Act No. 21 of 2008 regarding Shariah Banking that was enacted on 16 July 2008 has been proven to be a sound legal base for the shariah financial industry in Indonesia. In the last 5 five years the industry has recorded an annual average asset growth of over 65%, earning it a significant role in the country’s economic development.1 

The Indonesian central bank (Bank Indonesia) continues its support for the industry, the most recent of which is shown in the enactment of a number of Bank Indonesia regulations on the shariah based interbank money market (“Shariah Money Marketor “Market”). These regulations comprise Bank Indonesia Regulation No. 14/1/PBI/2012 which amends Regulation No. 9/5/PBI/2007 regarding Shariah Based Interbank Money Market “Bank Indonesia Regulation or “Regulation”), and its lower/implementing regulations, namely: (i) Bank Indonesia Circular No. 14/1/DPM regarding Shariah Based Interbank Money Market (“Circular I”); (ii) Circular No. 14/2/DPM regarding Interbank Mudharabah Investment Certificates (“Circular II”); and (iii) Circular No. 14/3/DPM regarding Shariah Based Interbank Commodity Trading Certificates (“Circular III”). All of these regulations were issued on 4 January 2012.

The term “Shariah Money Market” is defined as “interbank short term financial transaction based on shariah, in Rupiah (IDR) or in a foreign currency”. The financial instruments that are tradable in the Market are also specified, and further regulated in Circular II and Circular III.

Two instruments are specifically regulated: the Mudarabah Investment Certificate (“Mudarabah Certificate”) and the Shariah based Commodity Trading Certificate (“Commodity Certificates”).

The Mudarabah Certificate

The Mudarabah Certificate is defined as “certificate which is issued by a Shariah Bank under the mudarabah mechanism ( akad mudharabah ) as a short term investment tool for investing in the Market”. Mudarabah itself is defined as a fund investment made by a fund owner (sahibul maal) with a fund manager (mudharib) on a profit and loss sharing basis or on another revenue sharing basis, at an agreed percentage.

The Mudarabah Certificate: (i) may be issued either in IDR or in a foreign currency or in a script-less form; (ii) has a tenor that ranges from one day (overnight) to one year (365 days); (iii) is transferable before its maturity; and (iv) may be issued based on a fixed or variable return which is not more than the value of the asset it is based on.

Mudarabah Certificates may be purchased by shariah banks or conventional banks, whether local or foreign owned, are transferable before their maturity by way of a sale and purchase agreement (al bai’) and may be traded directly or through a brokerage house. The transfer of a Mudarabah certificate through a broker must be done by using akad Ju’alah as the instrument of transfer2. Otherwise, the transfer can also be done by using the repo mechanism.

The Commodity Certificate

As the name denotes, the Commodity Certificate is a commodity based instrument. Circular III defines the instrument as a shariah based certificate issued by a shariah bank in a shariah interbank money market, which serves as evidence of the sale and purchase with deferred payment of a commodity that is traded in a local futures commodity exchange (namely, the Jakarta Futures Exchange, the “Exchange”)”.

The Commodity Certificate has, among others, the following characteristics and restrictions: (i) it is issued in IDR and on the basis of a commodities transaction in the Exchange that uses the akad murabahah as the instrument (akad)3; (ii) it has a tenor that ranges from one day (overnight) to one year (365 days); (iii) the ownership is not transferable; (iv) it may not be issued at a value that is more than the trading value of the asset it is based on; and (v) the commodities and its trading in the Exchange must be halal (shariah compliant).

Commodity Certificates is issued by a Shariah Bank as consumers of the commodities (the “Consumer”). The instrument is tradable by Consumers and Shariah Banks either directly or through an intermediary (brokerage house).

On the mechanism of the issuance and transaction, Circular III among others stipulates that Commodity Certificates are issued by Shariah Banks as the consumers of the commodities (the “Consumer”), and that a Commodity Certificate may be traded either directly or through an intermediary (brokerage house).

The procedure is as follows:

  • The Consumer, a Shariah Bank acting as the buyer, orders a Commercial Participant (which are also Shariah Banks) to purchase commodities in the Exchange and promises (al wa’d) to purchase those commodities.
  • The Commercial Participant proceeds to purchase the commodities in the Exchange from a Commodities Trader Participant, and pays in cash (al’bai) the nominal value of the commodities.4
  • For the purchase, the Commercial Participant will receive a commodity ownership certificate (known as “SPAKT”).
  • The Commercial Participant then sells the commodities to the Consumers by using the murabahah instrument.
  • The Consumer pays for its purchase of the commodities to the Commercial Participant in installments in accordance with the terms of the murabahah instrument; upon which it issues the Commodity Certificates.
  • The Consumer is guaranteed to receive the commodities in the form of SPAKT from the Commercial Participant (qabdh hukmi).5
  • The Consumer sells the commodity through the Exchange to Commodities Trader Participants. and by using the al bai’ instrument. The payment is made in cash, amounting to the nominal value of the commodities as stated in the SPAKT.
  • The Consumer delivers the commodities by transferring the SPAKT that it has received from the Commodities Trader Participant.
  • The Consumer receives cash payment from the Commodities Trader Participant.

To prevent market manipulation, Circular III prohibits Commodities Trader Participants from conducting transactions with a party that acts as both the Commercial Participant and the Consumer.

Bank Indonesia will also allow issuance of other instruments provided that it has approved the issuance and provided that such instruments have been declared as shariah by the national shariah council. The regulation also stipulates the procedure and requirements.