The Islamic capital market (ICM) in Indonesia is not a stand-alone capital market which has its own system. Nor is the ICM separated from the country’s capital market system as a whole. In fact, ICM instruments use the same mechanism as the conventional market for their underwriting and trading. However, the ICM is different from the conventional capital market in terms of compliance with Islamic principles. All trading mechanisms and products must not be contrary to Islamic principles. According to the country's Security Commission (Bapepam-LK) Rule No. IX.A.13 concerning the issuance of ICM instruments, the Islamic principles which are relevant to the capital market sector are based on the Indonesia Sharia Supervisory Board's (DSN-MUI) fatwa as long as the latter is not contradicted by the regulations and/or other regulations of Bapepam-LK that were formulized based on the fatwa of DSN-MUI.
The ICM in Indonesia has experienced fast growth. A number of achievements and innovations have already been recorded. Indeed, Indonesia, with the world’s largest Muslim population, would seem to have great potential to develop ICM, whether in the form of fatwa, regulations¸ products, or other initiatives. However, the facts indicate otherwise. Only a minority of Indonesians understand capital markets, much less the ICM.
This study aims to portray milestones of the Indonesian ICM, development of Islamic securities instruments in the country, the public’s response to the ICM, initiatives to conduct the School for Islamic Capital Market (SICM), and the impact of SICM as education and socialization of the ICM.
A Report on the Islamic Capital Market in Indonesia
In its early stage, Islamic finance movement in Indonesia may be very tiny as compared to its conventional counterpart. The establishment of Bank Muamalat Indonesia in 1992 as the first bank to introduce banking operations without interest marks the birth of Islamic finance in Indonesia. The bank, which also functions as project financier, then sought an institutional partner with which it could share risk. With that, PT. Asuransi Takaful was established in 1994. With the need for instrument which can be used to deal with liquidity matters. For this reason, in 1997, PT. Danareksa Investment Management introduced its breakthrough Islamic mutual funds product even though there was no fatwa or SEC regulation on ICM available at that time. Since then, ICM has developed with great alacrity.
In 2000, the Indonesia Stock Exchange (which formerly known as Jakarta Stock Exchange) together with PT. Danareksa Investment Management launched Jakarta Islamic Index. This index is expected to perform its role as indicator of Indonesian Islamic stocks performance that can be useful for investors who want to invest their funds in instruments which do not conflict with Islamic principles. On April 18, 2001, for the first time, the National Sharia Supervisory Board of the Indonesian Ulama Council (DSN-MUI) introduced a fatwa which closely related to capital markets: Fatwa No. 20/DSN-MUI/IV/2001 concerning guidance on investment implementation for Islamic mutual funds.
One year later, in September 2002, the Indonesian Islamic capital market launching another ICM product, that is, the first mudharabah sukuk, which was issued by PT. Indosat, Tbk (one of the country's biggest telecommunications companies). This instrument was issued based on Fatwa No. 32/DSN-MUI/IX/2002 concerning Islamic bonds and Fatwa No. 33/DSN-MUI/IX/2002 concerning mudharabah Islamic bonds. On March 14, 2003, ICM in Indonesia finally gained its recognition through the signing of a strategic Memorandum of Understanding (MoU) between Bapepam-LK and DSN-MUI. This MoU concerns strategic initiatives to develop the ICM in Indonesia. One of the initiatives is formalization of DSN-MUI’s fatwa by Bapepam-LK. Only through this formalization can the fatwa have legally binding consequences. Besides coordination in formulating regulatory frameworks, Bapepam-LK and DSN-MUI also work hand-in-hand in areas such as composing Islamic Securities List (DES), consultation on sharia compliance, developing ICM products, and contributing to the public’s socialization and education on ICM.
The rapid development of ICM is more evident after the Government, together with the Parliament, decided to approve the issuance of Law No. 19 year 2008 concerning soverign sukuk (in Indonesia, it is called as Surat Berharga Syariah Negara – SBSN). With this law, more companies showed interest in raising their financing through sukuk instruments. Moreover, the development of ICM products in Indonesia is evident not just in sukuk instruments but in equity instruments as well. Since 2010, the Indonesia Stock Exchange (IDX) together with Bapepam-LK, DSN-MUI and other capital market players are more active in educating and socializing the public about the ICM.
During 2011, due to some developments in the country’s ICM, the IDX promoted more technical aspects of the current stock trading mechanism practice in the Exchange. Currently, the IDX uses a continuous auction method which is executed automatically by JATS Next-G (Jakarta Automated Trading System Next Generation) system. According to DSN-MUI, this auction method can be analogized as bai 'al musawamah (sale and purchase of a bargain). Why? At the time of a buying and selling order, the system will form a list of order priorities which is determined by time of order and best bid-offer values of the stocks. Through this mechanism, several bad practices of stock trading can be eliminated. Support of the system has made trading activities in the IDX become fairer. However, some other elements still could not be dropped. Through a series of thorough discussions, DSN-MUI finally came out with 14 forbidden stock trading mechanisms in the regular market. These resolutions are contained in Fatwa No. 80/DSN-MUI/III/2011 concerning Implementation of Islamic Principles in The Equity Trading Mechanism at The Stock Exchange’s Regular Market. This is the first fatwa in the world which regulates Islamic stock transactions in the stock exchange. This is also the first fatwa written in three different languages: Bahasa Indonesia, English, and Arabic.
Following the fatwa, the IDX encouraged several exchange members to develop what became known as the Sharia Online Trading System (SOTS). This is also believed to be the first system in the world which can accommodate the fatwa in a real trading practice setting. PT Indo Premier Securities is the first exchange member to have developed the system. Under this system, trading activities such as margin trading, short selling, and the buying of non-compliant stocks may not be executed. The system will also present a pop-up message stating why such transactions could not be done and which sharia principles are violated if the transaction were to be executed. In the near future, the IDX will continuously encourage the exchange members to apply SOTS in facilitating the needs of sharia-conscious investors. Furthermore, in order to document these matters, the IDX have put a special section on its website in which visitors may observe data and information related with the ICM. (These milestones are summarized in Figure 1 below.)
Figure 1: Milestone of Islamic Capital Market Development in Indonesia
Source: Abdalloh (2012)
Islamic Securities Instruments in Indonesia’s Islamic Capital Market
Islamic securities can be defined as securities defined in Capital Market Law and its implementing regulations in which its contract and issuance method fulfills the Islamic Principles in the Capital Market (Regulations of Bapepam-LK Rule No IX.A.13). This includes all Islamic stocks, sukuk, and Islamic mutual funds.
In determining which securities can be categorized as “Islamic,” Bapepam-LK (as the country’s security commission) is assisted by DSN-MUI (as the National Sharia Supervisory Board) to set the screening criteria. Results of the screening process are generated into Islamic Securities List (Daftar Efek Syariah - DES). The lists are updated every May and November. In addition, Bapepam-LK produces amendments to the DES should there be any corporate actions, information, or other facts related to the issuing companies which could influence the companies’ compliance with or departure from the criteria set by Bapepam-LK and DSN-MUI.
Regarding Islamic stocks, Bapepam-LK and DSN-MUI set several criteria for stocks to be included in the DES. The first criterion is types of issuers’ core business activities. The following business will not pass the screening process: business which involve gambling; trade activities which are forbidden under sharia; ribawi financial services; elements of high uncertainty; production, distribution, and trading of goods or services of unlawful substances; and bribery The second criterion is financial ratios. Only companies with the following ratios can pass this screening stage: a) total debt to total equity of not more than 82% (this also means that total debt to total asset of not more than 45%) and b) total interest income and other non-halal income compared to total revenue and other income of not more than 10%. To observe the most updated DES, see Bapepam-LK’s website. In addition, Islamic securities which are included in the most recent DES are presented in Figure 2 below.
Figure 2: Lists of Islamic Securities in the DES
Source: Indonesia Stock Exchange as per April 24, 2012
Since DES was first published by Bapepam-LK in November 2007, market participants have remained unaware that the number of Islamic stocks traded in Indonesia surpasses the 30 stocks that became the constituents of JII. This is because a composite index for Islamic stocks had not yet been available. Therefore, on May 12, 2011, the IDX launched Indonesia Sharia Stock Index (ISSI), which includes all the Islamic stocks in the DES. From then on, ISSI has been expected to facilitate the public’s monitoring and measuring of the performance of Indonesia’s ICM.
As of April 2012, the ISSI carries 238 Islamic stocks, or 53.7% of the total 443 stocks listed in the IDX. The majority of its issuers are operating in trading, service, and financial industry as well as property, real estate and construction industry (See Chart 1). The ISSI and the JII are complementary. Whereas the ISSI is formed as a performance indicator of all Islamic stocks traded in the IDX, the JII is composed as a performance indicator of “blue chip” Islamic stocks. Any stocks that are constituents of JII are screened from Islamic stocks included in ISSI based on their market capitalization and value of transactions.
Chart 1: Islamic Stocks Issuers based on Industry
Source: Indonesia Stock Exchange as of April 24, 2012
Since the launching of the ISSI, both the ISSI and the DES have outperformed the conventional benchmarks. Between May 12, 2011 and April 24, 2012, both ISSI and JII experienced performance increases of 13.26% and 8.3%, respectively, while the performance of the Indonesia Composite Stock Index (IHSG) and LQ45 rose by 9.5% and 4.69%, respectively.
Common Public Response to the Indonesian Islamic Capital Market
Despite this outperformance and support from the three pillars of the ICM (DSN-MUI, Bapepam-LK and IDX), development of the ICM in the country has yet to peak. It is important to raise the attention of issuing companies as well as of potential and current investors regarding the potency of the country’s ICM.
Issuing companies did not notice that their stocks are listed in the DES and ISSI. Some of them even asked when their companies were listed there and why. It is still far from an expectation that the companies will adjust their corporate finance policies in order to pass the screening mechanisms and listed in the DES and ISSI. This condition may leave big room for improvement. Yes, they need to be more socialized. Yes, they need more incentives — mostly in terms of taxation and legal matters — to be actively involved in the development of the ICM. Yes, they will do so if investors strongly demand their supplies. Regarding the latter, it is widely-known that numerous world investors’ demand for sharia-compliant securities has grown, especially in the case of the Middle East. However, the potential local issuing companies could not expand their market by issuing ICM instruments outside Indonesia. Regulations concerning this matter do not yet exist.
The investors, on the other hand, become an extra challenge for the development of the ICM. Public understanding of ICM — of their products, instruments, or mechanisms — is still rudimentary, at best. Education and socialization of the public on ICM should be a top priority. In a Capital Market assessment conducted in 2010 revealed that about 60 million people (about 26% of total population) participate in the banking sector. However, there were only 350 thousands active investors in the Indonesian capital market sector. This amount was equivalent to about 0.1% of Indonesia’s population. In sharp contrast, in Malaysia, about 4.5 million active investors (or the equivalent of 17% of its total population) were involved in the capital market. In the case of Singapore, a stunning 60%–70% of its 27 million people are active in the capital market. Research by the IDX (2010–2011) also revealed that potential investors are more dispersed in smaller municipalities as compared to in big cities.
The three pillars of the ICM have undertaken a number of programs aimed at socialization, such as conducting seminars in universities and seminars for current and potential issuing companies, as well as distributing brochures. However, these efforts were nonetheless of limited intensity. Bapepam-LK has been conducting a five-year campaign (from 2011 to 2015) of massive and intense education and socialization programs. One such vehicle is a seminar for journalists whose ultimate aimed is wider media exposure of the ICM. In addition, the IDX, in collaboration with Bapepam-LK and DSN MUI, regularly conducts a series of Schools for Islamic Capital Market (Sekolah Pasar Modal Syariah, or SPMS). All of these initiatives are done in order to facilitate the development of the public’s understanding of the ICM.
School for Islamic Capital Market (SICM)
During 2011, the IDX conducted seven series of Schools for Islamic Capital Market. These events were organized every Saturday (once per month) in the IDX’s office which is situated in Sudirman Centre Business District, one of the busiest locations in the Greater Jakarta area. Participants will not be charged to attend the event though prior registration is needed. The participants will receive free course materials and lunch. Those who participate from 9 a.m. to 4 p.m. will be entitled to a certificate of participation signed by the CEO of the IDX. Up to the time that this paper was prepared, public attention to this event has been quite impressive. The number of registered participants almost always exceeds capacity. In fact, would-be participants have had to queue for about 1–4 months to be able to attend the event.
In order to achieve the above intention: to educate the market, the IDX as organizing party, invited several; representatives from DSN-MUI, Bapepam-LK, market players, and academicians to formulate syllabus for the event. The meeting resulted that there are three main topics should be delivered to the participants: 1) overview about capital market – to be delivered by representative from the IDX, 2) sharia principles related with Capital Market, to be delivered by representative from DSN-MUI, 3) regulations and policies concerning Islamic capital market – to be delivered by representative from Bapepam-LK, and (4) news updates on the Indonesia’s Islamic capital market to be delivered by IDX representatives.
The seven SPMS conducted by the IDX were attended by 492 participants. Numbers of female participants (49%) were slightly higher than the male. Majority of them (58%) were in the age of 20 to <30. Most of them were students (47%) with monthly expense less than Rp5million (about USD500). Based on survey conducted by the IDX, in overall, participants satisfied with the events. The average degree of satisfactions on course presenters was 85%; on course material was 89%; for overall items on the event was 92%. From the questionnaire, it is revealed that the participants need to obtain more material enrichment. Of the four topics presented at the event, those focused on sharia principles in capital market and Regulations and on policies concerning Islamic capital market need to be further explored. (This data can be seen in Figure 3 below.)
Figure 3: School for Islamic Capital Market (SICM) in Numbers
Source: Indonesia Stock Exchange (2012)
For this reason, the IDX launched the second level of School for Islamic Capital Market, three of which thus far have been implemented. Questionnaires have been distributed though their results have not yet been compiled. However, the IDX have done preliminary research on organizing the SICM-level 2. Respondents were selected from participants who attended the 2011 SICMs conducted in the IDX. There were about 240 respondents for this survey, the majority of whom (54.84%) were male. Most of them worked as private-sector employees (34.68%) or students (32.66%). Just like the participants in the SICM-level 1, the respondents were dominated by young individuals whose ages ranged between 20 and <30 years old (52.82%). Most of them have monthly spending amounting to less than Rp5million. 73.79% of them have not been investors, and 27.51% of them intend to be investors in the ICM. Other factors which motivated them to attend the SICM-level 2 are to gain a greater understanding of the ICM (52.37%) and to obtain careers in the ICM sector (18.64%) and other motivations (1.48%). (This data is summarized in Figure 4).
Figure 4: School for Islamic Capital Market Level 2 — A Survey
Source: Indonesia Stock Exchange (2012)
As Figure 4 indicates, the SICM level 2 has great potential to increase the number of investors in the ICM. To help realize this potential, the IDX required that participants in SICM level 2 present proof that they have invested in an ICM instrument in order to obtain their certificate of participation. For those who still do not have any ICM investment, the IDX invited several market players to present their products and display their information at the SICM level 2 venue.
SICM level 2, like SICM level 1 sessions, are take place monthly on Saturday in the IDX’s office, from 9 a.m. to 4 p.m. Topics which are delivered to the participants of SICM level 2 include: 1) overview about stock trading mechanism in the IDX, 2) Fatwa No. 80, 3) role of the capital market supporting bodies, such as Indonesian Central Custody (KSEI), 4) overview of the SOTS by Exchange Member, and 5) Overview of Islamic mutual funds by Investment Manager.
Other Initiatives and Ways Forward
Based on Master Plan of Bapepam-LK for 2010–2014, there are four main strategies which will be executed in order to further develop the ICM and other Islamic non-bank financial institutions (INBFI). First is development of regulatory framework on ICM and INBFI. Bapepam-LK will make several improvements and add some new regulations in order to provide a more comprehensive legal foundation for the ICM and INBFI. Second is development of the ICM and INBFI products, including its socialization. Currently, the proportion of Islamic financial products is relatively small compared to conventional. Therefore, Bapepam-LK will draft guidelines on sharia principles related to the industries, conduct product research and development, as well as create new ICM and INBFI products. To socialize the ICM products, Bapepam-LK has published the ICM data and information on its website (http://www.bapepam.go.id/syariah/index.html). Third is providing equal treatment for Islamic financial products with the conventional counterparts. Bapepam-LK will improve its support to ensure that equal treatments are applied for both Islamic and conventional financial products. Fourth is improvement of human resource development for the ICM and INBFI. The program will include enrichments on industry techniques and skills as well as understanding on fiqh muamalah. In the near future, Bapepam-Lk will also set a minimum qualification standard and certification for professionals and sharia scholars in the ICM and INBFI.
All of the above initiatives have shown that the Government, industry players, sharia scholars as well as academicians are concerned with the development of this industry. Those initiatives have the potential to increase market participants’ and the public’s knowledge and understanding of the ICM. Moreover, development of the country’s ICM is expected to give more options for the population of “floating mass investors” which account for a majority portion as compared to the “loyalist investors.” In addition, the initiatives on ICM education and socialization are also expected to mobilize funds from the upper segment of this nation's economic pyramid, where there is a pretty extreme phenomenon in terms of asset ownership in Indonesia: less than 10% of the population is in charge of more than 90% of assets (wealth) of the country.
Moreover, future development of the Islamic capital market also needs to be done through the formulation of instruments and other administrative standards, including specific accounting standards on Islamic securities. Until now, accounting standards are available only for sukuk (FAS No.110). Other types of Islamic securities, including Islamic stocks and Islamic mutual funds, are still recorded using available accounting standards with some necessary adjustments. These initiatives are taken by the market players and auditors. In a discussion forum, an auditor even asked the authors regarding how they should assist their clients in preparing accounting records for their Islamic securities product. Some potential investors also still find several improper accounts used in the report (e.g., interest income to account for revenues derived from investment of Islamic securities). This phenomenon may affect investor confidence (particularly those who are sharia loyalists) in the ICM products. In order to manage this situation, a statement from the sharia supervisory board attached to the financial statement of ICM products may be a solution. For the time being, preparers of the reports may still refer to Indonesian SFAS Nos. 50 and 55, and AAOIFI FAS-14.
Lastly, cooperation between ICM industry practitioners and academicians in setting the syllabus in this area is urgently necessary. When countries such as Malaysia, the United Kingdom, and Middle Eastern countries rapidly develop their ICMs to support their economies, there are only two choices: left or synergy. Continuous socialization is needed for the ICM to develop and realize its full potential not just in Indonesia but throughout the world.
With the largest Muslim population in the world, Indonesia has a significant potential to develop Islamic economic, business, and financial sectors, including an Islamic capital market. A number of studies have shown that ICM products have developed rapidly in the span of just three years. The concerns of several important parties have been presented to further spur the growth of the ICM.
Despite support for the development of Indonesia’s ICM, it has yet to reach its peak. It is necessary to raise the attention of issuing companies as well as of potential and current investors as to the potency of the country’s ICM. One of the ways to do this is through the School of ICM (SICM). This study has revealed that SICM has the potential to increase the number of Indonesian ICM investors. Capital market authorities, industry practitioners, and academic institutions can, and should collaborate to maximize Indonesia’s ICM potential and seek to replicate this success elsewhere.
Abdalloh, I. (2012, April 24). Pengantar Investasi Syariah di Pasar Modal.
Abdalloh, I. (2012). The Islamic Capital Market of Indonesia. Material Presented at Islamic Finance Seminar 2012 conducted by Gunadarma University, Jakarta.
Bapepam-LK. (2010). Kajian Strategi Pengembangan Pasar Modal Syariah Jangka Menengah. Jakarta: Bapepam-LK.
Bapepam-LK. (2010). The Capital Market and Non Bank Financial Industry Master Plan 2010 - 2014. Jakarta: Bapepam-LK.
Appendix 1: DSN-MUI’s Fatwa Related to the Islamic Capital Market
Appendix 2: Bapepam-LK’s Regulation Related with the Islamic Capital Market
 M.K. Dewi and I. Abdalloh, Pasar Modal Syariah: Sinergi Untuk Makin Berkontribusi. Unpublished Research Report (2012).
 These 14 forbidden stock trading mechanisms include 1) front running, 2) misleading information, 3) wash sale, 4) pre-arrange trades, 5) pump and dump, 6) hype and dump, 7) creating fake demand and supply, 8) interest pooling, 9) cornering, 10) marking at close, 11) alternate trade, 12) insider trading, 13) short selling, and 14) margin trading. For more details, see DSN-MUI’s Fatwa No. 80/DSN-MUI/III/2011.
 One should note that this fatwa only regulates the stock trading mechanism on the regular market. Thus, fixed-income trading, secondary market trading, and any issues other than the above-mentioned topic are not regulated under this fatwa.
 See Indonesia Stock Exchange, “Sharia Market,” http://www.idx.co.id/Home/ProductAndServices/ShariaMarket/tabid/155/lan….
 For more details, see Regulation of Bapepam-LK. IX.A.13 Article 1.b.
 For additional information, see Regulation of Bapepam-LK. No. II.K.1 Article 1.b).
 As of April 24, 2012, market capitalization of the ISSI reached Rp2.189T (or 55.7% of all listed stocks’ market capitalization in the IDX); the transaction volume of the ISSI accounted for 3.579 million shares (or 66.1% of the total shares volume); the transaction values of the ISII amounted to Rp2.977 bio (or 66.8% of the total transaction values); while the trading frequency is 62.2% of the total.
 Bapepam-LK, The Capital Market and Non Bank Financial Industry Master Plan 2010–2014 (Jakarta: Bapepam-LK, 2010).
 SICM have been conducted in three ways: 1) by self-arrangement, such as those conducted in the IDX’s office or in the IDX’s representatives in some cities in Indonesia; 2) in collaboration with Indonesian Islamic Economics Society (Masyarakat Ekonomi Syariah – MES); and 3) based on public demand. The seven sessions elaborated here were conducted in the IDX’s office in Jakarta.