Islamic Finance 7c

NATIONAL CO-OPERATIVE ORGANISATION OF MALAYSIA

AR-RAHNU :A NEW ERA IN MICROFINANCE IN MALAYSIA


Presenter:

Dr MOHD ALI BAHARUMDeputy President

National Co-operative Organisation of Malaysia

(ANGKASA)


WELCOME TO MALAYSIA


CONTENT• Introduction• Aspects of Conventional Pawn Broking System • Ar-Rahnu: The Dawn of A New Era• Ar-Rahnu Centre vs CPB• The Advantages of Ar-Rahnu• The Concept of Ar-Rahnu• The Features of Ar-Rahnu• Ar-Rahnu As A New Business Opportunity • Ar-Rahnu Progress by Bank Rakyat• The Role of Ar-Rahnu In Socio-Economic Development• The Role of Ar-Rahnu As A Source of Capital• Challenges And Constraints To Business Expansion• Conclusion• References


INTRODUCTION

• People say diamonds are women’s best friend. In reality, gold jewelry is their true friend – at least true among Malaysian women.

• Gold jewelry functions as: – Enhancing women’s look,– Exclusive image / distinguish

rank: more gold implies wealth,– Saving as its price is more stable

and normally appreciates,– A collateral whenever cash is needed.

• Men can also share the benefit when emergency occurs.


INTRODUCTION• Why? • Because gold can be exchanged for

cash instantly and redeemed back after a certain period.

• Pawn broking business was introduced in Malaysia in early 19th century.

• The conventional pawn broking system is popular for quick cash borrowings. Mostly by low income earners in rural areas.

• The downside of conventional pawn broking service - high interest charges and unfair practices.

• To help the society, an alternative pawning system or AR-RAHNU was introduced and received encouraging response.


ASPECTS OF CONVENTIONAL PAWN BROKING SYSTEM

• The brokers had been operating since the 19th century. In 2002, there were 276 brokers registered making them easily accessible.

• Pawn broking activities is subjected to the Pawn Broking Act 1972. However co-operatives are exempted.

• They are private operators with sole objective to maximise profit.

• Fast and efficient service.• Flexible in terms of valuation and loan approval

and exercise simple procedures.


ASPECTS OF CONVENTIONAL PAWN BROKING SYSTEM

The downside of conventional pawn broking system:• Interest and other charges can be as high as 24%

p.a.• Purposely designed high pawning counters.• Valuation and measurement method are not

transparent. • The use of unreadable handwriting on the pawning

letter using unfamiliar language.• The absence of notices of unclaimed pawned items

surpassing its pawning period.• Unclaimed gold pawned will be auctioned but excess

money kept by the broker.


AR-RAHNU: THE DAWN OF A NEW ERA

• Historically, the Muslims in Malaysia were afraid of banks because of the interest imposed.

• Interest is prohibited in Islam.• The situation has improved especially after the

introduction and practice of Islamic financial system.

• However, the culture of keeping money in the form of gold prevails and pawn service sustains its popularity.

• Fast and hassle free service making pawning the preferred choice of micro credit.

• Lack of choice for Muslims.


AR-RAHNU: THE DAWN OF A NEW ERA

• The Malaysian Islamic Economic Development Foundation (YPEIM) suggested Ar-Rahnu to be introduced.

• The first Ar-Rahnu shop was set up in 1992 by Kelantan state government, later entrusted a co-operative to manage and operate other branches.

• The first co-op to run Ar-Rahnu in Malaysia is the co-op bank or Bank Rakyat in October 1993 with the co-operation from YPEIM.

• In 2004, 22 co-operatives involved in the business with 125 centers throughout the country. Bank Rakyat owns 100 centers.

An Ar-Rahnu center in Kelantan


AR-RAHNU CENTRE VS CPB*STATES No of AR-RAHNU CENTER No of LICENCE CPB

Perlis 2 4

Kedah 10 26

Penang 5 24

Perak 12 41

Selangor 23 28

Federal Territory 11 14

Negri Sembilan 6 19

Malacca 3 13

Johore 16 26

Pahang 7 14

Terengganu 6 6

Kelantan 6 10

Sabah 6 19

Sarawak 8 32

Total 121 276

*CPB = Conventional Pawn Broker


THE ADVANTAGES OF AR-RAHNU

• Gender Sensitivity:– Gold jewelries are women’s

asset. – According to Islam, women

have rights to their belongings.

– A lot of women involve in small scale businesses.

– Therefore, co-operatives offering the Ar-Rahnu scheme are sensitive to women’s need and welfare.


THE ADVANTAGES OF AR-RAHNU

• Interest free.• Transparent and customer

friendly counters.• All transactions are recorded

clearly.• Secured safekeeping with

insurance coverage for the pawned items.

• Issuance of notices to customers.

• Excess from the auction will be returned to the customer.

Inside an Ar-Rahnu center


THE CONCEPT OF AR-RAHNU• Islamic Concepts Used:

– Benevolent Loan (Qardhul Hasan)• It is a loan agreement between a lender and a

borrower.

• The lender is forbidden to ask for extra payment but the borrower is encouraged to give a token of appreciation.

– Trustworthiness (Wadiah Yad-Amanah)

• The borrower is required to produce a returnable collateral to ensure repayment of the loan.

• The borrower entrusted the lender to look after her belongings during the loan period. If something happens to the collateral item but not due to the lender’s negligence, the lender is not required to replace the item.


THE CONCEPT OF AR-RAHNU– The fee for safekeeping

(Al-Ujrah)• The lender is allowed to charge a

reasonable fee for keeping the pawned items safe and in good condition.

– Safekeeping with guarantee (Wadiah Yadhomanah)• The lender will be responsible to

replace the missing or stolen items to the owner if he/she fails to keep the agreement.

Gold testing process


THE FEATURES OF AR-RAHNU

• The Purpose:

– To extend loans in a quicker manner to the society, by taking gold as collateral.

• Loan Amount (depends on individual co-op): – Up to RM5,000 per day and

collectively up to RM25,000 maximum.

– Co-op with higher provision offers up to a maximum of RM50,000.

Testing the density of gold to determine

actual value


THE FEATURES OF AR-RAHNU• Margin of Loan (depends on

individual co-op):

– 60% to 75% from the value of the gold.

• Tenure of Loan (depends on individual co-op):

– 3 months + 3 months + 14 days

– 6 months + 2 months + 2 months

– up to 3 years for larger loan amount.

The scale gives accurate weight


THE FEATURES OF AR-RAHNU

• Fees (depends individual co-op):– Safekeeping Fee: RM0.40 to

RM0.60 for every RM100 depending on the value of the pawned item (marhun).

– Service charge: RM0.50 per transaction.

• Repayment Method: – Either by installment or lump

sum amount. Payment can be made by cash or cheque.

Tools used to test gold type


AR-RAHNU AS A NEW BUSINESS OPPORTUNITY

• It is a potential financial product. • A form of welfare business that also

generates income. • Amongst the advantages and benefits to

the business operators are:– This business is legal in the eyes of the

law.– High level of security features: premises

and items kept are protected and insured.

– The loan disbursed is only 60% to 75% of the gold value.

– The gold collateral is liquid, its price is most stable and high in demand.

– The level of non-performing account is very low because the collateral can be sold quickly.


AR-RAHNU PROGRESS BY BANK RAKYAT

No Year Amount of Transaction

Disbursement (RM‘000)

1 1993 880 960

2 1994 44,567 36,275

3 1995 52,881 42,570

4 1996 54,271 48,768

5 1997 66,666 61,680

6 1998 93,606 85,288

7 1999 117,006 106,610

8 2000 136,149 142,953

9 2001 169,630 151,361

TOTAL 735,656 676,465


THE ROLE OF AR-RAHNU IN SOCIO-ECONOMIC

DEVELOPMENT• As a source of capital to the

small business– Quick and easy system unlike

normal banking procedures.

• As A Source Of Financing Educational Needs– Especially at the beginning of

school term or prior to enrolment at tertiary level.

• The Development Of Agricultural and Village Industries– People who run agricultural

projects and small industries in the villages also need rolling capital.



DEVELOPMENT• As A Means Of Community

Service– Fulfills the desperate needs of low

income families; free them from falling into the prey of illegal schemes.

– In general, all illegal money lending scheme charges very high interest and the customer are being manipulated, threatened with their lives and some customers even commit suicide.

– Therefore, the Ar-Rahnu scheme can minimise such risk.

We never know when disaster will strike



DEVELOPMENT

• Ar-Rahnu As An Instrument To Encourage Saving and Investment

– Save money first to buy gold jewelry or items.

– Activities of buying and selling gold is a form of investment: double the profit out of gold price differences and proceeds from business using the loan under Ar-Rahnu scheme.


THE ROLE OF AR-RAHNUAS A SOURCE OF

CAPITAL

• A dichotomy exists - the lower income earners are not entertained by the financial institutions even though they form the largest group of income earners.

• There are a lot of small traders exist inside our society and located at all places.

• The small traders’ needs of fund/capital depends on the type of business they operate, starting from a very small capital up to even thousands of ringgit. Therefore, the Ar-Rahnu scheme can contribute to their business.


THE ROLE OF AR-RAHNU AS A SOURCE OF CAPITAL

• The hindrance of getting micro credit from financial institution faced by the small traders is largely due to:– The Collateral Issue

• Generally they do not have large possession of assets and banks do not accept gold in their normal daily practice.

– The Issue of Guarantee• Banks usually ask for a guarantor who is

hard to get. On the contrary the gold pawned in Ar-Rahnu scheme is itself a form of guarantee.

– Criteria of Qualification • To approve a loan, the bank usually asks

for a list of information about the business. For Ar-Rahnu, only need basic information and the items to be pawned.


CHALLENGES AND CONSTRAINTS TO BUSINESS EXPANSION

• Challenges:– The only rival would be the conventional pawn brokers as

they offers pawning to all kind of valuable items. Whereas, co-operatives at the moment only allows pawning for gold items.

• Constraints:– To venture into Ar-Rahnu business requires high capital

(RM2 million – RM4 million) in order to offer a truly secured and quality services. However, small co-ops may start small.

– Internal Problem: the business is exposed to misconduct by personnel if precautionary measures are not well taken care of.


CONCLUSION

• Pawn broking is a collateral loan system and known to be one of the oldest system used by men.

• The pawn broking system was fully utilised by the lower income group for fast cash following simple procedures.

• The Ar-Rahnu scheme is one of the instrument used by the small traders especially in the East Coast.

• Ar-Rahnu can be the main source of business capital and widely accepted and used by the society in their day to day business.

• Ar-Rahnu can be an economic tool to improve the socio-economic development of the lower and middle income society, and it is truly in line with the co-operative principle.


CONCLUSION • A very promising outlook for co-operatives involved in Ar-Rahnu business.

• The most beautiful part of the Ar-Rahnu scheme offered by the co-operatives in Malaysia is:

– AR-RAHNU IS GENDER SENSITIVE. Women are the majority owners and wearers of gold accessories. They have assets that can be turned into cash quickly and easily at their co-operatives for whatever reasons they have in mind.


THANK YOU


REFERENCES• “Ar-Rahnu (Islamic Pawn Broking): A Tool Of Enhancing Socio-Economic Development”, Bank

Kerjasama Rakyat Malaysia Berhad, 2005.• “Kertas Kerja Projek Ar-Rahn…”, Koperasi Pegawai-Pegawai Kerajaan Negeri Kedah Darul Aman

Berhad, Malaysia.• “Skim Kredit Islam Peribadi”, Dr Mohd Ali Haji Baharum, PELANCAR magazine January 1999,

ANGKASA, Malaysia.• “Menceburi Skim Pajak Gadai Islam Ar-Rahnu”, Azlan Mohamed, PELANCAR magazine May 1999,

ANGKASA, Malaysia.• “Ar-Rahnu Lebih Adil”, Muhammad Harun, PELANCAR magazine November 2000, ANGKASA,

Malaysia.• “Ar-Rahnu: Pinjaman Bercagar Tanpa Faedah”, Azlan Mohamed, PELANCAR magazine February

2002, ANGKASA, Malaysia.• “Kenapakah Pajak Gadai Ar-Rahnu”, Aini Haji Abdul Majid, PELANCAR magazine September 2003,

ANGKASA, Malaysia.• “Ar-Rahnu Istimewa”, Muhammad Harun, PELANCAR magazine November 2003, ANGKASA,

Malaysia. • “Ar-Rahnu Kegiatan Terbaru”, Muhammad Harun, PELANCAR magazine issue November 2003,

ANGKASA, Malaysia.• “Ar-Rahnu Dapat Sambutan”, Muhammad Harun, PELANCAR magazine Disember 2004, ANGKASA,

Malaysia.• “Emas dan Ar-Rahnu”, Muhammad Harun, PELANCAR magazine April 2005, ANGKASA, Malaysia.• “Satu Daerah Sebuah Ar-Rahnu”, Noriah Mohd Ali @ Awi, PELANCAR magazine August 2005,

ANGKASA, Malaysia.• “Mikro Kredit Dalam Koperasi”, Dr Mohd Ali Haji Baharum, PELANCAR magazine August 2005,

ANGKASA, Malaysia.