Islamic Economy &

Sustainable Development Islamic Ethics, Efficiency Regulatory

Framework of the Islamic Capital Market

Drs.H.Soeprayitno.MBA.,MSc.,Ph.D

DOSEN MATA KULIAH : EKONOMI SYARIAH

Program S2 Pendidikan EkonomiFAKULTAS KEGURUAN & ILMU

PENDIDIKAN UNIVERSITAS SEBELAS MARET

OBJECTIVE OF THE PROGRAMAwareness for students :I. Efficiency of the Market II. Ethics in the Regulation of

Islamic MarketIII. Islamic Market Does not AllIV. Basic Criteria for Rahmatan

Islamic Economy & Well-Being Function

Efficiency of the Market Allocative efficiency Allocative efficiency implies that funds

should be channelled into financially desirable projects

Price efficiency Price efficiency of stocks must be equal

their respective fundamental values at all times

Pricing efficiency is a prerequisite for allocative efficiency.

Continued…. Informational efficiency equality between prices and value of a

stock can only be achieved where there is informational efficiency

Operational efficiency In operational efficiency, transactions

should be executed at minimal costs Thus both informational efficiency and

operational efficiency are pre-requisites to pricing efficiency.

Regulation Ensures Efficiency Regulation that reduces transaction costs, simplifies the trading system, Increases the availability and accuracy of

information, Improves information processing by

participants These are steps towards improving allocative

efficiency.

Goal of Islamic Regulation Promotion of efficiency is the primary goal of

the Islamic capital and stock market regulator To ensure ethics and fairness in the markets

Ethics in the Regulation of Islamic Market

Freedom of Contract In the primary market, merit regulations govern the

issuance and sale of securities. This diminishes the right to freedom from coercion and makes senses only in a world where investors are likely to commit cognitive errors and lack of perfect self-control.

Secondary markets are concerned, trading halt regulations permit an exchange to suspend trading temporarily. Regulations also attempt to introduce price limits upper and lower bound outside which trading cannot take place, and disallow short-sale when prices are declining.

While stocks of all kinds of companies may be traded in a conventional market, the universe of permissible stocks is considerably smaller in an Islamic market.

continued Prohibition of Riba (interest/usury) The Quran and Hadith(tradition of the Prophet) are explicit in

condemning riba Major requirement of riba prohibition is that stocks must reflect

ownership interests in real assets and not in debts or money in order to be tradable at a market price.

Prohibition of Gharar Categories of gharar,:

Settlement Risk (when the seller has no control over the subject matter i.e. a sale without taking possession),

Inadequacy and inaccuracy of Information (gharar or uncertainty may caused by lack of adequate value-relevant information),

Complexity in Contracting (Gharar also refers to undue complexity in contracts; Shariah does not permit interdependent contracts, for example, combining two sales in one is not permitted according to a number of authenticated hadiths),

Games of Chance (The Quran prohibits contracts based on uncertainty or pure games of chance).

Continued… Free and Fair Price At macro level, Islamic finance envisages a

free market where prices are determined by forces of demand and supply.

Islamic ethics condemn any attempts to influence prices through creating artificial shortage of supply the Islamic term for this is ihtikar.

Prohibited artificial demand

Islamic Market Does not Allow Speculation Desire to make a quick gain from

buying and selling Buy stock anticipation of prices rising

usually with a short-term horizon Such purchases are often financed on

margins or other forms of borrowing Sell in anticipation of prices falling Speculator borrows stock from a

broker with a view to subsequently buying it at lower prices,

Margin Trading The margin trading refers to the purchase of

stocks on credit using a margin account at a stockbrockering firm

buying stock by paying part of the price in cash and borrowing the remainder from the broker at an interest rate called the margin interest rate

But stock markets and regulatory authorities attempt to use margin call and margin interest rates as devices for controlling speculative activity

margin trading is the ability to magnify any gains on a transaction, but at the same time it magnifies any losses, as these are not shared with broker.

Short Selling A short selling is simply the sale of a stock not

owned by the vendor. The purpose is to take advantage of an expected price decline. When the price declines, the stock is purchased and the short position closed. To facilitate these transactions the vendor’s broker will cover the sale by lending stock. Islamic shari’ah does not permit the sale of any commodity a person does not posses, but with certain exceptions such as Salam contracts.

Insider Trading ( Please describes your opinion )

Basic Criteria for Rahmatan Islamic Economy & Well-Being Function

• N: Living within the Earth’s physical and biological limits

• E: Maintaining a vital, prosperous economy

• S: Supporting social stability, equity, and development

• W: Making individual opportunity, fulfillment, and happiness possible

The Compass of Well Being FunctionN - Nature

Ecosystems, Species, Impacts, Resource Use

E - EconomyProduction, Consumption, Technology, Money, Work

S - SocietyGovernment, Culture,

Social Systems

W - Well-BeingHealth, Happiness,

Quality of Life

Used For ...

• Framing Sustainability• Developing Indicators• Doing Assessments• Managing Stakeholder Input

A Sustainable business . . .

Understands its own systems, and the systems in which it is embedded

Looks for and responds to long-term systemic trends that affect its ability to achieve its goals

Changes internally to meet and take advantage of external conditions and trends

Is resilient enough to withstand short-term shocks

Does not undermine the conditions of its own existence

N

W

S

E

17

What are organizations doing when they say they do What are organizations doing when they say they do Sustainable Dvelopment ( wellbeing function )”?Sustainable Dvelopment ( wellbeing function )”?

Environmental Management Corporate Social Responsibility Greening Industrial Ecology Stakeholder Management Life-Cycle Management Pollution Prevention (P2) Sustainable Development Design for Environment (DfE) Green Design Urban Reinvestment Brownfield Redevelopment ISO 14001 Waste Reduction Closed Loops Resource Productivity Sustainable Technology Radical Transactiveness Systems Thinking Good Corporate Governance

Clean TechnologyClean Technology Eco-EfficiencyEco-Efficiency Eco-EffectivenessEco-Effectiveness BiomimicryBiomimicry Triple Bottom LineTriple Bottom Line Base of the PyramidBase of the Pyramid Community CapitalismCommunity Capitalism Corporate CitizenshipCorporate Citizenship Voluntary RegulationVoluntary Regulation Civic EntrepreneurshipCivic Entrepreneurship Full Cost AccountingFull Cost Accounting Risk ManagementRisk Management Leapfrog TechnologyLeapfrog Technology Cradle to CradleCradle to Cradle Restorative TechnologyRestorative Technology Balanced ScorecardBalanced Scorecard Take-BackTake-Back TransparencyTransparency

Digital DivideCultural DiversityEcological FootprintProduct-to-ServiceIntegrated Product MgmtNatural StepBuilding the PyramidBlended ValuePrecautionary PrincipleGreen ProcurementGreen Building