Principles of Islamic Capital Market

Islamic banking finance economy

by islamicbankingfinanceeconomy.blogspot.com

Principles of Islamic Capital Market

 

The capital market is one of the important milestones in the world economy today. Many industries and companies that use capital market institutions as a medium to absorb investment and media to strengthen its financial position.Factually, the capital market has become the financial nerve-center (the world's financial nerve, Red) modern world economy. In fact, the modern economy would not exist without the capital market were well organized. Every day trillions of rupiah transaction through this institution.As a modern institution, the capital market is not out of the weaknesses and errors. One of them is an act of speculation. In general, the processes of business transactions that occur controlled by speculators.They always pay attention to market changes, make various analyzes and calculations, as well as taking action speculation in the purchase and sale of shares. These activities make the market remains active. However, this activity is not always advantageous, especially when the depression outstanding.Speculation summaries can be specified as follows. First, speculation is not an investment, although there are similarities between them. A very fundamental difference between them lies in the 'spirit' at the heart, not the shape.Speculators buy securities to profit by selling it back in the future. While investors buy securities with the intention to participate directly in the business.Second, speculation has increased unearned income for a group of people in society, without giving them any contribution, both positive and productive. In fact, they have taken advantage at the expense of the community, which is however very difficult to be justified economically, socially, and morally.Third, the speculation is the cause of the financial crisis. The facts show that the activity of speculators is what caused the crisis on Wall Street in 1929, which resulted in depression tremendous for the world economy in the 1930s.Similarly, the 1967 devaluation of the pound, the franc and the currency crisis in 1969. These are just some examples. Even today, the monetary authorities and financial experts are always busy to take steps to anticipate the action and the impact that may be caused by speculators.And, fourth, speculation is the outcome of a mental attitude 'wants to get rich quick'. If a person has been stuck in this mental attitude, then he will try to justify all sorts of ways regardless signs of religion and ethics. Therefore, Islam explicitly prohibits this speculation, because it is diametrically opposed to the values ​​of God and human.Basic principlesThere are some basic principles to build the capital market system in accordance with the teachings of Islam. As for implementation, it requires a long process of discourse.These principles, among others, the prohibition of sale and purchase directly. Currently, if a person or a company wants to sell or buy shares, he will use a broker.The broker will then contact the jobbers and conveys the intent to trade, both in the purchase and sale of shares. Then the jobber offers two price rates, the rate of purchase price that is usually lower and the rate price to be sold are usually higher.Then the jobber is obliged to buy the shares. Transaction model provides two implications. The first, the jobber will purchase shares even though they do not necessarily need it.They buy shares in the hope would be able to sell it back to the proper parties. This opens the door to speculation. The speculators know that they can buy shares from the market because the jobber is able to provide ready.Similarly, if the shares was less favorable, they quickly can also take it off. The next implication is the only price changes are determined by market forces, whereas no significant change from the intrinsic value of the stock.In the teachings of Islam, the rules of the capital market must be created in such a way to make the action as a business that is not interesting. To that end, the procedure of purchase / sale of shares directly is not allowed.The procedure, any company that has a certain quota shares giving authority to the agent on the trading floor, to make a deal on the shares. The agents task is to bring companies together with potential investors, and not buy or sell directly.The shares were sold or purchased if available. If multiple parties want a particular stock, then they must first be registered as an applicant, and such shares are subsequently sold / purchased by the principle of first-come-first-served (he who comes first served).Determination priceCurrently, the share price is determined by the forces of supply and demand. While the rules of Islam, the determination of the stock price different from the pricing as was the case at the moment. If we look at the balance sheet of the joint stock company, then that asset is equal to the share capital plus liabilities. Asset is a representation of the capital, where the obligations assumed to be zero.Thus, the share certificate has a certain value, which value will be equal to the value of its assets. Every stock price is above or below the value of its assets, does not show the actual condition.But market forces are able to make the stock price is above / below the value of its assets. In the view of Islam, to prevent the occurrence of this distortion, the stock price should correspond to its intrinsic value.The calculation formula is: share price equal to the share capital + profit - loss + accumulated gains - accumulated losses, which are divided by the number of shares (Muhammad Akram, Issues in Islamic Economics).This formula will give the true value of the share certificates, and will reflect the real conditions. Nobody is allowed to buy or sell at various price levels except under the regulation of a predetermined price.The question whether a policy such as this, speculators would not be interested in the activities of speculation? There are two reasons that explain this. Prices will not change quickly. Price declared since the balance sheet date and is valid until the next balance sheet.In addition, buying or selling stocks is not easy work, and generated a lot of uncertainty. Speculators will not be hasty in buying shares before the date of the balance sheet. This would reduce speculation.Another basic principle is research account books carefully. The standard practice of business management and accounting should be applied to all companies that have a certain quota shares. Then, there needs to be a process audit and sudden investigation to examine the validity of the balance sheet of a company.In addition, each company should be required to announce its financial position once every three months, so the public will know the intrinsic value of the shares, at least 4 times a year.Of course the date of the closing of a company will be different from other companies, so that the date of the announcement of financial position will be different. Thus, almost every week of the year, there will be closure and the financial position, and it will keep the market active throughout the year.This basic principle also forbids companies to sell their own shares. The Company further prohibited to sell its own shares in the market without any permission from the registrar / registrant Join Stock Company.In addition, there is a ban on the provision of credit for speculative purposes. Lending funds for the purpose of speculation in the stock market is strictly prohibited in Islam.Forward transactionOne big part of the business venture is the forward transaction, which the two parties agreed to make delivery on a specific date in the future. Typically between one and twelve months after the date of the transaction. On the London Stock Exchange, a forward transaction has been banned in a wider scale.In addition, it is also not allowed for short selling. It is selling shares before someone have it, hoping to buy them back at a lower price.Contango is also not allowed. There are two reasons why the contango will not happen in the Islamic capital market. First, the price will not change quickly because the price is determined by the intrinsic value of the stock. Then the second, the funds for that from contango usury will not be available because Islam prohibits usury or the like.Likewise, option transactions, both single and double option two is not allowed in Islam, as it is in the Mishkat al-Bai. Supervision of the overall capital markets activity. To ensure the effectiveness of the implementation of the Islamic capital market, as well as to prevent deviations from the values ​​of Islam, it is necessary to have an institution that has full authority, which consists not only financial experts, but also legal experts / Islamic sharia.