Defination Of Ar Rahnu And Conventional Pawn Broking Finance Essay
This chapter gives a review of the previous research on the determinants that influence customers’ acceptance towards Ar-Rahnu. The first section of this study is to discuss the definition of Ar-Rahnu and conventional pawn broking. The second section is to emphasize on the principles and concept of Ar-Rahnu. The third section is focus on the number of determinants influencing customers to choose Ar-Rahnu. Finally, the last section of this chapter will touch on the research framework.
DEFINATION OF AR-RAHNU AND CONVENTIONAL PAWN BROKING
In this study, Ar-Rahnu is referring to the Islamic pawn broking. Ar-Rahnu referring to a mechanism whereby a valuable item is used as collateral tied up for a secured debt that can be to paid, in the event of default (Guideline for Ar-Rahnu Approval, Malaysia Co-operative Societies Commission). The collateral may be disposed in the event of default (Maybank Islamic Bank). Ar-Rahnu provides a short-term financing to the public by allowing a customer to pawning his/her jewellery to banks or pawnshops as a security. It is one of the micro-credit and financial instruments for who seek for financial assistance mainly to meet of their working capital needs (Amin et al., 2011).
Conventional Pawn Broking
According to Wikipedia, pawn broking refers to an individual or business that offers secured loans to people, with items of personal property used as collateral. The word pawn is derived from the Latin pignus, for pledge, and the items having been pawned to the broker are themselves called pledges or pawns, or simply the collateral. If an item is pawned for a loan, within a certain contractual period of time the pawner may purchase it back for the amount of the loan plus some agreed-upon amount for interest. The amount of time, and rate of interest, is governed by law or by the pawnbroker's policies. If the loan is not paid within the time period, the pawned item will be offered for sale by the pawnbroker. In Malaysia, pawn broking business includes the business of taking articles in pawn (Pawnbrokers Act 1972).
PRINCIPLES AND CONCEPTS OF AR-RAHNU
Eventhough there are simarilities in the operation between conventional pawn broking and Ar-Rahnu but there are exist significant different between them as Ar-Rahnu is based on the clear concept based on Shari’ah principles. According to Mohamed Naim, 2004 as cited in Abd. Razak (2011), the pawning contract has four components:
Sighah implying "offer and acceptance of both parties’;
A-rahin (borrower), meaning ‘who pawns an object of his’ and Al-murtahin (lender) ‘who receives the pawned object’;
Al-marhun, ‘the pawned object as insurance of the debt’ and
Al-marhun bih, ‘the debt in lieu of which the object is pawned’.
The Ar-Rahnu is based on the Islamic concepts such as:
Qardhul Hassan (Benevolent Loan)
This is loan agreement between the borrower and the lender. The lender will grant a benevolent loan (interest free loan) to the borrower that pawned his item. The lender is not allowed to request additional amount from the borrower, whereby the borrower is only required to pay the amount borrowed. However, the borrower is encouraged to give some token as a sign of appreciation.
Al-Wadiah Yad Dhamanah (Safekeeping with guarantee)
The lender accepts custody of the valuable items, promise to keep it in a safe place and return it to the borrower upon the end of the contractual period. The lender will be responsible to replace the stolen or damaged items to the borrower if they fail to keep the agreement due to their own negligence (Bhatt and Sinnakkannu, 2008).
Al- Ujrah (Safekeeping fee)
Al-Ujrah concept allows the lender to charge a reasonable fee for keeping the valuable pawned items safely and in good condition.
According to Maulidia (2003), Rahn means to detain borrower’s valuable items as a guarantee or collateral for the loan and the detained items must have value so the lender has guarantee to get back all or a part of the loan. The valuable items can be used to pay back the debt if the event of default by borrower (YaPEIM, 2013).
Al-Qards concept refers to a loan given based on a certain percentage of the pawned item value (marhun value) and safekeeping fee charged is not based on the amount of the loan.
Overall, the mechanism of Ar-Rahnu can be illustrated when the lenders lend out loan to borrower, they will use the concept of al-qardhul hassan. In order to avoid the loan from default, they employ the concept of ar-rahn. For ensuring the pawned items to be kept safely and in good condition by the lender, they employ the concept of al-wadiah yad dhammanah. The lender will charged the borrower a reasonable fee for the safekeeping with guarantee services under the concept of al-ujrah.
DETERMINANTS INFLUECING THE CUSTOMERS ACCEPTANCE TO CHOOSE AR-RAHNU
There are various studies of Ar-Rahnu were conducted in Malaysia. A study by Mat Nor et al., (2012) investigate on the relationship of independent variables concerning pricing system, customer service, locality and low income with the customer awareness towards Ar Rahnu scheme at Sungai Buloh. The result from this study showed that all the independent variables have significant impacts towards the customer awareness on the Ar-Rahnu scheme.
The study conducted by Muhamat et al., (2011) about the non-muslim response towards Ar-Rahnu (Islamic Pawn Broking) services found that the product features and security of pledge items to have significant relationship in affecting the non-muslim acceptance of Ar-Rahnu. Among of the two independent variables, product features stand to be utmost reason for the non-muslin to pursue Ar-Rahnu services. This study also found that the cost of borrowing was not significant correlated between a non-Muslim acceptance of Ar-Rahnu.
A further study by Appannan and Doris, (2011) on Islamic Pawn Broking awareness and factors influencing the scheme in Sungai Petani shown that majority of Indians were not aware of Islamic pawn broking. Majority of Chinese and Malays were aware of the Ar-Rahnu scheme. The findings from this study also indicate that the majority of Ar-Rahnu customers came from a lower income group mainly from the private sector with an income of RM1,000 and below. The most important factor influencing consumers in Sungai Petani to pursue Ar Rahnu was cheap cost of loan. While factors such as confidential, low income, good customer service and locality were appear to be less important. The researchers suggested to add social factor and the advertisement factor to the further research for expanding the result of the study.
Prior study done by Ahmad et. al. (2012) resulted that from the selected variables concerning storage charge, service quality, locality and management practices have a significant relationship with the customer acceptance of Ar-Rahnu MAIDAM Dungun. The most significant factor that influences customers to pawn at Ar-RAhnu MAIDAM Dungun was management practices.
Hanudin Amin et al. (2007) examined the relationship between the independent variables consisting shariah view, pricing system, pledge asset, customer service and locality of Ar-Rahnu with the acceptance of Ar-RAhnu in Labuan. The results of their study showed that three independent variables which are consist of shariah view, pledge asset and customer service have significant relationship with the customers acceptance of Ar-Rahnu. Other two independent variables which are pricing system and locality of Ar-Rahnu showed insignificant relationship with the acceptance of Ar-Rahnu in Labuan. The researchers also suggested that there is a need for additional variables such as social factor and advertisement factor to predict the acceptance of Ar-Rahnu more accurately in future. Based on the previous studies and to fill in the gap, this study assumes that the social influence, pricing, location of Ar-Rahnu and advertisement are important determinants of customers’ acceptance to choose Ar-Rahnu. This study aims to investigate further the relationship between the determinants with the customers’ acceptance towards Ar-Rahnu.
The term social influence used in this study refers to subjective norm (Amin et. al, 2011). Social influence refers to the individual’s perception of the potential referent group or individuals approve or disapprove of performing the given behavior (Fishbein and Ajzen, 1975 as cited in Amin et al, 2010). The importance of this factor has been addressed by many scholars such as Ramayah et al., (2002) and Gopi and Ramayah (2007). The study by Gopi and Ramayah (2007) found that subjective norm had a direct positive relationship towards behavioral intention to use internet stock trading. Similarly, Taib et. al, (2008) also emphasized that subjective norm found to be more influential predictor of intention to use Islamic home financing than attitude among postgraduate students. These scenario shows that Malaysian consumers like to seek advice or opinion from those who are close to them before engaging the product or services and their opinion and view really have significant effect to their decision later.
According to Appannan and Doris (2011), the factor that influences the demand for Islamic pawn broking is pricing system. This statement also supported by Ahmad et al (2012) highlighted that it is important to have Islamic pawnshop that offered competitive rate to reflect the average pricing system in the market. Therefore, the researcher would like to study this factor and how far it can influence customers’ acceptance towards Ar-Rahnu.
The study by Amin et al (2007) found that the service charge imposed by Islamic based pawnshop relatively cheaper than the conventional pawn broking. It also supported by Bhatt and Sinnakkannu (2008) in their research shows the cost involved in borrowing from Ar Rahnu is calculated based on the safekeeping charges while the conventional pawn broking is calculated based on the monthly interest charges. Therefore, the cost of fund from Ar-Rahnu is cheaper than conventional pawn broking. By having this alternative will reduce the burden to the customers.
The lower pricing of Ar-Rahnu was one of motivators for community to deal with Ar-Rahnu service provider. This statement is consistent to what analyzed by Amin et al (2011) which is found that the ‘lower monthly payments’ was ranked second behind ‘transparency practice’. It is also significant to community’s intention to use Ar-Rahnu as their quick financing resources.
Location of Ar-Rahnu
Based on study done by Dusuki et, al., 2007 found that convenience including location is one of the significant factors contribute to the selection of Islamic bank by Malaysian consumers. This finding is consistent with what Almossawi (2001); Gerard and Cunningham (2001) found that convenience factors were of paramount importance in banking selection criteria as compared to other factors based on their survey conducted on conventional banking customers in Bahrain and Singapore respectively (Almossawi, 2001; Gerrard and Cunningham, 2001 as cited in Dusuki et. al, 2007).
The study done by Ahmad, et. al (2012) also found that the location of Ar-Rahnu outlet has significant relationship between the customer acceptance of Ar Rahnu MAIDAM Dungun. Hanudin et al (2007), suggested that the individual who want to open Ar-RAhnu should open it in a place that easy to access by the customers. The location of the Ar-RAhnu is important to make public realize on the presence of Ar-RAhnu in their areas. On the basis of these studies above, the researcher interested to test it in this study.
Based on study done by Appannan and Doris (2011), they suggested that it would be reasonable to add the advertisement as one other factor that influence the public intention to pursue Ar-Rahnu to further expanding the result of the study. Thus, it creates interest to researcher to include the advertising as one of the independent variable to be tested in this study.
Advertising is any paid form of nonpersonal presentation and promotion of ideas, goods or services by an identified sponsor via print media (newspapers and magazines), broadcast media (radio and television), network media (telephone, cable, satellite, wireless), electronic media (audiotape, videotape, videodisk, CD-ROM, web page) and display media (billboards, signs, posters) (Kotler and Keller, 2012). Nowadays, advertising is the most important tool in promoting and marketing of product and services. Advertising can be a cost-effective way to convey message to educate public regarding the product and services in order to increased public awareness or to build a brand preferences among consumers. In the practice, most of the companies believe that the businesses that keep on advertising regardless of rise or fall in the economic times get a competitive advantage over those that cut their advertising expenses. Therefore, in this study, the researcher want to further examine the relationship between advertisement factor toward customers’ acceptance to pursue Ar-Rahnu.
Based on the literature review above, the theoretical framework is constructed as below:
Figure 1: The research model
Figure 1 represents the diagram of the theoretical framework that will be used in this study. From the framework, the researcher identified four factors which are social influence, pricing, location of Ar-Rahnu and advertisement that could be influenced the customers’ acceptance to choose Ar-Rahnu. Therefore, the dependent variable in this study referring to the customers’ acceptance to choose Ar-Rahnu and the independent variables are social influence, pricing, clocation of Ar-Rahnu and advertisement. These factors have been chosen to be tested in this study because based on the previous research in various area found these factor were significantly influence the consumers acceptance towards products and services.
In conclusion, the researcher showed the literature review from the view and opinion of the prior studies done by previous researcher in related areas regarding the determinants such as social influence, pricing, location of Ar-Rahnu and advertisement influencing customers’ acceptance towards Ar-Rahnu. Besides that, this chapter also showed the research framework of this study to explain the independent variables and dependent variable.