Islamic Capital Market by Irwan Abdalloh

Lecture Material Sharia principles in the Capital Market(Islamic Capital Market)

The TAZKIA Islamic Economics College | 2013Irwan Abdalloh

Sunday, May 12, 2013

Irwan Abdalloh SE., MM.Tasikmalaya, July 2, 1973

Master Degree major in Islamic Business and Finance from the Paramadina Graduate Schools of Business.Bachelor Degree major in Economics from the State University of Padjadjaran Bandung.Guest lecturer at several universities.Speaker at several forums.IDX employee since June 2000 and recently as Head of Market Development.

[email protected]

08128989737


mailto:[email protected]

mailto:[email protected]

Objectives

ISLAMIC CAPITAL MARKET

UN

DER

STAN

DIN

VOL

VED

INTERESTED

AWARE


SyllabusIntroduction

Milestone

Securities

Market Structure

Instruments

MID TEST

Definition

Islamic Equities

Islamic Fund

Islamic Derivatives

Sukuk

Liquidity

FINAL TEST

Index and Infrastructure


the Milestone


The milestones of Islamic Financial Industry

Primarily Retail Islamic

Banking

Prior to 1970s

Commercial Islamic

Banking

1970s

Islamic Property Finance & syndication

Takaful

1980s

Equity Funds

Islamic Securitisation (Sukuk)

1990s

source: Islamic Finance & Global Financial Stability, April 2010, IFSB-IDB-IRTI, p. 27

Islamic Capital Market


source: Islamic Finance & Global Financial Stability, April 2010, IFSB-IDB-IRTI, p. 31Distribution of the World's Islamic Financial Industry


The milestones of Indonesia's Islamic Capital Market

Islamic Mutual Funds

1997: 1st funds2001: Fatwa no. 20

Jakarta Islamic Index

2000

Islamic Bond

2002: mudharabah2004: Ijarah

Fatwa DSN MUI no. 40

2003

Bapepam's Rules

2006 & 2007

SBSN Act

2008: UU No.19

Fatwa DSN MUI no. 80

Maret 2011

Indonesia Shariah Stocks Index

Mei 2011

Sharia Online

Trading System

September 2011


The milestones of Islamic Capital Market Fatwa of DSN MUI

20Mutual Funds

32 & 33Islamic

Bond

40Islamic Capital Market

59Mudharabah Conversion

65Islamic Right

41Ijarah

80Trading

Mechanism

66Islamic

Warrants

69Goverment

Sukuk

71Sale & Lease

Back

72Ijarah Sukuk

NEXT ?


What is the Islamic Capital Market?


Projects Financing

Risks Protection

Liquidity needs

Islamic Banking Takaful Islamic Capital Market

The development of Islamic Financial Industry


Where investment and financing activities and products are structured in accordance with Shariah principles. (IOSCO, 2004)

Islamic Capital Market?

• Investment• Financing activities• Products• Shariah principles

• Market place• Commodities• Price mechanism

Like stock market in general, the Islamic stock market will have, and should have, a market place, commodities and price mechanism. However, there will be certain variations from that of the non-Islamic market which will make the Islamic market quite distinct (El-Askhar, 1995)


• Market where activities are carried out in ways• Principles of Islam

Islamic Capital Market (ICM) refers to the market where activities are carried out in ways which doesn’t conflict with the principles of Islam. The ICM represents an assertion of religious law in capital market transactions where the market is free from prohibited activities and elements such as riba, maisir and gharar (Bursa Malaysia)

Islamic Capital Market?

• Prinsip-prinsip Hukum Islam• Kegiatan di bidang Pasar Modal

Prinsip-prinsip Syariah di Pasar Modal adalah prinsip-prinsip hukum Islam dalam kegiatan di bidang Pasar Modal berdasarkan fatwa Dewan Syariah Nasional Majelis Ulama Indonesia (DSN-MUI), sepanjang fatwa dimaksud tidak bertentangan dengan Peraturan ini dan/atau Peraturan Bapepam dan LK yang didasarkan pada fatwa DSN-MUI (Peraturan Bapepam-LK IX.A.13 tentang Penerbitan Efek Syariah)


Islamic Capital Market

1. Investment2. Financing activities3. Market place4. Products5. Price mechanism

Capital Market

Shariah Principles


The Sharia Principles in the Capital Market


1 Basically, any form of transaction is allowed unless there is a prohibition.

Basic Principles of Muamalah

Should not conduct legal action over property of others without permission.2


Shariah Principles of Muamalah

1. prohibition of interest2. risk sharing3. money as potential capital 4. prohibition of speculative behavior 5. sanctity of contracts6. Shariah-approved activities

Iqbal (1997)

El-Gamal (2000)1. prohibition of riba2. prohibition of gharar


Shariah Principles of Muamalah

1. Prohibition of riba2. Prohibition of gharar 3. Prohibition of Maysir4. Prohibition of haram of goods or services

IOSCO (2004)

1. freedom of contract2. freedom from al riba 3. freedom from al gharar 4. freedom from al qimar & al maysir 5. freedom from price control & manipulation 6. entitlement to transact at fair prices7. entitlement to equal, adequete & accurate

information8. freedom from darar 9. mutual cooperation & solidarity 10. maslahah al mursalah

Obaidullah (2005)


SHARIAH PRINCIPLES IN THE CAPITAL MARKET

Gharar is defined as activities that have elements of uncertainty, ambiguity or deception

Riba has the literal meaning of “an excess” and is defined as an increase or excess which accrues to the owner in an exchange or sale of a commodity (fadl), or, by virtue of loan arrangement, without providing equivalent value to the other party (na’siah)

Haram or Halal goods and services


Gharar is defined as activities that have elements of uncertainty, ambiguity or deception

Tolerated ExcessiveModerate

FAHISHMUTAWASSITYASIR

allowed by shariah


Riba has the literal meaning of “an excess” and is defined as an increase or excess which accrues to the owner in an exchange or sale of a commodity (fadl), or, by virtue of loan arrangement, without providing equivalent value to the other party (na’siah)

Loan arrangement

An exchange or sale of a commodity(gold, silver, wheat, dates, barley & salt)


[Market] Dari Abi Said al-Khudri dan Abi Hurairah r.a., bahwa Rasulullah saw menugaskan seorang sahabat di Khaibar. Kemudian Sahabat tersebut datang kepada Rasulullah saw membawa kurma yang bagus. Rasulullah saw bertanya: Apakah seluruh kurma Khaibar seperti ini? Sahabat itu menjawab: Tidak, wahai Rasulullah saw. Kami menukar satu sha’ dari kurma bagus ini dengan dua sha’ korma (biasa, pen.), dan menukar dua sha’ dari kurma bagus ini dengan tiga sha’ korma (biasa, pen.). Maka Rasulullah saw bersabda: Jangan engkau lakukan itu, tapi jual-lah kurma dengan dirham; kemudian dengan dirham tersebut, engkau membeli kurma yang bagus. (HR. Bukhari)


a mechanism through which buyers and sellers interact to determine prices and exchange goods and services.Samuelson & Nordhaus (2005, p. 26)

MARKET

Exchange mechanism, Buyers and sellers,Prices,Assets (goods and services).


BUYER SELLER

Assets (goods and services)

money

Exchange mechanism

Bai'


Asset Market

Financial Financial

RealReal

Type of market based on assets

Money Market Product

Financial Assets

Money Market

Capital Market

Financial assets is only traded at

the capital market


Capital market and Economy

Government

Corporation

Investmentcapital

Need

Need InfrastructureDevelopment

Business Expansion

CAPITAL MARKET ECONOMY Consumption


Investor

Securities

Listed Company Investment

Fund

Fund

The objective of listed company is to rise fund for investing

Primary Market

Exchange between investor and issuer of securities

Secondary MarketExchange between investor (buyer) and investor (seller)

Investor

SecuritiesFund

The objective of investor is to get return from their investment

Return

Fund

Fund

Consumption

The usage of return is either investment or consumptiion

both will be affected each other

Production

Investment means production

GDPConsumption or production is a tool to measure GDP

ECONOMY

GDP is a tool to measure performance

of economy

Investment means trading securities

How can secondary market affect the Economy?


Investment, Maqasid Shariah and Maslahah


• Investment is a process to managing asset in order to provide profit or return in the future

• Investment in the financial sector is an activity to buy and sell financial asset to earn return in the future

• Investment in the real sector is an activity to buy productive asset and to produce it become product through production process


Investment

Financial Assets

Equity

Bond Asset Backed Securities

Sukuk

Derivatives

Mutual Funds

Real Assets

Manufacture

Trading

Property

Commodities


Imam Al-Ghazzali's definition:The objective of the shariah is to promote the well-being of all mankind, which lies in safeguarding their faith (din), their human self (nafs), their intellect ('aql), their posterity (nasl) and their wealth (mal).

Maqosid Shariah

Dasuki and Abdullah: Maqasid al-shariah

Nafs

Nasl Mal

'Aql

Maqosid is not only the objective

but also the reason of Shariah

Public good and prevent social evil or corruption

Imam Al-Shatibi:Daruriyat (the essential) Hajiyat (the complementary)Tahsiniyat (the embellishments)

Maslahah

Din


Investment and Sharia

Investment

Investment is Sharia-based business activity

Aql

Mal

Nafs NaslDin

Return

Worship-based Wealth Maslahah


The Circle of Investment in Sharia

Maqosid

Maslahah

Investment

Return


[Interest] [Return and Risk]

Dan Allah telah menghalalkan jual beli dan mengharamkan riba (Al Baqarah 275)

Rasulullah SAW melarang jual beli yang mengandung gharar (HR. Muslim, Tirmizi, Nasa’i, Abu Daud, dan Ibnu Majah dari Abu Hurairah)


Interest

Price of transaction

Money

saving accounts and bonds

borrowing and lending

Object of transaction

Excess

Riba

Literal meaning

Fadl(Buyu')

Exchange or sale commodity

Janganlah kamu menjual emas dengan emas kecuali sama (nilainya) dan janganlah menambahkan

sebagian atas sebagian yang lain; janganlah menjual perak dengan perak kecuali sama (nilainya) dan janganlah menambahkan sebagian atas sebagian

yang lain; dan janganlah menjual emas dan perak tersebut yang tidak tunai dengan yang tunai.

(HR Muslim dari Abu Sa’id al-Khudri)

Hai orang-orang yang beriman, janganlah kamu memakan riba dengan berlipat ganda dan bertakwalah kamu kepada Alloh SWT supaya kamu mendapat keberuntungan.(Surat Ali Imran: 130)

Na'siah(Qurud)

Loan arrangement

Interest is (absolutely) riba

Social-based transactionHai orang yang beriman! Janganlah kamu saling memakan harta sesamamu dengan jalan yang batil, kecuali dengan jalan perniagaan yang berlaku dengan suka samasuka di antara kamu. Dan janganlah kamu membunuh dirimu; sesungguhnya Allah adalah Maha Penyayang kepadamu. (Surat An-Nisa: 29)


Risk and uncertainty as discussed in modern finance may be compared with the notion of gharar in Islamic jurisprudence.Risk is considered as gharar when the seller has no control over the subject matter. (Obaidullah, 2006)

(Suwailem, 2000 and El-Gamal, 2000)Risk means gharar.

Risk is considered as gharar only when risk is a channel to make one party profits at the expense of the other. (Suwailem, 2000)

Risk comes from uncertainty condition. Future is uncertain.


An element of gharar is considered a normal phenomenon in the market if it is not excessive in the contracts and where the effect on the economy and society is considered minimal. This is accepted by shariah as it would be practically impossible to eradicate this element completely from the market. A large element of gharar in a commercial transaction, on the other hand, is prohibited according to shariah as it may affect the legality of a transaction. (IOSCO, 2004)

Risk is allowed by shariah if meets conditions:1. Can be neglected2. Inevitable (can't be avoided)3. Unintentional


Ibnu Taymiyyah (1328):“Risk falls into two categories, commercial risk where one would buy a commodity in order to sell it for profit, and rely on Allah for that. This risk is necessary for merchants and although one might occasionally lose but this is the nature of commerce. The other type of risk is that of gambling, which is implies eating wealth for nothing. This is what Allah and His Messenger (saw) have prohibited.”

1. commercial risk2. gambling


Al kharaj bi al daman,risk and return go together, no return without risk.


Securities|[Capital Market Products][Financial Products]


The Type of Securities

Fixed income-based

Equity-based

Asset Securitization

Derivatives

Structured Product

Mutual Fund

Products that created from other products

AL

E


Equity-based

Return comes from dividend and capital gain

Ownership-based product [investor is the owner of corporation]

Stock or Share

The portion of corporate profits paid out to stockholders

The difference between ask (sell) and bid (buy/purchase) price

AL

E

Only corporate can be an issuer


Fixed Income-Based

AL

E

Return comes from interest (coupon) and capital gain

Lending & borrowing-based product [investor is the lender of money]

Bonds

The price of money that paid regularly by issuer


Corporate and government can be an issuerHas maturity dateInitial money (principal) will be paid back at maturity

By issuerBy maturity

By coupon payment


Asset Securitization

AL

E

Return comes from margin (coupon) and capital gain

Financing-based product [investor is the financer of asset]

The price of asset that paid regularly by issuer



ABSREITSSukuk

Shariah-complaint product

Booked as

Derived from


Sukuk

Return comes from margin (coupon) and capital gain

Financing-based product [investor is the financer of asset]


Shariah-complaint product

Pre-determined returnsProfit and loss Sharing

By Yield

Partnership-basedLease-basedHybrid

By Akad

Originator

SPV

InvestorUnit of Sukuk

creates

Rp

Sukuk

Assets

Return

Rp

Owner


creates

Sukuk

Assets

Owner

Leased backOriginator

SPV

Investor

Rental fees (Rp)

Investment Return (Rp)

Funds Transfer (Rp)

Funds Transfer (Rp)

Buy

Assets

Sold back

Pool of Funds

Initial Funds (Rp)

General Structure of Sukuk Ijarah

Unit of Sukuk

Pool of Funds

Structure of Akads

Originator - SPV

SPV - Investor

1. Bai’2. Ijarah3. Bai’

4. Wakalah

1

2

3

4


Project

OwnerOriginator

SPV

Investor

Margin (Rp)

Investment Return (Rp)

Funds Transfer (Rp)

Funds Transfer (Rp)

Financing

Pool of Funds

Initial Funds (Rp)

General Structure of Sukuk Mudharabah

creates

Sukuk

Unit of Sukuk

Pool of Funds

Structure of Akads

Originator - SPV

SPV - Investor

1. Mudharabah

2. Wakalah

2

1

Mudharib


Products that created from other products

Mutual FundCollective investment product that created to pool money from investors

Index-based

Project-based

Equity

Fixed income

Money market

Mixed

Closed

Open

DerivativesA financial contract-based product that created to hedge risk or speculative purposes

Options Futures

Issued by IM and Custodian BankReturn comes from capital gain

Price is called NAV = (A-L)/Units

Issued by ExchangeReturn comes from capital gain at

market of derivatives and underlying assets

Price is called premiumProduct has time limitation

Structured Product

Investment product that created to generate income from basket of underlying securities

Issued by Financial InstitutionReturn comes from capital gain at

market of structured productProduct has time limitation


Price Index|

An index is a collection or portfolio of stocks, bonds or other investments selected to represent a particular segment of a market. Standard & Poor’s (2005)

Stock market indices are a way of measuring how stockmarkets are moving or how particular groups of shares are performing. Bennetts (1995, p. 96)

The market performance indicatorThe portfolio benchmark


Composite All stocks or representatives are counted: IHSG, ISSI

Sectoral Only stocks in the same sector are counted: finance, trading, etc.

Non sectoral Only stocks in the same criterias are counted: JII, LQ45


2005 2006 2007 2008 2009 2010 2011 2012

1,163

1,806

2,746

1,355

2,534

3,704 3,822

4,410

The market performance indicator

IHSG


30%Average

-68%

-45%

-23%

0%

23%

45%

68%

90%

2005 2006 2007 2008 2009 2010 2011 2012

55% 52%

-51%

87%

46%

3%15%

EFGH

ABCD

Return IHSG

The portfolio (performance) benchmarking

Upper the Market

Below the Market

2005 2006 2007 2008 2009 2010 2011 2012

1,163

1,806

2,746

1,355

2,534

3,704 3,822

4,410

IHSG


Could stock price index reduce the level of gharar of stock investment?

Investment

Uncertainty

Liquidity

Return

Risk

• The degree to which an asset or security can be bought or sold in the market without affecting the asset's price

• The concept of liquidity is derived from the concept of market

• Indicators:Volatility, Frequent, Value of Trading, bid-asked spread

= value of stock

Return

Liquidity

stock price

Reflected by

Price IndexThe movement measured by

•The market performance indicator•The portfolio (performance) benchmark


The Milestones of Islamic Stock Price Index

RHB Unit Trust Management Bhd.

May1996

Feb1999

Dow Jones islamic Market Index

April1999

Kuala Lumpur Shariah Index

Oct1999

FTSE Global Islamic Index

July2000

Jakarta Islamic Index

Mei2011

Indonesia Sharia Stock Index


Tick size| A unit of value that can be input at the time of buying or selling stocks.


100

300

1000

3000

10000

101 102

305 310

1010 1020

3025 3050

10050 10100

1100

350

110

3250

10500

999890

295290250

990980900

297529502750

995099009500

Stock PriceTick size|Simulation


Auto Rejection| A limitation of stocks price movement in one day trading.

If the price moves exceed the limit, it will be automatically rejected by system.


1000 25%Stock Price

Auto Rejection|Simulation

Stock Price will be rejected by system

Stock Price will be rejected by system

1250

750

1 day movement


End of meeting for this material.


Economy & Finance

Islamic Capital Market by Irwan Abdalloh