The Shariah screening of equities in Indonesia plays an important role in the Indonesian Islamic capital market. The existence of the Islamic capital market in Indonesia is essential. It is because Indonesia is the largest Muslim population in the world. Furthermore, Indonesian people tend to apply Islamic principles in their investments. One of the instruments in the Islamic capital market is Islamic equity. Islamic equity is an investment that is in line with the shariah principle.
Islamic stock indexes in Indonesia
Indonesian Financial Authority or Otoritas Jasa Keuangan (OJK) issues an Islamic equity list periodically every May and November. By July 2021, OJK has recorded 461 companies listed in the composite Indonesia Shariah Index (ISSI). This figure is a significant number compared to the amount of shariah-compliant companies in the first semester of 2016. Moreover, at the same time, the market capitalization of ISSI is IDR 3,43 trillion. Based on Indonesia’s Islamic capital market statistic, there is a gradual increase from this number compared with the market capitalization in 2016.
There are four shariah indexes in Indonesia, they are:
- Composite Indonesia Shariah Index/ Indeks Saham Syariah Indonesia (ISSI). This index comprises the compilation of Islamic shares in the Indonesia Stock Exchange (IDX).
- Jakarta Islamic Index. IDX launched this index in July 2000. It comprises the most 30 liquid shariah stocks in ISSI.
- Jakarta Islamic Index 70. This index depicts the most 70 liquid shariah stock in ISSI.
- IDX-MES BUMN 17. In collaboration with Masyarakat Ekonomi Syariah (MES), IDX launched 17 liquid shariah stocks from state-owned companies in 2015. Furthermore, establishing this index aims to support the development of the Islamic capital market in Indonesia.
Shariah stock screening in Indonesia by OJK
The process of shariah screening in Indonesia by OJK is as follow:
- The prohibited business activities by the companies are:
- gambling and other activities related to it.
- Prohibited trading according to shariah principles such as:
- the trading with no inclusion of good or service
- the trading with fake bid/offer
- Financial service with interest such as:
- interest-based bank
- the company with interest-based financing
- the trading with the element of uncertain (gharar) and/or gambling (maisir), such as conventional insurance.
- The production, distribution, trafficking, and/or providing
- the prohibited good or service because of its substance
- the prohibited good or service but not because of its substance as stated by DSN-MUI
- the good or service harms morality.
- The issuer should comply with the financial ratios as follow.
- the total of interest-based debt compared to the sum of assets should not exceed 45% or
- the total interest-based income and other incomes from prohibited activities compared to the total revenue and other revenues should not exceed 10%.
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