FACTORS THAT DETERMINE CUSTOMERS ACCEPTANCE OF AR RAHN FINANCING IN SELANGOR

Dzuljastri bin Abdul Razak¹⁺ --- Farha Nabila Binti Baharun²

¹Department of Finance International Islamic University Malaysia

²Post graduate student Department of Finance International Islamic University Malaysia

Keywords:Ar Rahn Concept Pricing Justice and fairness Customer acceptance Selangor.

ARTICLE HISTORY: Received:16 July 2018 Revised:23 August 2018 Accepted: 27 September 2018 Published:.1 November 2018

Contribution/ Originality:This study contributes to the existing literature by providing useful information on Ar-Rahn acceptance in Selangor. Future studies can be conducted in broader aspect involving more aspects of Ar-Rahn to identify the determinants and develop policy by the practitioners. This study in Selangor is of its’ first kind on Ar-Rahn.

1. INTRODUCTION

ArRahn pawnbroking has been in existence in Malaysia since 1992 with the establishment of Muassasah Gadian Islam Terengganu. The concept of ArRahnis seen as a better alternative to conventional pawn broking especially in Malaysia which has a majority Muslims community. It is a method of providing short-term financing to a person by pawning his or her jewelry to the financial institution as a security (Hanudin and Rosita, 2013 ). It is used for micro-financing facilities available for low- and middle-class-income earners who are seeking financial assistance. Literally, Ar-Rahn was taken from the word Rahana which means constancy and continuity or holding and binding (Al-Zuhaily and Islam, 2007 ). It is the detention of a corporeal property on account of a claim like debt which may be satisfied out of that property. Dusuki (2012 ) define Ar-Rahn as taking a property as a security against a debt, whereby secured property can be utilized to repay the debt in the case of non-payment. The separation of the areas of research (public awareness and management) is considered insufficient to evaluate the development of Ar-Rahnu as one of the Islamic microfinance potential product. To examine the growth of Ar-Rahnu, it will only consider sufficient when there is a combination of public and management study in order to find or decide the most significant factor that influence the development. There is a need to build a new research with the objective to study the factors in a comprehensive manner (Rafidah, 2015 ).

1.1. Contribution of the Study

This study provides the perception of people in Selangor towards Ar-Rahn financing. It also realizes the acceptance level of ArRahn and the factors that determine this level of acceptance in Selangor. This research creates opportunities for interested scholars to assess the development of research in this discipline in other states of Malaysia as well as in other countries. It adds value to previous studies that were done on issues and challenges towards Ar Rahn andits function as a Shariah compliance financing instruments. It will also assist practitioners to review their marketing strategy for this product and emphasis on features that can attract customers and increase demand in the market.

2. CONCEPT OF AR-RAHN

The concept of Ar-Rahn services in Malaysia is based on four key aspects which are Qardh-ul Hasan,, Ujrah and Wadiah Yad-Amanah (Bhatt and Sinnakkannu, 2008 ; Jalil and Rahman, 2010 ; Amin, 2011 ). The customers who want to pawn their items need to pay the same amount borrowed to claim the items at an agreed period. Wadiah Yad-Amanah is trustworthiness where the customer gives a trust to the financer to keep the items along the financing period (Bhatt and Sinnakkannu, 2008 ). In addition, the financer needs to replace the item if something happens to it due to its negligence. Another concept that involved in Ar-Rahn is Ujrah which means safekeeping (Jalil and Rahman, 2010 ).

Based on Shariah resolution in Islamic Finance, 2010 by Bank Negara Malaysia, the collateral item may be used to cover the rental payment due to the default or negligence of the lessee plus the claim on actual cost incurred to recover rental due from collateral. Consequently, financer may charge a fee for the services of keeping the pawned items safely namely safekeeping with the guarantee, the financer has a responsibility to replace the missing or stolen items to the customer.

3. THE OPERATIONS OF AR-RAHN FINANCING PRODUCT

Ar-Rahn charges may be made on monthly basis (0.65 % to 0.7%) based on the value of the gold for the safekeeping fees (Khir et al., 2013 ). Therefore, through the Ar-Rahn system, customers have the advantage to pay less for similar service. This cost difference is significant in improving one’s financial status since the debtor will be able to fully repay back the debt at a lesser value compared to the conventional system.

Another key advantage of the Ar-Rahn system can be reviewed from the perspective of default case. The conventional pawnbroking concept requires the borrower to repay back the entire amount of cash borrowed including interest within a specific time period. In case of default, the operator will confiscate the gold that been pawned to them as compensation where in most cases the borrower would lose their gold possession (Maamor and Ismail, 2013 ). In some cases, the borrower is not notified by the operator on the compensation or auctioned off the procession.

In the Ar-Rahn operation, the customer will be notified prior to the auction process and the process will only be made with the consent of the parties involved. Ar-Rahn system will auction the gold that belongs to the customers who are unable to repay back their financing within the stipulated time period. In the event that the amount of cash receives from the auction is higher than the value of financing, the operator will reimburse the customer for the balance amount (Maamor and Ismail, 2013 ). The growth of this fair and transparent system is imperative for the social needs in managing financial difficulties. The concept of Ar-Rahn is explained in figure 1.

Figure-1. The Concept of Ar-Rahn

 Source: Developed from this Study.

In figure no 1 above, the customer visits the Ar-Rahn service provider to exchange their gold with cash under the principle of ‘Ar-Rahnu contract’. In step two (2), theAr-Rahn center offers to finance to the customer (e.g. 0.65% to 0.7 % of the gold’s value) under the formation of ‘Qard Contract’. Third (3), the gold assumes the status of ‘marhun’ (pledged gold) which will be kept by the service provider under the principle of ‘Waadi’ah Amanah’. For this service, the Ar-Rahn center charges safe keeping fee to the customer which in return promise to ensure the safety of the item during the period financing. Fourth (4) is when the maturity date comes to place and the customer must pay the full financing amount included with the safekeeping fee. Lastly, (5) the Ar-Rahn center returns the pledged gold to the customer.

According to a study by Razak (2017 ) there is positive and statistical significance between financial inclusion and customer adoption of Ar-Rahn which indicates that people who are excluded from mainstream financial institutions, or the so-called ‘unbackable,’ will obtain loans from non-banking financial institutions such as Ar-Rahn. The statistical significance of individual and societal well-beings in this study is an indication of the fact that a relationship exists between Ar-Rahn’s adoption and individual and societal well-beings.

4. HYPOTHESIS DEVELOPMENT

This study was conducted to identify the factors that influence customers for the usage of Ar-Rahns namely concept, pricing, justice and fairness. Hence the following hypotheses are developed.

4.1. Concept

Understanding the concept of Ar-Rahn is crucial for the consumer. This is to differentiate between the conventional pawn-broking system and the Islamic pawn-broking system. Ar- Rahn relies on various Shariah concepts, namely Qardh Hassan, Ujrah and WadiahYad Amanah. (Amin, 2011 ). Bhatt and Sinnakkannu (2008 ) believes that WadiahYad-Dhamanah, Qardh Hassan and Ujrah concepts are necessary to be applied in the Ar-Rahn scheme because each concept has its own distinctive role in ensuring the Ar-Rahn contracts are protected from the prohibited elements Thus, these basics concepts distinguished the differences between conventional an Islamic pawn-broking and protect the consumers. Hence the proposed hypothesis is:

Hypothesis-1

H₀: There is no effect of Concept on Customer Acceptance in Ar-Rahn Financing.

H₁: There is an effect of Concept on Customer Acceptance in Ar-Rahn Financing.

4.2. Pricing

Prices have been aligned with consumer behavior. Increasing and decreasing in prices product purchases correspond with consumer purchasing power. Increase in price will decrease the demand due to lower purchasing while lower price product will increase demand. It is important for retailers to choose the right strategy for pricing specific product or service (Blinder, 1998 ). A paper written by Al-Salamin and Al-Hassan (2016 ) on the impact of pricing consumer buying behavior conclude that there is a positive relationship between prices and consumer buying behavior (suitable prices make consumers more willing to purchase product or services). Ghafar Ismail and Zakiah Ahmad (1997 ) have examined the importance of pricing associated with the pawnshop lending. They argued that the safekeeping fee imposed by Islamic pawn broking is relatively cheaper than the conventional pawnshops namely 2% per month. This shows that Islamic pawn broking lessens the burden of customers compared to conventional pawnshops. Pricing has been identified as one of the major variables in determining whether the consumer will accept and acknowledge Ar-Rahn as a financing facility. Hence the next proposed hypothesis is:

Hypothesis-2

H₀: There is no effect of Pricing on Customer Acceptance inAr-Rahn Financing.

H₁: There is an effect of Pricing on Customer Acceptance inAr-Rahn Financing.

4.3. Justice and Fairness

Islamic pawn broking is created in order to exercise a collateral system that is based on short-term financing in an effort to make Islamic finance more equal and justice, especially for low- and medium-income people. Based on Malaysia (2010 ) the debt must be known and specified by both pledger and pledgee. Debt must be an established binding and enforceable one through a loan, sale or damage in the torts against a property. Besides that, the debt must be known and defined by both parties. The pawning is considered as invalid if one of the parties is uncertain of the debt. This will protect both parties in cases of default or destruction of the collateral item. Abdul-Razak (2011 ) stated that the conventional pawn broking is weak in term of evaluating the pawned item and conducting the auction in a transparent manner. While Hisham et al. (2013 ) explained that the conventional pawn broking often conceals the auction matters where the pawner is not informed about the auction. However, Ar-Rahn financing is different as it will notify the customer prior to the auction process and will only be made with the consent of the parties involved. The sense of justice and fairness is important for the consumer to establish trust in using the financing service itself. This will indirectly affect the consumer behavior towards the service. Hence the last hypothesis is:

Hypothesis-3

H₀: There is no effect of Justice and Fairness on Customer Acceptance in Ar-Rahn Financing.

H₁: There is an effect of Justice and Fairness on Customer Acceptance in Ar-Rahn Financing

The relationship between the variables can be shown as follows:

Figure-2. The Research Model

Source: Developed from this Study

5. RESEARCH METHODOLOGY

A convenience sampling was employed in this research in order to obtain the data. The data collection was based on both self-administered questionnaire and electronic means. The questionnaires were mostly distributed amongst the residents in the Gombak (n=93). The balance obtained via electronic means (n=28) such google doc, and WhatsApp applications.  The total respondents that have been collected were 121.

Data were analyzed using descriptive statistics and multiple regressions. The descriptive statistic can be broken down into measures of central tendency variability or spread. The descriptive statistic will be used to demonstrate the frequencies of the demographics of this study. A multiple regression equation expresses the linear relationship between the variables.

6. FINDINGS

6.1. Descriptive Analysis

Table-2. Regression Analysis

Source: SPSS analysis output

We derived the above result from multiple regressions by using SPSS. The result indicated that only one independent variable (ARP) pricing of Ar-Rahn had a significant relationship with the dependent variable; customer acceptance towards the product. This means that public will be attracted to Ar-Rahn product if the financial institutions are able to provide attractive pricing.

Other independent variables like Ar-Rahn concept (ARC) and Ar-Rahn (ARJF) justice and fairness have no significant relationship with customer acceptance. In other words, the knowledge of Ar-Rahn concept and justice and fairness system do not appeal towards the public acceptance of the product. This may be due to the consumer preference as being a financing product, pricing plays an important role in attracting them to Ar-Rahn rather than knowledge of the concept, and justice and fairness.

Table-3. F-Statistic Analysis

F-Statistic

Source: SPSS analysis output

Table 3, indicated that the regression analysis is significant, and the model used fits fairly well at 95% confidence level. It indicated that at 95% confidence level the model was able to explain the relationship between Ar-Rahn concept, pricing as well as the justice and fairness on consumer acceptance towards Ar-Rahnfinancing.

Table-4. DurbinWatsontest Analysis

Test of Auto-Correlation

Model Summaryb

a. Predictors: (Constant), ARJF, ARC, ARP

b. Dependent variable: ARCA

In table 4, Durbin Watson was used to test the strength of each independent variable. It was measured by the range of 1.5 to 2.5, which measured the correct model used for this study. The result of Durbin Watson in multiple linear regressions was 1.813. This indicated that the model used in this study had a positive autocorrelation and that the three variables used, concept, pricing, as well as the justice and fairness, can be accepted in analyzing the customer acceptance towards Ar-Rahn Financing.

7. DISCUSSION

Although the ArRahn pawn-broking has been in existence in Malaysia since 1992, many more studies need to be done, to understand customer perception towards the product. The concept of Ar Rahn is preferred by Muslim customers than conventional pawn broking as it is in line with their religious belief. However, the main attraction was due to its attractive system of pricing; higher margin rate of financing and low holding fee compared to conventional. In the case of default in conventional pawn-broking, the gold is auctioned off and the borrower is required to repay back the entire amount of cash borrowed including interest. This differs from Ar Rahn where the customer will be notified prior the auction process and refunded the value of the auction is higher than the outstanding amount. However, this aspect of justice and fairness was found to be insignificant to customers. There are other aspects of fairness in using gold value as is pricing structure and elimination of interest rate which is prohibited in Islam.   Hence, financial institutions can use the aspect of avoidance of riba (usury) to further market for the product. In addition, Islamic pawn-broking can also be utilized as a source of financing for the poor which can uplift their income, reduce poverty and improve the nations’ economy.

8. CONCLUSION

The main aim of the paper is to conclude on the factors that affect customers’ acceptance on the use of Ar-Rahn based on three variables namely concept, pricing, and justice and fairness. The result has revealed that pricing is a significant factor. However, there are many other factors that can be used to further enhance its usage such as fairness and justice which are yet to be implemented by the financial institutions in promoting Ar-Rahn financing.  Hence, steps should be taken to increase the awareness of this product which can be done via education and mass media. This product can also be used to provide initial capital for small business and enhance society living standard which would eradicate the poverty of the nation.

REFERENCES

Abdul-Razak, A., 2011. Economic and Religious Significance of the Islamic and Conventional Pawnbroking in Malaysia: Behavioural and Perception Analysis. Durham University.

Al-Salamin, H. and E. Al-Hassan, 2016. The impact of pricing on consumer buying behavior in Saudi Arabia: Al-Hassa case study. European Journal Business and Management, 8(12): 62-73.

Al-Zuhaily, W. and A.A. Islam, 2007. Islamic jurisprudence and its proofs: Financial transactions in islamic jurisprudence. 1st Edn.: Looh Press, 1.

Amin, H., 2011. Modelling ar-rahnu use in Eastern Malaysia: Perspectives of Muslimah. Journal of Islamic Economics, Banking and Finance, 7(3): 63-76.

Bhatt, P. and J. Sinnakkannu, 2008. Ar-Rahnu (Islamic Pawning Broking) opportunities and challenges in Malaysia. 6th International Islamic Finance Conference. pp: 255-268.

Blinder, A., 1998. Asking about prices: A new approach to understanding price stickiness. 1st Edn., New York: Russell Sage Foundation.

Dusuki, A.W., 2012. Islamic financial system: Principles & operations. International Shari’ah Research Academy for Islamic Finance, Xentral Methods Sdn bhd. pp: 17-32.

Ghafar Ismail, A. and N. Zakiah Ahmad, 1997. Pawnshop as an instrument of microenterprise credit in Malaysia. International Journal of Social Economics, 24(11): 1343-1352. Available at: https://doi.org/10.1108/03068299710193633.

Hanudin, A. and C. Rosita, 2013. Determinants for ar-rahnu usage intentions: An empirical investigation. African Journal of Business Management, 5(20): 8181-8191. Available at: https://doi.org/10.1109/istas.2011.7160610.

Hisham, S., S. Abdul Shukor, A. Ummi Salwa and K. Jusoff, 2013. The concept and challenges of Islamic pawn broking (ar-rahnu). Middle-East Journal of Scientific Research, 13(13): 98-102.

Jalil, M.A. and M.K. Rahman, 2010. Financial transactions in Islamic banking are viable alternatives to the conventional banking transactions. International Journal of Business and Social Science, 1(3): 220-234.

Khir, M.F.A., M.B. Badri and L. Hussain, 2013. Critical appraisal of rahn-based Islamic microcredit facility from Shari’ah perspective. Advances in Natural and Applied Sciences, 7(3): 221-232.

Maamor, S. and A.G. Ismail, 2013. Ar-Rahnu Islamic Pawn Broking, hlm. Kuala Lumpur: Dewan Bahasa Dan Pustaka. pp: 121–136.

Malaysia, B.N., 2010. Shariah resolutions in Islamic finance. Malaysia Deposit Insurance Corporation. Available from http://www.bnm.gov.my/microsite/fs/sac/shariah_resolutions_2nd_edition_EN.pdf.

Rafidah, M.A., 2015. Determinants of Ar-Rahnu development in Malaysian financial institution: The Study of Customer Relationships. International Conference, and PH.D Colloquium on Islamic Ecnomics and Finance.

Razak, A.A., 2017. The role of Ar-Rahn in enhancing financial inclusion: A structural equation modeling approach. Jurnal Pengurusan, 50. Available from https://doi.org/10.17576/pengurusan-2017-50-09.

Appendix

Multiple Regression Analysis

Regression Result

Correlation Result