islamic capital market by irwan abdalloh
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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.
abdalloh@gmail.com
08128989737
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Objectives
ISLAMIC CAPITAL MARKET
UN
DER
STAN
DIN
VOL
VED
INTERESTED
AWARE
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SyllabusIntroduction
Milestone
Securities
Market Structure
Instruments
MID TEST
Definition
Islamic Equities
Islamic Fund
Islamic Derivatives
Sukuk
Liquidity
FINAL TEST
Index and Infrastructure
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the Milestone
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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
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source: Islamic Finance & Global Financial Stability, April 2010, IFSB-IDB-IRTI, p. 31Distribution of the World's Islamic Financial Industry
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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
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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 ?
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What is the Islamic Capital Market?
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Projects Financing
Risks Protection
Liquidity needs
Islamic Banking Takaful Islamic Capital Market
The development of Islamic Financial Industry
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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)
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• 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)
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Islamic Capital Market
1. Investment2. Financing activities3. Market place4. Products5. Price mechanism
Capital Market
Shariah Principles
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The Sharia Principles in the Capital Market
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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
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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
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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)
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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
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Gharar is defined as activities that have elements of uncertainty, ambiguity or deception
Tolerated ExcessiveModerate
FAHISHMUTAWASSITYASIR
allowed by shariah
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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)
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[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)
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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).
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BUYER SELLER
Assets (goods and services)
money
Exchange mechanism
Bai'
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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
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Capital market and Economy
Government
Corporation
Investmentcapital
Need
Need InfrastructureDevelopment
Business Expansion
CAPITAL MARKET ECONOMY Consumption
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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?
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Investment, Maqasid Shariah and Maslahah
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• 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
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Investment
Financial Assets
Equity
Bond Asset Backed Securities
Sukuk
Derivatives
Mutual Funds
Real Assets
Manufacture
Trading
Property
Commodities
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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
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Investment and Sharia
Investment
Investment is Sharia-based business activity
Aql
Mal
Nafs NaslDin
Return
Worship-based Wealth Maslahah
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The Circle of Investment in Sharia
Maqosid
Maslahah
Investment
Return
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[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)
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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)
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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.
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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
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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
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Al kharaj bi al daman,risk and return go together, no return without risk.
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Securities|[Capital Market Products][Financial Products]
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The Type of Securities
Fixed income-based
Equity-based
Asset Securitization
Derivatives
Structured Product
Mutual Fund
Products that created from other products
AL
E
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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
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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
The difference between ask (sell) and bid (buy/purchase) price
Corporate and government can be an issuerHas maturity dateInitial money (principal) will be paid back at maturity
By issuerBy maturity
By coupon payment
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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
The difference between ask (sell) and bid (buy/purchase) price
Corporate and government can be an issuerHas maturity dateInitial money (principal) will be paid back at maturity
ABSREITSSukuk
Shariah-complaint product
Booked as
Derived from
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Sukuk
Return comes from margin (coupon) and capital gain
Financing-based product [investor is the financer of asset]
Corporate and government can be an issuerHas maturity dateInitial money (principal) will be paid back at maturity
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Tick size| A unit of value that can be input at the time of buying or selling stocks.
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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
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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.
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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
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End of meeting for this material.
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