Syariah Product

Introduction

Syariah-based Capital Market can be defined as the capital market that implements the principles of Islamic Canon Law in business activites and is not involve in things prohibited by the Islamic Law such as usury, gambling, speculation, etc.

Syariah-based Capital Market is officially established on March 14, 2003 together the signing of MOU between the BAPEPAM and the National Syariah Board of Indonesian Council of Ulama (DSN-MUI).

Eventhough it was established on 2003, the instrument of syariah capital market has existed in Indonesia since 1997. It is marked by the launching of Syariah-based Mutual Fund on July 3, 1997 by PT. Danareksa Investment Management. The Jakarta Stock Exchange then cooperated with PT. Danareksa Investment Management to launch the Jakarta Islamic Index (JII) on July 3, 2000. The purpose is to facilitate the investors who want to invest according to the Islamic principles.

In the next development, new instrument of syariah-based investment is added by the issue of Syariah-based Bonds by PT. Indosat Tbk in the beginning of September 2002. It was the first of other syariah-based bonds issued. In 2004, syariah-based bonds with rent agreement system, or known as syariah ijarah, is issued, and in 2006, Mutual Fund Index is formed, in which the index used as the underlying index is the JII.

Syariah-based Shares

Share is commercial paper that represents the equity participation in a company. In syariah-based capital market, the equity participation can be done in companies, which business activities are not against the Islamic principles such as gambling, usury, and manufacturing prohibited things in Islamic Law like beer, etc.

In Indonesia, the principles of syariah-based investment are not presented in syariah or non syariah-based individual shares. Instead, it is forming shares index that fulfilled the syariah principles. JSX has JII that consist of 30 shares, which fulfill the syariah criteria set by the National Syariah Board. The JII Index is prepard by the JSX together with PT Danareksa Invesment Management.

Jakarta Islamic Index is intended as a benchmark to calculate the performance of syariah-based shares investment. Hopefully, through this index, we can develop the the investor’s trust on syariah equities.

Jakarta Islamic Index consists of 30 choosen shares that are in accordance with the Islamic syariah. The criteria used in choosing the shares in JII are determined by the Syariah Overseer Council of PT Danareksa Invesment Management.

Shares that included in the Syariah Index are shares from issuers whose business activities do not against the Islamic law as below:

*
Gambling business and any games that include gambling or prohibited trading.
*
Conventional financial institution, including conventional banking and insurance.
*
Businesses that produce, distribute, and trade food or drink that are prohibited by Islamic Law.
*
Businesses that produce, distribute, and/or provide products and services that destroy morality and harmful.

Besides the criteria above, the process of shares selection in the JII by the JSX also considering the aspects of liquidity and financial condition of the issuers, such as:

1.
the business activity of the issuer is not against the Islamic law and the share is listed in the Exchange for more than 3 months (except if the shares include in the 10 biggest capitalization list)
2.
the company’s annual financial report or its mid-year financial report have the ratio of Obligation Assets for maksimum of 90%
3.
Included in the top 60 shares based on its last year average of market capitalization.
4.
Included in the top 30 shares based on its last year average of liquidity in regular market.

Re-evaluation will be held every six months by considering the index components at the beginning of January and July on each year. The changes in issuer’s line of business will be monitored all the time based on the public data available.


Syariah-based Bond

According to the Decree of National Syariah Board No. 32/DSN-MUI/IX/2002, “Syariah Bond is long term commercial paper that is based on syariah principles issued by an issuer to syariah bondholder, and obligates the issuer to pay an amount of margin/fee to the bondholder and to repay the bond fund on its maturity date.”

Not all issuer can issue syariah-based bonds. To be able to issue the syariah bonds, the company needs to fulfill the requirements below:

1.
Its core business is not against the Islamic Law and the substantion of the Decree of National Syariah Board No. 20/DSN-MUI/IV/2001. The Decree stated that business which against the Islamic Law includes: (1) Gambling business and any games that include gambling or prohibited trading; (ii) Conventional financial institution, including conventional banking and insurance; (iii) Businesses that produce, distribute, and trade food or drink that are prohibited by Islamic Law; (iv) Businesses that produce, distribute, and/or provide products and services that destroy morality and harmful.
2.
The investment grade: (i) has strong business fundamental; (ii) has strong financial fundamental; (iii) has a good image on the society.
3.
Additional benefit if the shares are included in the JII component.

There are 2 schemes of Syariah Bond in Indonesia: syariah mudharabah and syariah Ijarah bonds.

Syariah Mudharabah bond is syariah bond that uses the agreement of share profit, so that the investor’s income on the bonds is gained after having the information of the issuer’s income.

Syariah Ijarah is syariah bond that uses the rent agreement, so that the amount of coupon (ijarah fee) received is steady, and can be calculated since the first time the bond is issued.

Syariah-based Mutual Fund

Syariah Mutual Fund is Mutual fund that allocates all of iths fund/ portfolios into the syariah instruments such as in the shares that joined the JII, Syariah bond, and other syariah financial instrument.

Decrees and the Regulations of Syariah Capital Market

The operational provitions of syariah capital market are regulated by the National Syariah Board of Indonesian Council of Ulama (DSN-MUI) and regulations of BAPEPAM-LK below:

1.
No.20/DSN-MUI/IX/2000 on the Guidelines of Syariah Mutual Fund Investment.
2.
No.32/DSN-MUI/IX/2002 on Syariah-based Bond.
3.
No.33/DSN-MUI/IX/2002 on Syariah Mudharabah Bond.
4.
No.40/DSN-MUI/IX/2003 on Capital Market and General Guidelines of Syariah Principle Implemetation in the Capital Market.
5.
No.41/DSN-MUI/III/2004 on Syariah Ijarah Bond.
6.
BAPEPAM-LK Regulation No. IX.A.13 on the Issuing of Syariah Securities.
7.
BAPEPAM-LK Regulation No. IX.A.13 on Decrees Used in the Issuing of Syariah Securities in Capital Market.

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