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Durham Islamic Finance Summer School, 2011

Durham Islamic Finance Summer School Durham Islamic Finance Programme Durham University 4th – 8th July 2011 1

Background of the Study v 

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Pawnshop lending is characterized by small –sum loans, short maturities, and fully collateralized by personal property with an interest charge. ‘Pawn’ – French word ‘pan’ which means the skirt of a gown. Also a Latin word ‘pannum’ which refers to clothes. The earliest formal pawnshops : v  China (5th century) v  England (11th century) v  Italy (1440), France (1577), Netherlands (16th century) and Spain (1705) v  The United States of America (1657) Malaysia v  15th century (diplomatic relationship between China and Malacca) v  19th century (Chinese immigrant)

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

The Weaknesses of Conventional Pawnbroking v  v  v  v  v  v  v 

Charge a very high interest rates (more than 2% per month) Decreasing value of pawned item Low collateral value during the valuation process Issue an illegible pawn-ticket Auctioning the collateral without giving notice to the customer Pawnbrokers did not return the surplus after goods have been auctioned Asking for 50 cent for each replacement of pawn-ticket

These factors explain the negative image of this institution to the society!

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In order to transform the pawnbroking’s shady image, the Malaysian government has made an effort to establish a just pawnbroking system which represents a viable solution in terms of the elimination of riba and gharar, and promoting the social justice. ISLAMIC PAWBROKING – AR-RAHN SCHEME

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

The Practice of Pawnbroking in Malaysia Pawnbroking Institutions

Commencement Date

Muassasah Gadaian Islam Terengganu

Jan, 1992

Permodalan Kelantan Berhad

Mar, 1992

Bank Kerjasama Rakyat Malaysia

27th Oct, 1993

EON Bank

Aug, 2002

AgroBank

Sept, 2002

YaPEIM cooperative

Nov, 2000

Source: Skully (2005)

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Research Aim To measure the attributes and perceptions of the Malaysian customers and Islamic pawnbrokers about the role of Islamic pawnbroking to the socio-economic growth.

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

Research Objectives • 

To provide an overview of the mechanism of Islamic pawnbroking; •  To provide an overview of the history of Islamic pawnbroking in Malaysia; •  To identify the characteristic of the customers’ and pawnbrokers’ in the Islamic pawnbroking institution; •  To identify the determinants of pawnshop selection; •  To analyse the role of pawnshop in improving the socio- economic of the society; •  To analyse the prospects and challenges faced by the Islamic pawnbroking; •  To suggest several recommendations to the pawnbrokers and policy makers.

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Research Methodology •  Triangulation method •  Questionnaires •  customers (181) - Kelantan, Terengganu, Selangor, Kuala Lumpur, Johor •  pawnbrokers (15) •  Interview (representatives from 3 Islamic pawnbroking institution)

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

“The scheme needs to be widened because firstly, it is in accordance with Islamic principles, secondly it is simple, thirdly the system is fair, furthermore it will avoid borrowers from going to the loan sharks and conventional pawnshops which charge interest rates.” – (Najib Tun Razak, 2010)

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Proofs of Legality of the Pawning Contract The Qur’an •  “If you are on a journey and cannot find a scribe, then use the receipt of pawned objects” (2: 283)

The Sunnah •  “The Prophet (pbuh) bought some food from a Jew and he pawned his iron shield with him” (narrated by Al-Bukhari on the authority of Aisha (mAbpwh)

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

Pawnbroking in Shari’ah Framework and its Application in Islamic Finance Three important norms in Islamic financial ethics: i) Riba ii) Gharar iii)  Social justice Four underlying concept in Islamic pawnbroking: i) Al-Qardhul Hasan (benevolent loan) ii) Ar-Rahn (pledge) iii) Al-Wadiah Yad Dhammanah (guaranteed safekeeping) iv) Al-Ujrah (fee charge)

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Pawning Contract i) Sighah (contract of offer and acceptance of both parties) ii) Ar-Rahin (pawner) and Al-Murtahin (pawnbroker) iii) Al-Marhun (the pawned object as an insurance of the debt) iv) Al-Marhun Bih (the debt in lieu of which the object is pawned)

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

The Determination on the Implementation of Ar-rahn Scheme in Malaysia The meeting of the Fatwa Committee of the National Council for Religious Affairs held by JAKIM (10th – 12th April, 2007) : • 

Working capital must be gained from lawful sources

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Pawnbroker should subscribe the Islamic insurance coverage (takaful)

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If collateral lost/damage/stolen, pawnbroker must pay compensation for the remaining value of the collateral at the time of valuation

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Pawnbroker should appoint an internal Shari’ah legal advisor to supervise the operation and activities of ar-rahn

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The Determination of Value of Pledge Item and the Safekeeping Fee Value of Pledge Item

Safekeeping Fee (RM/monthly)

RM100 – RM1,000

The first 3 months = 0.60 The next 3 months = 0.70

RM1,001 – RM5,000

The first 3 months = 0.65 The next 3 months = 0.80

RM5,000 – RM10,000

The first 3 months = 0.80 The next 3 months = 0.95

Source: JAKIM (2010)

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

The Number of Islamic Pawnshops in Malaysia in 2010 NO.

STATES

PAWNSHOP Conventional

Islamic

34

30

KUALA LUMPUR

14

22

KEDAH

29

27

4

KELANTAN

11

50

5

MELAKA

12

7

6

NEGERI SEMBILAN

18

16

7

PULAU PINANG

27

17

8

PAHANG

14

26

9

PERAK

40

31

10

PERLIS

4

6

11

SABAH

7

14

12

SARAWAK

3

15

13

SELANGOR

39

40

14

TERENGGANU

7

28

259

329

1

JOHOR

2 3

TOTAL

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Findings and Conclusion

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

Customers Characteristics •  •  •  •  •  •  • 

Women Middle Age Malay Less Educated Married Large size family Government servant, housewife, working at private sector, and small businessmen •  Low income

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Pawnbrokers Characteristics •  Less than 10 years of establishment •  Branch, cooperative and corporation •  Parent company and subsidized by the government or state government •  More staff

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

Determinants of Pawnshop Selection •  •  •  •  •  • 

No element of interest in loan Practicing more transparent process Security of the collateral is guaranteed Minimum fee charge Positive image A high possibility in redeeming the collateral

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The Role of Pawnshop to the Society (Customer) Overcome money shortage Finance consumption and production purpose Finance children schooling Helps solve financial exclusion Helps solve social problem Alternative to the formal financing (during economic downturn) •  Abstaining from riba •  •  •  •  •  • 

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

The Role of Pawnshop to the Society (Pawnbrokers) •  •  •  • 

Helps solve financial exclusion Helps reduce social problem Alternative to the formal financing Abstaining from riba and gharar

# They disagree with the statement “when it is used for consumption and no redemption, it helps them to sustain their business”.

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The Prospect and Challenges of Islamic Pawnbroking Strengths

Weaknesses

•  High support and demand from •  No specific regulation the Malaysian Muslim •  Lack of diversification in terms of •  Government support collateral acceptance •  Lack of awareness about the existence •  Lack of branches in rural areas Opportunities

Threat

•  Alternative financing to the low •  Competition from other informal income and high risk groups financing •  Expand the opportunity spaces •  Strict license granting for demand from the nonMuslims •  Economic opportunity 22

Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

Recommendations •  •  •  •  •  •  •  •  •  • 

Lenient in granting license Encourage banks to open windows for ar-rahn scheme . Amendments to the Pawnbrokers Act 1972. Established a standard regulation for Islamic pawnbroking. Expand their branches to rural areas. Should consider to waive fee charge to customer under certain income level. Creating awareness among prospective customers. Diversified their collateral acceptance. Send staff for training Give discount to early repayment loan

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Conventional vs Islamic Pawnbroking Conventional Total of loan = RM10,000

Islamic Value of item = RM14,285 60% from collateral value = RM10,000

Interest rate = 2% per month Financing tenure = 6 months Calculation Total of int. rate = 2/100*10,000*6 = RM1,200 Total payment = RM10,000 + RM1,200 = RM11,200

Fee charge = RM0.75 (for every RM100.00) Financing tenure = 6 months Calculation Total fee = 14,285/100*0.75*6 = RM642.83 Total payment = RM10,000 + RM642.83 = RM10,642.83

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Durham Islamic Finance Summer School, 2011

Conclusion It is hoped that a new reform of the pawnbroking industry shown by the Islamic pawnbroking will improved the image of pawnbroking business which was previously associated in the public mind with poverty and crime. The Malaysian experience in offering the Islamic pawnbroking to the society will be a very useful model for other countries that might wish to consider.

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THANK YOU

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Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia

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Economic Signicance of Islamic Pawnbroking in Malaysia  

This article will discuss the economi significance of Islamic Pawnbroking in Malaysia