ISLAMIC PAWN-BROKING SYSTEM: THE UNCLAIMED SURPLUS

 SARIPAH ABDUL LATIF
KHALID ABD. WAHID
ZULKARNAIN YUSOFF
ABD. RAHMAN ALI
MARA University of Technology (UiTM),
Kelantan Campus, Bukit Ilmu, 18500 Machang, Kelantan, Malaysia.

 

INTRODUCTION 

One of the most important developments of Islamic pawning system is the amendment of The Pawnbrokers Act (1972) in 1981, by the Ministry of Housing and Local Government. This changes the landscape of conventional pawning system. Today, more and more Islamic pawnshops are being developed and operated by cooperative companies.

‘Sistem Gadaian Islam Ar-Rahn’ (Ar-Rahn) is a business unit of Permodalan Kelantan Berhad (PERMODALAN ) , which involves in Islamic Pawn broking System. This system provides small-scale financing for petty traders and helps to avoid the local community from being victimized by deceitful lenders. Its first branch was set up in March 1992 and was located at Wisma Suara Muda, Kota Bharu, Kelantan. However, presently, the premise of Ar-Rahn has moved to PT 95, Seksyen 7, Jalan Temenggong, 15000 Kota Bharu, Kelantan Darul Naim.

Ar-Rahn is proud to be the first institution introducing and operating an Islamic Pawning System under The Pawnbrokers Act 1972 (Ammended 1981), of which the survivability is generated by the income from placement of pledge (marhun). Whilst, ‘Muassasah Gadaian Islam Terengganu’ (MGIT) is funded by the State Government of Terengganu.

Since its introduction way back in March 1992, with an initial paid up capital of RM4 million, Ar-Rahn has been a key focus of PERMODALAN growth strategies. Currently, Ar-Rahn outstanding accounts have surpassed RM28 million marks with a staggering loan disbursement of RM69.80 million to 101,900 customers as at December 2005. Ar-Rahn Kota Bharu (ARKB) operations represent 45% of the PERMODALAN’s total revenue of approximately RM 9million.

The conventional pawning system, which was inherited from the British since 1945, is irrelevant to Islamic pawning concepts. Since then, significant milestones have been achieved in developing the Ar-Rahn infrastructure, as well as in the development of the prudential Islamic pawning framework in meeting the changing requirements of the business.

However, there are quite a number of problems related to conventional pawn broking (Yap Kon Lim, 2005).  Firstly, the interest rate is high, considering the fact that those loans given are more than covered by the value of the collateral. Next, pawned items are not weighed or measured. Hence, some weight or length of objects pawned might be reduced. Thirdly, an inadequate compensation is given to pawners in cases of lost or stolen pawned objects. These problems are considered as the weaknesses of conventional pawn broking system.

The introduction of Ar-Rahn is to balance the existence of conventional pawnshops with the Islamic principles. It is a popular choice among local consumers because it provides an option to obtain cash to fulfill any immediate financial needs. This service secures a loan through personal surety or pledge. Thus, the risk bored by pawners in cases of lost objects, robbery and fire is very low.  

PROBLEM STATEMENT 

With the increasing amount of outstanding loans, the chances of unredeemable pawn tickets are also high. Even though the total of unredeemed tickets that would result in auctioning is a small fraction of the total monthly pawn figure, which is less than 10%, but the amount to be auctioned is high. The report as at September 2003 showed that total uncollected surplus at ARKB has accumulated to RM 242,224.04 or equivalent to 2,765 customers. This figure has increased to RM 300,000 as at December 2005 and the amount is still increasing at the rate of 13% per year.

Section 23(1)(a) of the Pawnbroker Act 1972 stated that any mortgage less than RM 200 if not redeemed before the expiration or extension period agreed by both parties, the ownership will be transferred to the mortgagee. However, if the mortgaged assets are more than RM 200, the collateral would be auctioned off by a licensed auctioneer and Section 25 mentions that a notice of surplus amount will be sent to the pawner within 7 (seven) days and the pawner has 4 (four) months to claim the surplus.

Before the auction, Ar-Rahn sends a couple of reminders to the pawner. It is done in the 10th month of the pawning period, either to collect or renew the pawn ticket. If no action is taken by the pawner after the 12th month of the pawning period, an auction notice will be sent. If there is still no further action taken by the pawner, the pawned items will be auctioned on the approval of the Ministry of Housing and Local Government. After the auction exercise, a registered letter will be issued ordering the pawner to collect the surplus (outstanding balance).

        However, a large number of pawners do not collect the outstanding balance. It is a dilemma faced by ARKB and other branches. Referring to Table 2.1, it can be seen that the amount of the unclaimed surplus increases every year from 1992 until 2005. The total amount of the unclaimed surplus as at December 2005 is RM 82,771.45. There is an increase of 375 percent compared to year 2004. Meanwhile, the total outstanding amount as at December 2005 is RM 397,106.14 or a 126 percent increase from the outstanding amount in year 2004. 

TABLE 2.1:  ARKB Total Unclaimed Suplus as at 31 Dicember 2005

 

OBJECTIVES OF THE STUDY 

The objectives are as listed below: 

  1. To examine the pawners’ awareness in relation to their current level of Islamic pawning system information on the understanding of surplus.

  2. To evaluate the effectiveness of the existing method of communication in delivering information to the pawners by Ar-Rahn front liners on the understanding of surplus.

  3. To ascertain whether the consumers receive accurate information on surplus in Islamic pawning system within Ar-Rahn premise. 

 FINDINGS 

Understanding of Surplus 

Pawners’ Understanding the Meaning of Surplus 

It was found that majority of respondents, 63.2% from a total of 76 of them do not have thorough understanding of surplus. It seems that they do not really know what surplus is and the consequences entailing it. This scenario exists despite the effort made by the management of Ar-Rahn in opening few branches in Kelantan, together with dissemination of information to Kelantan community. The customers of Ar-Rahn still do not understand the consequences if their pledge is not redeemed within the given period.  

Auction of Pawn Tickets Not Redeemed on Time 

The finding shows that majority of the customers are alert that the pawn tickets will be auctioned if not redeemed on time, where 92.1% or 70 persons of total respondents understand it.

Understanding of certain procedures on pawning and redemption needs understanding of the characteristics of the Islamic pawning system itself. Customers know that if they have pledged their precious jewelries to Ar-Rahn, they would have to redeem it back after a certain time. 

Returned Surplus After Auction 

1n term of return of surplus after auction, only a small majority of 56.6% admitted that they know about the procedure. Adding to that, 71.1 % of the respondents are not aware that the unclaimed surplus will be sent to Accountant General if it is not claimed by the owners.

 

Conveyed Information through Existing Communication 

Ar-Rahn Personnels Proactive in Delivering the Information on Islamic Pawning System 

The findings show that the Ar-Rahn personnels are proactive in delivering the needed information on Islamic pawning system. A percentage 55.3% of the respondents agreed with the given statement.

According to Yu Zhang (2005) a proactive communication is crucial for understanding and sharing common goals and for cooperative action. It also allows employees to deliver the information effectively – surplus, pawning and redemption procedures. A proactive communication conducted by employees also increases a sense of understanding of the real situation and they will take a preemptive measure before the customers face a problem.

In ensuring the employees are proactive in delivering additional information, Ar-Rahn should be committed in ensuring that the information are accurate and correct. Ar-Rahn's personnels should be trained to answer customers’ questions and to provide accessible information to the customers. 

Words Used in Explaining of Islamic Pawning System Easily Understood by Pawners 

The researchers found that the customers can easily understand verbal explanation compared to documentations (84.2%) and 76.3 % are satisfied with the explanation conducted by Ar-Rahn staff.  However, a small number of the pawners that could not understand would lead to  problems for Ar-Rahn.  In order to rectify the situation, Ar-Rahn should impose changes such as: 

  1. Communicate in plain simple language that can be understood by all levels of people

  2. Use the most appropriate communication channels such as online, on air or in printed materials for relevant audiences

  3. Consult relevant stakeholders where appropriate

  4. Review its information regularly to assess its impact.

According to Schermerhorn (2000), customers’ satisfaction is the way to stay competitive in today's marketplace. Customers have an expectation of services and product performance that must be met. The balancing act between what customers want and what a company can provide must be optimized in order to maximize a firm's long-term profits. This occurs in two ways:  

  1. With precise information, companies can focus on issues that truly drive customers’ satisfaction. A directed focus often leads to cost reduction because companies can emphasize improvement in areas of customer concern and de-emphasize focus in other areas.

  2. Focusing on customers’ satisfaction leads to their loyalty, which tends to be the most profitable (i.e., repeat business is usually the most profitable). An inclusive customers’ satisfaction and loyalty program can, therefore, be considered a source of future profits.

Current Way of Communication Through the Ar-Rahn Counter Enhanced Understanding on Islamic Pawning System 

90.8% of total respondents are satisfied with the current way of communication used by Ar-Rahn to enhance the understanding of Islamic pawning system. A total of 48.7% of the respondents give ‘good’ rating to Ar-Rahn front liners, communicating the procedures of Islamic pawning system. 

Dissemination of Accurate Information 

55.3% of the total respondents agreed that the information materials are sufficient.

Customer could save their time in understanding of the Islamic pawning system especially the surplus problems if all the information is available at the premise. Ar-Rahn must ensure that adequate and up to date information is available.

The concept of professional regulation serving the public interest is summarized in the "Consumer Bill of Rights," first articulated by President Kennedy in 1960: 

“The right to be informed:  To be protected against fraudulent, deceitful, or grossly misleading information, advertising, labeling, or other practices and to be given the facts needed to make informed choices.”

 

According to Stair (1998), information should have characteristics to make it valuable to users. Information needs to be accurate and complete. Not too complex but relevant in decision-making.

Relevant and timely information allows management to make accurate decisions. Meanwhile, irrelevant information creates a difficulty in decision-making and adds to confusion. As a consequence it will affect the over all performance of the organization. Therefore it is crucial that management should be aware what kind of information is required, how to acquire it and maximize it in order to stay competitive in today’s information-intensive environment. Ar-Rahn should provide more informative materials to customers in order to enhance the understanding of Islamic pawn broking system. The study found that 55 percent of the respondents do not get useful materials from Ar-Rahn. 

Discussion 

The pawners’ current understanding of Islamic pawning system does influence their understanding of surplus, particularly if their pawn ticket tenure is already over due.

To support the finding, the understanding of Islamic pawning system is referring to the ability to understand clearly the procedures of pawning and redemption. The question in the customers' mind is whether Ar-Rahn is doing the necessary response in informing the pawners’ surplus. Therefore, Ar-Rahn should ask whether it is doing the right procedures in giving true information to the pawners. This is further clarified by Zeti Akhtar (2004) when she stressed that a clear understanding of an Islamic financial product would surely reflect the appropriate execution of Islamic financial contract, especially in Islamic pawn-broking business situation.

Understanding is the most important dimension from the customers' perspective. In conjunction with this, the finding proved that the level of understanding of Islamic pawning system is very important in improving the understanding of surplus.

The finding shows that there is no effective communication with the pawners, which becomes an important element that will determine the understanding of surplus among Ar-Rahn front liners.

It can be concluded that lacking of communication among the employees could lead to a problem. According to Mambert (1971), an organization needs a good communication in order to get the message being conveyed to the other parties through active listening, speaking and observing. If this matter is not taken seriously, it could cause conflict between both parties.

Furthermore, a good communication could lead to a better understanding on any subject or matter. According to Zeti (2004), communication is an art and technique of effectively imparting thoughts, information and ideas. Ar-Rahn management and front liners have to understand the process of good communication of their services and what customers would get from it.

The dissemination of accurate information influences the pawners towards a clear understanding of surplus. The main purpose of disseminating the information effectively is to make the customers has full understanding of Islamic pawn-broking system and enable them to make their judgment correctly.  

Conclusions 

The main goal of this study is to ascertain the causes of increasing outstanding amount of unclaimed surplus in the account of Sistem Gadaian Islam Ar-Rahn organization, specifically Ar-Rahn Kota Bharu branch. As an Islamic pawning system advances forward to become an important integral component of the financial system, efforts need to continue to strengthen further its operational system.

Generally, the customers of Ar-Rahn understand what surplus is in Islamic pawning system. However, the effectiveness of existing communication between pawners and front liners of Ar-Rahn and the accurateness of information disseminated by Ar-Rahn to its pawners are still not satisfying.

For Islamic practices, before an auction took place or before the expiration period, the management of Ar-Rahn would send a reminder to the pawners. After an auction, the pawners can claim the balance of the cost and loan at any time after the date of auction. Under the The Pawnbrokers Act 1972 (amended 1981), it is limited to 4 (four) months after the auction and if the remaining surplus is still unclaimed, the surplus will be sent to the Accountant General.

Statistics also shows that the customers of Islamic pawning system have different points of view on related matters. To complement the efforts in creating a sustainable and comprehensive system, consumers’ education and awareness on Islamic pawning system should be extensively undertaken. Ar-Rahn management and Islamic bodies such as the Majlis Agama Islam Kelantan (MAIK) should organize consumers’ education programs. Such programs would increase the understanding on the virtues and availability of Islamic pawning system offered by Ar-Rahn institutions. What consumers can expect to benefit will depend on how well informed they are about the pawning services being provided.

Recommendations 

The following is a brief synopsis on the key recommendations. The recommendations are aimed to establish an appropriate policy design of the unclaimed surplus.

Current Regulatory Framework 

The current operation procedures of informing the pawners regarding their pawn ticket expiry should be dealt adequately with the appointment of special personnel that will foresee the procedures run smoothly.   

Procedure of Pawning and Redemption 

Every pawner must be asked to give true information about their personal details such as address, telephone number, and others for easy reference if their tickets are overdue. 

Period of Redemption 

Under the Pawnbrokers Act 1972, the collateral must be redeemed within 6 months or otherwise will be subjected to auction. As in the Islamic pawning system, the period is seldom being extended to another 6 months if the pawners still do not redeem their tickets. Ar-Rahn should notify the pawners in advance regardless whether they know or not as to give the pawners ample time to make the redemption.

 

 

 

 

 

 

 

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