buying and selling securities between sellers and buyers (individuals, corporations, governments).
• Primary Market - the initial buying and selling of securities between the issuer (emitter) and investors.
• Secondary Market - the trading of securities between selling investors and buying investors.

Nunen (2008)

11

Basic Principles of Fiqh Muamalah

Fiqih

Ibadah

Muamalah

Sharia Principles in the Capital Market

• Regulating human relations with Allah Subhanahu Wa Ta'ala
• Everything SHOULD NOT be done UNLESS there is an order or provision

• Regulates human relations
• Everything CAN be done UNLESS there is a clear prohibition

Activities Contrary to Sharia Principles

12

Antara lain terdiri dari:

Benefits of the Capital Market

Investment Vehicle

Source of Financing

Transparency and Professionalism

Good Corporate Governance

Job Creation

Advancement of the National Economy

Ownership Dispersal

Application of Sharia Principles in the Capital Market

Direktorat Pasar Modal Syariah

15

Sesuai fatwa DSN:

1. No. 20 tahun 2001 tentang Pedoman Pelaksanaan Investasi untuk Reksadana Syariah

2. No. 40 tahun 2003 tentang Pasar Modal dan Pedoman Umum Penerapan Prinsip Syariah di Bidang Pasar Modal

Application of Sharia Principles in the Capital Market

16

According to the DSN fatwa:

1. No. 20 of 2001 concerning Investment Implementation Guidelines for Sharia Mutual Funds
2. No. 40 of 2003 concerning Capital Markets and General Guidelines for Application of Sharia Principles in the Capital Market Sector
3. No. 80 of 2011 concerning Application of Sharia Principles in Equity-Type Securities Trading Mechanisms in the Stock Exchange Regular Market

Islamic Capital Market

17

Sharia Shares

Sharia Shares

A certificate showing proof of ownership of a company, and shareholders have claim rights to the income and assets of a company whose business activities and management do not conflict with sharia principles.

Sharia Shares

19

Sharia Shares

Active Issuer/PP

Passive Issuer/PP

Appropriately reviewed

Regulation No.II.K.1

Issuer/PP shares that comply with Regulation No.II.K.1 / POJK 17 will be entered into the Sharia Securities List (DES)

Appropriately reviewed

POJK No. 17/POJK.04/2015

DES Preparation Screening Process

20

BUSINESS SCREENING

FINANCIAL SCREENING

List of Sharia Securities

Activities that are contrary to sharia principles

• Gambling and the like
• Prohibited trade
• Ribawi financial services
• buying and selling risks that contain elements of uncertainty (gharar) and/or gambling (maisir)
• Production/distribution of illicit goods
• Bribery transactions

• Interest-based debt compared to total assets of not more than 45%
• Non-halal income compared to total income is not more than 10%

Sharia Shares

List of Sharia Securities

• Jakarta Islamic Index 70 (JII70)
• The Jakarta Islamic Index 70 (JII70 Index) is an Islamic stock index launched by the IDX on May 17 2018. The JII70 constituents only consist of the 70 most liquid Islamic stocks listed on the IDX. Just like ISSI, a review of sharia stocks which are constituents of JII is carried out twice a year, in May and November, following the DES review schedule by the OJK.

21

Indonesian Sharia Stock Index Index (ISSI)

• Consists of all sharia shares listed on the IDX
• Launched on May 12, 2011

Jakarta Islamic Index (JII)

• The Jakarta Islamic Index (JII) is an Islamic stock index that was first launched on the Indonesian capital market on July 3, 2000. JII's constituents only consist of the 30 most liquid Islamic stocks listed on the IDX. Just like ISSI, a review of sharia stocks which are constituents of JII is carried out twice a year, in May and November, following the DES review schedule by the OJK.

1.

2.

3.

Sharia Mutual Funds

Sharia Mutual Fund Diagram

23

Fee/Ujrah

Investor

empower/

represent

Return/Imbal Hasil Investasi

Investment Manager

• Investment Manager: a party whose business activities are managing securities portfolios for customers or managing collective investment portfolios for a group of customers. Their activities:
• Conduct research on securities
• Analyze the feasibility of investment
• Manage securities portfolios on behalf of customers
• Manage mutual funds

Differences between Sharia Mutual Funds and Conventional Mutual Funds

Sharia Mutual Funds:

• Managed in accordance with Sharia principles.
• Investments are only made in permissible Sharia-compliant securities.
• There is a mechanism for purifying non-halal assets (cleansing).
• Managed by professional Investment Managers who understand activities that contradict Sharia principles.

Non-Sharia Mutual Funds:

• Managed without considering Sharia principles.
• Investments are made in all permissible securities.
• Does not employ the concept of asset purification.
• Managed by professional Investment Managers.

Sukuk

• Definition of Sukuk:
• AAOIFI
• "Certificates of equal value representing undivided shares in the ownership of tangible assets, usufruct, and services or (in the ownership of) the assets of particular projects or special investment activity."
• According to the Financial Services Authority Regulation No. 18/POJK.04/2015 regarding the Issuance and Requirements of Sharia Securities, sukuk is a certificate or proof of ownership that has the same value and represents an inseparable or undivided portion of the underlying asset.
• Under the Islamic Government Securities Law (SBSN), sukuk is defined as "government securities issued based on Sharia principles, representing participation in the underlying assets of Islamic government securities, either in Indonesian Rupiah or foreign currency."

• The underlying asset can consist of:
• Specific tangible assets.
• Beneficial interests in specific tangible assets.
• Services.
• Specific project assets.
• Pre-determined investment activities. Funding/Financing through Sukuk Issuance.

Funding/financing through the issuance of sukuk

27

ISSUER

Aset/Proyek

INVESTOR

Sukuk

Publish

Securities

The issuer provides yields and returns the Sukuk funds

Investors

Submitting Sukuk funds

Assets underlying the issuance of sukuk:

• Inclusion in the Project
• Lease
• Buy and sell

Characteristics

28

Why do SUKUK need UNDERLYING ASSETS?

http://idpii.com/

OJK (2022)

Sharia-compliant securities are certificates or proofs of ownership that have equal value and represent an inseparable or undivided portion of the underlying asset.

>> Regulated under the Financial Services Authority Regulation No. 18/POJK.04/2015 regarding the Issuance and Requirements of Sukuk.

Types of Sukuk

1. Types of sukuk based on the contract used for Sukuk (Fatwa No. 32) include:
• Mudarabah (Fatwa No. 33) - profit-sharing.
• Musharakah - profit-sharing.
• Murabahah - margin.
• Salam - margin.
• Istisna - margin.
• Ijarah (Fatwa No. 41) - fee (return).
2. Types of sukuk based on the underlying asset:
• Asset-backed sukuk: Involves a true sale (transfer of asset ownership).
• Asset-based sukuk: Only involves the transfer of ownership of asset benefits.

Sukuk Negara Indonesia (SNI)

Short-term

• Sukuk Ritel (SR)
• Sukuk Tabungan (ST)

Surat Perbendaharaan Negara – Syariah (SPN-S)

Long-term

• Islamic Fixed Rate (IFR)
• Sukuk Dana Haji Indonesia (SDHI)
• Project Based Sukuk (PBS)

Government Bonds

State Securities

Loan

APBN Financing Instruments

Sukuk Negara

Domestic Loans

Foreign Loans

State Sukuk: State Budget Financing Instrument

State Sukuk

32

Way Forward: �Integration of Commercial & Social Finance

33

Cash Waqf Linked Sukuk

Green Sukuk

Thank You :)