Islamic Capital Markets

Week 1

Menyiapkan Pemimpin Inklusif, Relevan & Bereputasi

Class Arrangement

• PMI A: Nur Dhani Hendranastiti/M. Budi Prasetyo
• PMI B : Tika Arundina/Karina Wulandari
• PMI KKI : Tika Arundina/ Nur Dhani Hendranastiti
• Teaching assistant:
• Syllabus
• Default: offline
• Teaching Materials: emas2.ui.ac.id
• Book access: https://vitalsource-ui.slite.com/p/channel/PotzFVRSEip8c2cYnyjfYe (follow the guideline)
• Calculator is needed for the class sessions and exams; please bring your calculator along with you
• We will use Capital IQ Pro (https://www.capitaliq.spglobal.com) to learn about the data for sukuk and stocks; please create your account (the activation link has been sent out to your email)

Class Rules

• No coming later than 14.15 am; later than that will be taken as absent
• Minimum attendance is 60% (already included any kinds of absence)
• For taking any leave, students must have a clear reason/letter to proof the absence
• If there is any online session, students must switch on their camera/video

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• Special note: this course has relatively moderate probability of failure; please have a good read and give more effort

What is financial system?�What are the functions?

Global Financial System

Functions of Financial System and Market

Savings

The global system of financial markets and institutions provides a conduit for the public’s savings.

Wealth

The financial instruments sold in the money and capital markets provide an excellent way to store wealth

Liquidity

Provide liquidity for savers who hold financial instruments but are in need of money.

Payments

Provides a mechanism for making payments for goods and services, in the form of currency, checking accounts, debit cards, credit cards, digital cash, etc.

Risk Protection

The financial markets offer protection against life, health, property, and income risks, by permitting individuals and institutions to engage in both risk-sharing and risk reduction.

Policy

The financial markets are a channel through which governments may attempt to stabilize the economy and avoid inflation.

Credit

Furnish credit to finance consumption and investment spending.

Intermediary in Financial Market

• Direct Finance – Direct lending gives rise to direct claims against borrowers.

✔ Simple 🗶 Difficult to match & risky

Intermediary in Financial Market

• Semidirect Finance – Direct lending with the aid of market makers who assist in the sale of direct claims against borrowers.

✔ Lower search (information) costs

🗶 Risky & matching is still required

Intermediary in Financial Market

• Indirect Finance – Financial intermediation of funds.

✔ Low risk & affordable

Intermediary in Financial Market

Structure in the Financial Market

Types of Financial Market in the Global Financial System

• The money market is for short-term (one year or less) loans, while the capital market finances long-term investments by businesses, governments, and households.
• In particular, governments borrow from commercial banks in the money market, while in the capital market, insurance companies, mutual funds, security dealers, and pension funds supply the funds for businesses.

• The money market may be subdivided into Treasury bills, certificates of deposit (CDs), bankers’ acceptances, commercial paper, interbank funds and Eurocurrencies.
• The capital market may be subdivided into mortgage loans, municipal bonds, consumer loans, Eurobonds and Euronotes, corporate stock, and corporate sukuks, notes and bonds.

Types of Financial Market in the Global Financial System

• In open markets, financial instruments are sold to the highest bidder, and they can be traded as often as is desirable before they mature. In negotiated markets, the instruments are sold to one or a few buyers under private contract.
• Financial capital is raised when new securities are sold in the primary markets. Security trading in the secondary markets then provides liquidity for the investors.

• In the spot market, assets are traded for immediate delivery (usually within one or two business days).
• A futures or forward market is designed to trade contracts calling for the future delivery of financial instruments.
• Options markets enable contracts that grant the right to buy or sell certain securities at specific prices within a certain time to be traded.

Then, what is Islamic financial system?

Islamic Financial System

A system in a country’s economy consisting of financial markets, financial institutions, financial instruments and market participants that operate along Islamic principles with the purpose of meeting the Maqasid (objectives) of Shariah

Islamic Capital Markets

What is capital market?�What are the differences between conventional and capital markets?

Issuer

Intermediary in Financial Market

Islamic Capital Markets

Capital Market

is an activity related with public offering and trading of securities, public companies related with the securities issued, along with institutions and professions related with the securities

Islamic capital market

is an activity in the capital market that follows shari’ah principles

Capital Market

is a mechanism of securities trading between seller and buyer (individual, corporation, government)

Primary Market 🡪 transaction between the issuer and investor

Secondary Market 🡪 transaction between investors who want to sell and buy

Islamic Capital Markets

Shari’ah Principles in Economics/Muamalat

Objective:

Promotion of well being of all mankind (rahmatan lil ‘alamin)

Principles:

• Promotion of justice
• Transparency and honesty
• Fair transactions
• Fair competition
• Mutually beneficial transactions

• Avoiding illegitimate activities
• Prohibition of harmful products and services
• Prohibition of the use of illegitimate sources and unfairness
• Usefulness
• Productive and non-speculative
• Avoiding idle and inefficient use of resources
• Providing greater access of resources to society
• Prohibition of:-
• Riba (usury, interest)
• Gharar (uncertainty combined with cheating)
• Maisir or Qimar (gambling)
• Ihtikar (hoarding)
• Rishwah (corruption)
• Jahl (ignorance)

Functions and Objective of the Islamic Capital Market

What is the basic law for Islamic capital market and its principles?

Law in the Islamic Capital Markets

Implementation of Shari’ah Principles in Capital Market

Activities and types of business that are not aligned with shari’ah principles:

• Gambling & games categorised as gambling
• Conventional financial services
• Trade of risk, gharar, maysir
• Production, distribution, trade, supplier:
• Products/services that the substances are unlawful
• Products/services that are unlawful not because of substances, but based on DSN-MUI
• Products/services that can harm moral or disadvantegous

Transactions that are not aligned with shari’ah principles:

• Fake supply demand (bai’ najsy)
• Transaction without delivery of the goods/services
• Selling goods/services that are not being owned (bai’ al-ma’dum/short selling)
• Insider information (insider trading)
• Margin transaction (riba)
• Hoarding (ihtikar)
• Contains bribe (risywah)
• Other transactions involving speculation (gharar), manipulation, fraud (tadlis), hide the defects (ghisysy), contains deceit(taghrir)

Differences between Conventional and Islamic Capital Markets

Differences between Bond and Sukuk

What kind of company that can be part of Islamic capital market?

• Types of business, products, services, contract, corporate governance are based on shari’ah principles
• Compulsory to sign and fulfil contractual requirement based on shari’ah for the securities issued
• Compulsory to ensure that the business fulfil shari’ah principles and have shariah-compliance officer
• If in any case, the company unable to fulfil the requirement, the securities issued are no longer part of shari’ah securities

Types of Shari’ah-compliant Securities

Market Price Stipulation

Market price of shari’ah securities should reflect the actual value/condition of the underlying asset and/or aligned with regular market mechanism, reasonable, efficient, and not being engineered

Recent Trend

Recent Trend

Indonesian Financial System

Who are the stakeholders in governing the Indonesian financial system?

Indonesian Financial System

• Majority of emerging market has bigger size of banking industry rather than capital market
• The development of capital market is needed to balance the risk so that it is not only borne by the banking sector
• It also provides alternative capital sources for the corporations 🡪 might be more efficient to raise funds from capital market rather than getting loan/credit

Indonesian Capital Market Structure

Indonesian Capital Market Structure

Indonesian Capital Market Structure

Process for Go Public

Registration Process in IPO

Islamic Capital Market in Indonesia

When was the 1^st time being established? What was the product?

The History of Islamic Capital Market in Indonesia

Islamic Capital Market in Indonesia

Islamic Capital Market in Indonesia

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TERIMA KASIH