Sharia compliance in sharia mutual funds: A qualitative approach

Abstract

Purpose: This study aims to describe the elements of Sharia compliance found in Sharia mutual funds, according to the fatwa of the National Sharia Board or Dewan Syariah Nasional (DSN) – the Indonesian Ulema Council or Majelis Ulama Indonesia (MUI) and some regulations which were issued by the Financial Services Authority or Otoritas Jasa Keuangan (OJK) in Indonesia. Design/Methodology/Approach: This study applied a qualitative approach using documentary and secondary data including fatwa and regulations which are needed to explore the Sharia compliance of Sharia mutual funds. This study highlighted and identified the elements of Sharia compliance using a hierarchy map. Findings: This study shows that Sharia mutual funds are Sharia compliant since they are obey Islamic principle including non-interest transaction, offering the halal product, no uncertainty (gharar) and no element of gambling. The OJK’s regulation and fatwa from the DSN–MUI emphasised other Islamic principles, including the prohibition of margin trading, short selling, and insider trading in Sharia mutual fund investments. They permit to payment of compensation (ujrah) for the service which are provided by the investment managers. Practical Implications: This study notes that economic activities (mu’amalah) should be conducted based on Islamic law. Due to the limited number of Islamic banks that being permitted to act as custodian banks in Indonesia, the mu’amalah of the Sharia mutual funds is conducted through conventional banks. This finding means the policymakers need to create more Islamic custodian banks for Sharia mutual fund investments. Originality/Value: The study has a contribution in identifying the elements of Sharia compliance in Sharia mutual funds in Indonesia.