First Islamic pawn broking institution

INTRODUCTION

The first Islamic pawn broking institution, Muassasah Gadaian Islam Terengganu (MGIT), was set up by the

Terengganu State Islamic Affairs and Malay Customs in January 1992.On 21 August 1993, the Minister of Finance

announced the introduction of a scheme, known as Ar-Rahnu scheme through the collaboration of three institutions

Namely Bank Negara Malaysia (supply the expertise in financing field), Islamic Economic Development Foundation

Malaysia or YPEIM as the funder, and Bank Kerjasama Rakyat Malaysia Berhad which supply the infrastructures and

Managing the transaction. Later, on 27 October 1993 the first phase of Ar-Rahnu scheme was launched at six

Branches of Bank Kerjasama Rakyat Malaysia Berhad. Now, the Ar-Rahnu scheme is available at all Bank Kerjasama

Rakyat Malaysia Berhad branches throughout Malaysia. YPEIM had also taken the initiative to launch 17 counters of

Ar-Rahnu scheme through YPEIM co-operatives. Later in 1997, the Islamic pawn broking commenced in Bank Islam

Followed by EON Bank (August 2002) and Bank Pertanian Malaysia in September 2002.

Generally, the operation for Islamic pawnshop transaction is quite similar with conventional. Only, the contract

(aqad) in the Islamic pawnshop is different from the conventional pawnshop. The loan granted is based on four

Concepts, i.e. al-qardhul hassan (loan without interest), al-wadiah yad dhammanah (keeping valuable goods by

Guarantee), al-ujrah (storage fees) and ar-rahn (collateral). The storage fee is based on the value of gold and not on the

Amount of the loan, and charged differently by each Islamic pawn broker as in Table 1.

In the Islamic-based pawnshop, gold is the only permitted item. Gold have several advantages as collateral over

Other items (Skully, M.S, 2005). Firstly, gold is easily resold and so there is potentially auctioning the collateral should the borrower not redeem the pledge. Secondly, gold’s purity can be easily determined and so the risk of mispricing the collateral can be minimized. Thirdly, gold chains and rings typically require only a small flat envelop for storage and so can be kept securely in the bank safe at little, if any, additional cost.

MAS (Monetary Authority of Singapore) requirementAccording to Monetary Authority of Singapore’s (MAS) top executive said on Tuesday (June 3),“Singapore’s interests in Islamic finance look promising. This is because there are more funds that are continuously establishing themselves here in order to tap the Islamic debt market.”Going with the words of MAS Managing Director Ravi Menon “Singapore comes in as the unique non-Muslim majority country in the top 15 nations for Islamic finance,” He said this at the 5th World Islamic Banking Conference Summit being conducted at the city-state.He dutifully added that additional funds will continue to be established in this place, with an aim to meet demand from the expansive client’s base in Asia and from the Middle East. This happens at a time while several corporations have acted and established sukuk programmes in some parts of Singapore in order to tap the market over the next few years.Just for an insight, Sukuks are bond-like structures that usually comply with Islamic investment principles that do not allow the charging or paying of interest.Regulation entails the regulation of rules of behavior, monitoring, on the other hand, involves observing whether rules are obeyed and the oversight ensures the supervision of the financial sector. Islamic banks products should never lead ultimately to the sale of the present for future money. One example is about Islamic banking products, Islamic banking products once constructed through mixing contracts. However, they should be distinguished in form and consequence from the classical loan contract used by conventional.According to Mr. Toby O’Connor, the CEO of Islamic Bank of Asia, ” A lot of liquidity exists in the conventional space in which the new Islamic products are competing with. However, it’s a huge opportunity. By just looking at the wealth management space, there exist a lot of liquidity coming into Singapore, a portion of that will be injected to Islamic finance, and by looking at sukuk, there are a number of issuances, and programmes being set up”.The Director and CEO of OCBC Al-Amin Bank Berhad Syed Abdull Aziz Syed Kechik was of the opinion that, “Sukuk has grown to become a crucial instrument for cross-border capital flows, that is driven by the ever-developing demand for Shariah-compliant investments transcending borders. However, the sobering reality remains that the current demand for sukuk constantly outweighs supply twice over”.Mr Menon said that global Islamic financial assets can be estimated to have reached a high of US$1.8 trillion by the end of 2013. This point at a notable rise from US$1.5 trillion in 2012. There is also the fact that Islamic finance has been improving by double-digits in recent years, thus making it one of the star performers in the international finance field. As viewed from recent independent Islamic bond issues by new players such as Britain and Hong Kong, the industry has also become more international.This is also a sector that has witnessed double digit growth last year, whereby it saw more participants jumping in to exploit growing demand.Echoing his sentiments, “As more countries cater for Islamic finance, there is an increase of the scope for cross-border Islamic finance. Islamic assets have surged fourfold over the last five short years. There is a more sukuk issuance within Asia and between the Middle East and Asia. There are 15 banks in the whole of Singapore generally involved in Islamic banking. This is double the number that was in existence five years ago. The city-state had 30 sukuk issuances to date, with about seven in year 2013 alone.”Kuala Lumpur, however, is at the moment the world leader in Islamic sukuk market. The region is credited for 60 percent of the total, globally.In order to tap growing demand, Hong Kong as well as the UK has of late taken steps to facilitate the issuance of sukuk.Mr Wasim Saifi, who is the Global Head of Islamic Banking in Consumer Banking as well as the CEO of Standard Chartered Saadiq based in Malaysia added, “These are crucial initiatives judging from an Islamic finance perspective. It would lead to other UK corporate aiming to raise sukuks, (and thus) lead to other companies from other parts of the globe looking to offer sukuks in London and in a similar manner out of Hong Kong. By having a sovereign taking the lead, then the private sector also follow suit.”According to the most recent EY report, worldwide Islamic banking assets are tipped to grow to 3.4 trillion US dollars by 2018.Participants in the industry opining that the increase in trade flows between Asia and the Middle East and growing support for Islamic finance will offer significant chances of development. A lead to tapping the opportunities lies in steering greater connectivity between all the different markets.Specifically, EY identified six rapid growth markets. In order of ranking, they are:Qatar, Saudi Arabia, Indonesia, Malaysia, Turkey and UAE(QISMUT).Islamic banking assets together with commercial banks are usually expected by consultancy experts to grow at an annual growth rate of 19.7% over 2013-2018 throughout the QISMUT nations, so as to reach US$1.6 trillion by 2018.In this respect, the MAS might step up regulations aimed at curbing money laundering as well as terrorism financing risks that are constantly posed by remittance agents, some Internet-based payment systems as well as money changers.A thriving allegation is that “Singapore’s openness as an international transport hub as well as a financial center exposes it to many inherent cross-borders” money laundering and financing risks, according to the study. Terrorism also falls into this class. MAS “have come up with a robust preventive regime. Controls on all pawnbrokers as well as corporate service givers such as accountants and lawyers can be improved, according to a government study that was released today. Nonetheless, there are areas for further enhancement.” According to the report, the authorities in Singapore are monitoring virtual currencies such as Bitcoins at close range. This is because they might be utilized for illegal activities and will also consider regulation if at all needed. Bankruptcy is unacceptable for fear of contagion. Bank interconnection, is greater than in any other sector. A bank failure may lead to the fall of many other banks. Government bailouts in the banking sector during this crisis were the largest in US history.

The risk assessment study comes after about seven weeks since Singapore police as well as the bank association pressured residents to be wary of all fraudsters who seek to use their bank accounts in an aim to funnel all illegal funds after a substantial increase of cases reported last year.According to today’s report, remittance agents, usually accept money for transfer to people outside Singapore, and the money changers then operate in “cash-intensive” industries as well as offering great risks of money laundering or in some cases terrorism financing.The implementation of controls in the industries isn’t as robust as in banks and MAS is going to make sure that “enforcement efforts are further stepped up,” according to the report. Total remittance from Singapore added up to S$24.1 billion ($19 billion) in 2012, and the inward remittances came to a total of S$995 million, the authorities said in the study. Volumes in the process of money-changing business in the year amounted to S$36.8 billion.More PowersThe study showed that the pawn broking industry registered total loans outstanding at over S$1 billion in 2012. The total number of pawn shops in the whole city increased to 191 in the year, down from 114 in 2008.MAS is in the process of looking at additional supervisory powers as well as requirements to boost “nascent” money laundering and terrorism financing controls for Internet payment companies such like PayPal Inc. or Alibaba Group Holding Ltd.’s Alipay.Corporate service providers and accountants can be exposed to various money laundering as well as terrorist financing enedeavors if higher-risk customers get to hire them in order to set up complex structures that will conceal ownership and also reduce the transparency of these transactions, according to the suggestions of the study. Agencies that  involved in the study that included MAS, the Accounting and Corporate Regulatory Authority, the bureau of customs, the casino regulator, and the finance, as well as home law ministries. In the long run, all this adds up to make some sense. Tax EvasionMAS made money laundering a crime last July for all clients to utilize financial institutions in order to evade tax. Singapore’s central bank is now stepping up its anti-money laundering laws in line with the global regulations after U.S. authorities’ investigation towards several Swiss banks for dealings on behalf of the American clients.UBS (UBSN) AG as well as Credit Suisse Group AG, Switzerland’s major banks, is among firms incriminated in a U.S. clean-up since 2008 on offshore tax evasion that resulted to charges against approximately 70 American taxpayers and 30 bankers, attorneys and advisers.U.S. as an economy charged UBS in 2009 with colluding in tax evasion by thousands of American clients. The Zurich-based bank paid a $780 million penalty, and avoided prosecution, admitting it fostered tax evasion. It also agreed to hand over data on client accounts to U.S. tax officials in the relevant offices.Private BankingSingapore is today Asia’s largest private banking center as it has offshore assets amounting to $800 billion, Boston Consulting Group information shows, as of September. Risks for all the private banks operating in Singapore are usually lower than those for the full banks as they have fewer clients, and less physical cash transactions as well as more checks when the clients open accounts, according to the opinion of today’s report.In November, local police, the bank association and the N.C.P.C said that the amount of illegal monies in Singapore fell to S$15.5 million down from 2012’s S$24.6 million. The total number of the reported cases of hard and illegitimate cash being given out to so-called money mules in order to hand over to a legitimate third party increased to 133 during the first nine months of last year, from 93 for all of 2012.The national regulator of business entities as well as public accountants in Singapore is known as ACRA. The regulator plays the role of a facilitator for business entities development and the public accountancy profession.The Accounting and Corporate regulatory Authority (ACRA) has of late announced revised filing requirements for all Singapore registered companies. From the popular date, 2nd December 2013, all Singapore brought in companies (unless it has been exempted such as insolvent Exempted Private firms) which are unlimited or limited by the shares will require to file a full set of their financial statements in the XBRL (eXtensible Business Language format) with ACRA. It promotes the transparency of all the financial statements and information to all the stakeholders of company and also adds value to the total financial reporting process.BizFin Preparation Tool comes in as the new preparation tool that is provided by ACRA for free in order to enable companies prepares their financial statements in the XBRL offline. This tool also allows the companies in order to manage their XBRL financial statements on the basic MS Excel-based templates in the minimum to-do list. To reduce the minimum time for manual data entry, this tool is equipped with an automatically tagging function to auto-map all items and drag-and-drop functionality in order to populate their financial data.The basic requirement list as has been explained in the table below shows a combination of a text block element to give chance to companies to submit entire set of financial statements; as well as detailed information elements allowing companies to submit data within individual parts of the financial statements.A whole set of financial statements given using a single text block elementStatement by directors Independent auditors’ reportStatement of the total financial position Income statement of the cash flowsGeneral and corporate information Trade as well as other receivables Trade and payables Provisions Share capital Revenue Government grants Employee benefits expense

Secondary research

1.2Research Objectives

1. To identify the level of public awareness towards Islamic pawn broking scheme in Singapore

2. To identify the factors that influence public to pursue Islamic pawn broking scheme

3. To identify the most important factor that influence people to pursue Islamic pawn broking scheme.

1.3 Research Question

1. What is level of public awareness towards Islamic pawn broking in Sungai Petani, Kedah?

2. What are the factors that influence public to pursue Islamic pawn broking?

3. Which is most important factor that influences public to pursue Islamic pawn broking scheme?

2. LITERATURE REVIEW

2.1 Micro Credit Program in Malaysia

Microcredit is the extension of small loans to entrepreneurs too poor to qualify for traditional bank loans. It has

proven an effective and popular measure in the ongoing struggle against poverty, enabling those without access to lending institutions to borrow at bank rates, and start small business. The key implications of microcredit are in its name itself: ‘micro’. A number of issues come to mind when ‘micro’ is considered: The small size of the loans made, small size of savings made, the smaller frequency of loans, shorter repayment periods and amounts, the micro/local level of activities, the community-based immediacy of microcredit etc. Hence microcredit is not the solution, but is a menu of options and enablement, that has to be put together, a la carte, based on local conditions and needs.

Microcredit has been used as an ‘inducer’ in many other community development activities, used as an entry point

in a community organizing programme and as an ingredient in larger education/training exercises (Hari Srinivas,

Coordinator).

2.1.4 Co-operatives

The Department Of Co-operative Development was established in July 1992. The department is entrusted with development and regulatory functions under of the Co-operative Societies Act, 1993 (Act 502) and the Co-operatives

Regulations, 1995. To ensure the co-operative movement plays an effectives role in the socio-economic development of the country towards an equitable distribution of wealth (Selamah Binti Maamor and Abdul Ghafar Ismail, 2006).

2.1.5 Credit Guarantee Corporation (CGC)

Credit Guarantee Corporation Malaysia Berhad was incorporated in 1972 with Bank Negara and Financial

Institutions as its shareholders. As an agency under the purview of Ministry of Entrepreneur and Co-operative

Development (MECD), CGC acts as the only institution in Malaysia which provides guarantee on loans to Small and

Medium Industries (SMIs). The aim is to assist viable SMIs with inadequate collateral or without collateral or have no track record to gain the much needed access to financing. Credit Guarantee Corporation has evolved from its primary role as a credit supplementation institution to a more market-driven role to sustain Malaysian SMIs in the competitive economy. The role as a ‘Credit Enhancer’ is revealed in CGC’s approach to position itself as the intermediary to provide access to credit for all Malaysian SMIs (Selamah Binti Maamor and Abdul Ghafar Ismail, 2006). Since its establishment in 1972, CGC has approved more than 385,000 applications amounting to RM34.5 billion under its various schemes. In 2006, CGC approved 7,500 loan applications amounting to more than M3 billion (SME Annual Report, 2006).

2.2 History of Islamic Pawnshop

To cater for the demand of non-interest bearing pawn-broking services by the lower income group, a few Islamic pawn-broking institutions were established in the early 1990’s. The first Islamic pawn-broking institution, Mu’assasah Gadaian Islam Terengganu (MGIT), was set up by the Majlis Agama Islam dan Adat Istiadat Terengganu in January 1992. In March 1992, Kedai Al-Rahn (KAR), a subsidiary of Permodalan Kelantan Berhad commenced its operations. On 21 August 1993, the Minister of Finance announced the introduction of a scheme, known as Skim Al-Rahnu (SAR) through the collaboration of three institutions namely Bank Negara Malaysia, Yayasan Pembangunan Ekonomi Islam Malaysia and Bank Kerjasama Rakyat Malaysia Berhad. Later, on 27 October 1993 the first phase of SAR was launched at six branches of Bank Rakyat (Selamah Binti Maamor and Abdul Ghafar Ismail, 2006).

In terms of legislation, the Islamic pawnbroking system is subject to certain laws but no specific acts. For example, ar-rahnu scheme in Bank Kerjasama Rakyat Malaysia Berhad is subject to three different acts, which are the Bank Kerjasama Rakyat (M) Berhad Act 1978, the Co-operative Societies Act (1993) and the Development Finance Institutions Act 2002. In addition, Bank Kerjasama Rakyat Malaysia Berhad has introduced separately the ar-rahnu manual guidelines(Bank Kerjasama Rakyat (M) Berhad (2000, 2002 dan 2003). Manual Pinjaman Pajakgadai Islam) . Other relevant acts are the Occupational Safety and Health Act for workers who are exposed to acid for the gold test and the Weight and Measurement Act, in which the gold weighing device has to be licensed every year (Sehan, M.

A.)

2.3 Level of public awareness towards Islamic pawn broking (Ar Rahnu)

Studies by Mustafa indicates that level of awareness was measured using few variables such as gender, age, working status, race, education background, income level, number of dependent and type of marketing tools.

According to Mustafa (2006), 73.3 % of respondents aware of Islamic pawn broking and about 26.7% of respondents were not aware of Islamic pawn broking. Studies by (Mohd Fazli Mohd Sam, Md Nor Hayati Tahir, Noor Khamisah

Abdul Latif, 2010) indicate that level of awareness was measure using variables such as education, and good advertising such as promotion.

The study by YPEIM indicates people know the existence of micro-credit scheme of the organizers of the scheme

YPEIM and implementing the scheme. However, given the information has not been a very effective implementation

Scheme. YPEIM measure level of aware using variables such as race, income level, marketing tools and working group (Religion news daily, 2008). The study by (Assoc. Prof. Dr. Zuriah Abdul Rahman, 2007) measure level of awareness using variables such as race, marketing tools and education background. The study by Mohamed Ishak Hj Badarudin Rais, 2007) measure level of awareness using variables such as race, gender, working group and income level. Hence the variables that are used in this research in order to measure the level of awareness are gender, age, marketing tools, education background, income level, and working status.

2.3.4 Working status

Islamic pawn broking consumers consist of those who work in public or private sector, the self-employed as fortune-house, mechanics, farmers, rubber tapers, fishermen and tailors. (Religion news daily, 2008).The study by (Mohamed Ishak Hj Badarudin Rais, 2007 ) 25% of the respondents are housewife, 15.26 percent are government staff, 24.47 percent worked in the public sectors, 6.32 percent are farmer, 23.95 percent of the respondent involved in business activities and 5 percent represent the non-productive unit such as the pensioner, unemployed and students.

Furthermore for the Islamic pawnshop customers, the highest distribution are reported for the public sectors employee that represent 24.02 percent, follows by the government staff and housewife that represent 22.06 percent respectively and for respondent that involved in business activities represent 21.57 percent.

2.3.5 Income level

Mustafa (2006) indicate that about 56.0% of respondents were income above RM1200 aware of Islamic pawn broking, followed by about 25.0% of respondents income between RM801 to RM1200 indicate aware of Islamic pawn broking and about 15.0 % of respondents income between RM501 to RM800 indicate aware of Islamic pawn broking. The remaining about 3.30% of respondents’ income between RM200 to RM500 indicates aware of Islamic pawn broking. The researcher concludes that majority of Islamic pawn broking consumers were with income above

RM1200.

Most of Islamic pawn broking consumers fall on middle and lower income groups which were about 21 per cent

earning less than RM500, less than RM1 ,000 (39.8 percent), less than RM1, 500 (22.7 percent), between RM1, 500 to RM2, 000 (8.3 percent) and the rest earn between RM2, 000 to RM4, 000 (Religion news daily, 2008).

2.3.6 Marketing tools

The researcher concluded that majority of respondents aware of Islamic pawn broking through friends. Majority

of Islamic pawn broking consumers aware about Ar Rahnu scheme through various sources such as from friends, relatives, posters, print and electronic media. (Religion news daily, 2008) In general, the public knows about Islamic financial products (88.6%) but are not familiar on its operations, product attributes and many other factors of which the relevant information have not been adequately disseminated to them (Assoc. Prof. Dr. Zuriah Abdul Rahman, 2007)

2.5 Factors influencing public to pursue Islamic pawn broking (Ar –Rahnu) scheme

According to Mohamed Ishak Hj Badarudin Rais (2007) factors that influence the demand for islamic pawn broking were syariah, fast, confidentiality and mortgage. Whereas according to Hanudin Amina, Rosita Chonga, Hazmi Dahlana, Rostinah Supinaha (2007) factors that influence the demand for Islamic pawn broking were syariah view, pricing system, pledged asset, customer service and locality of Islamic pawn shop. According to Mustafa (2006) those factors that affect customer demand were low income, fast, syariah view, confidential and interest rate. Hence factors that be chosen for this research are pricing system, customer service, locality of Islamic pawn broking, confidential and income.

2.5.2 Customer service

The important of service in the conventional-based pawnshop has been in details explained by Lao, J.J. (2005).

He suggested that Islamic pawnshops should offer a quick and convenient way to borrow money. Unlike banking institutions, pawnshops are more convenience for consumers. Most consumers use pawnshops primarily because they poor credit and would be denied loans from traditional institutions. The borrowed money is exchanged with pledged assets to secure the loan itself.

According to Mohammed, N., Daud, N.M.M., & Sanusi, N.A. (2005), he mentioned the importance of service factor. The Islamic-based pawnshop must maintain the record of customers, keep the record confidentially and treat the customers fairly regardless of their race or religion. The Islamic-based pawnshop must stress the important of customer service in order to strengthen the customer base, in addition to Shariah view concern. In order to become a successful Islamic pawnshop, there is a need, therefore to strengthen the customer service. According to Hanudin Amina, Rosita Chonga, Hazmi Dahlana, Rostinah Supinah (2007) the present study revealed that customer service is significantly associated with acceptance. Indeed, this result offers points for local authority and businesses to consider.

First, the approval for the transaction must be efficient and fast. Second, the pawnshop must offer advice service or merely consultation to facilitate the customers’ transaction. Third, the pawnshop must free from the issue of discrimination.

According to Mustafa (2006) his research revealed that Islamic pawn shop offer convenient, fast and efficient services for customer. From the good service for the customer satisfaction hoped that syariah pawn shop will be the alternative company for the Moslem Community that doesn’t want interact with the conventional economic system.

As the promotion tool syariah pawn shop use Halal, but with the development of age, that concept is no longer relevant. Now people is very smart when choosing the right things for their, they prefer the good service, responsible and always made Islamic ways as the number one (Arrifin, M.I, 2005). Pawn shop also gives flexible service to the customer about giving back the loan. The customer cans longer their loan with only paid the interest, which service will hard to do if we deal it with the bank. If customer can’t pay their loan, pawn shop will do the auction for the customer’s collateral. But if the price of auction is higher than the value from appraiser, the customer will get the profit from that auction. Then if the result is lower than the value, it becomes the pawn shop risk. The company gets the profit from the interest and the administration cost that coming from customer.

2.5.3 Locality of Islamic-based pawnshop

There exists scare information on the important of location factor for pawnshops. The two important studies have

been employed to generalize the idea into the present study analysis. The first study is by Mohammed, N., Daud, N.M.M., & Sanusi, N.A (2005), argued that location is the significant factor for the pawnshops development. In more details, Mohammed et al. (2005) also argued that, individuals tend to choose pawnshops that near to their houses. The authors also still believe that if the local authority wishes to establish such business, a well-informed location must be met at least where people know where is it. According to Hanudin Amina, Rosita Chonga, Hazmi Dahlana, Rostinah

Supinah (2007) if individuals want to open an Islamic-based pawnshop, they should open it in the place where it is easy to access by the users.

2.5.4 Confidential

In acquiring pawnshop credit the customers need not reveal the reason for acquiring the loan. It is deemed that the customer is in the best position to determine how the loan will be utilized. According to Selamah Binti Maamor and

Abdul Ghafar Ismail (2006) in acquiring pawnshop credit the customers need not reveal the reason for acquiring the loan. Besides that, According to researcher Mustafa (2006), one of the factor consumer demands for Islamic pawn shop is because of confidential. Customer doesn’t have to tell the purpose of their borrowings.

2.5.5 Low Income

The important of helping the needy especially the poor has long been emphasized in much of Islamic faith.

Therefore, lending to the needy should be the main focus in Islamic finance. In this context, the Islamic pawnshop (Ar

Rahnu scheme) is the most appropriate mechanism as it provides a financial product for the lower-income group and

small businesses which usually have limited capital or have been excluded from the mainstream financial system.

According to Ismail, A.G., & Ahmad, N.Z. (1997) the high interest rates make it difficult for the consumers to

Reclaim their goods or jewelers. As for those who need the loan as a business capital, they find that their capital is rapidly diminishing. Before the implementation of the Islamic pawnshop system, the conventional pawnshops had charged high interest rates on the loans given. The conventional Pawnshops were more motivated on making profit from the needy individuals and this activity was only restricted by the laws in the Pawnbrokers Act 1972.

According to Azila Abdul Razak (2004) the conventional pawnshops had i