Rev.

4 date 20120709

THE POTENTIAL FOR ISLAMIC EXCHANGE TRADED

FUND (ETF) IN INDONESIA:
A COMPARATIVE STUDY OF DEVELOPMENT IN US,
UK, AND MALAYSIA
YOGA PRAKASA, CFP
ABSTRACT
Indonesia holds significant potential for Shariah-compliant ETF products. Large
Muslim population, resilient stock market performance, and recent rating upgrades
have put Indonesia into global investment communitys radar. Shariah-compliant
proxies are needed for swift access to Indonesian market to fulfill the demand from
Shariah-compliant investors.
For that purpose, a study is made on comparative development of Shariahcompliant ETF in three countries: the United States, where the first and only
Shariah-compliant ETF launched in the US market was closed in less than two
years; in the United Kingdom, where ten Shariah-compliant ETFs are currently
traded in the London Stock Exchange in just less than five years; and in the
neighboring country Malaysia, where the first Shariah ETF in Asia was listed in
2008 and continued to be traded until today. The resulting comparison is hoped to
be useful in understanding the possibility for Shariah-compliant ETF development
in Indonesia.

CONTACT INFORMATION
Yoga Prakasa, CFP
PT Indo Premier Investment Management
Wisma GKBI 7/F, Suite 719
Jl. Jend. Sudirman No. 28
Jakarta 10210
Indonesia
Phone : +62 (21) 5793-1260
Fax : +62 (21) 5793-1222
Email : yoga.prakasa@ipc.co.id
Web : http://www.PremierReksadanaOnline.com

I. TABLE OF CONTENTS
I.
II.
III.
IV.

Table of contents
Abbreviation
Terms used in Indonesian Capital Market Regulations
Selected regulations governing ETF and Shariah-compliant equity fund in
Indonesia
V.
Introduction
VI. The appeal of Indonesia
A. Largest Muslim population
B. Resilient stock market performance
VII. Exchange Traded Fund (ETF)
A. Mutual fund as the precursor of ETF
B. ETF regulation in Indonesia
C. Benefits of investing in ETF
D. Shariah-compliant ETF in Indonesia
VIII. Comparative studies of Shariah-compliant ETF in other countries
A. United States of America
B. United Kingdom
C. Malaysia
IX. Conclusion
X.
References

2
3
5
7
10
11
11
13
16
17
18
19
20
24
25
28
31
34
36


II. ABBREVIATION
The followings are abbreviations used in this paper:
Bapepam-LK : Badan Pengawas Pasar Modal & Lembaga Keuangan (Capital
Market and Financial Institution Supervisory Agency)
Established in 1976, Bapepam is led by a Chairman assigned by the President of
Republic of Indonesia and is responsible to the Ministry of Finance. Bapepams
main function is to create an orderly, fair, and efficient capital market and to
protect the interest of the general public and investors. In 2005, Bapepam is
merged with non-bank financial institution supervisory agency Direktorat Jenderal
Lembaga Keuangan (Directorate General of Financial Institution) under the
Ministry of Finance, and became Bapepam-LK.1
BEI : PT Bursa Efek Indonesia (Securities Exchange Indonesia)
A limited liability company formed in 2007, a merging between an equity bourse
PT Bursa Efek Jakarta and a debt & derivative bourse PT Bursa Efek Surabaya.
BEI is one of the three Indonesian Capital Market SROs. Its main task is to
administer orderly, fair, and efficient Securities trading in Indonesia. It is owned by
Members of the Securities Exchange.2
DES : Daftar Efek Syariah (Shariah-compliant Securities List)
List of securities not in violation of the Shariah Principle in Capital Market. The
list may be issued Bapepam-LK or third party approved by Bapepam-LK. Any
fund claiming to be Shariah-compliant has to limit its holding to only securities
approved in this list.
DPS : Dewan Pengawas Syariah (Shariah Supervisory Board)
A supervisory board responsible for the implementation of Shariah Principle in
each of its respective financial institution and non-financial corporation. A separate
and new DPS is formed each time an institution is requesting for Shariahcompliant supervision, and it shall be tasked for supervision on the requesting
institution. Members of DPS are comprised from members of DSN. It reports to
DSN.3
DSN : Dewan Syariah Nasional (National Shariah Board)
A subset of MUI. It is formed for specific tasks to organize, coordinate, and
determine on economic and financial matters for conformity with the Shariah
Principle. It reports to MUI.4

Bapepam-LK website, available: http://www.bapepam.go.id

IDX website, available: http://www.idx.co.id
3
MUI website, available: http://www.mui.or.id
4
MUI website
2

KPEI : PT Kliring Penjaminan Efek Indonesia (Securities Clearing Guarantee

Indonesia)
A limited liability company established in 1995 by BEI, with main tasks to perform
clearing activities and settlement guarantee of Securities Exchange transaction for
equities, bonds, and securities derivatives. KPEI is one of the three Indonesian
Capital Market SROs.5
KSEI : PT Kustodian Sentral Efek Indonesia (Securities Central Custody
Indonesia)
A limited liability company established in 1997, with main tasks to provide
orderly, fair, and efficient Securities Central Depository and Settlement services
for account holders comprising of Securities Companies and Custodian Banks.
KSEI is one of the three Indonesian Capital Market SROs.6
MUI : Majelis Ulama Indonesia (Indonesian Council of Ulama)
The council was formed in 1975 with the intention to accommodate the aspiration
of wide-range Muslim constituents, which include two largest Muslim
organizations in Indonesia, Nahdlatul Ulama and Muhammadiyah. Representatives
from religious organizations, provinces, and the military also sit in the council. The
council shall organize, coordinate, and determine on matters of religious interest of
its collective constituents.7
SRO : Self-Regulatory Organization
A non-governmental organization which has the authority to create and enforce
industry regulations and standards. In the Indonesian capital market, there are three
SROs, namely: BEI, KPEI, and KSEI.

KPEI website, available: http://www.kpei.co.id

KSEI website, available: http://www.ksei.co.id
7
MUI website
6


III. TERMS USED IN INDONESIAN CAPITAL MARKET
REGULATIONS
Anggota Bursa Efek (Members of the Securities Exchange) : Securities Brokers
licensed by Bapepam-LK which have the right to utilize Securities Exchange
infrastructure and/or systems in accordance with the Securities Exchange
regulations.
Bursa Efek (Securities Exchange) : the Party who provides and administers
infrastructure and/or systems to facilitate the bid and offer between Securities
buyers and sellers for trading purposes.
Dealer Partisipan (Authorized Participant) : Members of the Securities Exchange
who has signed an agreement with the Investment Manager of an ETF to buy or
sell ETF shares on its own or on investors behalf, which is usually exchanged inkind with baskets of underlying securities.
Efek (Securities) : those which include debt instruments, commercial papers, equity
stocks, bonds, certificate of debts, Participation Units of collective investment
contract, futures contracts on securities, and other derivatives on securities.
Emiten (Issuer) : the Party who issues Public Offering.
Kustodian (Custody) : the Party who offers custody services on Securities and
other related assets, and other services which include:
- receipt of dividends, interests, and other rights,
- settlement of Securities transactions, and
- representation of account holders
Lembaga Kliring dan Penjaminan (Clearing and Guarantee Institution) : the Party
who administers clearing service and settlement guarantee of transactions in the
Securities Exchange.8
Lembaga Penyimpanan dan Penyelesaian (Depository and Settlement Institution) :
the Party who takes the role as the central custody to Custody Banks, Securities
Companies, and other Party.9
Manajer Investasi (Investment Managers) : the Party who conducts its business
activity by managing Securities Portfolio and/or collective investments on behalf
of its investors; other than insurance companies, pension funds, and banks who
falls under separate regulations.

8
9

Capital Market Law article 14.1

Capital Market Law article 14.2

Pasar Modal (Capital Market) : the market for conducting activities related to
Public Offering and Securities trading; Public Companies and their issued
Securities; and other institutions and professions related to Securities.
Penawaran Umum (Public Offering) : the activity of offering to sell Securities to
the general public, done by the Issuer, in accordance to governing Law and
regulations.
Penjamin Emisi Efek (Securities Underwriter) : the Party who sign a contract with
the Issuer to conduct the Public Offering on behalf of the Issuer with or without the
obligation to buy unsold Securities.
Perantara Pedagang Efek (Securities Broker) : the Party who trade Securities on
its own behalf or other Parties.
Perusahaan Efek (Securities Company) : a company whose business activities
include Securities Underwriting, Securities Brokerage, and/or Investment
Management.
Portofolio Efek (Securities Portfolio) : a collection of Securities owned by a
Party(s).
Pihak (Party) : individual, corporation, joint venture, association, or any other
organized group.
Prospectus (Prospectus) : written information related to Public Offering for the
purpose of selling Securities to other Parties.
Perusahaan Publik (Public Company) : a company who has performed a Public
Offering of its equity shares, with its shares subsequently owned wholly or
partially by the general public.
Reksa Dana (Mutual Fund) : a vehicle used to raise funds from public investors to
be subsequently invested in Securities Portfolio by the Investment Manager.
Unit Penyertaan (Participation Unit) : the unit of measure that shows proportionate
interest of each Party in the collective investment portfolio.


IV. SELECTED REGULATIONS GOVERNING ETF AND
SHARIAH-COMPLIANT EQUITY FUND IN INDONESIA
Capital Market Law Number 8/1995 on Capital Market (Undang-Undang Republik
Indonesia Nomor 8 Tahun 1995 tentang Pasar Modal)
This is the most authoritative regulation governing all aspect of Indonesian Capital
Market including administration, legalities, and instruments such as mutual funds.
Government Regulation Number 45/1995 on Administration of the Activities in the
Capital Market as later changed by Government Regulation Number 12 / 2004
(Peraturan Pemerintah Nomor 45 Tahun 1995 tentang Penyelenggaraan Kegiatan
di Bidang Pasar Modal sebagaimana telah diubah dengan Peraturan Pemerintah
Nomor 12 Tahun 2004)
This is a more detailed regulation on the administration of Indonesian Capital
Market and acts as the executive order of the Capital Market Law Number 8/1995.
Bapepam-LK Regulation IV.B.1 on Management Guideline for Mutual Fund
Formed as Collective Investment Contract (Peraturan Bapepam-LK Nomor IV.B.1
tentang Pedoman Pengelolaan Reksa Dana Berbentuk Kontrak Investasi Kolektif)
This regulation provides the guideline for investment management companies on
managing CIC-based mutual fund. Since ETF is considered as CIC-based mutual
fund in Indonesia, this guideline also applies to ETF. It currently refers to the
Decree of the Chairperson of Bapepam-LK Number KEP-552/BL/2010
(Keputusan Ketua Bapepam-LK Nomor KEP-552/BL/2010).
Bapepam-LK Regulation IV.B.2 on Guideline for Mutual Fund Contract Formed
as Collective Investment Contract (Peraturan Bapepam-LK Nomor IV.B.2 tentang
Pedoman Kontrak Reksa Dana Berbentuk Kontrak Investasi Kolektif)
This regulation provides the guideline for investment management companies on
forming CIC-based mutual fund contract. Since ETF is considered as CIC-based
mutual fund in Indonesia, this guideline also applies to ETF. It currently refers to
the Decree of the Chairperson of Bapepam-LK Number KEP-553/BL/2010
(Keputusan Ketua Bapepam-LK Nomor KEP-553/BL/2010).
Bapepam-LK Regulation IV.B.3 on ETF (Peraturan Bapepam-LK Nomor IV.B.3
tentang Reksa Dana yang Unit Penyertaannya Diperdagangkan di Bursa Efek)
This regulation acts as the legal basis for the creation and administration of ETF in
Indonesia. It currently refers to the Decree of the Chairperson of Bapepam-LK
Number KEP-133/BL/2006 (Keputusan Ketua Bapepam-LK Nomor KEP133/BL/2006).


Bapepam-LK Regulation IV.C.3 on Guideline for Daily Announcement to Net
Asset Value of Open-End Mutual Fund (Peraturan Bapepam-LK Nomor IV.C.3
tentang Pedoman Pengumuman Harian Nilai Aktiva Bersih Reksa Dana Terbuka)
This regulation provides the calculation method for open-end mutual fund, which
is one of the two approved NAV calculation method for ETF. By implication, this
regulation allows for the formation of actively managed ETF. It currently refers to
the Decree of the Chairperson of Bapepam-LK Number KEP-08/PM/1997
(Keputusan Ketua Bapepam-LK Nomor KEP-08/PM/1997).
Bapepam-LK Regulation IV.C.4 on Management Guideline for Capital Protected
Fund, Guaranteed Fund, and Index Fund (Peraturan Bapepam-LK Nomor IV.C.4
tentang Pedoman Pengelolaan Reksa Dana Terproteksi, Reksa Dana Dengan
Penjaminan, dan Reksa Dana Indeks)
This regulation acts as the legal basis for the creation and administration of capital
protected fund, guaranteed fund, and index fund in Indonesia. It also provides
NAV calculation guideline for index fund, which is one of the two approved NAV
calculation methods for ETF. It currently refers to the Decree of the Chairperson of
Bapepam-LK Number KEP-262/BL/2011 (Keputusan Ketua Bapepam-LK Nomor
KEP-262/BL/2011).
Bapepam-LK Regulation IX.A.13 on Issuance of Shariah-compliant Securities
(Peraturan Bapepam-LK Nomor IX.A.13 tentang Penerbitan Efek Syariah)
This regulation acts as the legal basis for the creation and administration of
Shariah-compliant securities, including CIC-based Shariah-compliant mutual fund.
Since ETF is considered as CIC-based mutual fund in Indonesia, this regulation
should be applicable to Shariah-compliant ETF. It currently refers to the Decree of
the Chairperson of Bapepam-LK Number KEP-181/BL/2009 (Keputusan Ketua
Bapepam-LK Nomor KEP-181/BL/2009).
Bapepam-LK Regulation IX.A.14 on Definitions of Aqad (Contract) Used in the
Issuance of Shariah-compliant Securities (Peraturan Bapepam-LK Nomor IX.A.14
tentang Akad-akad yang Digunakan dalam Penerbitan Efek Syariah di Pasar
Modal)
This regulation acts as the legal basis for the formation of contracts to be used in
the issuance of Shariah-compliant securities. Creation of Shariah-compliant ETF
has to use the aqad as defined in this regulation. It currently refers to the Decree of
the Chairperson of Bapepam-LK Number KEP-131/BL/2006 (Keputusan Ketua
Bapepam-LK Nomor KEP-131/BL/2006).
Bapepam-LK Regulation II.K.1 on Criteria and Issuance of Shariah-compliant
Securities List (Peraturan Bapepam-LK Nomor II.K.1 tentang Kriteria dan
Penerbitan Daftar Efek Syariah)
This regulation explains the criteria for Shariah-compliant securities to be included
in Bapepam-LK issued Shariah-compliant Securities List (DES). Since Shariah-


compliant ETF is a portfolio of Shariah-compliant securities, securities included in
its basket have to conform with DES. It currently refers to the Decree of the
Chairperson of Bapepam-LK Number KEP-208/BL/2012 (Keputusan Ketua
Bapepam-LK Nomor KEP-208/BL/2012).
Fatwa DSN-MUI 20/2001 on Investing Guideline for Shariah-compliant Mutual
Fund (Fatwa DSN-MUI Nomor 20/DSN-MUI/IV/2001 tentang Pedoman
Pelaksanaan Investasi untuk Reksa Dana Syariah)
This fatwa acts as fiqh basis on investment and administration guideline for
Shariah-compliant mutual fund. In this fatwa, it is determined for usage of wakalah
aqad for the creation of mutual fund and mudharabah aqad for its securities
investment. Since ETF is considered as CIC-based mutual fund in Indonesian, this
fatwa should be applicable for Shariah-compliant ETF.
Fatwa DSN-MUI 40/2003 on Capital Market and General Guideline for the
Implementation of Shariah Principle in Capital Market (Fatwa DSN-MUI Nomor
40/DSN-MUI/X/2003 tentang Pasar Modal dan Pedoman Umum Penerapan
Prinsip Syariah di Bidang Pasar Modal)
This fatwa reaffirms the Shariah Principle in Capital Market, including prohibited
trading practices in the securities exchange. Since Shariah-compliant ETF is
investment in the securities traded in the exchange, this fatwa should apply.
Fatwa DSN-MUI 80/2011 on the Implementation of Shariah Principle in Trading
Mechanism of Equity-based Securities at Securities Exchanges Regular Market
(Fatwa DSN-MUI Nomor 80/DSN-MUI/VI/2011 tentang Penerapan Prinsip
Syariah dalam Mekanisme Perdagangan Efek Bersifat Ekuitas di Pasar Reguler
Bursa Efek)
This fatwa determines on the permissibility for equities trading in the secondary
market. Since Shariah-compliant equity ETF is investing in equities traded in the
secondary market, this fatwa should apply.


V. INTRODUCTION
Indonesia is a large nation of archipelago with population of more than 230
million. Some 88% of the population are Muslims, and as such affirming the
country for holding the largest Muslim population in the world. Consequently,
Indonesia may underpin the largest potential market, by population, for Shariah
financial products including those that are traded in the capital market.
Unfortunately, lack of Shariah finance awareness is among, if not the most, serious
challenge that may have inhibited its growth to date. Out of IDR 3,628 trillion
(approximately USD 394 billion) in Indonesian banking sectors assets, only IDR
145 trillion (or some 4% of total banking assets) were recorded by Shariah banks.10
Similarly, out of IDR 190 trillion (approximately USD 21 billion) in mutual fund
industrys net assets, only IDR 4 trillion (or some 2.1% of total funds net assets)
were placed in Shariah-compliant mutual funds. Another IDR 651 billion, or some
0.3% of total funds net assets) are placed in ETFs.11 In comparison between the
two industries, fund industry size was about 5% of banking industry.12 Obviously
there is a long way to go, but looking from another side, there is tremendous
opportunity to be tapped.
Recent sovereign credit rating upgrades by Fitch and Moodys have put Indonesia
in the investment grade territory and back into global investment communitys
radar. With relatively small market capitalization, global investors may need for
swift access to Indonesia market, and currently no Shariah market proxy is being
traded in the stock exchange. The large potential and largely underpenetrated
capital market present an opportunity for Shariah-compliant ETFs for domestic and
global investors demanding Shariah-compliant proxy to Indonesian market. At
present only two ETFs are currently listed in the stock exchange, a fixed income
and an equity, neither is Shariah-compliant.
This paper tries to present the potential for Shariah-compliant ETF in Indonesia.
As a comparative study, it looks into the development of Shariah-compliant ETF in
three countries:
The United States, where the first and only Shariah ETF launched in US
market was closed down in less than two years after its launch;
The United Kingdom, where 10 Shariah-compliant ETFs are currently
being traded in the London Stock Exchange, in less than five years since
its first Shariah-compliant ETF was launched;

10

Indonesian Banking Statistics Feb 2012, Bank Indonesia.

NAV as of 30 Mar 2012, Bapepam-LK
12
To put into better context, Indonesias GDP in 2011 was USD 845 billion. Indonesia
Stock Exchange market capitalization was USD 376.8 billion as of 20 June 2012.
Therefore, mutual fund industrys assets were 5.57% of Indonesias market capitalization.
11

10

Malaysia, the neighboring country where the first Shariah ETF in Asia
were listed in 2008 and continued to be traded until today.

It is hoped that the resulting comparison shall be useful in understanding the

possibility for Shariah-compliant ETF development in Indonesia.

VI. THE APPEALS OF INDONESIA

The archipelago nation of Indonesia is not only captivating in its sight, but also the
potential that lies in the future of its capital market. The country is not only rich in
natural resources such as coal, palm oil, coffee, tins, natural gas, and geothermal
energy but also its diverse population and culture. The fourth largest population,
and the third largest democracy, was gradually recovering from its downfall during
Asian Financial Crisis of 1997. Fourteen years after the crisis, Indonesia regained
its investment grade status when Fitch upgraded the countrys sovereign credit
rating from BB+ to BBB- in December 2011, on the back stabilizing
macroeconomic, steady growth, and shrinking debt.13 With Indonesia now back
into global investment radar, the development of Shariah-compliant finance and
economy shall become more pivotal and relevant considering its large Muslim
population.
A. LARGEST MUSLIM POPULATION
According to the Pew Research Centers Forum on Religion and Public Lifes
population projections, the global Muslim population is expected to rise from 1.6
billion in 2010 to 2.2 billion in 2030 or increasing by 35% in the 20-year period.
The number of projected Muslim population shall comprise roughly a quarter of
8.3 billion of the worlds total population in 2030 according to the Pew Forum.14
Exhibit 1. Muslims shall comprise a quarter of the worlds population by 2030

13

Deutsch (2011).
Based on The Future of the Global Muslim Population: Projections for 2010-2030,
Washington, DC: Pew Research Center.
14

11

Muslims as a Share of World Population, 1990-2030

9
8
7
6
5
4
3
2
1
0

4.8

4.2

6.1

5.8

5.3

1.1

1.3

1.6

1.9

2.2

1990

2000

2010

2020

2030

Muslims

Non-Muslims

Source: Pew Research

According to the Pew Forum demographic study, an estimated 205 million
Muslims live in Indonesia, roughly 88% of its 230+ million populations. The
number makes up 13% of total global Muslim population, making Indonesia the
largest country with Muslim population.
Exhibit 2. Indonesia has the largest Muslim population

10 Countries with largest Muslim Population (in million)

250
200

205
178

150
100
50

177
149
80

76

75

75
35

32

Source: Pew Research

12

This large base of Muslim population shall serve as a highly potential market for
Shariah-compliant financial products, including Islamic ETF. According to KSEIs
data, there were 381,374 securities account holders as of 20 February 2012.15 This
indicates low penetration of capital market investments and largely untapped
market.
The IMF in its World Economic Outlook Database recorded 17.7% in GDP per
capita growth from USD 2,980 in 2010 to USD 3,508 in 2011.16 Assuming that the
growth rate is sustainable, then the annual GDP per capita can surpass USD 5,000
in three years. Bearing that in mind, domestic demand on investment products shall
rise rapidly.
B. RESILIENT STOCK MARKET PERFORMANCE
As of 30 March 2012, Standard and Poors reported in its Global Equity Indices
update, Indonesia Broad Market Index (BMI) cumulative price return for the past
five years was 95.3%, third highest right behind Thailands 104% 5-year
cumulative price return.17 It should be noted that out of 26 developed countries and
20 emerging countries that make up S&P Global BMI, only 20 of them recorded 5year positive return.
Indonesia topped the longer-term (3-year and 5-year) stock performance relative to
its ASEAN peers, BRIC countries, and predominantly Muslim countries, for the
most part. While past performance does not indicate future returns, the resilience of
Indonesian stock market as it weathered the Global Financial Crisis of 2008-2012
cannot be discounted.

15

Setyadi (2012:2).
IMF WEO Database April 2012.
17
S&P Global Equity Indices Monthly Update March 2012
16

13


Exhibit 3. Compared to the BRIC countries, Indonesia recorded higher long-term
performance

Stock Price Returns in %, BRIC + I

Indonesia
China
India
Russia
Brazil
-50
5-year

0
Brazil
43.9

50
Russia
-24.58

100
150
India
11.16

200
China
22.48

3-year

86.73

113.31

78.13

50.91

240.35

1-year

-15.34

-20.59

-20.67

-15.96

3.1

YTD

13.73

18.05

20.03

11.21

6.14

5-year

3-year

1-year

250
300
Indonesia
95.26

YTD

Source: S&P Global BMI March 2012

14


Exhibit 4. In ASEAN, Indonesia was at par with Thailand in longer-term
performance

Stock Price Returns in %, ASEAN 5

Indonesia
Thailand
Philippines
Malaysia
Singapore
-50
0
Singapore
5-year
4.1

50
100
150
200
Malaysia Philippines Thailand
44.48
82.6
104.01

250
300
Indonesia
95.26

3-year

115.44

122.58

207.52

224.49

240.35

1-year

-4.81

1.91

23.03

13.35

3.1

YTD

18.75

8.06

20.96

20.76

6.14

5-year

3-year

1-year

YTD

Source: S&P Global BMI March 2012

15


Exhibit 5. While in predominantly Muslim countries, Indonesia excelled in longerterm performance

Stock Price Returns in %, Muslim Countries

Indonesia
Malaysia
Turkey
Egypt
Morocco
-50
5-year

0
Morocco
-8.77

50
Egypt
-31.91

3-year

4.31

13.61

120.66

122.58

240.35

1-year

-15.36

-10.94

-16.38

1.91

3.1

2.28

35.03

28.36

8.06

6.14

YTD

5-year

100
150
200
Turkey
Malaysia
10.33
44.48

3-year

1-year

250
300
Indonesia
95.26

YTD

Source: S&P Global BMI March 2012

VII. EXCHANGE TRADED FUND (ETF)

ETF was first launched in 1993 in the American Stock Exchange. An ETF is like
an index mutual fund in that it holds a portfolio of securities mimicking an index.
In the case of equity ETF, it will hold a basket of stocks that make up an equity
index. The difference lies in that ETF can be traded in the stock exchange while an
open-end index fund cannot. With its tradability, the benefits and drawbacks of
stock investing are embedded in ETF. But first and foremost, it is essentially an

16


index fund.18
A. MUTUAL FUND AS THE PRECURSOR OF ETF
The first attempt to enable small investors to own a large portfolio of investment
dated back in 1770s the Netherlands where a Dutch financier named Adriaan Van
Ketwich raised money from 37 individual investors to be invested in European
government bonds.
Van Ketwich success was followed by some 30 other investment trusts, first in the
Netherlands and by the end of 1800s, the idea had reached England. The first
investment trust established outside the Netherlands was the Foreign and Colonial
Government Trust, which was established in London in 1868.
The appearance of investment trust in the United States started in 1893 where
Boston Personal Property Trust was organized. The precursor of modern mutual
fund structure was also originated in the United States, in the name of Alexander
Fund, which was established in 1907 as an investment club between few
individuals. The Fund allowed shareholders to sell back their shares to the fund at
any time, a feature later made common in modern mutual fund.
The first landmark mutual fund is credited to be the Massachusetts Investment
Trust, formed in 1924 by faculty and staff of Harvard University. After the
introduction of Investment Act of 1940, as a regulation of US mutual fund industry
following the Great Depression of 1929, the number of mutual funds grew
dramatically.
Until 1970s, the mutual fund industry had only known active investment
management. Addressing investors concern for a mutual fund whose returns
would not depend on its managers luck or skill and would simply follow the
market return, Vanguards founder John Bogle and Princeton Universitys
economics professor Dr. Burton Malkiel introduced the Vanguard 500 Index Fund
on 31 August 1976. The Fund was designed to track the S&P 500 Stock Index.
The Toronto Stock Exchange Index Participation Shares (TIPS) were launched in
Canada in 1989. It tracked Toronto-35 Index and represented fractional ownership
of the stocks comprising the Index. TIPS were traded in the Toronto Stock
Exchange and behaved very much like ETF.

18

Recent developments have resulted in the launching of actively managed ETFs since late
2000s. Regardless, the large majority of ETF in the market today is passively managed.

17


In 1993, the first ETF was launched by the American Stock Exchange. The ETF
was named S&P Depository Receipt (SPDR) Trust Series 1, and was designed to
track S&P 500 Stock Index. The number of ETFs traded globally has grown
rapidly ever since. Until end of February 2012, there were 3,145 active ETFs
traded worldwide with combined underlying assets of US$ 1.52 trillion.19
B. ETF REGULATION IN INDONESIA
Exchange Traded Fund is known in Bahasa Indonesia as reksa dana yang unit
penyertaannya diperdagangkan di bursa or translated as mutual fund with
exchange-tradable participation units. Because ETF is classified as mutual fund
under Indonesian law, its underlying regulations and characteristics are similar to
those govern mutual fund, with some exceptions.
Exhibit 6. ETF, for the most part follows the regulations on open-end mutual fund,
except for specific ruling on Regulation IV.B.3 which applies only for ETF. The
following table shows regulations on mutual fund that applies to ETF.
Open-End Mutual Fund
ETF
Collective Investment
Bapepam-LK Regulation
Bapepam-LK Regulation
Contract (CIC)
IV.B.2 on CIC guideline.
IV.B.2 with additional
formation between
clauses related to ETF
Investment Manager
such as unit creation
and Custodian Bank
method
Investment Policy

Bapepam-LK Regulation
IV.C.3 which classifies
mutual fund into money
market, equity, fixed
income, and balanced
funds.
Bapepam-LK Regulation
IV.C.4 adds another
classification, index
fund.

Bapepam-LK Regulation
IV.C.3 which implies
actively managed ETF.
Bapepam-LK Regulation
IV.C.4 on index fund
allows asset allocation
not in conformity with
Regulation IV.C.3 due to
indexing mechanism
(i.e., more than 10% on
one stock in a funds
portfolio).

Public Offering

Bapepam-LK Regulation
IX.C.5 on registration for
public offering.

Bapepam-LK Regulation
IX.C.5 with additional
registration to BEI and

19

BlackRock (2012:12)

18


agreement with
Authorized Participants.
Administration and
Management

Bapepam-LK Regulation
IV.B.1 on management
guideline for investment
manager.

Bapepam-LK Regulation
IV.B.1 with certain asset
allocation exemption due
to indexing process.

Source: Bapepam-LK
Portfolio holding of mutual fund (or basket in ETF parlance) is consisting of
securities, which may be in the form of equities and/or bonds. Other type of
securities such as commodities and derivatives, although common in developed
countries, are not yet allowed by Indonesian law to be held in mutual fund and
ETF.
C. BENEFITS OF INVESTING IN ETF
Because of its hybrid structure of an index fund and a stock, ETF can combine the
benefits of both worlds.
Instant diversification
Because it is a basket of stock portfolio, each trade of ETF can expose
investors to diverse equity names. As a result, investors may lessen or even
eliminate unsystematic risk, which is also known as company-specific risk.

Passive management
Most ETF is passively managed, tracking the performance of an index.
The implication of passive management includes: 1) low asset turnover,
which improves its tax and cost efficiency, 2) low management fee
attributable to assistance of technology, 3) market-tracking performance,
assuring market beta achievement.

Limited divergence of its NAV

Since ETF is traded throughout the trading day, ETF valuation mimics its
underlying prices. Any divergence causing arbitrary opportunities will be
taken advantage by authorized participants, resulting in valuation
efficiency and greater transparency.

Stock-like tradability
Investor may apply stock-trading strategies with most ETFs since ETFs are
traded throughout the trading day. As such, common brokerage
commissions apply for ETF trading. Because it is traded on the exchange,

19


front-end and back-end fees common in mutual fund are not existent in
ETF.

Liquidity
Because of its unit creation mechanism, changes to ETFs underlying
securities and their prices are immediately reflected in the ETFs market
price.

Easier implementation of asset allocation strategy

Due to its market mimicking behavior, a more complex asset allocation
strategy can be implemented with little effort by assembling a portfolio of
ETF based on its tracked asset classes or sectors or any other
combinations.

Despite the recent upgrade in its sovereign credit rating, foreign investors may be
reluctant to invest in Indonesian market due to its relatively smaller capitalization
and may require fast exit strategy mechanism. Such investment requirement may
be fulfilled by ETF.
D. SHARIAH-COMPLIANT ETF IN INDONESIA
At present, there are two ETFs traded in BEI: 1) a fixed income ETF, Reksa Dana
ABF Indonesia Bond Index Fund, and 2) an equity ETF, Reksa Dana Premier ETF
LQ-45. Neither of them is Shariah-compliant. As such, it presents an opportunity
for the development of Shariah-compliant ETFs.
Creation of a Shariah-compliant ETFs would be under similar regulation as
conventional ETFs. As for Shariah-compliancy, there is no specific fatwa issued
for ETF by the DSN. Nevertheless, the current available fatwa should be sufficient
to cover the Shariah-compliancy of ETF.
Since ETF is classified as mutual fund under Indonesian capital market regulation,
its CIC-based mutual fund form is covered under Fatwa DSN-MUI 20/2001 on
Investing Guideline for Shariah-compliant Mutual Fund. Fatwa DSN-MUI
20/2001 stipulates for the usage of wakalah aqad for operational mechanism
between the fund and its investor, while operational mechanism between the fund
and its investee (in the form of share ownership) is using the mudharabah aqad.
The functions of Investment Manager and Custodian Bank similar with
conventional mutual fund, and that they will be remunerated for their services in a
scheme also known as wakalah bil-ujrah.

20


Fatwa DSN-MUI 20/2001 defines that Reksa Dana Syariah (Shariah-compliant
Mutual Fund) is a mutual fund which operationally abide by the principle and
regulation of Shariah law, with regard to the form of aqad between investor as the
capital owner (Shahib al-mal/Rabb al-mal) with Invesment Manager and between
Investment Manager as representative (wakil) of Shahib al-mal and the capital user
(the investee).
Article 2 of the Fatwa describes the operational mechanism of Shariah-compliant
mutual fund, consisting of:
Between investor and Investment Manager, it is conducted through waqala
aqad.
Between Investment Manager and investee, it is conducted through
mudharabah aqad.
Characteristics of mudharabah aqad are:
Sharing of profits between the investor (Shahib al-mal), as represented by
Investment Manager, and the investee is according to the agreed
proportion by both Parties and that there will be no guarantee of fixed
return to the investor.
Investor only shares the risk proportionate to the capital contributed.
Investment Manager as the representative (wakil) does not bear risk of loss
to the investment as long as no gross negligence (tafrith) conducted on his
part.
Article 3 of the Fatwa describes that the aqad between investor and Investment
Manager is conducted through waqala aqad. Therefore, investor gives a mandate
to the Investment Manager to invest on behalf of the investor, in accordance to
terms and condition as stipulated in the Prospectus.
Investors collectively have the right to investment return of the Shariah-compliant
Mutual Fund, until they redeem their participation units. Consequently, the risks to
the Fund are borne by investors. At any time, investors have the right to subscribe
or redeem their participation units through the Investment Manager. Invested fund
shall be put in safekeeping by Custodian Bank, and it is the duty of the Custodian
Bank to calculate the Funds daily net asset value. For its investment management
service and collective fund safekeeping, Investment Manager and Custodian Bank
respectively have the right to service fees which are calculated as certain
percentage of the Funds NAV. Any risk caused by gross negligence (tafrith) by
Investment Manager and Custodian Bank shall be borne by them, independently or
jointly.

21


Bapepam-LK Regulation IX.A.14 on Definitions of Aqad (Contract) Used in the
Issuance of Shariah-compliant Securities stipulates the following for the issuance
of Shariah-compliant mutual fund formed as Collective Investment Contract:
Follow regular public offering of participation units in accordance with
Bapepam-LK Regulation IX.A.1 on General Conditions for Filing
Registration and Bapepam-LK Regulation IX.C.5 on Registration for
Public Offering of CIC-based Mutual Fund.
Need additional clauses in the Contract and Prospectus, for the following:
o Investment Manager and Custodian Bank (the wakilin) are acting
on behalf of unit holders (the muwakil), whereas Investment
Manager is authorized to manage collective investment portfolio
and Custodian Bank is authorized to perform custodial service of
the collective investment.
o Investment policy of the Mutual Fund must abide to the Shariah
principle. Investment Manager representative and Custodian Bank
coordinator must comply with the Shariah principle.
o The word Syariah have to be put in the name of the issued
Mutual Fund.
o Mechanism for purification of Mutual Funds assets from elements
in violation of the Shariah principle, have to be stated.
o Asset of Shariah-compliant Mutual Fund may only be invested in:
Equity shares included in the DES either by issue (general
company stock as approved by Bapepam-LK) or by issuer
(Shariah-based company proven by its Article of
Association, also as approved by Bapepam-LK).
Shariah-compliant right issues and warrant.
Sukuk, as long as the issue have undergone Public
Offering and/or traded in the BEI. Foreign exchangetraded Sukuk is also permissible as long it is included in
the DES.
Agency rated Shariah-compliant EBA.
Agency rated Shariah-compliant commercial paper.
Shariah-compliant securities issued by international
agencies where Indonesia is a member country.
Shariah-compliant money market instruments, both in IDR
or foreign currency.
o Custodian Bank must reject Investment Managers instruction
when it will cause deviation of investment portfolio from the
above list.
o In the event that deviation occurred due to no part of action from
Investment Manager or Custodian Bank, then the following
actions must be taken:

22

Investment Manager has to sell and settle in no later than

10 business days.
o Securities that is no longer included in DES and/or abide by the
Shariah principle, with any capital gain incurred since its last
inclusion has to be treated as social allocation and not included in
the calculation of the Funds NAV.
In the event that deviation occurred due to active action from Investment
Manager or Custodian Bank, then Bapepam-LK may do the followings:
o Forbid Investment Manager to issue and sell new participation
units.
o Forbid Investment Manager and Custodian Bank to move Funds
assets other than asset purification.
o Command Investment Manager and Custodian Bank to jointly and
severally purchase the Shariah-prohibited securities from the Fund
at the acquisition price.
o Any failure of implementation of the above shall risk BapepamLKs mandated replacement of the Investment Managers and/or
Custodian Bank, or dissolution of the Fund.

Prohibited business activities for investment is covered under Fatwa DSN-MUI

20/2001 and Fatwa DSN-MUI 40/2003, and reaffirmed with Bapepam-LK
Regulation II.K.1 on Criteria and Issuance of Shariah-compliant Securities List
(DES). They are, among others:
Gambling and other games categorized as gambling;
Shariah-prohibited trade, which include:
o Trading without accompanying transfer of goods/services;
o Trading with false bid;
Conventional financial services based on riba:
o Interest-based banks, and
o Interest-based financing companies;
Trade of risk which contain elements of uncertainties (gharar) and/or
gambling (maisir) which include conventional insurance;
Production, distribution, trade and/or provision of:
o Goods or services of which are essentially haram (haram lidzatihi);
o Goods or services of which are not essentially haram but decided
to be haram by DSN-MUI (haram li-ghairihi);
o Goods or services of which are mudarat in nature and morally
destructive;
Transaction with elements of bribe (risywah).
Bapepam-LK Regulation II.K.1 also stipulates financial ratio to be adhered as
follows:

23

Total interest-bearing debt over total asset must not be over 45%, or
Total interest income and non-halal income over total revenue and other
income must not be over 10%.

Shariah-compliancy for ETF trading in the exchange is covered by Fatwa DSNMUI 80/2011 on the Implementation of Shariah Principle in Trading Mechanism
of Equity-based Securities at Securities Exchanges Regular Market. Although
ETF definition is not specified definitively, the definition for Equity-based
Securities in this Fatwa is applicable to ETF. It is stated that Equity-based
Securities are shares (stocks) or securities that are convertible into shares or
securities containing the right for share acquisition. Since ETF can be exchange inkind with its underlying stock portfolio, it fits with the definition of Equity-based
Securities in this Fatwa. The Fatwa also describes in more detail, 14 prohibited
trading mechanism, which none is violated in normal trading mechanism of ETF.
Although it should be noted that certain common stock-trading mechanism such as
short selling and margin trading are not allowed for Shariah-compliant stock, and
consequently may not be allowed for Shariah-compliant ETF.

VIII. COMPARATIVE STUDIES OF SHARIAH-COMPLIANT ETF

IN OTHER COUNTRIES
In assessing the possibility for Shariah-compliant ETF development in Indonesia, a
comparative study is made to look into the development of Shariah-compliant ETF
in the United States, the United Kingdom, and Malaysia.
The three countries are selected because of the following reasons:
The United States, because the first and only Shariah-compliant ETF
launched in the US market was closed down in less than two years after its
launch. Considering that US has the most advanced ETF market in the
world, with ETF assets of USD 1.06 trillion representing 1,152 listed
ETFs, a failed Shariah ETF would be an interesting case study.20
The United Kingdom, because there are 10 Shariah-compliant ETF
currently being traded in the London Stock Exchange in less than five
years since its launch. The recent ascent of UKs prominence in Shariah
finance was rooted from its active government support. Outside other
countries with predominantly Muslim populations, UK is considered to be
foremost provider of Shariah-compliant financial products. As such, it
would be interesting to learn more about the development of Shariahcompliant ETF in this country.

20

Blackrock (2012:17)

24

Malaysia, because the Indonesias next door neighbor has listed its, and
Asias, first Shariah-compliant ETF since 2008. Demographically,
Malaysia has the most similarity with Indonesia, where the population is
predominantly Muslims of somewhat similar ethnic groups and languages
following the same Shafii school of thought (madhab). Comparatively,
Shariah finance development in Malaysia is the closest proxy of what may
be the future development of Shariah finance in Indonesia.

A. UNITED STATES OF AMERICA

The first and only Shariah-based ETF to date to be traded in US market was
launched in 1 July 2009. Javelin Exchange Traded Funds (JETS) Dow Jones
Islamic Market International Index Fund (ticker: JVS) was designed to track the
Dow Jones Islamic Market (DJIM) Titans 100 Index, comprising of 100 companies
located in 23 countries outside the US.
The investment adviser for JVS was Javelin Investment Management, LLC
(Javelin). According to JVS prospectus, Javelin was a new investment adviser with
no previous experience in managing mutual funds. Acting sub-adviser to JVS was
Esposito Partners, LLC (Esposito) with responsibility for implementing replication
strategy for JVS and providing general administration, compliance, and
management services, subject to the supervision of the investment adviser.
Javelin used a sampling strategy, rather than a replication strategy in managing
JVS. Sampling strategy means that JVS assets might not be invested in all of the
securities that make up DJIM Titans 100, and/or that each security weighting might
differ from those of the index. However, as the prospectus of JVS mentioned, the
investment manager would try to construct a portfolio so that its market
capitalization, industry weightings, fundamental investment characteristics and
liquidity measures would perform just as similar to the target index. At minimal,
90% of JVS assets would be invested in securities of the target index.
The fund prospectus also said that since Shariah principle preclude the use of
interest-paying instruments, the fund did not intend to invest in short-term income
producing instruments unless those instruments were consistent with Shariah
principle. Consequently, JVS might underperform in its ability to earn a return on
those assets not fully invested in the underlying securities of DJIM Titans 100.
Exhibit 7. The following table list all the parties involved in the provision and
daily trading operation of JVS
Investment adviser
:
Javelin Investment Management, LLC
Sub-adviser
:
Esposito Partners, LLC
Shariah advisor
:
Shariah Supervisory Board (Shaykh Nizam

25

Principal underwriter
and distributor
Administrator, transfer
agent and custodian
Compliance support
Index provider
Source: JVS Prospectus

Yaquby of Bahrain, Sheik Taha AbdulBasser, and Dr. Yousef Abdullah AlShubaily)
Foreside Fund Services, LLC

Brown Brothers Harriman & Co.

:
:

Foreside Compliance Services, LLC

Dow Jones & Company, Inc.

The DJIM Titans 100 Index is a float-adjusted, market capitalization weighted

index comprising of 100 securities, each is traded outside of the US market and
considered as foreign security to US-based investors. The securities are selected to
reflect the industry breakdown of the global market and to represent the most
liquid securities of those industries. Additional technical and fundamental factors
are also considered including market turnover, country weighting, and corporate
financial health. Each stock has to meet the Shariah principle. The criteria of which
are follows:
Exclusion of businesses and industry groups with material ownership of or
revenues from the following:
o alcohol,
o conventional financial services (banking, insurance, etc.),
o casinos/gambling,
o pornography,
o tobacco manufacturers,
o pork related products,
o weapon companies.
Exclusion of companies with unacceptable levels of debts or interest income.
A Shariah supervisory board for JVS was retained by the investment manager in
order to maintain standard of compliance with Shariah principle. This supervisory
board was separate from DJIMs own Shariah supervisory board. Board members
were not affiliated with JVS nor Javelin. The fund should abide by the guideline
set by AAOIFI as periodically reviewed by the board.
Sadly, JVS failed to attract investor assets and subsequently ceased its trading on
19 October 2010, slightly more than a year since its launch. JVS had been slow in
gathering assets and building up trading volume. As of end of August 2010, the
fund had just USD 2.2 million of AUM, about the same when it was launched on 1
July 2009. Javelin president and founder Brint Frith was quoted in press release
dated 15 September 2009, With over seven million Muslims in the United States,
we believe that Shariah-based investing has a promising future, but we found it

26


difficult to reach target investors through the marketing channels typically used by
ETFs.
The circumstance during the operational year of JVS was also not favorable.
Coming off from sub-prime mortgage crisis, the US economy has just slowly
recovered. Global market had yet to face escalating European debt crisis, but stock
markets continued to be volatile nonetheless.
Another investment manager offering faith-based ETF products also struggled to
gain traction with investors. FaithShares Trust had launched in 2009 five ETFs
with investment strategy to match religious values of popular Christian
denominations in the US. They were FaithShares Catholic Values ETF (ticker:
FCV), FaithShares Methodist Values ETF (ticker: FMV), FaithShares Baptist
Values ETF (ticker: FZB), FaithShares Lutheran Values ETF (ticker: FKL), and
FaithShares Christian Values ETF (ticker: FOC). On 15 July 2011, FaithShares
ceased the trading of FCV, FMV, FZB, and FKL, and subsequently liquidated
them. The largest of the five with about USD 3 million in AUM, FOC, had ceased
its trading on 31 August 2011. Although faith-based ETF did not fare well in
general, the demand for faith-based investment continued to be satisfied through
faith-based mutual fund as proven by Shariah-compliant mutual funds.
The question begs, why the development of faith-based ETF had been difficult in
US? Developing a vibrant ETF market would require both the products and the
investors. Creating Shariah-compliant ETF products would need transparent,
replicable, and readily available Shariah indices to be tracked.
The Standard & Poors family of indices lists 27 Shariah equity indices with 11 of
them being tradable versions which include S&P 500 Shariah Index, the Shariahcompliant version of the popular S&P 500 Index. The European-based FTSE
Group developed broad Shariah equity indices based on six countries and one on
global market. The largest player and most established, the Dow Jones Islamic
Market, has indexed 69 countries into thousands of Shariah-compliant indices in
broad asset classes, including the DJIM Titans 100 Index and DJIM Malaysia
Titans 25 Index. Both the Titans 100 and Malaysia Titans 25 have been made into
ETF products.
Clearly, the long list of readily available and trackable Shariah-compliant indices is
not the impediment for ETF managers to create new products. Therefore the other
side of the equation, namely the investors or the demand side, may explain the
somewhat slow progress in Shariah ETF development. ETF managers, or the
supply side, will go where the demand takes them. This, however, does not imply
that there are no investors for Shariah-compliant investment in the US.
The Pew Forum estimated 2.6 million Muslims live in United States in 2010,

27


representing 0.8% of the US total population. By 2030, Muslim population in the
US is expected to grow to 6.2 million or representing 1.7% of projected total
population. While potential investors do not amount as much compared to
predominantly Muslim countries, the much higher standard of living is more than
enough to compensate it. Added to that, non-Muslim US-based investors and
foreign-based Muslim investors could create large asset potential for investment
managers capable to capture them.
The oldest US-based Shariah-compliant mutual fund, Amana Income Fund (ticker:
AMANX), also happen to be the second largest public equity fund in the world
with USD 1.3 billion in assets under management. Amana Income Fund was
launched on 23 June 1986 and has since been managed by Saturna Capital
Corporation. Saturna also managed the largest public equity fund, Amana Growth
Fund (ticker: AMAGX), which began its operation on 3 February 1994 and have
amassed USD 1.9 billion in assets.
That also does not imply that demand for Shariah-compliant investment only
limited to actively managed fund. The Iman Fund (ticker: IMANX) is a passively
managed equity index fund based on the Dow Jones Islamic Market US Index.
Iman Fund inception date was 30 June 2000. Its fund manager is Allied Asset
Advisors. Iman Fund recorded USD 39.5 million of AUM as of 20 April 2012.
Compare this with USD 2.2 million AUM of JVS when it was liquidated in 2010
after being operational by about one year.
While US domestic investors have the avenue for Shariah-compliant investment in
mutual funds, foreign investors have wider Shariah-compliant investment choices,
some of them are Shariah-compliant ETFs traded in the London Stock Exchange.
B. UNITED KINGDOM
The Pew Forum estimated 2.87 million Muslims live in United Kingdom in 2010,
representing 4.6% of UK total population. By 2030, Muslim population in UK is
expected to grow to 5.57 million or representing 8.2% of projected total
population. Muslim population in the UK is slightly higher than the US. The
development of ETFs themselves had also been considerably late. Regardless, the
development of Shariah-based ETFs has been promising on this side of the globe.
The first ETF in United Kingdom was launched on April 2000, iShares FTSE 100
(ticker: ISF), which was designed to track FTSE 100 Index. The Index comprises
100 of the highest capitalized stocks traded in the London Stock Exchange,
representing 81% of UK market capitalization.
But it was not until 2007, with tax regulation reform favorable to ETFs, that ETF

28


trading started to pick up significantly. Within one year period after the abolition of
stamp duty for ETFs incorporating overseas, listing had increased by 146%,
monthly value traded had increased by 103% while number of monthly trades had
increased by 88%. As of 2 April 2012, there are 1,367 ETFs listed in the London
Stock Exchange.
In December 2007, the first Shariah-compliant ETFs in the world were listed in the
Exchange. They were six Irish-domiciled iShares family of ETFs: iShares MSCI
USA Islamic ETF (ticker: ISUS for GBP-based, ISDU for USD-based), iShares
MSCI World Islamic ETF (ticker: ISWD for GBP-based, IWSD for USD-based),
and iShares MSCI Emerging Markets Islamic ETF (ticker: ISEM for GBP-based,
ISDE for USD-based).
As of 19 April 2012, ISUS and ISDU had accumulated USD 20.8 million of assets;
ISWD and IWSD were USD 45.7 million; while ISEM and ISDE were USD 39
million. Combined, all iShares Shariah-compliant ETFs had close to USD 106
million of AUM.
In July 2008, more Shariah-compliant ETFs were listed in the Exchange. They
were four Deutsche Bank db x-trackers ETFs: db x-trackers Dow Jones Islamic
Market Titans 100 ETF (ticker: XIMT), db x-trackers S&P Europe 350 Shariah
Index ETF (ticker: XSHE), db x-trackers S&P Japan 500 Shariah ETF (ticker:
XSHJ), and db x-trackers S&P 500 Shariah ETF (ticker: XSHU). In total, currently
there are ten Shariah-compliant ETFs traded in the LSE.
As of 30 March 2012, XIMT had accumulated USD 9.3 million of assets; XSHE
were EUR 5.3 million; XSHJ were USD 2.6 million; and lastly XSHU were USD
7.2 million of assets. Combined, all db x-trackers Shariah-compliant ETF had
slightly more than USD 26 million of AUM.
Exhibit 8. The following table list all the parties involved in the provision and
daily trading operation of all iShares Shariah-compliant ETFs
Fund manager
:
BlackRock Asset Management Ireland Limited
Issuing company
:
iShares II plc
Administrator
:
State Street Fund Services (Ireland) Limited
Custodian
:
State Street Custodial Services (Ireland) Limited
Product licenser
:
MSCI
Benchmark
:
MSCI Inc.
provider
Source: iShares fund fact sheets

29


Exhibit 9. The following table list all the parties involved in the provision and
daily trading operation of all db x-trackers Shariah-compliant ETFs
Investment manager
:
State Street Global Advisor Limited
Distributor
:
Deutsche Bank AG
Custodian
:
State Street Bank Luxembourg S.A.
Administrative agent,
:
State Street Bank Luxembourg S.A.
paying agent, and listing
agent
Registrar and transfer
:
State Street Bank Luxembourg S.A.
agent
Management company
:
DB Platinum Advisors
Source: db x-trackers simplified prospectuses
The MSCI USA Islamic Index is a subset of MSCI USA Index. It comprises of US
stocks which comply with Shariah-compliant investment principles. The MSCI
World Islamic Index is a subset of MSCI World Index, comprising Shariahcompliant stocks from developed countries. The MSCI Emerging Market Islamic
Index is a subset of MSCI Emerging Market Index with constituents of Shariahcompliant stocks for emerging markets. All stocks in MSCI Index have to comply
with MSCI criteria on size, liquidity, and free float. As for maintaining compliance
with Shariah principle, it is under the supervision of BlackRock (iShares parent
company) Shariah Panel.
The Government has been actively and publicly supporting the development of
Shariah finance. Former British Prime Minister Gordon Brown, when he was still
Chancellor of the Exchequer, had declared for London to be the global center of
Islamic banking. At least five fully Shariah-compliant banks and no less than 17
conventional financial institutions offering Shariah window exist in the UK.
The financial service industry regulator Financial Services Authority (FAS) was
created in 2001, as a single financial regulator overseeing both the banking
industry and capital market. FAS is an independent body under Ministry of
Treasury and accountable to the Parliament. In 2002, FSA had stated one of its
objectives was to incorporate fully Shariah-compliant Islamic bank.21 Later in
2006, the first fully Shariah-compliant bank was established in the UK. Since the
beginning, FSA stance toward Shariah finance can be summed up simply as no
obstacles, no special favors. FSA is keen to promote a level playing field
between conventional and Islamic providers, and clearly states that they are
financial, not a religious, regulator.22

21

Nanava (2007:42)
Islamic Banking in UK, FSA. Available:
http://www.fsa.gov.uk/about/media/notes/bn016.shtml
22

30

Such strong support from the British Government may explain the rapid growth of
Shariah-compliant ETF in UK. Political situation in US post 9/11 may also explain
the movement of a big chunk of Gulf money from US to UK.23 While UK is
ambitious to be the beacon for Sharia finance in the West, the race is joined by its
former colony in the East, Malaysia.
C. MALAYSIA
The first ETF in Malaysia was launched on 19 July 2007, the FBM30etf, which
tracked FTSE Bursa Malaysia Large 30 Index. FBM30etf was later renamed to
FTSE Bursa Malaysia KLCI (ticker: FBM KLCI etf) with its underlying index, the
FBM KLCI Index, re-launched on 6 July 2009. The Index comprises the largest 30
Malaysian companies by market capitalization. There are four equity ETFs and one
fixed income ETF currently trading in Bursa Malaysia.
One of the Malaysian equity ETFs is MyETF Dow Jones Islamic Market Malaysia
Titans 25 (ticker: MyETF-DJIM25), which is claimed to be the first Shariahcompliant ETF in Malaysia and Asia. MyETF-DJIM25 was launched on 31
January 2008 and was designed to track the Dow Jones Islamic Market (DJIM)
Malaysia Titans 25 Index, comprising 25 largest Shariah-compliant companies by
market capitalization.
The investment manager for MyETF-DJIM25 is i-VCAP Management Sdn. Bhd.
(i-VCAP). i-VCAP is a state-owned enterprise, wholly owned subsidiary of an
investment holding company Valuecap Sdn. Bhd. Valuecap is equally owned by
the sovereign wealth fund Khazanah Nasional Berhad, Malaysias largest fund
management company Permodalan Nasional Berhad, and the national retirement
fund Kumpulan Wang Persaraan (Diperbadankan). i-VCAP was incorporated on
25 October 2007 with a specific mandate to provide Shariah-compliant investment
management services.
Exhibit 10. The following table list all the parties involved in the provision and
daily trading operation of MyETF-DJIM25
Fund manager
: i-VCAP Management Sdn. Bhd.
Trustee
: Deutsche Trustees Malaysia Berhad
Shariah advisor
: CIMB Islamic Berhad
Technical advisor
: BNP Paribas Asset Management Malaysia Sdn. Bhd.
Participating
: CIMB Investment Bank Berhad and OSK
dealers
Investment Bank Berhad

23

Buchanan (2009).

31


Selling agents

Aseambankers Malaysia Berhad and Affin

Investment Bank Berhad
Index provider
: Dow Jones & Company, Inc.
Source: MyETF-DJIM25 prospectus
The DJIM Malaysia Titans 25 Index is a market capitalization weighted and freefloat adjusted index. The Index was created by Dow Jones on 18 January 2008. It
was constructed based on reference value of 1,000 as of 17 January 2008. The 25
largest market cap stock comprised of Malaysia-based companies which comply
with Dow Jones screening methodology. The 25 constituent companies accounted
for 29% of Malaysia stock market capitalization.24
MyETF-DJIM25 Shariah investment policies and guidelines have to comply with
both Malaysian Securities Commission Shariah Advisory Councils criteria and
Dow Jones Shariah Advisory Boards screening methodology. The policies and
guidelines are established and endorsed by the ETFs Shariah advisor, with the
following qualitative criteria:
The ETF can only invest in securities and financial instruments which
comply with Shariah principles and prohibited to invest in those which do
not comply.
Companies with carry out and/or involved in the following main line of
business are prohibited for investment:
o manufacturers, sellers, distributors, and packagers of alcohol,
tobacco, pork, music, and pornographic production;
o food & beverage establishments and hotels/motels with the
exception of those not serving alcohol and non-halal food &
beverage;
o entertainment business which are not permissible under Shariah
principles such as gambling casinos operators and gambling
machines manufacturers as well as operators of cinema and cable
television;
o financial services which include conventional banks, brokerages,
insurance companies, and investment companies which invest in
companies engaging in impermissible activities under the Shariah
principles.
As for the quantitative criteria, the ETF may only invest in companies with the
following ratios:
total debt divided by trailing 12-month average market cap is less than 33%,
sum of cash and interest-bearing assets divided by trailing 12-month average
market cap is less than 33%,

24

MyETF-DJIM25 Prospectus (2008)

32


account receivables divided by trailing 12-month average market cap is less
than 33%.
A tolerance benchmark based on ijtihad is used in case when investment is done on
companies with mixed revenue contribution from permissible and impermissible
activities under the Shariah principles. The companies will be classified as nonShariah compliant when:
revenue contributions from clearly prohibited goods and services such as
riba, gambling, pork, and alcohol is more than 5%;
revenue contributions from activities involving umum balwa (prohibited
element that is difficult to avoid and affects most people) such as interest
income from conventional banks deposit is more than 10%. Tobaccorelated businesses also use 10% tolerance benchmark;
revenue contributions from line of businesses that are generally permissible
activities under the Shariah principles and have the element of maslahah to
the general public, but also have other questionable elements under the
Shariah principles to be more than 25%. Those activities linked to this
tolerance benchmark include hotel and resort operators, share trading and
brokerage, as these businesses may involve activities deemed impermissible
under the Shariah principles.
The Pew Forum estimated 17.14 million Muslims live in Malaysia in 2010,
representing 61.4% of Malaysia total population. By 2030, Muslim population in
Malaysia is expected to grow to 22.75 million or representing 64.5% of projected
total population. Out of the three comparative countries studied, Malaysia has the
largest potential investors despite the lowest standard of living among the three.
Nevertheless, MyETF-DJIM25 has managed to accumulate MYR 301 million
(approximately USD 98 million) in assets as of 25 April 2012, confirming its status
as the single largest Shariah-compliant ETF in term of AUM
In Malaysia, fund management industrys assets were MYR 30.9 billion
(approximately USD 10.1 billion) as of March 2012, where 31.6% or MYR 9.7
billion (USD 3.14 billion) was placed in Shariah-compliant fund.25 Fund industry
assets comprised of 2.43% of Bursa Malaysia stock market capitalization.
Although Malaysias mutual fund industry is somewhat smaller than Indonesias,
the proportion of Shariah-compliant fund in the industry is much larger. As such,
developing Shariah finance sophistication level coupled with pro-active
government support and legislative reform, similar to those occurred in Malaysia,
may cause the discrepancy in Indonesias case to be narrowed down in the near
future.

25

Suruhanjaya Sekuriti (2012).

33

IX. CONCLUSION
The experience of ETF development in the three countries studied can be
summarized as follows:
Government support can jumpstart and/or accelerate development of
Shariah-compliant investment. UK and Malaysia has actively asserted their
position as Shariah finance hubs in Europe and Eastern Asia, respectively.
Their respective Governments has supported heavily on the policy and
incentives for Shariah-compliant investment development. As as result,
Shariah-compliant ETFs in UK and Malaysia have managed to amass USD
132 million and USD 98 million, respectively, in just 5 years.
Consumer demand can prevail even without active support from the
Government albeit taking longer time lead. US-based Shariah-compliant
mutual funds Amana Income and Amana Growth have managed to amass a
combined USD 3.2 billion without the existence ofShariah regulation in US
Capital Market. This may be attributable to the first mover advantage of the
Amana Fund itself but also to well-informed domestic investors and their
corresponding demand for Shariah-compliant investment.
Countries with significantly smaller Muslim population are able to innovate
in the area of Shariah finance. Although in the past such innovation in
Indonesia is deemed as not lucrative due to the populations low standard of
living, rising income shall change the tide. Strong existence of domestic
investors shall simultaneously prompt entry of foreign investors and improve
stock market resiliency against hot money.
Indonesia stock market performance for the past decade has been exemplary. The
country still hold much larger potential with its abundant natural resources, rising
middle class population, and continuing need for infrastructure development. In
addition, its sovereign rating upgrade to investment grade shall bring more interest
from the global investment communities. There have been limited instruments that
allow for liquidity and swift entry/exit from exposure to Indonesian equity market,
and almost none for Shariah-compliant investors. Consequently, there is a need for
Shariah-compliant instrument that can facilitate exposure to the equity market
without sacrificing liquidity and momentum. A Shariah-compliant ETF shall be
expected to enable Shariah-compliant investors access to Indonesian market with
all the advantages inherent in ETF.
Developing Shariah-compliant ETF and its liquidity in the market is not without
challenges. The large Muslim population coupled with lack of capital market
investing awareness presents both a large untapped potential market and a daunting
challenge for investing education. The nascent Shariah finance needs active
support from the Government in the form of conducive policies and appropriate

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incentives for rapid development of Shariah-compliant capital market.
###

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