economic signicance of islamic pawnbroking in malaysia

Durham Islamic Finance Summer School, 2011

Azila Abdul Razak, Economics Significance of Islamic Pawnbroking in Malaysia 1

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Durham Islamic Finance Summer School Durham Islamic Finance Programme

Durham University 4th – 8th July 2011

Background of the Study v  Pawnshop lending is characterized by small –sum loans, short

maturities, and fully collateralized by personal property with an interest charge.

v  ‘Pawn’ – French word ‘pan’ which means the skirt of a gown. Also a Latin word ‘pannum’ which refers to clothes.

v  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)

v  Malaysia v  15th century (diplomatic relationship between China and Malacca) v  19th century (Chinese immigrant)

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T h e W e a k n e s s e s o f C o n v e n t i o n a l Pawnbroking

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

auctioned v  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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The Practice of Pawnbroking in Malaysia

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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

S o u r c e : S k u l l y (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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•  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.

Research Objectives

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•  Triangulation method •  Questionnaires

•  customers (181) - Kelantan, Terengganu, Selangor, Kuala Lumpur, Johor

•  pawnbrokers (15) •  Interview (representat ives from 3 Islamic

pawnbroking institution)

Research Methodology



“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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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)

Proofs of Legality of the Pawning Contract

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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)



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

•  Pawnbroker should subscribe the Islamic insurance coverage (takaful)

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

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

The Determination on the Implementation of Ar-rahn Scheme in Malaysia

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The Determination of Value of Pledge Item and the Safekeeping Fee

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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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NO. STATES PAWNSHOP

Conventional Islamic

1 JOHOR 34 30

2 KUALA LUMPUR 14 22

3 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

TOTAL 259 329

The Number of Islamic Pawnshops in Malaysia in 2010

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Findings and Conclusion



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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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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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 •  High support and demand from

the Malaysian Muslim •  Government support

Weaknesses •  No specific regulation •  Lack of diversification in terms of

collateral acceptance •  Lack of awareness about the

existence •  Lack of branches in rural areas

Opportunities •  Alternative financing to the low

income and high risk groups •  Expand the opportunity spaces

for demand from the non- Muslims

•  Economic opportunity

Threat •  Competition from other informal

financing •  Strict license granting



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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 Islamic

Total of loan = 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

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

economic signicance of islamic pawnbroking in malaysia

Documents

pawnbroking v

islamic pawnbrokers

role of islamic pawnbroking

history of islamic pawnbroking

month v

auctioned v

century v italy

century v england