Islamic Finance in the Era of Finacial Service Authority (OJK)

Abdul Qoyum, SEI, M.Sc.Fin Presented in Seminar Nasional Convention Hall UIN Sunan Kalijaga Yogyakarta 08 February 2014

Outline
1. 2.

3.
4. 5.

Islamic Finance? statistics of world Islamic finance Islamic finance in Indonesia (Islamic banking, sukuk, islamic equity, islamic unit trust, etc) Problem of Islamic finance development in Indonesia Some Policy of OJK in developping Islamic finance.

Islamic Finance
Islamic finance or shariah finance?............ 1. Financial system which is developped based on an islamic worldview 2. Financial system based on Islamic value 3. Islamic finance objective is to realize maslahah (manfaat and berkah) and realize maqosid syariah. Dharuriyyat (religion, self, mind, progeny and wealth), hajiyyat and tahsiniyyat. 4. Basic principle of islamic finance: no riba, no gharar, no maysir and halal activities. 5. Islamic finance is finance which is based on Iman, Islam and Ihsan.

Islamic Finance...
Islamic finance should support economic activities, optimal level of economic growth, low and stable inflation, low unemployement, Alleviate poverty, Support international Trade. 2. Islamic finance is Equity base Financial system, not debtbase. 3. Islamic finance is Real-sector base finacial system
1.

Competitiveness in Islamic Finance

Indikator Keuangan Islam Dunia

Statistics

Islamic Finance Assets

Islamic Banking

Sukuk Market

Knowledge Indicator

Governance

Shariah Governance

CSR Fund and Awarness

October 2013, the annual growth of Islamic banking (Islamic Banks / BUS/ UUS) was recorded 32% with total assets of Rp229, 5 billion, total financing Rp179, 3 billion and total deposits of Rp174 trillion. The number of Islamic banks listed 11 banks, UUS is 23 units and BPRS has reached the number of 160, bank offices is 2932, increase of 269 compared 2012.

In Billion Rupiah 100,000 120,000

20,000

40,000

60,000

80,000

0 Jan-09 Mar-09 May-09

Sukuk

Jul-09
Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12

Sovereign Sukuk (SBSN) issuance

Sep-12
Nov-12 Jan-13 Mar-13

SUKUK (SBSN)*

Table 1.1. Global Corporate Islamic Bond Ranking by Deal Nationality Full Year 2012 Rank Deal Nationality Deal Value (USD million) 1 Malaysia 15,245 2 United Arab Emirates 3,065 3 Saudi Arabia 2,683 4 Singapore 529 5 Indonesia 373 6 Hongkong 196 7 Japan 91 Total 22,182 Sources: www.asiamoney.com No. of issuance 73 7 4 2 4 2 2 94 % share 68.7 13.8 12.1 2.4 1.7 0.9 0.4 100.0

the number of companies issuing sukuk in Indonesia is very few. According to www.asiamoney.com, currently Indonesia companies ranks as fifth in term of geographic ranking for corporate sukuk issuance accounted for 1.7% with total value USD373 million after corporates from Malaysia, Saudi Arabia, Singapore, and United Arab Emirates.

Sukuk Issued by company is very few. It indicates some points: first, company still underestimate with the quality of sukuk in supporting company growth. Second, company still prefer for using another source of fund to finance their investment activities. Third, very few study that address some issue how sukuk can contribute significantly to the value of company (capital structure theory)
Figure 4.1. Total Sukuk Outstanding as April 2013
BUMN Sukuk, 204.05
Corporate Sukuk, 323.58

Government /Sovereign sukuk, Total Sukuk Outstanding (Rp Billion) 7100.61

Sources: International Islamic Financial Statistic (IFIS). Author calculation

ISSUE TYPE

SEC TO R

NO

ISSUER

TYPE O F SUKUK

AMO UNT (IDR MILLIO N)

Sovereign Sukuk

Government Government

1 2 TOTAL

M inistry of Finance Perusahaan Penerbit SBSN Indonesia

Short Term Ijara Al Ijarah

167.46 6933.15 7100.61 93.08 %

Government Related Entities (BUM N)

Banking/Financial Telecommunication

1 2

Bank M uamalat Syariah PT Indosat

M udharabah Al Ijarah

105.95 98.1 204.05 2.67%

TOTAL Corporate Banking/Financial Banking/Financial Energy Retail M anufacturing Food M anufacturing IT Retail M anufacturing Construction/Property Car rental/leasing transportation Chemical M anufacturing Water Power (Utilities) Food M anufacturing Chemical M anufacturing Food M anufacturing Construction/Property 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 BPD Sulawesi Selatan Bank Nagari Sumatera Barat Aneka Gas Industri, PT M atahari Putra Prima Tbk M ayora Indah Tbk M etrodata Electronics Tbk M itra Adi Perkasa (M API) PT Adhi Karya (PERSERO) PT Adira Dinamika M ulti Finance PT Berlian Laju Tanker PT Pupuk Kaltim Timur PT Sumberdaya Sewatama PT Tiga Pilar Sejahtera Food PT Titan Petrokimia Nusantara Salim Ivomas Pratama Summarecon Agung, PT M udharabah M udharabah Al Ijarah Al Ijarah M udharabah Al Ijarah Al Ijarah M udharabah M udharabah Al Ijarah Al Ijarah Al Ijarah Al Ijarah Al Ijarah Al Ijarah Al Ijarah

11.62 10.94 48.23 12.04 48.7 9.74 4.1 25.93 9.58 4.29 13.88 20.58 30.69 22 29.66 21.6 323.58 7628.24 4.24% 100%

TOTAL GRAND TOTAL

Albeit AAOIFI has issued standards for 14 different types of sukuk structure, namely 1) Istisna sukuk, 2) Murabahah sukuk, 3) Musharakah sukuk, 4) Mudarabah sukuk, 5) Wakalah sukuk, 6) Muzaraah sukuk, 7) Musaqah sukuk, 8) Mugharasah sukuk, 9) Salam sukuk, 10) Sukuk of existing services; 11) Sukuk of future service, 12) Sukuk if existing owned assets, 13) Sukuk of existing leased assets, and 14) Sukuk of future assets on lease contract, the common sukuk structure in Indonesia are either ijarah or mudharabah.
Figure 4.4.Corporate Sukuk Structure
Corporate Sukuk in Indonesia by Akad (No. of issuance)
Muda ra bah 33% Al Ija rah 67%

Sources: International Islamic Financial Statistic (IFIS). Author calculation

Requisite of the good Islamic financial system

Good Islamic Financial System
Shariah Advisory

Strong Risk Management

Supportive legal frameworkk

Good Educational System

Effective Regulation
Active Research in Islamic Finance Sound Corporate and Shariah Governance Society awareness Robust Accounting Disclosure and

Problems of Islamic finance development in Indonesia

Human resources Gap Academicians and Practitioners Gap Low level of Research and product development in all areas

of Islamic finance (islamic banking, islamic money market, islamic capital market, islamic bond/sukuk, islamic unit trust, takaful, zakat institution, etc.) Awareness is very critical. Slow development paradigm. 2014 Challange (General election, OJK as full regulator, Bank BUMN Syariah, Dana Haji, Bank Wakaf, The fed policy etc)

OJK as Regulator
Argument for regulation
Chapra-Khan theory Systemic objectives, the protection of depositors, compliance with syariah, integration of islamic finance in the international financial systems. Drages Theory Instability of financial systems, Bank failure. Llewellyns Theory Potential systemic problem, the correction of other market imperfections and failures, the need for monitoring of financial firm, the need for consumers confidence, potential moral hazard.

The Policy by OJK

Provide a legal, regulatory and supervisory infrastructure. Islamic financial system

OJK-Shariah advisory council as the highest authority

Indonesia international islamic financial centre Strengthening synergies between financial system

OJK should responsible for increasing the integration of Islamic finance into the international finacial system. This is more important due to the AEC 2015. Human capital development Establish a research center for shariah and islamic finance which is under OJK. It is very important to support the rule of OJK to regulate and supervise the financial institution especially related to many issue that arises in islamic finance. In addition, this institution will develop new product in Islamic finance that maybe relevant and workable in islamic financial institution. Coordinate with all university which are provide islamic finance education, training etc. The role of OJK is to provide the standard curriculum which is relevant the industries Establish university in Islamic finance which provide a scholarship. International body in Islamic Finance (AAOIFI, IFSB, IILM, IIFM)

 Shariah governance OJK should regulate the issue of Shariah governance in Islamic financial institution.

OJK
Declare as Islamic Financial Hub Issue a islamic finance master plan (cover Indonesia

timur) Coordination with all ministry in supporting islamic finance Human resource Gap Product development (bottom-up approach and topdown approach) and (Fast Line and SAC Line) (good for corporate and also for SMEs) Islamic economic civilization

Islamic Money Market Instrument

Mudharabah interbank investment, Commodity

Murabahah (bursa sukussila)Government Investment Issue, Malaysian Islamic Treasury Bills, BNM Notes, Sukuk BNM, Islamic Negotiable Intrument (BBM akad),Negotiable Islamic Debt Certficate (BBA), Islamic Accepted Bills, Sell and buyback agreement, Cagamas Sukuk.

Sukuk

Sales based (BBA, Murabahah, Salam, Istishna) Lease-Based (Ijarah, Ijarah Muntahiya bittamlik) Partnership (Mudharabah and Musyarakah) Agency based (Wakalah bil istismar) Issue: Sukuk Debt or Equity? Sukuk trading Sukuk pricing Sukuk Default Sukuk Rating

Derivative Product
Forward Wad-I Product
Islamic Forex Swap Islamic Cross Currency Swap Islamic Profit Rate Swap Islamic Option Islamic Structured Product

OJK and Islamic Economics

OJK has an important agenda in realizing Islamic economic civilization. 3 Pillar in Islamic Economic Civiliztion A. Welfare 1. QS Quraisy : 1-4 (indicator: Islamic value system, economic power in the real sector (industry and trade), basic needs fulfillment and distribution systems, as well as security and social order.) 2. QS Thaha : 124 (Welfare is Shariah based) 3. QS Al-Hasyr : 7 (Distribution of assets) B. Economic Independence optimization of the local potential, the quality of human resources, and Shariah based business culture. C. Sovereignty and Economic Governance (maslahah and maqosid syariah base)

Wassalamu Alaikum

Appendix

Islamic Money Market Instrument

Mudharabah interbank investment, Commodity

Murabahah (bursa sukussila)Government Investment Issue, Malaysian Islamic Treasury Bills, BNM Notes, Sukuk BNM, Islamic Negotiable Intrument (BBM akad),Negotiable Islamic Debt Certficate (BBA), Islamic Accepted Bills, Sell and buyback agreement, Cagamas Sukuk.

Sukuk

Sales based (BBA, Murabahah, Salam, Istishna) Lease-Based (Ijarah, Ijarah Muntahiya bittamlik) Partnership (Mudharabah and Musyarakah) Agency based (Wakalah bil istismar) Issue: Sukuk Debt or Equity? Sukuk trading Sukuk pricing Sukuk Default Sukuk Rating

Derivative Product
Forward Wad-I Product
Islamic Forex Swap Islamic Cross Currency Swap Islamic Profit Rate Swap Islamic Option Islamic Structured Product

Product Development

Step One : Activity, Industry, & Products Screening

DJIM Non-Permissible Activities: Pork Production
Tobacco Alcohol Gaming

MSCI Islamic Index

Negative Screen Alcohol Tobacco Pork-related products Conventional Financial services

S&P Shariah Index

Excludes: Pork Production Cloning ( Non-Halal Food Products) Alcohol Beverages Gambling

FTSE Islamic Index Non-Permissible Activities: Pork Production

Non-Halal Food Products Alcohol Beverages Gambling

Conventional Financial Services Entertainment

Defense/weapons Gambling

Interest based Financial Institution Pornography

Arms, Defense Tobacco

Interest based Financial Institution

Entertainment( casinos) Arms, Defense Tobacco

Defense, Weapons Music Non Halal food Hotels Activities Contrary Cinema to Islam Adult Entertainment

Gold & silver trading as Activities Contrary to cash on deferred basis Islam Activities Contrary to Islam

Step One : Activity, Industry, & Products Screening

Meezan islamic index Jakarta Shariah index Negative Screen Gambling and games considered as gambling. Trading that is prohibited according to Shariah Conventional financial institutions * Transactions that contain elements of bribery (risywah ) Excludes: SAC ( S C ) AAOIFI Non-Permissible Activities:

Non-Permissible Activities:
Interest related

Not to engage in prohibited Financial sevices based on riba business

Gambling

Gambling/ Gaming

Alcohol Beverages

Manufacture and/ or sale of non halal products

Arms Manufacturing

tobacco

Insurance both life and general Defaulter Company Non Halal Food Mutual Funds both open-ended and close ended

products or services that Conventional can deprave ones morals insurance and are harmful

Entertainment

Stockbroking or share trading in Shariah non-compliant securities

Step Two : Financial Screening

DJIM *Acc Rec/24 Mth Average Market Cap < 33% Liquidity *Cash + Int Bearing Sec/24 *Cash + Int Bearing Sec/ Cash + Interest-Bearing Mth Average Market Cap. < Market value of equity ( Sec / Total Assets < 33.33% 33% 36 Mth average) < 33% *Non Permissible Income other than Interest Income/Revenue < 5% MSCI Islamic Index S&P Shariah Index

Total Cash + Account *Acc Rec/ Market value of Receivables / Total Assets equity ( 36 Mth average) < 33.33% < 49%

Prohibited Income

Debt

*Total debt divided by *Total Debt/ Market value trailing 24-month average *Total Debt/Total Assets < of equity ( 36 Mth market capitalization < 33.33% average) < 33% 33%

Step Two : Financial Screening

FTSE Islamic Index *Acc Rec + Cash/Total Asset < 50% Liquidity *Cash + Int Bearing Sec/Total Assets < 33% Account receivables / Total Assets <45% Jakarta Islamic Index Meezan Islamic index (Cash + interest bearing deposits) / total assets < 30%

Interest Income & *Interest Income/Group Income from NonTurnover < 5% (Total interest + income Prohibited Shariah compliant *Non Permissible Income from non-compliant Income business activities/Total other than Interest activities) / Revenue <5% Revenue < 10% Income/Revenue < 5%

Debt

Total Debt/Total Asset < Interest-bearing Conventional debt / total 33% debt/Total Equity < 82% assets < 30%

Advantages & Disadvantages of ETF

Advantages
1. Single Transactions 2. Cost-Effectiveness 3. Taxes 4. Derivatives 5. Flexibility 6. Accountability 7. Passive Management 8. Immediate Dividends

Disadvantages
1. Inability to reinvest dividends 2. International Limitations 3. Low Trading Volumes 4. Long Investment Horizon 5. Inactivity

Difference between ETF and Unit Trust

ETF Diversification Transparency Unit Trust Less transparent

Fund Information

Market price and trading activity data readily available on Bursa Malaysias website or via brokers

Information available from the fund manager and funds appointed agents

Liquidity Entry Fee

Brokerage fee, clearing fee and stamp duty are applicable when trading on Bursa Securities
0.4% - 0.5% p.a. of the NAV T+3 (if through brokers) Brokers or participating dealers May change throughout the day

Less liquid 3% - 5% (for equity fund)

Management Fee Purchase Settlement Trade Via Daily Trading Period

0.75% - 5% p.a. of the NAV Upfront Agent Fixed throughout the day

Structure of Al-aqar KPJ REIT

3-58

Whats types of REITs?

Equity REITs owns and operates income-generating real estate which involves a wide range of activities including leasing, development of real properties and tenant services. Mortgage REITs primarily hold long-term mortgages, but many also engage in short-term construction financing. It is also offers interest-based loans to real estate owners, operators or developers. It involves greater risk since mortgage REITs tend to be more sensitive to volatility in market interest rates. Hybrid REITs are a combination of equity and mortgage REITs. In other words they own and operate real estate at the same time extend loans to real estate owners and operators.

3-59

Why invest in REIT?

Diversification
Stable and recurrent income

3-60

Benefits

Comfort of regulations Inflation hedge Relatively cheap compared to real property

60

Unit Trust
A unit trust is an investment system that a fund manager collects money from numerous investors to invest in a portfolio of assets.

3-61

The different types of unit trust can be equity funds, bond funds, money-market funds and a balanced fund. Can be classified income, growth and balanced funds. There are three parties of a unit trust arrangement and are investor, the investment management company and the trustee.
Unit trust is established by a trust and should spell out some objectives.

3-62

Benefit of Investing in Unit Trust

Diversification of units Service of professional fund managers Liquidity Low capital requirement Convenience Access to foreign financial markets Hedge against inflations

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Issues in Investing in Unit Trust

Market risk Interest rate risk Credit risk Country risk Currency risk or foreign exchange risk. Investment manager risk

3-64

Similarities And Differences

REITS UNIT TRUST

Real Assets
Direct Investment in the underlying asset of a REIT Limited to property sector

Financial Asset
Indirect investment in the investments held by the Unit Trust. Allows for diversification across different sectors

Stable returns
Distribution is in dividends Can be traded on the floors of the exchange

Return is dependent on performance

Distribution is in units Trading is done through the fund manager

Introduction to Sukuk (Cont)

Sukuk v.s. Conventional Bonds