Sharia Capital Market


The Basic Principles of Sharia Capital Market

According to Law No. 8 Year 1995 concerning Capital Market (UUPM), Capital Market is defined as: An activity concerned with the public offering and trading of securities, the Public Company relating to the issuance of securities, as well as the institutions and professions related to securities.

Based on this definition, the terminology of Islamic capital market can be defined as the activity in capital markets as provided for in UUPM that does not againts Islamic principles. Therefore, the Islamic capital market is not a separate system to the capital market system as a whole. In general, Islamic Capital Market activity has no difference with the conventional capital market, but there are some special characteristics of Islamic capital market, which are the products and the transaction mechanism do not againts Islamic principles.

Islamic Principle

The principle is "fiqih muamalah". The application of Islamic principles in the capital stock market certainly springs on Quran as the supreme source of law and Prophet Muhammad Hadith. Furthermore, from these two sources, the Ulemas derive of legal interpretations that the scholars do then called "fiqih". One of the discussions in "fiqih" is about muamalah, namely the relationship between human beings related to commerce. Thus, the activities in Islamic Capital Market are developed based on fiqih muamalah. Based on the Islamic capital market activities that are developed on the basis of fiqih muamalah. The rule which states that "In essence, all forms of muamalah be done unless there is proof (dalil) that otherwise (haram). This Concept is the basic principle of Islamic capital market in Indonesia.


1.     Rule Number II.K.1 on Criteria and Issuance of Sharia Securities List

2.     Rule Number IX.A.13 about Sharia Securities Issuance

3.     Rule Number IX.A.14 about Covenants (akad) used in the Issuance of Sharia Securities


History of Indonesian Islamic Capital Market


History of Islamic Capital Market in Indonesia began with the issuance of Islamic Mutual Funds by PT Danareksa Investment Management on July 3, 1997. Furthermore, the Indonesia Stock Exchange ( in the past was Jakarta Stock Exchange) in cooperation with PT Danareksa Investment Management launched the Jakarta Islamic Index on July 3, 2000 which aims to guide investors who want to invest funds in Shariah. The Jakarta Islamic Index, since then, has provided the investors with shares that are in accordance with Islamic principles.

On 18 April 2001, for the first time, National Sharia Board of Indonesian Ulema Council (DSN-MUI) issued a fatwa that are directly related to capital markets, namely Fatwa No. 20/DSN-MUI/IV/2001 on Guidelines for Implementation of Sharia Mutual Fund. Furthermore, the Islamic investment instruments in the capital markets continue to grow with the issuance of Islamic Bonds of PT Indosat, Tbk. in early September 2002. Using mudharabah covenant, the instrument was the first Islamic Bonds issued.

History of Islamic capital market can also be traced from institutional developments involved in the Islamic capital market regulation. The development started from the MoU between Bapepam-LK and DSN-MUI on March 14, 2003. The MoU indicates the existence of an agreement between Bapepam-LK and DSN-MUI to develop sharia-based capital market in Indonesia.

From the institutional side of Bapepam-LK, the development of Islamic capital market is characterized by the establishment of Islamic Capital Market Development Team in 2003. Subsequently, in 2004 the development of Islamic capital market has also been marked by the inclusion of Islamic capital market unit in the organizational structure of Bapepam-LK, The unit was an Echelon IV-level unit that specifically has a duty and function of developing Islamic capital market. In line with the development of existing industries, in 2006 the existing Echelon IV unit was then upgraded to Echelon III-level unit.

On November 23, 2006, Bapepam-LK issued a rule package of Bapepam-LK-related to Shariah Capital Markets. The rules package contains Bapepam and LK rule Number IX.A13 concerning Sharia Securities Issuance and rule Number IX.A.14 concerning Covenants Used in the Issuance of Islamic Securities in Capital Market. Subsequently, on August 31, 2007, Bapepam-LK issued rule Number II.K.1 regarding Criteria and the Issuance of Sharia Securities List, followed by the launch of the first Sharia Securities List by Bapepam-LK on September 12, 2007.

The development of Islamic capital market reached a new milestone with the enactment of Law No. 19 of 2008 on Sharia Sovereign Bonds (SBSN) on May 7, 2008. This law is needed as a legal basis for the issuance of Islamic securities or sovereign sukuk. On August 26, 2008, for the first time, the Government of Indonesia issued SBSN with serial number IFR0001 and IFR0002.

On June 30, 2009, Bapepam-LK has made revisions to Bapepam-LK rule Number IX.A.13 concerning Sharia Securities Issuance and II.K.1 concerning Criteria and Issuance of Sharia Securities List.

Further, on April 24, 2012, Bapepam-LK has revised Bapepam-LK rule Number II.K.1 concerning Sharia Criteria and Issuance of Sharia Securities List.


Introduction to Indonesia Sharia Capital Market Product


Based on Law Number 8 Year 1995 concerning Capital Market (Capital Market Law), the securities defined as promissory notes, commercial paper, shares, bonds, evidences of indebtedness, participation units of collective investment contracts, futures contracts related to securities, and all derivatives of securities.

Bapepam-LK Rule Number IX.A.13 concerning Issuance of Sharia Securities stated that the shariah securities is securities as defined in Capital Market Law and its implementing regulation in which its contract and issuance method fulfills the shariah principles in capital market. Up to now, the sharia securities that have been issued in Indonesian capital market are shariah stocks, sukuk and shariah mutual funds.

1. Sharia Stocks

The idea of stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. Based on shariah principles, this idea known as musyarakah or syirkah concept, meaning by nature its a shariah product. However, not all stocks referred to as shariah stocks. The stocks could be classified as shariah stocks if issued by:

a.     The issuer who declares that its business activities as well as its business management are conducted based on the shariah principles in the capital market as clearly stated in its article of association.

b.     The issuer who does not declares that its business activities as well as its business management are conducted based on the shariah principles in the capital market, as long as the issuer fulfills the following criteria:


​​i.    Business activities that does not conflict with shariah principles in the capital market. Bussiness that conflict with its 
      principles, among other things, are:

  • gambling;
  • trading with non deliverance of goods or service;
  • trading with counterfeit offering/demand;
  • conventional banks;
  • conventional leasing companies;
  • trading of risk that contain uncertainty (gharar) and or gambling (maisir), e.g. conventional insurance;
  • producing, distributing, trading, and or providing: products or services that are forbidden because of its contents; products or services that are forbidden not because of its contents but because they are stated forbidden by the National Sharia Board-MUI; and or products or services that can deprave one's morals and are useless;
  • doing transaction that contains bribe substance.

ii.   Total interest-based debts in comparation with total assets < 45%.

iii.   Non-permissible contribution income to revenue < 10%.

2. Sukuk

Sukuk (previously known as shariah bond) is the plural form of the Arabic word "sakk". According to Bapepam-LK Rule Number IX.A.13 concerning Issuance of Sharia Securities, sukuk is shariah securities in a form of certificate or proof of ownership that have the same value and represent participation unit that is not separated from or consist of:

  1. The ownership of particular tangible assets;
  2. The beneficial value or services of particular project's assets or particular investment activities; the ownership of particular project's assets or particular investment activities.
  3. Services (al khadamat) that have already existed or will be exist;
  4. Particular project assets (maujudat masyru 'mu'ayyan); and / or
  5. Investment activities that have already been determined (nasyath ististmarin khashah)".

Type of Sukuk

Type of sukuk based on Sharia Standards of AAOIFI No. 17 concerning Investment of Sukuk, consist of:

  1. Ownership Certificate on leased asset.
  2. Ownership Certificate on benefit, which consist of: ownership certificate on existing asset, ownership certificate on future asset, ownership certificate on party of services, ownership certificate on future services.
  3. Salam Certificate.
  4. Istishna Certificate.
  5. Murabahah Certificate.
  6. Musyarakah Certificate.
  7. Muzara'a Certificate.
  8. Musaqa Certificate.
  9. Mugharasa Certificate.

3. Sharia Investment Fund / Sharia Mutual Fund

In Regulation of Bapepam and LK No. IX.A.13, Sharia-Based Mutual Fund is as defined in Law No. 8 year 1995 concerning Capital Market Law and its implementing regulations, in which the conduct of the business activities is not in contrary to Sharia Principles in capital market.

Sharia-Based Mutual Fund is an investment alternative for the investors, especially for small investor and those who have less time and skill to count the risks of their investments. Mutual Fund is designed as tool to collects fund from the society that have the capital, have plan to invest, but only have limited time and knowledge.

Sharia-Based Mutual Fund is to be known at the first time in Indonesia in 1997 characterized by issued of Danareksa Stocks Sharia-Based Mutual Fund in July 1997.

As one of the investment instruments, Sharia-Based Mutual Fund has different criteria with Conventional Mutual Fund. This difference comes from the choosing of investment instruments and investment mechanism that shall not be in conflict with Sharia Principles. Other differences are all of portfolio management process, screening, and cleansing.

Like other investments, besides giving various opportunities of profits, Mutual Fund has possibilities of risks, such as:

·       Risk of Decreased Value of Participating Units
The risk is influenced by the decrease price of securities (stocks, bonds, and other securities) that included in the Mutual Funds Portfolio. It is related with the investment manager capability to manage their funds.

·       Liquidity Risk
The risk is related to the difficulty faced by the fund manager if most of the unit holders resell (redemption) their units. Fund manager will find difficulty in providing cash for this redemption. The risk only happens on mutual funds company which has open characteristic. The risk is called as redemption effect.

·       Default Risk
While commonly most of the mutual funds wealth is insured to the insurance company, there is a probability of the worst risk, default risk. The risk can raise when the insurance company that insures the mutual fund's wealth is not being able to pay immediately the indemnity or only pay lower than the loading value in the case of unwanted events happens. In addition, default risk is also possible to be triggered from other parties related to mutual funds, brokerage, custodian bank, payment agent, or catastrophic events, that cause the decrease of Net Asset Value of investment funds.

·       Politic and Economy Risk
The risk, which resulted from the change of political and economic policy influencing the stock exchange and company, so that finally affecting securities in mutual funds portfolio.

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