Sharia capital market: Rules regarding investing in sharia-compliant financial products

As the most populous Muslim country in the world, Indonesia is in a unique position to provide sharia-compliant financial products and services to its citizens and to an international customer base.

Sharia financial products and services are regulated by the country’s Financial Services Authority (OJK). Fatwas (Islamic rulings) issued by the National Sharia Board-Indonesian Council of Ulema help to establish correct practices, as long as said fatwas do not contradict regulations set for forth by the OJK.

Sharia securities, which are defined under the Capital Market and Financial Institution Supervisory Agency Regulation No. IX.A.3, must fit a series of requirements. Their issuance mechanism and business activities cannot contradict sharia principles in the capital market. To give clear guidance to investors regarding sharia securities, the OJK issues the Sharia Share List, which it publishes twice a year.

Share-typed securities including Islamic pre-emptive rights and Islamic warrants should satisfy the following series of rules and regulations.

Securities must not involve business activities such as gambling, sharia prohibited trading, usury-based financial services, and risk trading involving gharar (uncertainty) or gambling. Share-typed securities are also barred from distributing, trading, and/or providing, among other things: prohibited goods or services: goods or services impairing moral values and/or having harmful effects; and conducting transactions which involve bribery. Sharia shares must meet set financial ratios. The total of interest-based debt compared to total assets cannot be more than 45%, and total interest income and other illegitimate (non-halal) income compared to total operating revenue and other income can be no more than 10%.

Track Record 

There were 310 sharia stocks listed on the bourse as of August 2016. These stocks comprise 56.3% of total IDX market capitalisation, or Rp3263.2trn ($238.2bn), with the 2016 daily average transaction value standing at Rp4.1trn ($299.3m). The performance of all Indonesia sharia shares are tracked by the Indonesia Sharia Shares Index (ISSI). Meanwhile, the 30 sharia stocks with the largest market capitalisations are tracked by the Jakarta Islamic Index (JII). Since its inception in May 2011, the ISSI has outperformed the MSCI World Islamic Index (MIWO), with ISSI growth at 144.5%, followed by the JII with 140% and the MIWO with 116%.

Future Plans 

To increase the investor base for the sharia capital market, the IDX has devised a nationwide campaign called Yuk Nabung Saham (“Let’s Build Our Savings in Shares”). The programme, launched in November 2015, aims to shift the populace’s mindset from saving to investing. One of the obstacles preventing the issuance of sharia securities is the lack of experts to provide advice and suggestions. Additional personnel are needed to insure the fulfilment of sharia principles in capital markets. To increase the number of experts the IDX, through its subsidiary, the Indonesia Capital Market Electronic Library and in cooperation with National Sharia Board–Indonesian Council of Ulama, launched a certification scheme titled the Expert in Sharia Capital Markets.

The most recent strategic initiative related to sharia capital markets was between the IDX and Bursa Malaysia. The two exchanges came together in August 2016 and signed an agreement to create the Global Sharia Capital Market Hub at the World Islamic Economic Forum held in Jakarta. The hub has a number of aims. These include becoming a centre for securitisation and sharia instruments in global capital markets, serving as a global reference for the development of sharia securities, and becoming a global research centre for sharia capital market micro-structure development. Lastly, the hub aims to evolve to become the centre of professional human resource development in sharia capital markets and to become the centre for sharia securities listings.