Definition of Islamic Mutual Funds as an Indicator of

the Economy of the Ummah

Annas Syams Rizal Fahmi, May Shinta Retnowati and Muhammad Ilham Amrullah

University of Darussalam, Ponorogo, Indonesia

Keywords: Investment, Fund, GDP, Mutual Fund, Capital Market.

Abstract: Islamic mutual funds which are also often referred to as Islamic Investment Fund or Syariah Mutual Fund

are intermediary institutions that help surplus units to place funds for further reinvestment. In addition to

providing convenience for prospective investors to invest in the capital market, the establishment of the

Islamic Investment Fund or Syariah Mutual Fund also aims to meet the needs of groups of investors who

want the benefits of clean and religiously responsible sources and mechanisms of investment and do not

conflict with the principles of sharia. But the problem in this study is what is the definition of Islamic

mutual funds? What are the economic indicators of Islam? And what is the role and function of Islamic

mutual funds on people's economic indicators? Method used in writing this essay is a normative legal

research method. By collecting data in library studies (library research). The author uses a library research /

library research. In this case legal research is carried out by means of library research or referred to as

normative research. Based on the results of the study, it was found that the definition of Mutual Funds

comes from two vocabulary words, namely "mutual" which means maintaining or maintaining, and "funds"

which means (collecting) money. So that when combined, mutual funds are defined as collections that are

managed (together for interest). And in other terms, Islamic mutual funds are mutual funds that have

management and investment policies that refer to Islamic law, for example not investing in managing

company stocks or bonds or products that are contrary to Islamic law. The indicators that we generally

know are the number of Gross Domestic Product (GDP), the number of poor people, the number of

unemployed, the inflation rate, interest rates, and others. This indicator is important to know how big a

country's economic growth is. National sharia mutual fund assets are projected to grow above 10% to

around Rp 2.08 trillion. This number is projected to continue to increase with the increasing number of

investors who are now beginning to see investments in Islamic mutual funds that are considered more

profitable. And In general, the function of Islamic mutual funds is not much different from the functions of

the capital market. The capital market has an important position in the economy of a country, as well as

mutual funds. Islamic mutual funds have two functions, namely: Economic function, and financial

functions.

1 INTRODUCTION

In the midst of the chaos of the national economy,

this country has been hit again by global socio-

political constraints that hamper any economic

recovery efforts. The issue of the war against

terrorists, anarchic actions carried out by the

elements of society and bird flu, and others, who

finally inevitably gave birth to travel brands for

foreign tourists is a serious threat to the country's

foreign exchange or also an increase in the country's

risk index Not to mention the end, the issue of the

American and British attacks began to peek to

increase the mistrust of macro conditions conducive

to economic recovery in the country, even though

globalization had begun at another angle. This is

indicated by the increasingly strong nails of

economic liberalization in developed countries

which are pushed into the era of free markets (cross

border markets) through the principles of capitalism.

A system of capitalism cannot be separated from the

background of life a nd the way of life of Western

society where this system is born and developed.

Capitalism is carried out as a stimulation of the

liquidity of stock exchanges that can be accessed

easily from any country, in the interest of bringing

Fahmi, A., Retnowati, M. and Amrullah, M.

Deﬁnition of Islamic Mutual Funds as an Indicator of the Economy of the Ummah.

DOI: 10.5220/0010121100002898

In Proceedings of the 7th ASEAN Universities International Conference on Islamic Finance (7th AICIF 2019) - Revival of Islamic Social Finance to Strengthen Economic Development Towards

a Global Industrial Revolution, pages 245-250

ISBN: 978-989-758-473-2

245

together investors in a fair, orderly and efficient

capital market.

Mutual funds are collections of stocks, bonds or

other securities owned by a group of investors and

managed by a professional investment company.

Funds invested in mutual funds from investors will

be put together with funds from other investors to

create a purchasing power that is far greater than

they make their own investments. Which one

Investment comes from English investment from the

basic word invest (Sunariyah, 2003) which means

planting. In Arabic investment is called with

istitsmar (Fikriawan,2018) which means "making

fruit, growing and increasing in number. And Islam

teaches its people to try to get it a better life in the

world and in the hereafter. Get good life in the world

and this end can guarantee achievement of physical

and spiritual well-being. (Aziz, 2010) in this case,

the development of investment in the Islamic

economy is growing, so the writer wants to know the

definition of Sharia Mutual Funds, Islamic

Economic Indicators, The Role and Function of

Sharia Mutual Funds Against People's Economic

Indicators.

2 LITERATURE REVIEW

Based on the Law of the Republic of Indonesia

Number 8 of 1995, the capital market is an activity

concerned with public offering and securities

trading, public companies related to securities issued

and institutions and professions related to securities.

Explained that understanding of the market capital

as an activity concerned with a public offering and

offering of securities (securities) and public

companies (general) relating to the securities issued

(Anoraga, 2008).

According to Enni Savitri in his research, that:

To provide evidence of the influence of the issuance

of Islamic bonds (sukuk) the author uses a micro-

structural approach, namely: Sukuk Equity Ratio and

conversion rating of issuance of Islamic bonds

(sukuk). And to provide evidence of capital market

reactions, the authors use cumulative abnormal

return calculations. The results of the study indicate

that the independent variable does not have a

significant effect on the dependent variable. This is

evidenced by the magnitude of the influence of

Islamic bonds issuance on the capital market

reaction that is equal to 11.8% while the other 88.2%

is influenced by other factors not measured in the

study (Savitri, 2015).

Research studied by Ahmad Dahlan Malik in his

thesis by analyzing the factors influencing investor

interest through the UISI investment gallery stock

exchange in the form of risk factors, income level,

motivation, knowledge, perception, and learning in

investing in Islamic capital markets. From the results

of the research conducted, the model Y = 0.011 +

0.386 X1 + 0.380 X2 + 0.290 X3 - 0.016 X4 - 0.045

X5 - 0.005 X6. From this model, the significant role

is the risk, income and motivation variables that are

important to pay attention to respondents or

investors in BGIU (Bursa UISI Investment Gallery)

compared to others because these variables have a

positive regression (Malik, 2017).

Majid, M. Shabri Abd, Maulana, and Hartomi

they concluded on their research. This study

empirically assesses the relative efficiency of mutual

funds in Indonesia during the period 2004 to 2007.

To measure their efficiencies, the output-input data

consisting of a panel of 23 mutual funds are

empirically examined based on the most commonly

used non-parametric approach, namely, Data

Envelopment Analysis (DEA). The study finds that,

on average, the mutual funds experienced a decrease

in total factor productivity (TFP) growth. It is

mainly caused by a declining in both efficiency and

technical efficiencies, where the efficiency change is

largely contributed by the changes in pure efficiency

rather than scale efficiency. The findings of the

study suggest that the mutual funds' industry in

Indonesia has a great opportunity to promote its TFP

by constantly optimizing and upgrading the

educational and training programs intended to

improve managerial ability and to speed up the

adoption of new technologies (Shabri, 2010).

Economic growth is the development of

activities in the economy which causes the goods

and services produced in society to increase and

prosperity society increases. The problem of

economic growth can be seen as a macroeconomic

problem in the long run. Development of the ability

to produce goods and services as a result the

increase in the factors of production is generally not

always followed by an increase in the production of

goods and services of the same magnitude. Increased

potential to produce is often greater than accretion

actual production. Thus, economic development is

slower than its potential (Sukirno, 2011).

This research belongs to the type of literature

study research by finding reference theories that are

relevant to the case or problem found. The

theoretical references obtained by means of research

literature studies serve as the basic foundation and

the main tool in this research.

7th AICIF 2019 - ASEAN Universities Conference on Islamic Finance

246

Then to collect data or sources related to the

topic raised in a study. Literature study can be

obtained from various sources, journals,

documentation books, internet and literature.

Furthermore, the data that has been obtained are

then analyzed using descriptive analysis methods.

Descriptive analysis method is done by describing

the facts which are then followed by the analysis,

not merely describing, but also provides sufficient

understanding and explanation.

3 RESULT AND ANALYSIS

Judging from the origin of the word, Mutual Funds

come from two vocabulary namely "mutual" which

means keep or maintain, and "funds" which means

(collection) of money. So that when combined,

mutual funds are defined as collections that are

maintained (Widayanti, 2013).

In other terms, sharia mutual funds are those

with management and investment policies that refer

to Islamic law, for example not investing in stocks

or bonds of companies that manage or products that

are contrary to Islamic law. According to Iyuk

Wahyudi, the difference in Islamic mutual funds

with conventional mutual funds is in two stages of

the process that must be passed, namely:

a. Screening process, namely filtering of

investment instruments based on sharia

guidelines.

b. The process of cleansing, which is to cleanse

income that is considered to be obtained from

activities that are unlawful according to sharia

guidelines.

According to M. Antonio Syafi'i, the existing

conventional mutual fund activities still contain

many elements that are not in accordance with

Islamic sharia, both in terms of contracts, investment

objectives, technical investment, income, and in

terms of profit sharing. For this reason, the existence

of Islamic mutual funds that follow sharia principles

in mu'amalah maliyah is indeed very necessary.

The existence of Islamic mutual funds is an

effort to provide a way for Muslims not to worship

and eat property by vanity. In addition, Islamic

mutual funds provide a means for Muslims to

participate in national development through

investments in accordance with Islamic sharia.

Experience in Muslim countries shows that sharia

mutual funds provide better benefits than

conventional mutual funds, even though they have

succeeded in elevating the economic welfare of the

community.

However, the most important thing from the

experience of some countries that already have

sharia mutual funds is the existence of a Sharia

Supervisory Board that makes a list of instruments

and types of businesses that can be entered into. This

forces the issuers to follow Islamic business ethics,

such as transparency, halal products, do not disturb

the environment, not speculation, etc.

Sharia mutual funds in Indonesia which are

widely issued today are open-ended mutual funds in

the form of Collective Investment Contracts (KIK),

such as: PNM Syariah, Danareksa Syariah

Berimbang, Rifan Syariah, and Amanah Syariah

mutual funds. In Islamic mutual funds, investment

managers and custodian banks enter into contracts

under the Capital Market Law which are referred to

as Collective Investment Contracts.

In the KIK contract, investment managers and

custodian banks bind themselves to the interests of

the capital community to open a forum where

investors can place their funds in mutual funds and

obtain participation units. The funds will be placed

in the securities portfolio by the investment manager

in accordance with the mandate stated in the

contract.

Funds which are joint assets owned by mutual

fund investors, or commonly referred to as unit

holders, will be held by the custodian bank. In

mutual fund operations, the custodian bank will

receive instructions from the investment manager to

complete the investment activities decided by the

investment manager. So, the important thing in

mutual funds and sharia is the contract problem.

Because, although the practical considerations of

investors do not bring KIK directly, but because

before investing in mutual funds, investors must

read the prospector and sign an application form for

participation in a mutual fund, so that investors can

be bound in the contract.

3.1 Economic Indicators of the Islamic

Ummah

The economic growth of a country is often measured

by using certain indicators. The indicators that we

generally know are the amount of Gross Domestic

Product (GDP), the number of poor people, the

number of unemployed, the inflation rate, interest

rates and others. This indicator is important to know

how big a country's economic growth is. Where the

state actually encourages economic growth so that

the people reach "prosperity".

Efforts to reduce the number of poor people and

the amount of unemployment must be the dream of

Deﬁnition of Islamic Mutual Funds as an Indicator of the Economy of the Ummah

247

all parties, but often the reduction in the number of

poor people and unemployment is not done through

steps aimed at the problem. In general, to solve this

problem, the state often relies on GDP. Often thrown

out, if GDP rises by a percentage, unemployment

decreases by a percentage or poor people decrease

by a percentage.

The fact is that for years, the GDP indicator has

no effect on the indicator of the number of poor

people and the number of unemployed. As a result

of these failures, there was a new flow among

economic thinkers, namely developing the economic

science concept of Welfare State. Where the

economic concept focuses on welfare measures

which are the main indicators of a country's

economic success. (Gianfranco, 1992)

How about Islam? Economic indicators for

countries that implement Islamic economic systems

are quite simple. By looking at how many poor

people are filled with basic needs by the state, how

much land is unemployed and how many

unemployed people do not want to try. These three

simple indicators should be a measure of the success

of a government in a country. Why is that? Because

in the Islamic economic system the principle is first,

having the economy to fulfill basic needs so that

they can worship and give thanks to Allah SWT.

And second is the movement of the real sector so

that money rotates between them so that no one

collects as much wealth as possible.

Poor people do not need to be burned, because

there really is and must be there. If not, where

should we pay zakat? The most important thing seen

from poor people is to provide opportunities to

improve their quality of life, but that does not mean

we aspire to no poor people in this world. The

obligation to improve the quality of life of the poor

is how they are able to try to fulfill one's basic life

needs in order to worship Allah SWT.

Moving the real sector through empowering dead

lands and providing opportunities and assistance to

unemployed people to open up new businesses. The

government's duty should be to create new

entrepreneurs rather than save or build new

financial-financial institutions. Financial institutions

are supporting institutions for moving the real

sector, not the main ones. The main thing that drives

the real sector is the entrepreneurs themselves. By

giving vacant land to unemployment, soft capital,

and assistance is one effort to create new

employment opportunities that will absorb new

workers. Some of these steps are carried out by

many countries today, but they only help

entrepreneurs who are already ready and do not

provide services and assistance to prospective and /

or new entrepreneurs. Why? because the current

government is held by many established

entrepreneurs, they must secure their position from

competitors and try to enrich themselves because the

state can be managed in such a way as to support the

development of their own business.

3.2 The Role and Function of Sharia

Mutual Funds against the

Economic Indicators of the Ummah

The Islamic mutual fund market is currently

showing promising growth. Since sharia banking

and investment activities have only emerged in

recent years, the growth of sharia mutual funds

continues increased. National sharia mutual fund

assets are projected to grow above 10% to around

Rp 2.08 trillion. The number is projected to continue

to increase with the increasing number of investors

who are now starting to look at investing in Islamic

mutual funds which are considered more profitable.

In Indonesia, the development of sharia mutual

funds as a capital market as well has experienced

rapid progress, as an illustration of at least some

developments and advancements which should be

noted, among them, are the issuance of six Fatwas of

the National Sharia Council of the Indonesian Ulema

Council relating to the capital market industry. The

six fatwas in question are:

a. No. 05 / DSN-MUI / IV / 2000 concerning Share

Buy and Sell.

b. No.20 / DSN-MUI / IX / 2000 concerning

Guidelines for Implementing Investment for

Sharia Mutual Fund.

c. No.32 / DSN-MUI / IX / 2002 concerning Sharia

Bonds.

d. No.33 / DSN-MUI / IX / 2002 concerning

Mudharabah Syariah Bonds.

e. No.40 / DSN-MUI / IX / 2003 concerning

Capital Markets and General Guidelines

Application of Sharia Principles in the Capital

Market.

f. No.41 / DSN-MUI / III / 2004 concerning Ijarah

Syariah Bonds (Hidayah: 2019).

With the issuance of fatwas relating to Islamic

mutual funds or the Islamic capital market, it has

provided an impetus to develop alternative sources

of financing while simultaneously adding alternative

halal investment instruments. The current

development of Islamic mutual funds is marked by

the rise of companies listing in the Jakarta Islamic

Index, public offering of Sharia Bonds and Sharia

Mutual Funds.

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248

The performance of sharia shares listed in JII has

experienced quite encouraging developments. In

order to accommodate the needs of people who have

investment motives based on sharia principles and

are based on confidence in the prospect of

developing Islamic mutual funds that will become

one of the pillars supporting the Indonesian capital

market industry, BAPEPAM-LK has compiled the

Indonesian capital market Master plan. In it there are

two strategies main development of sharia-based

mutual funds, namely:

a. Preparation of a legal framework that can

facilitate development sharia-based capital

market and encourage its development.

b. Encourage the development and creation of

capital market products sharia based. (Annisa:

2017)

Of the two main strategies described by

Bapepam to seven strategy implementations,

namely:

a. Arrange the application of sharia principles;

b. Arrange accounting standards;

c. Developing the profession of market

participants;

d. Socialization of sharia principles;

e. Developing products;

f. Creating new products; and

g. Increase cooperation with the MUI National

Sharia Council.

From the concept to the prospect of Islamic

mutual funds, the most important thing that must

happen in Islamic mutual funds is that every

transaction (sale and purchase) of shares must be

with intention and purpose to obtain additional

capital, obtain liquid assets, and expect dividends by

having them until maturity, so that it becomes halal

as long as its business is not in the case of

illegitimate.

However, when the sale and purchase of shares

is misused and becomes a speculative tool to pursue

profits over the loss of other parties, the law is

forbidden because it changes into stock gambling. In

addition to these prospects, according to Mangasa

Simatupang Islamic mutual funds aimed at meeting

groups of investors who want and obtain investment

income that do not contain speculative and

religiously responsible elements that are in line with

sharia principles have very prospective development

opportunities, this in line with the stronger

conviction of most Muslim communities in

Indonesia, which is estimated to reach more than

78%, it is argued that the practice of the

conventional financial sector contains usury and is

not in accordance with Islamic principles.

In addition, the Islamic finance industry

including Islamic mutual funds is one of the fastest

growing industries globally, averaging 10% to 15%

per year. Another thing that is also very supportive

and more optimistic about the growth of Islamic

finance in the world and in Indonesia in the future is

that there is data that shows that currently there are

very large funds available in Arab countries that

have funds reaching $1,3 trillion, of which according

to the research results Merryll Lynchs will be placed

at $800 billion to be managed by the Islamic finance

industry, so the Islamic mutual fund industry in

Indonesia has a great potential to absorb some from

the fund.

In general, the function of the Islamic mutual

fund is not much different from the function capital

market. The capital market has an important position

in the economy a country, as well as mutual funds.

Islamic mutual funds have two functions, namely:

a. Economic function

1) Providing facilities or vehicles that bring

together two interests, namely those who

have excess funds (investors) and those who

need funds.

2) Facilitating directly for the owners of capital

to participate in achieving investment

benefits.

3) Facilitating entrepreneurs or public

companies in obtaining additional capital to

stabilize the level of liquidity of their

companies through the sale of shares through

IPO procedures or debt securities.

4) Facilitating the efforts of various companies

to increase the company's financial capacity

in the context of business expansion.

b. Financial functions

Means for fund owners to get compensation by

investing in financial instruments such as

stocks, bonds, mutual funds, and others. Thus,

companies or communities can place their funds

in accordance with the characteristics of the

advantages and risks of each instrument. So, it

is expected that with the existence of capital

market economic activity become increasing

because the capital market is a funding

alternative for companies to be able to increase

company revenues ultimately providing

prosperity for the wider community. While the

functions of the capital market in Indonesia

include:

1) As a means of business entities to get

additional capital.

2) As a means of equalizing income.

Deﬁnition of Islamic Mutual Funds as an Indicator of the Economy of the Ummah

249

3) Enlarging production with capital gained so

productivity increase.

4) Accommodating workers; and

5) Increasing tax revenue for the government.

Benefits of the Capital Market In general, the

benefits of the existence of a capital market are:

1) Providing financial resources for the

business world while enabling optimal

allocation of funds.

2) Provide a diverse investment vehicle for

investors so make it possible to diversify.

3) Provide a leading indicator for the

development of an economy Country. That

is, if the capital market develops it is

expected the economy will also develop.

4) Distribution of company ownership to the

community level middle class.

5) The spread of ownership, openness and

professionalism creates healthy business

climate and encourage the use of

professional management.

The capital market is a source of financing for

the business sector and as a vehicle for investment

for investors who have a strategic role to play

support the implementation of national development.

So that the position of the capital market considered

important in a country.

4 CONCLUSIONS

Islamic mutual funds are mutual funds that operate

according to the provisions and the principles of

Islamic law. Both in the form of contracts between

investors as owner of treasure (shahib al-mal) with

investment managers as representatives, or between

investment manager as a representative with

investment users. Shariah can accepting business

such as mutual funds as long as things do not

conflict with sharia. Zuhaily said: And every

condition that does not conflict with the basics the

basis of the Shari'a and can be equated with the law

with the conditions legitimate.

Sharia mutual funds forms include: law-based

mutual funds, mutual funds based on the nature of

operations, mutual funds based on the type of

investment. There are two choices in mutual funds,

namely financial aspects and non-financial aspects.

Islamic reclamation investment activities: In

carrying out activities Islamic mutual fund

investments can do anything as long as they do not

conflict with sharia, contracts made by sharia mutual

funds with issuers can done through mudarabah

(qiradh) or musyarakah.

Sale and purchase of Islamic mutual funds as

mudarib, it is also permissible to make share trading,

Transaction Mechanism. The advantage in investing

through mutual funds is as the following: Good level

of liquidity, Professional managers, Diversification,

Costs low. While the risks in investing through

Islamic mutual funds are among others: Risk of

changes in economic and political conditions, Risk

reduced value of participation unit, risk of default by

parties related, liquidity risk, risk of losing

opportunity to investment transactions on when

filing an insurance claim

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