Journal of Islamic Accounting and Business Research

Emerald Article: Is "not-real" price lawful?: The case of Islamic (sukuk) mutual funds in Indonesia during financial crisis Dodik Siswantoro

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To cite this document: Dodik Siswantoro, (2012),"Is "not-real" price lawful?: The case of Islamic (sukuk) mutual funds in Indonesia during financial crisis", Journal of Islamic Accounting and Business Research, Vol. 3 Iss: 2 pp. 163 - 177 Permanent link to this document: http://dx.doi.org/10.1108/17590811211265966 Downloaded on: 12-02-2013 References: This document contains references to 41 other documents To copy this document: permissions@emeraldinsight.com This document has been downloaded 133 times since 2012. *

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Dodik Siswantoro, (2012),"Is "not-real" price lawful?: The case of Islamic (<IT>sukuk</IT>) mutual funds in Indonesia during financial crisis", Journal of Islamic Accounting and Business Research, Vol. 3 Iss: 2 pp. 163 - 177 http://dx.doi.org/10.1108/17590811211265966 Dodik Siswantoro, (2012),"Is "not-real" price lawful?: The case of Islamic (<IT>sukuk</IT>) mutual funds in Indonesia during financial crisis", Journal of Islamic Accounting and Business Research, Vol. 3 Iss: 2 pp. 163 - 177 http://dx.doi.org/10.1108/17590811211265966 Dodik Siswantoro, (2012),"Is "not-real" price lawful?: The case of Islamic (<IT>sukuk</IT>) mutual funds in Indonesia during financial crisis", Journal of Islamic Accounting and Business Research, Vol. 3 Iss: 2 pp. 163 - 177 http://dx.doi.org/10.1108/17590811211265966

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Is not-real price lawful?

The case of Islamic (sukuk) mutual funds in Indonesia during nancial crisis
Dodik Siswantoro
Department of Accounting, Universitas Indonesia, Depok, Indonesia
Abstract
Purpose The purpose of this paper is to discuss some unique phenomena on Islamic xed (sukuk) mutual fund price during nancial global crisis in Indonesia. It aims to show that the sukuk mutual fund did not adopt the actual price of sukuk which may contradict Islamic teaching with regards to transparency and could cause investors to make wrong decisions. In addition the paper also aims to analyse correlation analysis, dependency of sukuk price to conventional bond and proposed recommendations. Design/methodology/approach The study applies benchmarking graph analysis, Pearson correlation as well as Correlogram Granger Causality test and Response to Cholesky. To show that sukuk did not adopt the actual price, benchmarking analysis and correlation analysis were conducted as additional tools. Findings The paper nds that the sukuk price movements were affected by the conventional bond and have a strong correlation, while the Islamic xed mutual fund did not apply the actual price, which was unstabler. This has caused the fund to remain in a steadily increasing trend and stable; in addition, this has brought about good performance which actually did not show the real price. Practical implications This research is practically of benet because it helps to show the correlation of price movement in sukuk and conventional bond. Fund managers should be transparent in marking the real price and prudent in managing the liquid reserve of the sukuk mutual fund. Originality/value This case may only occur in Indonesia as decreasing price of stocks and bonds in the USA has habitually caused the same to be seen as very expensive in some countries. Thus, bond price in Indonesia was affected signicantly; this was actually caused by panic action. Foreign investors withdrew their funds because of liquidity and currency depreciation. On the other hand, an Islamic market that might be based on a conventional system was indirectly affected with benchmarking price problems. Sukuk mutual fund performance would look nice and stable as it did not adopt the actual price, this could mislead the performance analysis of the fund. Keywords Islamic, Sukuk, Price, Indonesia, Mutual fund, Unit trusts, Financial risk Paper type Research paper

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1. Introduction In emerging countries where the size of the capital market is not very big, it causes unstable condition in mutual funds (Kaminsky et al., 2001). Similar phenomenon may occur in Indonesia. Interestingly, it does not affect Islamic xed (sukuk) mutual fund severely. This paper tries to show some empirical evidences and observations on Islamic xed (sukuk) mutual fund in Indonesia during nancial global crisis in 2008. In this case, the performance of Islamic xed (sukuk) mutual fund during that crisis looked stable and outperformed, however this condition did not show the real condition or actual price. In this paper, it would be explained in detail why that phenomenon occurred.
This paper was awarded the Best Paper Award at the International Academic Conference on Sukuk and Development Challenge 2010 in Indonesia held by Universitas Indonesia.

Journal of Islamic Accounting and Business Research Vol. 3 No. 2, 2012 pp. 163-177 q Emerald Group Publishing Limited 1759-0817 DOI 10.1108/17590811211265966

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In Islam, transparency must be disclosed in all business transaction. Otherwise, it is not in line with Islamic teaching due to false price offering otherwise known as cheating (khilaabah). This was stated 15 times in similar hadith (prophet saying) in different narrators. Speaking of mutual fund, it was dated back in USA around 1924s, there were many changes in types and characters of the fund (Bogle, 2005). In Indonesia, actually it started in the middle of 1990s, in which it was rst offered by private in the form of closed fund. At that time, there were not many bonds and stocks offered, and the awareness of society on mutual fund was quite low even after reformation in capital market law during the 1980s. Then, some requirements for bonds and stocks market to list in the stock market was lessen by the government in the last 1990s. Just like a statement supply creates its own demand, this also caused the increasing demand of bond to be offered, which in turns has thrived the development of mutual fund market. When a company issued bond or stock, this would cause other sectors grew indirectly by placing their fund in the capital market to get higher return. This process run simultaneously. Historically, the rst Islamic mutual fund was offered by PT Danareksa Investment Management on 3 July 1997, in form of balanced fund. It consisted of Islamic stock that was formally later called Jakarta Islamic Index on 3 July 2000 by Indonesian (formerly Jakarta) Stock Exchange (Siswantoro, 2002). When Islamic capital market was ofcially introduced on 14 March 2003, it covered all Islamic capital market products under one roof (Securities Exchange Commission Badan Pengawas Pasar Modal (BAPEPAM)). In the case of Islamic bond, the rst Islamic bond issued by PT Indosat Tbk was mudharabah (prot sharing) scheme in September 2002 (Siswantoro and Ferdiyan, 2006), while in 2004 ijarah (leasing) scheme was launched (Bursa Efek Indonesia, 2009). Islamic Government bond (sukuk) itself was issued in 2008, after supported by Act No. 19/2008 which was regulated for underlying assets. This would support the development of Islamic capital products as there are various Islamic bonds and stocks to meet the market demands. The structure of the paper is as follows, rst it states previous research on mutual fund, scandals and its problems, as well as the case in Indonesia. Second, it explains the dependency of sukuk from the conventional rate as well as further implication. Third, the research methodology that is applied to answer the phenomenon. Then lastly, analysis is to respond to the objectives of the paper. Principally, the paper would analyze some factors behind the stability of Islamic (sukuk) mutual fund during nancial crisis by observing the different movement patterns of IFR01 (Islamic Government bond), FR027 (reference price of IFR01), Islamic sukuk mutual fund and other Islamic xed (sukuk) mutual funds that would be analyzed in benchmarking graph, Pearson correlation. Additionally, correlogram Granger causality test and response to Cholesky are used to analyze IFR01 and FR027 for affecting factors. 2. Literature review Scandals in mutual funds may occur in any country because of lack of regulations from government, or weakness in operation monitoring such as bond late trading and market timing (Houge and Wellman, 2005), and conict of interests (Bogle, 2005). In Indonesia, scandals such as coincident wrong price reference still occurred even under Indonesian Securities Exchange Commission watch. Fraud scandals have occurred in Indonesia

such as mutual fund link or discretionary fund linked which was not registered under government monitoring and supervision. However, there should be direct access from investors to check the legality and sustainability of them. In fact, online activity monitoring of mutual fund was shut down without any reason since 2008 until recently. Thus, investors did not have reliable and independent data to check the condition of mutual fund. Besides, it would be more risky for big investors if others redeem almost the whole funds. Liquidity would become a big issue as last portfolio was usually not the good ones after fund managers sold their portfolio for many times to meet the liquidity. In Indonesia, crisis in mutual fund already existed in 2005 especially for xed mutual fund. This has occurred to the conventional as well as the Islamic one. At that time, the government increased the gasoline price up to 50 percent, which has caused high ination. Then, central bank increased interest rate sharply. At the same time this made most investors to shift their fund from capital market to the bank. While, yield to maturity (YTM) of bond increased sharply, on the other hand, price decreased sharply as well. This was worsened by those shifting activities. At the same time, xed mutual fund still referred the price to HIMDASUN (Perhimpunan Pedagang Surat Utang Negara Bond Dealer Association). The problem was that the reference price was different from the actual price in the trading market. This is what we term as the not-real price, the price of mutual fund referred to reference price which was not the actual price of that day transaction price. The actual price has decreased, but the reference price still remained increasing as it was based on the average price in three months. The fund manager are seen as practicing cheating or khilaabah as offering false price. Once, one investor withdrew their funds in huge amount, and this has caused fund managers to sold bonds at very further big drop price to meet the liquidity. Most bonds decreased up to 2 20 percent up to 2 30 percent, including the Islamic ones. Then, other fund managers priced the bond with that big dropped price (Siswantoro and Dewi, 2011). In relation to mutual fund, some problems did attach to it. For example, generally in some countries, problems of bond price in the market may be caused by illiquidity (Driessen, 2005; Kagraoka, 2005; Kemps and Uhrig-Homburg, 2000; Shi, 2008; Warga, 1992), fund ows in the mutual fund (Dritsakis et al., 2006; Oh and Parwada, 2007; Shu et al., 2002) which need intervention to maintain the price which decreased signicantly (Cremers et al., 2007). However, to avoid such problems we should refer to the previous researches. While, the ability to identify the characteristics of funds would give better results (Chan et al., 2002; Crabbe and Turner, 1995; Kothari and Warner, 2001) or the diversication of funds to reduce risks (ONeal, 1997), and more historical performance to see future performance (Grinblatt and Titman, 1992; Kahn and Rudd, 1995). However, Indonesia indeed has different phenomenon due to emerging market issue, but some lessons can be taken from them. In general, mutual fund performance was relatively better in the short term, but not in the long term (Bollen and Busse, 2005; Carhart, 1997; Harless and Peterson, 1998), not quite superior compared to some benchmarks (Detzler, 1999). Therefore, investors need to be cautious when investing in mutual fund. Different results were found in UK; there was a signicant persistence in the relative rankings of fund (Fletcher and Forbes, 2002). In the case of Islamic bond in Indonesia, actually we can manage the portfolio directly to obtain better and specic Islamic bond (sukuk) rather than in mutual fund. Especially, if the fund is big, we may possibly choose good Islamic bond

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at low price and manage them in time preference (for selling) without hampering the whole weighted price like in the mutual fund. Furthermore, there were some characteristics between ethical and conventional mutual funds conducted by Bauer et al. (2005), where they analyzed 103 ethical basis mutual funds in the UK, USA and Germany. They found no signicant differences among them. On the other hand, it gave smaller returns for ethical basis mutual fund than non-ethical ones in USA (Mueller, 1994). Similar cases also occurred in Indonesia, which may be caused by nancial crisis period in 2007-2008. In fact, they consisted of materials and energy stocks for Islamic mutual fund in Indonesia, of which the performance decreased signicantly (Syrifani, 2009). They highly depended on the price of materials and energy which was dropped. Sharp price decrease in bond that was caused by withdrawal in mutual fund was not always mainly caused by fundamental problems (Altman, 1987). In Indonesia, bonds are traded over-the-counter-market (OTC), where the numbers between sellers and buyers may not be equal. Someone would like to sell but what if no one buys, so they have to make the offer lower, but actually the price is not that low, opposite condition can occur to buyers, vice versa. This, however, has caused volatile price market which was worsened during nancial crisis. In some countries, like USA, the spread of offer and bid price tends to narrow, showing effective market (Hong and Warga, 2000), in addition, this can be seen also as liquidity problems (Sarig and Warga, 1989; Stock and Schrems, 1984). Similar results were found in Japan (Boudoukh and Whitelaw, 1993). The volatility itself was caused by changes in interest rates and possibility of default risks (Hopewell and Kaufman, 1973). In Indonesia, it occurred when there was turning point of interest rate when it already arrived at the bottom or peak level. This has been discussed by Siswantoro and Dewi (2011). 3. Benchmarking issues Islamic Government bond utilized ijarah and lease back scheme, it is actually similar to leasing scheme (Siamat, 2008) (Figure 1 for further details). The difference between conventional and Islamic bonds is the absence of collateral and special purpose vehicle (SPV) in conventional bonds. This is because they are based on interest coupon rate. While, in Islamic bonds, applies leasing or rental scheme. On the other hand, this is contradictory to Act No. 11/2004 which prohibits selling of government assets. In fact, SPV is government itself, so there is no selling transfer outside government. Its assets would become collateral in the scheme. This would be a problem if there is a default payment when it is at maturity date. The collateral can be taken by investors. The important issue to be addressed in issuing of Islamic bond is the rate of determination of the Islamic bond. It usually charged on the market price, and was based on a research conducted by arrangers. It refers to the conventional bond which has similar characteristics such as maturity, rating, business type, and bond scheme (variable or xed). In the case of IFR01, it referred to FR027 which has similar characteristics in term of maturity (other bonds such as FR048 (maturity date is at 4 December 2008) and FR049 (maturity date is at 15 September 2013) (this is also compared by arrangers to see the spread rate, however, they have different maturity date with IFR01). Therefore, in the case of leasing rate, it simply refers to the conventional bond rate. However, leasing rate should be different from conventional coupon rate as it is attached to different risks. Similar method was also applied in

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Source: Ministry of Finance, Republic of Indonesia (2010)

Figure 1. Scheme of Islamic bond issuance

determining Islamic bond rating, however, it still refer to the conventional method (Siswantoro and Ferdiyan, 2006). In accounting, standard No. 110 on accounting sukuk (recently issued in 2011, effective 1 January 2012) clearly prohibit the adoption of interest rate for valuation basis or reference. Besides, other method for valuation can be in any method such as index of prot sharing rate (Figure 2). Government in practicing Islamic bond through ijarah scheme, because there are some strategies in developing budget nancing through Islamic scheme, they are (Waluyanto, 2008): . nancing for national budget, it uses sale and lease back scheme, head and sub lease; . cash nancing money market mismatch, it uses sale and lease back scheme, head and sub lease; and . project nancing, it uses istishna (sale-purchase), musharaka (partnership), mudharaba (partnership), and hybrid (aqad combination). Other Islamic nancing scheme such as mudharaba has been conducted by State Owned Company, PT Indosat Tbk. (used satellite revenue for prot sharing), PTPN 7 (used agricultural income for prot sharing). There is not much critics for mudharabah bond as they are on prot sharing basis for the coupon rate. So far, only two schemes (mudharaba and ijarah) are allowed by National Supervisory Board in Indonesia. 4. Research methodology This research uses some statistical analysis and tools such as Pearson correlation, Granger causality and correlogram. Pearson correlation was used as the data ratio

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14% 13% 12%

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11% 10% 9% 8% 5-Jun-08 3-Jul-08 17-Jul-08 14-Feb-08 28-Feb-08 13-Mar-08 27-Mar-08 10-Apr-08 24-Apr-08 8-May-08 22-May-08 19-Jun-08 31-Jul-08

Figure 2. Benchmarking to determine coupon rate for Sukuk

FR0027

FR0048

FR0049

Source: Danareksa, Mandiri Sekuritas, and trimegah Securities (2008)

to see the correlation among variables. Furthermore, correlogram test was used to see whether the data is stationary or otherwise. As data is not stationary, it is converted rst by using rst difference, then Granger causality test is conducted. It is used to verify which variable that becomes independent (affecting) or dependent (affected) between IFR01 as sukuk and FR027 as the conventional bond for price reference. Whereas, to check the not-real price of Islamic sukuk mutual fund, benchmarking graph was employed as well as the Pearson correlation. We can see the price difference movement in the graph. Sample that is employed in the research: . IFR01 is the rst issuance of sukuk (Islamic bond) by Republic of Indonesia as Rp2.7 tn. Applying the ijarah basis, it issued in 2008 until 15 August 2015 with coupon rate of 11.8 percent (ijarah basis). Data is taken from Ministry of Finance, Republic of Indonesia. . FR027, is conventional bond at maturity date on 15 June 2015. Data is taken from Ministry of Finance, Republic of Indonesia. . Islamic sukuk mutual fund, is Islamic xed mutual fund which is based mainly on sukuk (IFR01) and it is called Trim syariah sukuk, issued by PT Trimegah. Data is taken from Bisnis Indonesia (newspaper). . Islamic xed mutual fund mainly consisted of Islamic corporate and government bond (sukuk). They are BNI Dana Syariah, BIG Dana Muamalah, I-Hajj Syariah Fund and PNM Amanah Syariah. Data is taken from Bisnis Indonesia (newspaper). There are two types of data period used in this research:

(1) Based on IFR01, this started its issuance from 26 August 2008 to 19 June 2009. It compared IFR01 to some Islamic xed (sukuk) mutual funds. (2) Islamic based IFR01 of Islamic sukuk mutual fund, this started from its issuance from 4 November 2008 to 19 June 2009, it compared IFR01 to FR027. All the data refer to the availability of mutual fund information; this may be caused by suspended stock market in 2008, and national holiday which causes differences. So, it has already been balanced.

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5. Some analyses Benchmarking graphs would be added in the analysis as it shows objectivity in evaluating the performance of data apparently. IFR01 (Figure 3) since issuance had likely increased slightly for a couple of days, and then it dropped signicantly to almost 0.75 at the end of October 2009. It uctuated, and then it started to increase on 21 November 2009 (i.e. following the track of mutual funds line graphs). However, its price has been uctuating ever since with some occasionally shocks occurring. During the decrease of IFR01, other Islamic xed (sukuk) mutual fund continue increasing in a steady trend. However, when IFR01 increased, it was only one mutual fund (BNI Dana Syariah) that followed its track (however, it has negative correlation, see Table I). At the end, both were still below other funds. This phenomenon could be explained as those which remained steady while IFR01 decreased sharply because they referred to reference price (based on HIMDASUN Perhimpunan Pedagang Surat Utang Negara/Bond Dealer Association) which adopted the average price. This is known as the not-real price of Islamic xed
1.15 1.1 1.05 1 Index 0.95 0.9 0.85 0.8 0.75 0.7 8/26/2008 9/9/2008 9/23/2008 10/7/2008 10/21/2008 11/4/2008 11/18/2008 12/2/2008 12/16/2008 12/30/2008 1/13/2009 1/27/2009 2/10/2009 2/24/2009 3/10/2009 3/24/2009 4/7/2009 4/21/2009 5/5/2009 5/19/2009 6/2/2009 6/16/2009

Date
BNI Dana Syariah BIG Dana Muamalah I-Hajj Syariah Fund IFR01 PNM Amanah Syariah

Source: Bisnis Indonesia

Figure 3. Benchmarking graphs of other Islamic xed (sukuk) mutual fund

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BNI D S I-HAJJ S F Pearson correlation Sig. (two-tailed) n Pearson correlation Sig. (two-tailed) n Pearson correlation Sig. (two-tailed) n Pearson correlation Sig. (two-tailed) n

BNI D S 1.000 0.000 197

I-HAJJ S F 0.363 0.000 197 1.000 0.000 197

PNM A S 0.370 0.000 197 0.991 0.000 197 1.000 0.000 197

BIG D M 0.365 0.000 197 0.998 0.000 197 0.985 0.000 197 1.000 0.000 197

IFR01 2 0.215 0.002 197 0.598 0.000 197 0.641 0.000 197 0.575 0.000 197

170
PNM A S BIG D M Table I. Correlation of IFR01 and other Islamic xed (sukuk) mutual funds

Note: * *Correlation is signicant at the 0.01 level (two-tailed) Source: Data result

mutual fund, if they may adopt the actual price of IFR01 (which is also included in their portfolio), their price would not be high and stable. However, that good performance would attract investors to buy the fund. If investors buy it, actually they buy net asset value (NAV) index at higher level whilst the real price should be lower. This actually is not in line with Islamic teaching. Fund managers may feel cheated or khilaabah, which is prohibited. Then, problems might occur if there were investors who would like to withdraw fund in huge amount which at the same time there was no sufcient cash in the portfolio. Some fund managers usually prohibit their clients from withdrawing it. They warn them that a sharp price decrease could occur and other investors could panic in seeing the withdrawal and so on. Thus, the performance of those mutual funds would be nice and stable. On the other hand, if they would like to withdraw, fund manager must sell sukuk with lower price. This would affect NAV, it could become lower, and then the investors that had withdrawn will suffer losses. Liquidity problems could also occur if they have to wait for the price to be recovered. There should be mutual understanding on this issue between investors and fund manager if they would like to sell their fund to mitigate smaller NAV as it is not stated in the requirement. However, this once occurred in 2005, some Islamic xed (sukuk) mutual funds were also affected, they were forced to adopt actual price which made the funds index to harshly (Siswantoro and Dewi, 2011). The price of Islamic bond was affected by conventional bond as it was sold in huge amount but no buyer at all, then it decreased to 2 30 percent within one to two days. Then, one of the solutions for this case is by providing protected funds to immune the index from a sharp fall. Therefore, this unresolved problem always occur in one period and raised a question, should Islamic xed (sukuk) fund adopt the real price which is the actual price (mark to market) or does it need special treatment? The problem may still occur as the actual price is not always available because limited transactions occur for sukuk. On the other hand, Ministry of Finance has their own daily price (only the Islamic Government bond (sukuk), not the corporate one), but it is only for internal purpose. Actually, fund managers could refer to the conventional bond and asking permission from Ministry of Finance to get the price.

All Islamic mutual funds were signicantly correlated to IFR01 but the correlation was below 0.65. This means that these Islamic mutual funds have different price movements which may not follow the actual price. On the other hand, BNI Dana Syariah gave a negative relationship to IFR01. Even though, they tried to follow the price movement of IFR01 at the end of 2008. Among them (excluding BNI Dana Syariah) they correlated very high (above 0.99). This showed that both might have similar price treatment (adopt the average price of HIMDASUN). In addition, the correlation also shows that the benchmarking graph could not show the correlation analysis in detail as described in the previous paragraph above. To anticipate the sharp decrease, fund managers should be able to handle the overreaction from their clients to withdraw fund in huge amounts as it is usually only temporary shock or they had to be able to provide big cash to anticipate huge redemptions. To enable them sell when the price is at the top. The proportion of safe money market in the portfolio should be maintained effectively to anticipate such a huge redemption. When Islamic sukuk mutual funds (Trim Syariah Sukuk) based on IFR01 was issued, the price of IFR01 was very low. So, it beneted fund manager. They could get capital gain as they bought at low or discounted price. It is shown in the graph (Figure 4), the price of fund increased faster and higher than IFR01 and FR027. However, in the next period when IFR01 and FR027 price increased higher, the Trim Syariah Sukuk did not follow it. This might be caused by a cautious action taken by the manager to anticipate some withdrawals. They might be reluctant to adopt actual price which was high. IFR01 itself did not follow FR027 when the price increased or was higher. Theoretically, IFR01 price should be higher than FR027 as it is covered by collateral which gives better inherent value. From the graph we could predict that the correlation between them to IFR01 was higher than it was in the previous graph. Both, IFR01 and FR027 had high correlation (0.938) while Islamic sukuk mutual fund based on IFR01 (Trim Syariah Sukuk)
1.4 1.35 1.3 1.25 Index 1.2 1.15 1.1 1.05 1 0.95 0.9 11/4/2008 11/18/2008 12/2/2008 12/16/2008 12/30/2008 1/13/2009 1/27/2009 2/10/2009 2/24/2009 3/10/2009 3/24/2009 4/7/2009 4/21/2009 5/5/2009 5/19/2009 6/2/2009 6/16/2009

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Date Trim Syariah Sukuk FR27 IFR01

Source: Bisnis Indonesia

Figure 4. Benchmarking graphs IFR01-FR027 and Islamic mutual fund based IFR01

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was 0.886 (Table II). This was better than previous mutual funds. However, this might be caused by it based on IFR01, so the movement was similar to it. The correlation analysis may show that the higher correlation, the higher possibility in the adoption of actual price of the sukuk (IFR01) as it was based on IFR01. To check whether there is a consistent pattern between IFR01 and FR027, as the coupon rate of IFR01 refers to FR027 Granger causality test was used. It shows which variable inuencing the other variables. First, the data were tested to check whether they were stationer or not. As both data were not stationer (see Appendix), we converted to use rst difference (Tables AII and AIV). The result can be seen in Table III, which shows that FR027 has a signicant effect to IFR01. This is consistent to the previous statement that IFR01 rst referred to FR027 to determine its coupon rate. This also can be a supportive argument to refer to conventional bond price by Islamic bond as the price was not daily traded. Next, the effect of variable changes to others was tested. From Figure 5, we can see that 1 SD of FR027 has caused a change/shock to almost 0.4 to IFR01. Then, it is stable in period 4. While, IFR01 gives a maximum effect positively in period 3, then it becomes relatively stable in period 4 and completely stable in period 7. 6. Conclusions Conclusions that can be drawn from this paper are: . IFR01 and other Islamic xed mutual funds have varied correlation, this may cause the Islamic mutual funds to consist of various sukuk (including the corporate and government sukuk type). The lowest was 2 0.215 and the highest was 0.641. However, not all Islamic xed mutual fund dominantly consisted of sukuk (IFR01). The adoption of actual price by Islamic mutual fund should cause higher correlation than the movement price of sukuk.
TRIM S S TRIM S S FR27 IFR01 Pearson correlation Sig. (two-tailed) n Pearson correlation Sig. (two-tailed) n Pearson correlation Sig. (two-tailed) n 1.000 0.000 152 FR27 0.858 0.000 152 1.000 0.000 152 IFR01 0.886 0.000 152 0.938 0.000 152 1.000 0.000 152

Table II. Correlation of IFR01, FR027 and Islamic (Sukuk) mutual funds based IFR01

Note: *Correlation is signicant at the 0.01 level (two-tailed) Source: Data result

Null hypothesis Table III. Granger causality tests of IFR01 and FR027 D(FR027) does not Granger cause D(IFR01) D(IFR01) does not Granger cause D(FR027) Source: Data result, sample 151, lags 2

Obs. 148

F-statistic 13.7832 0.36272

Probability 3.4 102 6 0.69642

Response to Cholesky One S.D. Innovations 2 S.E. Response of D(IFR01) to D(IFR01) 2.0 1.6 1.2 0.8 0.4 0.0 0.4 0.8 1 2 3 4 5 6 7 8 9 10 2.0 1.6 1.2 0.8 0.4 0.0 0.4 0.8 1 2 3 4 5 6 7 8 9 10 Response of D(IFR01) to D(FR027)

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Response of D(FR027) to D(IFR01) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 0.2 1 2 3 4 5 6 7 8 9 10 1.2 1.0 0.8 0.6 0.4 0.2 0.0 0.2 1

Response of D(FR027) to D(FR027)

10

Source: Data
.

Figure 5. Response graphs

IFR01 and Islamic sukuk mutual fund (Trim Sukuk Syariah) based on IFR01 has signicant correlation (0.886). But, graphically when both price bonds increased higher, the fund (sukuk mutual fund) did not follow it because of the withdrawal actions for reserve. Fund manager did not apply marked to market price method in the fund, because they can manage accordingly. But, if they conduct it on purpose for their benets and interest, they may violate the transparency principle and can be seen as cheating or khilaabah. It is not in line to Islamic teaching. The correlation of IFR01 and FR027 was so high (0.938), but IFR01 had a relatively and stable price movement. For secular investors, they can choose any one that benets them as it has similar characteristics. But not for Muslims, they have to stick to Islamic compliant product due to Islamic teaching requirements. FR027 has a signicant effect to IFR01 empirically by Granger causality (this was already proved by the coupon rate determination when rst issuance). Its dependency is unavoidable as it assumed having similar characteristics.

7. Recommendations In addition, some useful recommendations from this issue are: . It is important to separate Islamic and conventional bond market which has different nature and characteristics. Therefore, there should be a moral obligation for Islamic bond investors not to speculate sukuk which can cause losses to others

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and to trade by un-Islamic way. This is also applied for Islamic xed mutual fund investors. Thus, trading bonds is permissible but for some urgent reasons. However, this nature of Islamic bond is for investment, it is different from the conventional one. Islamic xed and sukuk mutual funds should adopt the actual price of Islamic bond (sukuk) even though there will be a volatility of Islamic xed mutual fund performance in the market. Conservatism principle can be a better solution for this, which adopted whichever is lower for the price between the actual price and reference price (HIMDASUN). However, this reects the capability of fund manager to maintain their funds. In addition, an independent body is necessary to monitor and to observe the price reference. So far, moving average system is not very useful. In fact, conventional xed mutual fund have already adopted the actual price which caused uctuate in the graph performance. The permissible maximum fund for each investor should be based on asset under management (AUM), not the proposed unit. So, there will be no big investors that can affect the stability of portfolio index when they would like to withdraw, especially in an illiquid market. In this case, transparency must be expressed by fund manager to the investors. The maximum of money market position in each portfolio should be increased, so far the authority only permits maximum of 20 percent from total assets. This is to avoid the non-liquidity of the bond market. Even though, it may affect the performance of the fund slightly. Perhaps minimum money market requirement is needed to anticipate such a huge redemption, for example 10 percent.

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Autocorrelation .j * * * * * * *j .j * * * * * * *j .j * * * * * * *j .j * * * * * * *j .j * * * * * * j .j. j .j. j .j. j .j. j Note: Sample 151

Partial correlation .j * * * * * * *j *j. j .j. j *j. j .j. j .j. j *j. j .j. j *j. j

AC 1 2 3 4 5 33 34 35 36

PAC 0.971 0.937 0.905 0.867 0.831 2 0.016 2 0.018 2 0.024 2 0.031

Q-stat. 0.971 2 0.082 0.002 2 0.123 0.048 0.004 2 0.086 2 0.025 2 0.075

Prob. 145.11 281.34 409.19 527.21 636.56 1,318.7 1,318.8 1,318.9 1,319.1

Table AI. Correlogram of FR027 data

Autocorrelation .j * * j .j * j .j * j .j. j .j. j .j * j .j * j .j. j .j. j Note: Sample 151

Partial correlation .j * * .j * .j. *j. .j * .j * .j. .j. .j. j j j j j j j j j

AC 1 2 3 4 5 33 34 35 36

PAC 0.242 0.151 0.107 2 0.049 0.063 0.101 0.100 0.062 0.028

Q-stat. 0.242 0.098 0.054 2 0.106 0.084 0.099 0.045 0.037 2 0.034

Prob. 8.9968 12.522 14.299 14.679 15.300 46.666 48.632 49.385 49.541

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177

Table AII. Result of rst for FR027

Autocorrelation .j * * * * * * *j .j * * * * * * *j .j * * * * * * *j .j * * * * * * j .j * * * * * * j *j. j *j. j *j. j *j. j Note: Sample 151

Partial correlation .j * * * * * * *j .j. j .j * j *j. j .j. j *j. j .j. j *j. j .j. j

AC 1 2 3 4 5 33 34 35 36

PAC 0.946 0.902 0.875 0.839 0.805 2 0.115 2 0.113 2 0.117 2 0.120

Q-stat. 0.946 0.060 0.157 2 0.076 0.017 2 0.097 0.038 2 0.079 0.010

Prob. 137.90 263.93 383.44 494.08 596.63 1,197.6 1,200.1 1,202.9 1,205.7

Table AIII. Correlogram of IFR01 data

Autocorrelation
*j. j * *j. j .j * j

Partial correlation
*j. j * *j. j

AC 1 2 3 4 5 33 34 35 36

PAC 2 0.087 2 0.200 0.094 0.016 0.068 2 0.055 0.040 2 0.010 0.009

Q-stat. 2 0.087 2 0.209 0.058 2 0.012 0.105 2 0.083 0.037 2 0.074 0.034

Prob. 1.1483 7.3187 8.6885 8.7274 9.4521 35.720 36.035 36.053 36.069

.j. .j * .j. .j. .j. .j.

j j j j j j

.j. .j. .j * *j. .j. *j. .j.

j j j j j j j

Note: Sample 151

Table AIV. Result of rst for IFR01

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