ARRAHNU : A NEW ERA IN MICROFINANCE IN MALAYSIA

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AR-RAHNU A NEW ERA IN MICROFINANCE IN MALAYSIA
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• Presenter
• Dr MOHD ALI BAHARUM
• Deputy President
• National Co-operative Organisation of Malaysia
• (ANGKASA)

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WELCOME TO MALAYSIA
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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

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INTRODUCTION

• People say diamonds are womens best friend. In
  reality, gold jewelry is their true friend at
  least true among Malaysian women.
• Gold jewelry functions as
• Enhancing womens 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.

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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.

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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.

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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.

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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.

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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
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AR-RAHNU CENTRE VS CPB
CPB Conventional Pawn Broker
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THE ADVANTAGES OF AR-RAHNU

• Gender Sensitivity
• Gold jewelries are womens 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 womens need and welfare.

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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
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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 lenders negligence, the lender is not
  required to replace the item.

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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
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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
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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
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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
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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.

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AR-RAHNU PROGRESS BY BANK RAKYAT
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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.

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THE ROLE OF AR-RAHNU IN SOCIO-ECONOMIC
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
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THE ROLE OF AR-RAHNU IN SOCIO-ECONOMIC
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.

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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.

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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.

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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.

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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.

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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.

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THANK YOU
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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,
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• Ar-Rahnu Lebih Adil, Muhammad Harun, PELANCAR
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