Comparative Political Economy

Comparative Political Economy Edited by Masudul Alam Choudhury

Humanomics Volume 13 Number 3/4

1997

3 Medieval Islamic Socio-Economic Thought: Links with Greek and Latin-European Scholarship by S. M. Ghazanfar

33

Divergent Development: The Pursuit of Liberty and Growth in Argentina and the Republic of Korea by Lawrence R. Alschuler

61

Poverty Eradication: An Islamic Perspective by Abu/Hasan M Sadeq

110

Success Story in Malaysia's Development: Conventional and Islamic Perspectives by Ataul Huq Pramanik

135

Equity Versus Growth: The Malaysian Experience of the Islamic Financial System Under the Dual Systems by Muhammad Syukri Salleh and Abdul Fatah Che Hamat

174

The Poor People's Perception of Poverty and Its Implications on the Realization of Islamic Development in Kelqntan, Malaysia by Muhammad Syukri Salleh and Osman Md. Yuso/J

215

Globalization Agenda and Contemporary Approaches to Economic Co-operation Among the Member Countries of the Islamic Conference by A . R. Zeinelabdin and Ilhan Ugurel

249

Critical Review of Papers Presented in the Session, Comparative Political Economy: Contemporary and Islamic Perspectives, Eighth International Conference of the Society for the Advancement of Socio-Economics University of Geneva, July 12-14, 1996 by Masudul Alam Choudhury

281

\\ r·

The Centre of Humanomics.

l

The Centre of Humanomics is a formally established intellectual association of university professors from around the world at the University College of Cape Breton, Sydney, Nova Scotia. It is devoted to the ethico-economic study of major socio-economic issues in world perspective. The main objective of the Centre is to disseminate scholarly views and writings of social thinkers and personalities on ethico-economic issues for the awareness, education and interest of informed readership. The programmes of the Centre of Humanomics are: editorship of the international academic journal Humanomics; publication of occasional refereed monographs on ethico-economic issues, organisation of occasional learned seminars and conferences in the areas of ethico-economics, socio-scientific epistemology and globally interactive systems. For all of this the Centre seeks active participation in ethico-economic research and deliberations from the world intellectual community.

Humanomics is catalogued in the Journal of Economic Literature and is entered in the CD-ROM of JEL

Copyright © 1997 Barmarick Publications, Enholmes Hall, Patrington, Hull, East Yorkshire, England, HU120PR. Telephone 01964 630033 Printed by Staples Printers Limited, Neptune Close, Medway City Estate, Rochester, Kent, ME2 4LT England. ISSN 0828 - 8666

ISBN 1-85385-102-7

Volume 13 Number 3/4 1997

1

COMPARATIVE POLITICAL ECONOMY Edited by Masudul Alam Choudhury

Proceedings of papers presented at the Eighth International Conference of the Society for the Advancement of Socio-Economics Session: Comparative Political Economy: Contemporary and Islamic Perspectives, University of Geneva, July 12-14, 1996. This session was organized and chaired by Professor Masudul Alam Choudhury, Editor of this journal

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EQUITY VERSUS GROWTH: THE MALAYSIAN EXPERIENCE OF THE ISLAMIC FINANCIAL SYSTEM UNDER THE DUAL SYSTEMS by Muhammad Syukri Salleh & Abdul Fatah Che Hamat, School of Social Sciences, Universiti Sains Malaysia Introduction In the opening speech at the International Islamic Capital Market Conference held in Kuala Lumpur recently, the Deputy Prime Minister Dato Seri Anwar Ibrahim (1996: 5), referring to the role of the capital market, advocates an "economic growth with distributive justice, profitability with social responsibility, prudent management and transparency in dealings". He believes that these are the prerequisites of a healthy and sustainable economy. This kind of statement echoes the on-going concern over the issue, which originated and became popular in the sixties and early seventies, regarding the problem of growth versus distribution in the pursuit of economic well-being of the nation. The period of the sixties saw development plans giving greater emphasis to growth with the belief that "highly unequal distribution of income are necessary conditions for generating rapid growth" (Todaro 1982: 137). 1 And it was believed that the high growth would ensure better standards of living for the society, and hence fairer distribution of income. However, it was soon realized by most that the relatively rapid economic growth achieved by the developing countries in the sixties had not in fact benefited much of their population.2 This showed that rapid growth would not necessarily yield better living standards and fairer distribution for the society. In fact, there were compelling arguments to the contrary that more equal distribution would enhance economic growth.3 The development policies of the Malaysian economy followed similar pattern as the rest of the developing world. In the sixties, the focus of the development was much more on growth, with little to none emphasis given to distribution. However, the situation changed

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after the racial riots which occurred on May 13, 1969. Since the tragedy, more attention was given to the issues of distribution, and Malaysia embarked on the policy of "growth-with-redistribution" as its policy which was pursued in the decades that followed. The period of the seventies also witnessed the beginning of a new era as far as Islamic resurgence is concerned. The phenomenon was worldwide and Malaysia was no exception. Being a country with the majority of its population (over 50 per cent) embracing the Islamic faith , the Malaysian Government had made bold efforts to integrate Islamic values (which are universal in nature) in all facets of the Malaysians life. One such effort was the introduction of an Islamic financial system which exists along with the conventional system. The present paper attempts to investigate the role of the Islamic financial system and its corresponding ramifications in the context of this dual system with reference to the objective of simultaneously achieving the economic targets of growth and distribution for the nation. Section 2 traces the events behind the emergence of the dual financial systems. Section 3 discusses the roles of the financial system in promoting the "redistribution-with-growth" objective. The discussion on a few selected Islamic financial institutions is given in Section 4. The evaluations and conclusions are given in Section 5 and Section 6 respectively.

The Dual Financial System Emergence. The dual system referred to in this paper is the two parallel financial systems prevailing simultaneously in Malaysia, that is the conventional and the Islamic financial systems (nizam al-ma! al-Islamz). Its origin owes very much to the meeting of two important events in the recent history of the country, that is the 1969 bloody Malay-Chinese racial riot and the increasing Islamic resurgence in the seventies. These two events, though did not occur exactly in the same year, had continued to relate to each other significantly, and managed

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to leave inevitable impact upon the Malaysian society in the decades that followed. The Islamic resurgence could be seen as the consequence of, among others, or at least being stimulated more intensely than before by, the racial clash itself. Having realized their poor economic condition and the growing threat posed by the Chinese against their long dominated political power as evidenced by the riot, many Malays who are nearly all Muslims "returned" to their religious roots. Islamic movements in the country such as Darul Arqam and ABIM (Malaysian Muslim Youth Movement) suddenly found themselves to be quite attractive to these Malays and hence were able to increase their followers substantially by the end of the decade. The racial clash, which was said to have been sparked by the inequality reflected by the racial functions in the country (the Malays dominating political power while the Chinese, the economic power), has entailed a change in Malaysian development strategy, from the growth strategy to the redistribution-with-growth strategy. Founded on the latter philosophy and with the objective of redressing the racial economic inequality, the New Economic Policy (NEP) was introduced in 1971 through the country' s 20-year long-term economic plan, called the First Outline Perspective Plan 1971-1990. With two-pronged strategy, that is firstly to eradicate poverty irrespective of ethnic groups and secondly to restructure Malaysian society by eliminating the identification of certain ethnic groups with certain economic functions, the NEP was implemented beginning with the Second Malaysia Plan, 1971-1975. But in implementing this redistribution-with-growth strategy, the Malays were faced with a dilemma: whether to catch up with the Chinese through the existing conventional riba system or to explore a new system which is compatible with their Islamic doctrines. With the resurgence of Islam then and an overwhelming awakening of Islamic consciousness, quite a few Malays who were willing to participate in the governments efforts had chosen the second alternative, that is, insisted on the participation which was Islamic.


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These Islamically conscious Malays supported the governments efforts to achieve either the objectives of the NEPs redistribution-with-growth strategy later the objectives of the post-NEP strategy called Vision 2020 which aims at making Malaysia a fully industrialized and developed country by the year 2020, but they will agree to participate meaningfully only if they can remain as good and faithful Muslims. They are willing to participate as 'equal partners and stand shoulder-to-shoulder with their non-Muslim counterparts if they can be assured of halal dealings in all development matters in general and in financial dealings in particular (Abdul Hamid Islami, 1996: 9). The Malaysian governments m1tlat1ves and political will in accommodating such insistence, regardless of the governments true intention, was, and still is, encouraging. 4 It made a strategically wise move by opting to go along the wave of the Islamic resurgence while at the same time acknowledging the existence of the other apathetic Muslims and the non-Muslims in the country. For the latter, the conventional system was retained. For the former, an Islamic development system in general and Islamic financial system in particular was formulated and introduced, hence the existence of the dual system.

Characteristics As mentioned above, the "dualism" in the context of the Malaysian financial system refers to the existence of two systems, each different from the other, but together form an integral part of the nations financial system. One system, the more established between the two, is the conventional system which is based on riba, and which had evolved along the usual capitalist framework since the early days of nations birth. While the other, the Islamic system, a relatively more recent establishment, is broadly based on the concept of "profit-sharing" based on Islamic principles which forbids riba. It should be noted that both systems are complete in their own right, in the sense that each can exist independent of the other. While this is obvious as far as the conventional system is concerned since it

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was long established, the other (Islamic system), being newer in existence, has the potential to act and operate like the former in all aspects. The latter system, since its inception, has been evolving at a rather fast pace, in one sense, to match the former system in all areas, while at the same time keep up with the current developments. The two systems, despite being different, continue to interact with each other, even though such interactions are less than mutual. They both complement and substitute each other in different areas. As far as transactions involving riba or unislamic business activities such as dealings in liquor and alcohol are concerned, only the conventional system can suppon them. However, in other areas of transactions involving activities which do not run counter to Islamic principles, both systems can complement each other. There have been cases involving the financing of some major projects like the construction of oil-refineries, pooled-sources from both systems were used. At the very least, the existence of the two systems has given choice to many clients especially the devout Muslims, who otherwise would be less willing to panicipate meaningfully in business ventures. Thus, the kind of interactions generated by the dual system has indeed enriched the overall financial system of the country. Framework

The Malaysian financial system at present, as far as the size of assets and operations are concerned, is still largely of the conventional capitalist type. The system as a whole consists of two types of institutions. Firstly, the banking system which includes the central and other banks, shon-term money market and foreign exchange market. Secondly, the various types of non-bank financial intermediaries (Nor Mohamed Yakcop 1996: 32-33). The Islamic financial system, which by far still form just a small fraction of the entire system, comprises only two institutions in the formal set-up of the financial system; the Islamic Bank Malaysia (IBM) in the banking sector, and the Pilgrimage Management and Fund Board (PMFB) in the non-bank financial intermediaries category. However, the ramifications of their growth and expansion have been far-ranging.


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Since the establishment of PMFB in 1973 to mobilize funds from Muslims who aspire to perform their pilgrimage to Mecca, and the introduction of Islamic Banking Act in 1983, which led to the establishment of IBM as the first full-fledged Islamic commercial bank in the country, and its subsidiary, Syarikat Takaful Malaysia which provides Islamic insurance services, other expansions followed. In 1993, another Islamic insurance (takaful) company was established by the Malaysian National Insurance (MNI). In the same year, Sistem Perbankan T anpa Faedah (SPTF) or Interest Free Banking Unit (IBU) aimed at boosting further the Islamic banking system was introduced by many conventional merchant banks. 5 This was followed by the introduction of Islamic pawnshops as "banks" for the poor, and the establishment of Islamic Unit Trust Funds especially by some state governments in 1994. In the private sector, there were the introduction oflslamic capital market including Islamic financing and stockbroking house and schemes such as those operated by the Bank Islam Malaysia Berhad Securities, Majestic Global Investments Ltd, Rashid Hussein Securities and Abrar Group International, to suit well with the Islamic Money Market System established by the Malaysian Central Bank in 1994. 6 Role Of Financial System in Promoting the "Redistribution-with-Growth" Objective In any monetized economy, financial system will act as a mirror image to the real sector of the economy. Besides fulfilling the basic functions of providing medium of exchange, units of account and value among others, it performs the most important function in the context of development, which is that of financial intermediation. In the latter function, the financial system enables the movement and distribution of resources from the one in surplus to that of shortage. In the context of Malaysia, this function is deemed very crucial indeed. Even though, of late, there have been a lot of foreign capital and investments coming into the country, Malaysia cannot afford to "waste" its internal funds through misallocation and inefficiency. Thus, in this regard, the financial system plays the needed role, that is to channel savings to

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the parties most in need of funds for investment. In addition, it also provides mechanisms to collect funds from those who have surpluses. lt can be argued that both of these roles promote growth as well as distribution. On the one hand, by directing limited resources (funds) from those in surplus to the parties most in need, it will directly or otherwise promote efficiency and productivity. This will enhance growth. Similarly, looking at the other aspect, where financial system sets up appropriate mechanisms to enable the population at large, especially the poor to part with their otherwise idle funds to be channeled to more productive uses, it will definitely help promote fairer distribution. Also, another point ought to be highlighted. It was mentioned earlier that the financial system in the monetized economy reflects their real sector counterpart. In the context of Malaysia, this has considerable significance. The Malaysian government, after the May 13, 1969 racial riots, had implemented various policies such as the New Economic Policy (NEP) and others, aimed at redressing the "imbalances" among the various races in the country. This strategy, dubbed the "redistribution-with-growth" strategy together with other later policies, have produced considerable successes. Today, Malaysia not only was able to maintain on average over 8 per cent growth per annum for the past many years, but also succeeded in the efforts of overcoming hard-core poverty, with employment rate reaching the full employment level. These successes would not have been achieved without the financial sector playing their appropriate roles much in concert with the real sector. Not only did the policies in the real sector get translated into appropriate actions in the financial sector, the latter was very much guided, if not dictated by the policies of the former. In order to play its role more effectively in the fast growing economy in the era of increasing globalization, the financial system needs to adopt appropriate strategies to enable them to remain competitive. These may include among others, expansion of the present institutions, diversification of institutions as well as the

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the parties most in need of funds for investment. In addition, it also provides mechanisms to collect funds from those who have surpluses. It can be argued that both of these roles promote growth as well as distribution. On the one hand, by directing limited resources (funds) from those in surplus to the parties most in need, it will directly or otherwise promote efficiency and productivity. This will enhance growth. Similarly, looking at the other aspect, where financial system sets up appropriate mechanisms to enable the population at large, especially the poor to part with their otherwise idle funds to be channeled to more productive uses, it will definitely help promote fairer distribution.

Also, another point ought to be highlighted. It was mentioned earlier that the financial system in the monetized economy reflects their real sector counterpart. In the context of Malaysia, this has considerable significance. The Malaysian government, after the May 13, 1969 racial riots, had implemented various policies such as the New Economic Policy (NEP) and others, aimed at redressing the "imbalances" among the various races in the country. This strategy, dubbed the "redistribution-with-growth" strategy together with other later policies, have produced considerable successes. Today, Malaysia not only was able to maintain on average over 8 per cent growth per annum for the past many years, but also succeeded in the efforts of overcoming hard-core poverty, with employment rate reaching the full employment level. These successes would not have been achieved without the financial sector playing their appropriate roles much in concert with the real sector. Not only did the policies in the real sector get translated into appropriate actions in the financial sector, the latter was very much guided, if not dictated by the policies of the former.

In order to play its role more effectively in the fast growing economy in the era of increasing globalization, the financial system needs to adopt appropriate strategies to enable them to remain competitive. These may include among others, expansion of the present institutions, diversification of institutions as well as the


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instruments offered, and finally but not least, the expansion of the capital and foreign exchange markets. It is in this light, that the inclusion and hence the introduction of the Islamic financial systems to exist alongside its conventional counterpart is deemed fit and timely. As mentioned previously, the Islamic financial system at the present time, is still very small. It accounts for a very small portion of the whole financial system. Nonetheless, it expands at a rather fast rate, thanks to the efforts and political will of the present government. Hence it has the potential to contribute substantial share towards the economic well-being of the nation. In this regard, it can be seen that the system promotes both distribution as well as growth. First, it can be shown that the system grows in tandem with the rest of the financial system. This means that it cannot grow any slower than the rest of the financial system, which had directly or indirectly contributed to the high growth of the economy. Looked in this way, though small in contribution, the system does support growth. The Islamic financial system also can be shown to support and promote fairer distribution. Even though the system is open to all, irrespective of race or religion, the majority of the clients who participate in the system are still Muslims. In Malaysia, the Muslims still form the majority ofthe poor. Hence, the Islamic financial system through its various institutions such as the Pilgrimage Management and Fund Board (PMFB) which mobilizes the savings of the Muslims who aspire to perform the pilgrimage or the Islamic insurance companies which provide Islamic insurance services to mainly Muslim clients are seen as promoting fairer distribution. Selected Islamic Financial Institutions The above sections have touched on the efforts made by the Malaysian Government to achieve both high rate of economic growth and distributive equity as important economic targets for the nation. It has been shown that both of these targets are complementary to each other in the sense that both can be achieved simultaneously. The purpose of the present section is to discuss the roles played by a few

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selected Islamic financial and socio-economic institutions in Malaysia that aim at promoting these objectives. These include (1) Islamic Bank Malaysia, (2) Pilgrims Management and Fund Board, (3) Islamic Insurance (Syarikat Takaful Malaysia), (4) Islamic Pawnshop (Muassasah Gadaian Islam Terengganu), (5) Islamic Trust Fund (Amanah Saham Darul !man), and (6) Private Islamic Financial House (Commerce Majestic Global Investments). With the exception of the Islamic Bank Malaysia which is part of the banking system and Commerce Majestic Global Investments Sdn Bhd which is a private Islamic financial house, the other institutions are non-bank financial intermediaries created primarily to fulfill specific purposes. The Pilgrims Management of Fund Board (PMFB) was established solely for the purpose of mobilizing savings of Muslims who intend to travel on pilgrimage to Mecca. Syarikat Takaful Malaysia (STM), on the other hand, as one of the two operators of takaful (Islamic insurance) in Malaysia provides insurance coverage to Muslims against losses from all kinds of disasters, in accordance to the Islamic principles as prescribed by the Quran and Sunnah. The Amanah Saham Darul !man (ASDI) and Muassasah Gadaian Islam Terengganu (MGIT) are respectively the trust fund and pawnshop based on Islamic principles and guidelines. To start with, it should be pointed out that these institutions, in terms of assets account for only very small fractions of the total assets of the Malaysian financial system. As can be seen from Table 1, three of these institutions, namely, IBM, PMFB and STM, each accounts for less than one percent of the total assets of the financial system. On summing up, their joint contributions still fall short of the one percent mark (1990: 0.83 per cent; 1993: 0.73 per cent). The remaining two Islamic institutions, namely, ASDI and MGIT, by virtue of their regional set-ups (that is confined to the State ofTerengganu only) are assumed to contribute even less. Two points can be made here in this connection. One is that the high growth performance of over 8 per cent experienced by the Malaysian economy over the past few years was achieved mainly through the conventional capitalistic design, rather than the Islamic one. However, on closer scrutiny, it is seen


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that the percentages representing the respective contributions of Islamic institutions in the total assets had stayed relatively constant over the years. This goes to indicate that the growth of the Islamic institutions are much in tandem with the growth of other sectors of the financial system, which are claimed to have contributed to the high growth rate of the economy. In this respect, the Islamic institutions, though small in contribution, appear to support growth. Table 1: Assets of the Malaysian Financial System, 1970 - 1993

1970 BANKING SYS.

1980

Mil.

%

Mil.

%

Bil.

7445

64.1

54346

73.3

Islamic Bank NON-BANK

171 {1983) 4167

35.9

19807

1993

1990

26.7

%

Bit.

223.5

69.8

413.9

72.6

1385 (Mil)

0.43

2

0.35

96.9

30.2

156.6

27.4

38.2

0.01

100.9

0.02

%

FIN INTERMEDIAR. Syarikat Takaful

(Mil) PMFB

17

197

0.27

1234

(Mil)

(Mil) 0.39

2066

0.36

(Mil)

Source:l.Bank Negara Malaysia, Annual Report {1990,1991 & 1993) 2. Bank N egara Malaysia, Wang Dan Urusan Bank Di MaL:zysia, 1989.

Islamic Bank Malaysia (IBM) IBM was formed in 1983 as part of the governments effort to create and implement a dual banking system, i.e. an Islamic banking system existing on a parallel basis with the conventional system. Its basic objectives are to (1) meet the banking and credit needs of the Muslim population in Malaysia according to the rules of the Shariah which prohibits interest, and (2) to fill the void in the existing banking system by offering the alternative services of a fully-operational commercial bank based on the Islamic principles of banking and credit conforming to the Shari'ah.

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The bank offers a wide range of Islamic banking services such as accepting deposits, granting credit facilities, provision of safe-keeping facilities and fund transfer. It accepts savings and demand deposits from members of the public under the principles of Al- Wadiah Yad Dhamanah. Under this principle, the bank accepts deposits as trust and guarantees repayment when demanded. The bank :also offers investment accounts under the principle of Al-Mudharabah (profit-sharing), in which it will invest the fund into the types of investment permissible by Shariah and distribute the prgfit according to the pre-determined ratio. There are various financing facilities offered by IBM such as project financing (Al-Mudharabah and Al-Musyarakah), lease financing (Al-Ijrah), acquisition of assets and hire- purchase financing (Al-Bai Bithaman Ajil), trade financing (Al-Mudharabah, Al-Musyarakah and Al- Wakalah), gu_arantees (AlKafalah) and benevolent loans (Al-Qardhul Hasan. In addition, two new instruments were introduced in 1991, namely, Islamic Accepted Bills and Islamic Export Credit Refinancing Facility (Al-Mudharabah and BaiAl-Dayn). Since it began operation in 1983, IBM has proved to be a viable banking institution with commendable performance and activity expanding throughout the country. The banks total resources increased from RM171 million at the end of 1983 to nearly RM2 billion at the end of 1993 (Table 1). Financing extended by the bank for the same period increased from RM41 million to RM1.1 billion. The bank part-financed a leading oil company in its purchase of equipment for refinery, and this represented an important joint participation involving Muslim and non-Muslim financial institutions working together. Despite being a relatively newcomer in the financial industry, IBM's shares was floated and quoted on the Main Board of the Kuala Lumpur Stock Exchange in 1991. The listing of the shares has provided for its shareholders and enabled the public to participate directly in the equity of the bank. The long-term objective of the Malaysian government is to create a full-fledged Islamic banking system which functions on a parallel


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basis with the conventional system. To do that would reqmre fulfilling three conditions, namely, 1.

Adequate number of institutions participating in the system

2.

A broad variety of instruments must be offered

3.

There must be an efficient and effective interbank money market to link the players (institutions) and the instruments.

In addition to the above requirements, an Islamic banking system must also reflect the socio-economic values of Islam, in the sense of being Islamic in substance and not merely in label. The second condition was met when a total of 21 Islamic instruments were successfully developed by the beginning of 1993 . Regarding the first requirement, the Central Bank had allowed existing financial institutions to offer Islamic banking services using their existing infrastructure and branches. Thus, the Interest-Free Banking scheme (IFBS) was launched on March 1993, in which all commercial banks, merchant banks and finance companies could participate. Finally, the Islamic money market to link the institutions and the instruments was set up on January 3, 1994 to cover the following aspects: 1.

Interbank trading in Islamic financial instruments;

2.

Islamic interbank investments; and

3.

Islamic interbank cheque clearing system.

Thus, with the three requirements met, a full-fledged Islamic banking system was established to function side-by-side with the conventional one existing within the framework of a dual banking system.

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Pilgrimage Management and Fund Board (PMFB) PMFB was formed in 1969 with the purpose of mobilizing the savings and assist them in performing their pilgrimage. It was long observed in the fifties that the Muslims, especially the poor one (1) had saved mainly for the purpose of going on pilgrimage, and (2) they kept their savings at home. They shied away from keeping their money with the banks because the interest the banks offered was against Islam. Hence, the establishment of PMFB helped fill this void by allowing the Muslims to save their money to go on pilgrimage without having to worry about interest while at the same time have the opportunity to participate meaningfully in the economic activity of the nation through PMFB. Thus, the specific objectives of PMFB can be given as follows: 1.

To enable the Muslims to save their money gradually for the purpose of performing their pilgrimage or for other useful purposes.

2.

To allow the Muslims, through their savings with PMFB to participate in halal investment in various sectors of the economy such as industry, trade, plantation, land and buildings.

3.

To provide protection, control and services to Muslims while performing their pilgrimage.

In line with the objective to involve the Muslims more effectively in economic activities, PMFB participated in all investments which are considered halal. These include investments in industry, trade, plantation, asset owning of land and buildings. As of 1979, it had invested 70 per cent of its assets in shares of Islamically approved companies; 20 per cent in oil-palm plantation, and 10 per cent in land and buildings in urban areas. During the New Economic Policy (NEP) years, 1970- 1990, PMFB had played quite a significant role in realizing the twin objectives of NEP, namely, the restructuring of society, and reduction of poverty. PMFB, through its various projects had given jobs to many Muslims, held equity in selected companies,


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and ensured the minimum 30 per cent Bumiputera participation in companies it held substantial equity ownership. Table 2 shows the extent of participation of Muslims in the PMFB, as measured by the number of persons performing the pilgrimage as well as those making new deposits. As can be seen, the number of pilgrims and new depositors are quite large reflecting the obligatory nature of pilgrimage as an ibadah (religious duty for those who can afford) and remain moderately constant over the years. Since by regulation, the pilgrims who register for pilgrimage with PMFB have to become depositors with it, many for over extended number of years, they are indirectly participating in investment activities of PMFB and getting benefits from it in the form of yearly bonus. In this respect, PMFB helped in mobilizing the savings of Muslims especially the poor ones and channel them to more productive uses. The investment performance ofPMFB has been very encouraging as can be glimpsed from Table 3. The total asset has grown on average at more than 16 per cent per year in the years indicated. The profit before zakat has grown steadily over the years, and by 199 3, the figure has more than doubled the figure in 1989. The bonus issued to depositors can also give some indication as to the strength of the company. In this regard, PMFB was able to offer bonus at the rate of between 7 and 9 per cent for at least five consecutive years. Furthermore, the zakat payment on the deposits has been quite substantial, and this can only mean that (1) the number of depositors is consistently high, and (2) the deposits are maintained over much longer period. In the final analysis, these indicators bear testimony to the sound growth of PMFB as it cruised along with the rest of in the economy and contribute positively to its impressive performance.

Islamic Insurance: Syarikat Takaful Malaysia (STM/ STM, which was formed on 24 September 1984 and started operation on 1 August 1985, is a subsidiary of Islamic Bank Malaysia (IBM) which owns 87.15 per cent of its equity. The purpose of its existence is to provide Islamic insurance (Takaful services) on a commercial basis but in accordance to Islamic principles and guidelines to Muslims

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Table 2: Total Pilgrims, New Depositors and Net Deposits of PMFB: 1989 · 1993 Year

Tot. Pilgrims

New Depositors

Tot. Deposits (Mil.)

Net Deposits (Mil.)

1989

32963

213,000

556.90

169.00

1990

36843

242,000

557.61

34.85

1991

26938

278,792

687.63

8.23

1992

43208

146,621

752.56

236.47

1993

37025

167,593

811.89

241.63

Source: 1. Bank Negara Malaysia, Annual Report (1990,1991,1993) 2. Bank Negara Malaysia, Wang dan Urusan Bank Di Malaysia 1989 3. Lembaga Urusan Dan Tabung Haji, Laporan Tahunan (1989, 1991, 1992, dan 1993).

Table 3: Key Indicators of Performance of PMFB; 1989 • 1993 Year

Profit Before Zakat (Mil.)

Bonus Issued (Mil.)

Bonus Rate

(Mil.)

Zakat Paid (Mil.)

Asset (Mil.)

Gross Income (Mil.)

1989

1140

114.8

73.8

55.7

7

2.4

1990

1234

101.3

63.1

57.1

7

3.0

1991

1486

137.6

87.1

71.8

8

2.9

1992

1677

163.2

105.5

85.8

8

2.9

1993

2066

282.8

175.3

132.4

9

4.3

Source:l. Bank N egara Malaysia, Annual Report (1990, 1991, 1993) 2. Bank N egara Malaysia, Wang Dan Urusan Bank Di Malaysia 1989 3. Lembaga Urusan Dan Tabung Haji, Laporan Tahunan (1989, 1991, 1992, 1993).

and non-Muslims population of the country. However, the need for its services by Muslims is more since some have doubts as to the "Islamicity" of the concept of insurance for covering future undertaking and risks as is practised by the conventional insurance compantes.


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The provision of takaful services is based on the Islamic principles of Al-Takaful and Al-Mudharabah_ The former means the act of a group of people reciprocally guaranteeing each other, while the laner is the commercial profit-sharing contract between the provider of fund for a business venture and the entrepreneur. Thus, the takaful business may be regarded as a form of profit-sharing venture between the company and the individual members of a group of participants who desire to reciprocally guarantee each other within the group against certain loss or damage that may be inflicted upon any one of them. STM offers two types of takaful services, namely, the family takaful business and the general takaful business. The former offers various family takaful plans which provide savings as well as cover of mutual financial aid and assistance, in the form of takaful benefits, in the case of untimely death of a participant. In this scheme, a substantial portion of the participant's installment payments will be channeled to his saving and investment to be managed by the company, while the remaining smaller portion will be pooled to pay takaful benefits to fellow participants who have been struck with catastrophe or disaster. The profit made from the investment in the scheme will be divided according to the pre-agreed ratio as spelled out in the contract. The general takaful business offers schemes which provide cover or protection against material loss of damage arising from catastrophes, disasters or misfortunes inflicted upon properties or assets belonging to participants. The contributions from participants in the form of monthly installments will be pooled into the general takaful fund. Apart from paying compensation or indemnity to participants who have suffered loss from catastrophes or disasters, the fund will be invested by the company with the profits pooled back into the common pool. Any surplus made after deducting operational costs will be shared between the company and the participants who have not incurred any claims or received any takaful benefits.

Humanomics

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By the look of the data in Table 4, it appears that STM has done reasonably well in terms of growth. Its total assets had increased by about four times the size in five years, with the asset under family takaful on average expanding at a faster rate than the general takaful. The asset of the former had increased more than four times as compared to slightly less than four in the case of the latter for the period in question. However, the asset of the general takaful accounts for much bigger fraction of the total asset. The participation in the takaful schemes has been quite encouraging. The new participation under the family takaful plans had averaged around 3563 per year while the average terminated participation stayed at 461 per year for the same period. However, in spite of such termination, the net participation had grown substantially in the five year period to almost quadruple the figure in 1989. Table 4: Asset of STM and Certificate Issued Under the Family Takaful: 1989-1993

Year

(Mil.)

Family (Mil.)

General (Mil.)

New

Terminated

Total

1989

25.9

9.1

16.8

3220

335

5720

1990

38.2

15.5

22.7

3159

402

8477

1991

57.4

22.6

34.8

3489

384

11582

1992

77.1

31.9

45.2

4309

603

45288

1993

100.9

42.6

58.3

3638

581

18345

Total

Source: 1. Bank Negara Malaysia, Annual Report (1990,1991,1993) 2. Bank Negara Malaysia, Wang dan Urusan Bank Di Malaysia 1989 3. Syarikat Takaful Malaysia, Annual Report (1990, 1991, and 1993).

Looking at the contribution side, the growth has been much slower as can be seen from Table 5. The total contribution had grown gradually from 23.8 million in 1989 to about double the size of 45.3 million in 199 3. The bulk of the contribution, as expected comes from the general takaful scheme. In addition, the total claims for the period had averaged around 5.46 million per year.

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Table 5: Contributions and Claims of STM, 1989- 1993 Contributions Year

Total (Mil.)

Family (Mil.)

General (Mil.)

Total Claims (Mil.)

1989

23 .8

7.6

16.2

2.6

1990

28.4

8.4

20.0

4.7

1991

34.4

9.4

25.0

5.9

1992

40.0

11.0

29.0

7.8

1993

45.3

12.4

32.9

6.3

Source:l. Bank Negara Malaysia, Annual Report (1990,1991,1993) 2. Bank Negara Malaysia, Wang dan Urusan Bank DiMalaysia 1989 3. Syarikat Takaful Malaysia, Annual Report (1990, 1991, and 1993).

In the final analysis, the following points can be highlighted. Even though STM contributes just a small fraction to the total financial system, it plays a very vital role to fill the void in the insurance system of the country. As can be seen, there has been fairly good participation by Muslims in the various schemes offered, perhaps as an alternative to the conventional system which was regarded by some to be rather un-Islamic. The takaful business is certainly a viable venture which has all the ingredients for expansion and growth, especially if sufficient efforts are undertaken to widen the participation. Islamic Pawnshop: 1he Case of Muassasah Gadaian Islam Terengganu (MGIT)

Islamic pawnshop is regarded as a peripheral Islamic financial institution but is very pertinent in complementing the Islamic financial institutions in the mainstream. It is the 'bank' for the needy to fulfill their immediate needs, including buying foods for their family. The initial idea regarding the need for establishing Islamic pawnshop came from the then Governor of Central Bank, Tan Sri Jaffar Hussein during a forum at Universiti Sains Malaysia in Pulau Pinang in 1990 (Jaafar bin Hussein 1990). With the objective of

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helping the poor and expanding Islamic financial system in Malaysia, the Central Bank-initiated Islamic pawnshop based on Ar-Rahn concept was later launched in Kuala Terengganu on August 21, 1993 through Bank Kerjasama Rakyat Malaysia (Bank Rakyat) network. As a cooperative, the Bank Rakyat is automatically exempted from the Akta Pemegang Pajak Gadai 1972 (Pawnshop Act 1972), hence overcoming the all legal problems faced in earlier attempts (Nor Mohamed Yakcop, 1996: ix-xi). About a year and a half before the launching of Bank Rakyats pawnshop, that is on January 23, 1992, Terengganu State Government had launched the first Islamic pawnshop system in the country called Muassasah Gadaian Islam Terengganu (MGIT) in Kuala Terengganu. Currently, apart from the Bank Rakyats pawnshop known asAr-. Rahnu and the MGIT operated under the auspices of the State Government of Terengganu through its Islamic Religious and Malay Traditions Council, there is another pawnshop called Ar-Rahn in Kota Bharu, Kelantan operated by the Kelantan State Islamic Party (PAS) - led government. Altogether, therefore, there are three organizations operating the Islamic pawnshops in Malaysia. All the three Islamic pawnshops have more or less a common objective, namely, providing cash for the needy to fulfill their immediate needs through an Islamic system. One possible difference between the three pawnshops is perhaps in terms of the degree of commercialization. Bank Rakyats Islamic pawning system for instance, being the one operated by the commercial bank, certainly is more commercial-oriented than the MGIT in Terengganu. While the former charges a certain amount of interest-free profit, the latter operates with no extra charge. The only extra income the MGIT gets is from voluntary contributions of its clients after they have repaid all their debts. Even this contribution is optional: it is up to the clients whether to contribute or not. In other words, the MGIT operates merely as a welfare socio-financial institution. In actual fact, the MGIT can afford to operate in such a way since it is fully sponsored by the State Government ofTerengganu, through


193

the Terengganus Islamic Religion and Malay Traditions Council. Its services is open to all Terengganu Muslim population above 18 years of age. Possessions to be pawned (as collateral), or the marhun, in Arabic, at the moment are limited only to jewelry made of gold or diamonds. The total cash a client is entitled to is 75 percent of the value of his or her jewelry but not more than RM1,500. He has to repay the debt within three months and with permission the period can be extended to another three months. A client who fails to repay within that period will be given another fourteen days to find a buyer of his jewelry. Failure to do so would incur an auction which entails repayment of the debt. Any excess money from the repayment will be given back to the client. The client is given four months to claim it from the MGIT. Since its establishment, the MGIT with an initial grant of RM1 million from the Terengganu State Government, has in May 1995 served more than 83,000 clients with a total of RM62.77 million loan (Utusan Malaysia, May 16, 1995). About five months later, on October 16, 1995, the number of clients served increased to 101,300 and the total value of the loan climbed to RM78,165,388.00. On average, MGIT receives about 150 clients daily with a pawning value ofRM160,000. The repayment rate is also high. Out of 101,300 clients on October 1995, 88,265 clients had repaid their loans totaling RM66,781,028 .00. Within about three years of operation, the MGIT had collected about RM400,000 from its clients' voluntary contribution. Of all the clients, 60 percent fall into self-employed group such as small entrepreneurs while the other 40 percent are the government servants oflower ranks. The former group normally uses the MGIT's services to get capital for their small businesses while the latter group for buying Amanah Saham Darul !man (ASDI, an Islamic Unit Trust Fund introduced by the T erengganu State Government) and other shares. 8 Thus, it can be seen that, even though the contribution of the MGIT is small by comparison, it has indeed played an important role in providing yet another source of capital for the lower strata of the SOClety.

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Humanomics

In order to serve its clients better, the MGIT has planned to raise a little income to cover its operating cost of between RM170,000.00 to RM200,000.00 a year by charging a small fee for keeping the clients jewelry during the pawning period. Such a charge, in the opinion of the MGITs management, would not likely deter the peoples good response towards MGIT services for even with the charge, which is small by comparison, the Islamic pawnshop services would still be much more convenient and fairer than the conventional ones. Islamic Unit Trust: The Case ofAmanah Saham Darul !man (ASDI) Of late, trust fund has become one of the trendy means of involving the Malaysian general population especially the poor in the shares market, and in so doing help promote the accomplishment of distributive justice and the narrowing of the rich-poor gap. A few states in Malaysia such as Johor, Selangor, Kedah and Terengganu have launched their own respective trust funds, which provide access to investment opportunities for their respective populations. Of these states trust funds, T erengganus trust fund is the most unique and in fact the sole, pioneering trust fund that is based on and adheres to Islamic Shariah. Established in 1994 by the T erengganu State Government, it is calledAmanah Saham Darul !man (ASDI, The Darul Iman Trust Fund). Its Islamicity is monitored by a three-person Shariah Advisory Panel which scrutinizes, approves or disapproves investments to ensure involvement in non-riba and Islamically clean business activities only. ASDis parent organization is Permodalan T erengganu Berhad. The main aim of ASDI is to provide a channel for investors from all walks of life to accumulate and invest their capital (ASDI, 1994: 12). Apart from corporate organizations, institutions, government servants and private workers, a total of RM112 million shares, or approximately 22.9 percent of the RMSOO million ASDis whole shares), are allocated specifically for the poor. The task of organizing t hese shares is given to the government-sponsored Yayasan Pembangunan Keluarga (YPK, the Family Development Foundation). 9 Until 9 September 1995, the percentage of the lower

195


income group such as peasants and fishermen participating in ASDis investment was rather low (0.4 percent; Table 6). But with the special allocation given through Yayasan Pembangunan Keluarga, the Terengganu State Government hopes that this percentage will increase substantially. Since the buyers of the ASDis shares are automatically sharing ASDis assets and enjoying ASDis benefits including appreciation in the shares value from time to time, the general population especially the poor now have a chance to better themselves. Like other ASDis investors, they are also entitled to the benefits of ASDis investments, which may come in the form of dividends and capital profits. Since ASDI started its operation just slightly more than a year ago, its real distributive achievement at the moment is hard to be seen and too early to be judged. However, its concern for the poor as TABLE 6: ASDIS Share Units According to Occupation as of 9 September 1995.

Occupation

Units (RM)

%

Government Officers

6,846,375.22

1.4

Government Servants

90,509,164.18

18.4

6,413,064.75

1.3

35,001,303.00

7.1

Private Executives Private Staff Fishermen Self-Employed Peasants Housewives

346,744.18

0.1

25,569,622.04

5.2

1,282,694.67

0.3

12,288,321.27

2.5

Entrepreneurs/Businessmen

8,576,354.68

1.7

Students

1,734,554.01

0.4

166,171,606.03

33.8

112,775,000.002

2.9

Corporate/Institutions Allocations for the Poor Others TOTAL Source: ASDI, Kuala Terengganu, 1995.

24,045,334.13

4.9

491,559,938.16

100.0

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Humanomics

reflected by the substantial allocation reserved for them represents a positive element. If this is to be fully realized especially through the help of an efficient, just and soundly based bureaucratic organization, ASDis achievement could to some extent contribute to the overall growth and equity programme of Malaysia. Private Islamic Financial Companies: 1he Case of Commerce Majestic Global Investments (MGI) Sdn. Bhd.

Apart from the government-initiated endeavours, the expansion of the Islamic financial system in the private sector is also encouraging. At the moment, in addition to the interest-free banking system (SPTF) adopted by Islamic Bank Malaysia or Interest-free banking unit (IBU) services created at conventional banks, there are at least three big companies which involve directly in offering Islamic financial schemes. They are Rashid Hussein Berhad which introduces Islamic stockbroking scheme, Abrar Group International which plans to create an Islamic financial supermarket (Wan Mohamad Hasni Wan Sulaiman, 1996) and Commerce Majestic Global Investments Sdn. Bhd (CMGI) which aims at creating a prominent global Islamic merchant banking institution with Malaysia as its horne base (Commerce MGI Sdn. Bhd. n.d.). The present discussion will highlight some of the features of CMGI as one example of the financial companies participating in the Islamic financial system in Malaysia. 10 CMGI is a joint venture between Majestic Global Investment Ltd (MGI), an international Islamic investment company with accomplished Islamic investment bankers and leading international Shariah scholars (Majestic Global Investments Ltd n.d.) 11 , and distinguished local businesses and personalities, namely, among others, Commerce Asset Holding Berhad, Renong Berhad, and Dallah Albaraka (M) Holdings Sdn Bhd. The CMGis primary goal is to provide investors with an opportunity to invest in a range of merchant banking products and to benefit from various financial services by way of maintaining judicious balance between risks and returns under the strict compliance with Islamic Shariah laws. With an independent and


197

geographically diverse membership of the Shariah Board chaired by the well-known Dr. Yusof Abdullah Al-Qaradawi, a wide and integrated range of innovative Islamic investment products offered, and various financial services available, the CMGI avows to have, among others, the following abilities. Firstly is the ability to contribute towards solidifying Malaysian leadership in a US$100 billion global Islamic financial sector and towards the development of new instruments of funding and global fund mobilization to support the robust and growing Malaysian and regional economies. Secondly is the ability to channel the untapped Islamic funds of the Middle East and Indian subcontinent into the emerging markets of South East Asia, whether by direct investment and/ or establishment of funds. And thirdly is the ability to mobilize the massive Islamic funds in South East Asia with the CMGis innovative products and services. The products and financial services of the CMGI are divided into five types. Firstly is the Corporate Finance Products which consists of Asset Backed Securities, Direct Investments (Acquisition and IPOs), Underwriting/Market Making and Placement Activity. Secondly is the Asset and Portfolio Management which consists of Malaysia/South East Asia Equity Fund, Islamic Global Equity Fund and Multi Asset Fund. Thirdly is the Unit Trust. Fourthly is the Property Management and fifthly, the Specialty Services and Consultancy. At the moment the company is also in the process of developing American Home Finance, Liquidity Management and Global Real Estate Fund. 12 In brief, the CMGI and its present partner the Majestic Global Investment Ltd are committed to Malaysia and to the international arena in providing innovative and cutting edge Islamic financial engineering services and products that will deepen the securities market, support institutions as well as give investors a new channel of halal investment (Majid Bader A.H. Al-Refai 1996:6). Among its other activities, so far, CMGI is acting as a joint-arranger, together with Commerce International Merchant Bankers, Bank Bumiputera

198

Humanomics

and Bank Islam Malaysia, and as Islamic financial advisor in financing a major infrastructure project valued at RMS billion using a sophisticated Islamic financial engineering mechanism. It is also acting as joint global coordinator towards securing a mandate from an international airline company to finance its purchase of aircraft through the issuance of Islamic securities (Sukuk) .

Evaluation To properly evaluate the significance of the roles played by selected Islamic financial institutions in promoting the "redistribution-with-growth" objectives within the dual financial system, the following perspectives should be adopted in order to facilitate better understanding. First, it should be noted that in Malaysia, the majority of the poor are Malays, who are also Muslims. Thus, any policy meant to alleviate poverty and promote redistribution will indirectly help Muslims, the majority of whom are Malays. Second, even though most of the Islamic financial institutions are accessible to all races, the majority of the participants are still Muslims.13 Third, since Islam forbids riba and the conventional financial system is based on riba, there are substantial number of Muslims especially the devout ones who regard the Islamic institutions as the only recourse which enables them to participate in economic activities without going against religious injunctions. Fourth, there are those, Muslims especially, who found the Islamic set-up, for instance, the pawnshop, to be extremely just and easily accessible, and would prefer these over similar set-ups under the conventional system. It is in the light of these perspectives that we argue that the Islamic financial institutions play their due roles in promoting growth and redistribution objectives. First, as we have previously hinted, the growth of the Islamic financial system has been much in tandem with the growth of other sectors of the economy. Thus, it must have contributed positively towards the high growth performance of the economy since it does not in anyway, hinder or obstruct the overall achievement of such performances. Second, since nearly all


199

transactions of Islamic financial institutions involve the Muslims, who are poor in general, such undertakings would have fulfilled the objective of promoting growth and redistribution simultaneously. In this case, the savings mobilized from the Muslim masses in various forms through these institutions are put to more productive uses such as participating in meaningful investments in the real sector. The Muslim clients benefit indirectly from these ventures in the form of shared profits and dividends obtained. On the other hand, by mobilizing the otherwise idle savings from the Muslim masses and channeling them to productive uses, it plays considerable role in promoting growth in the economy.

Islamic Bank Malaysia The role of the Islamic bank, as far as promoting "redistribution-with-growth" objective is concerned, can be argued on the following points. First is the ability of the bank to attract at least three categories of clients, who are either completely left out in the present conventional set-up, or who are willing to shift from the conventional to the Islamic one due to some attractive features of the Islamic system. The first category of clients are the Muslims who strictly observe Islamic injunctions, and hence would completely reject any dealing based on riba. This group has no place in the present conventional system. The second group comprises those Muslims who do not mind dealing in the conventional system if the Islamic alternative is not available, but will prefer the latter if it is available out of religious conscience. The last group is composed of non-Muslims who simply find the Islamic system to their advantage. Perhaps, the appeal of the system to this group lies in the direct sharing of profits and losses between the clients and the bank since the latter (banks) in most cases are known to be large profit-makers. With regard to the first category of clients, the filling of such void, left out by the present conventional system, by the Islamic bank is a vital justification for the lathers need for existence. In this connection, the following instances will suffice: (1) Prior to the introduction of the Islamic system, some young Muslim professionals, especially

200

Humanomics

those who have "rediscovered" Islam while studying overseas, upon their return, have found difficulty in purchasing automobiles and houses without resorting to the riba method of the conventional system. They either have to postpone their purchases until they have accumulated enough savings or resort to other methods such as shared ownership in the pooled resources among colleagues and friends. (2) Many aspiring business-minded Muslims have to forget their dreams of setting up business ventures or expanding the present outfit because of lack of capital since they refuse to access the conventional sources. There are cases, even among those who were already successful, but decide to quit their undertaking after "rediscovering" that their financial sources are against their religious conscience. (3) Many potential joint-venture projects involving Muslim-land with non-Muslim expertise failed to get off the ground due to unavailability of the mutually agreed sources of finance. These examples and many others go to show that Islamic institutions in general, the bank in particular, can play their due roles to provide the needed sources of finance. Beside engaging the Muslims who have opted out of the conventional system into the Islamic system such as above, it also provides room for the "middle-of-the-road" Muslims to participate in the system out of their religious conscience, and the non-Muslims because of the attractive features the system offers. This adds elements of vitality and competitiveness to the system as it is able to attract even those who are already participating in the conventional systems. Second is the ability of the Islamic bank to meaningfully compete with its counterparts in the conventional sector. In actuality, the only unique difference between the Islamic bank and its conventional counterparts lies in the kinds of transactions it conducts which is based on Islamic principles. Removed of this feature, Islamic bank would be essentially no different from the conventional one. It is also for this unique feature that has given rise to the dualism in the financial system in the first place. The record shows that, regardless of who make up the bulk of the banks "businesses", whether the government sector or the private, the banks performance is at par with the


201

conventional ones. This point is important since it indicates that the bank, in spite of being in the system which is "different and less developed" than the conventional one, is still able to perform just as strongly as their conventional counterparts. In this regard, the Islamic bank supports the overall financial system in producing the present growth performances. Pilgrimage Management and Funds Board

According to Islam, performing pilgrimage to Mecca once in the lifetime is incumbent upon all Muslims who can afford the trips as well as meeting some other related obligations. Like other Muslims in other parts of the world, the Malaysian Muslims in general, have taken this injunction far too seriously in aspiring to perform this duty. Even though the pilgrimage is compulsory only to those who can afford, many Muslims who obviously appear not to meet the criteria, have taken it upon themselves to make sure that they perform the duty at some point before they die. To achieve that end, these Muslims save some portion out of their meager income in the hope that in the end they are able to complete the duty. In a lot of these cases, pilgrimage is the only motive for saving their income. Since the trip is very costly, it may cost these Muslims nearly their entire lifetime savings. In the early days, there were no formal mechanisms where the Muslims can save their incomes for the pilgrimage. The conventional banks were ruled out by virtue of their non-Islamic transactions involving riba. As the result, many Muslims kept their money at various places in the homes. Thus, there was a large accumulation of untapped savings among the Muslim masses, the savings which were not put to any productive uses, not to mention the various risks such as fires, thefts and robberies which can rob owners of their accumulations. It is for this purpose that the Pilgrimage Management and Fund Board (PMFB), the first formal Islamic financial institution to be established in the country in 1969, was formed. It had played a vital role in mobilizing these savings, untapped otherwise, and channeling

202

Humanomics

them to useful purposes such as to finance Islamically approved investments in the real sector of the economy. The Muslims involved get their wishes to perform pilgrimage duties fulfilled, while at the same time, are able to participate in halal investments in various sectors of the economy and reap benefits in the forms of profits and dividends in the process.

It should be emphasized that the establishment of the formal setup such as PMFB has further stimulated pilgrimage. One reason is that the whole process now becomes simpler, more organized and better coordinated than before. PMFB has created centres in all states and smaller branches in various districts to facilitate easier access to the services offered. On the investment side, more pilgrimage translates into more savings, and hence more investments. To date, PMFB has used the savings from the clients to undertake halal investments in various sectors such as industry, plantation, trade, land and ·buildings.

Islamic Insurance (Syarikat Takaful Malaysia) There are basically two reasons why the Muslims are likely to hesitate when it comes to the conventional insurance. The obvious one is the riba-based transactions and the possible non-halal activities of the conventional insurance. The other, and even more important is the very issue surrounding the concept of insurance itself in the eyes of Islam. Is insurance coverage allowed by Islam or not? Indeed, there have been various references in the Holy Quran and Hadith that the coverage for the future risk-taking and uncertainties is regarded in some sense as being un-Islamic since " everything has been pre-destined". Modern realities, however, have prompted the Muslims to re-think the issue seriously by going back to the authentic sources, Quran and Hadith, to discover if there is justification to relook at the matter in the light of modern needs and problems. In Malaysia, the effort has given birth to the first Islamic insurance company, Syarikat Takaful Malaysia (STM) in 1984. 14 The establishment of the Islamic insurance, based on Islamic principles, to some Muslims, has solved


203

the two problems which have prevented them from participating in the insurance schemes. The Muslims, now, have the insurance schemes from which they can cover themselves for the various forms of disasters, future undertakings and risks. Viewed in this way, one can see the importance of the roles played by the Islamic insurance company such as STM. Even though, the Muslims, like anyone else, needs insurance coverage to cover for future undertakings and risks, they will only participate if they are convinced that the schemes are Islamic. Obviously, under the conventional insurance schemes, the Muslim participation, in principle, does not exist. It is only through the Islamic schemes that this group can be mobilized, and have their contributions in the schemes channeled to productive uses. Hence, the Islamic insurance such as STM, is able to generate additional sources of fund which can be used to finance Islamically-approved investments, and in so doing helps contribute to the growth of the economy. The redistribution side of the objective has been similarly fulfilled since the Islamic insurance, to a large extent, is a form of "profit and loss" undertaking, and as such, the clients (which can also include the non-Muslims) can get their share of the profits in the form of dividends and bonuses. Islamic Pawnshop: 7be Case ofMGIT

Conventional pawnshops, in general, can be regarded as informal "banks" for the poor in the sense that the facility is most easily accessible to them. The interactions between the clients and the lender are very informal and are usually based on trust even though the transactions are recorded. Usually there are no real set-up in the sense of formal building structures since the business can be carried out almost anywhere. Hence, the pawnshops can be found all over the place, and usually quite close or within the locality of their intended clients. In Malaysia, the pawning businesses are usually carried out by Indian traders, who inherit the same from their fathers and forefathers before them. Pawnshops play very important roles in providing quick and easy finance to the poor. The same services will not be extended by the

204

Humanomics

banks for various reasons. While the reasons why the poor need immediate cash are many, there are also genuine ones such as the need to start a small family business or to spruce up the "troubled" one. In this regard, pawnshops roles are vital to development and growth. It also promotes redistribution in the same manner, since successful small businesses by the poor imply improvement in their living standards. However, the pawnshops are also notoriously known for their prohibitively high interest charges. A lot of properties have changed hands due to the inability of the clients to repay their loans. In Malaysia, the pawnshops businesses or the chattier as they are locally known, have possessed a lot of lands, formerly belonging to the poor Malay farmers. The latter were unable to reclaim ownership to the lands after failing to settle their loans in time. The establishment of a few Islamic pawnshops in the country at present, and many more in the future, has given hope that some of the unjust practices of the pawnshops, as far as imposition of prohibitively high charges and inhumane possession of the properties belonging to the poor are concerned, can be solved. In the most important way, it will rid the involvement in riba by the Muslim poor, who, in the absence of the Islamic set-up and out of dire necessity, have resorted to the dealings involving riba. The Islamic pawning is established mainly to help the poor Muslims in getting access to the needed credit, and not so much, if any, to make profit. The MGIT, for instance, at the beginning of its operation, did not impose any charges to the customers for the services rendered. It accepted only voluntary contributions from the clients upon the final settlement of the loans. However, in the future, it plans to charge some fees to cover for the operational costs involved but the amount is nominal and would not be burdensome to the clients. Since the need for urgent credit by the poor Muslims in times of difficulty will always be there, the Islamic pawnshops will continue to grow, both in size as well as in number. Looking at the data on MGIT in the previous section, one gets the encouraging impression


205

that the Islamic services have caught on with the Muslim masses. It was able to ease the temporary financial burdens of some, while in others, it helped facilitate the purchases of shares and trust fund units. All considered, the Islamic pawnshops such as M GIT, in spite of being new in existence, have gone a long way in helping the Muslims ease their economic problems if not bettering their economic conditions. However, one disturbing note to add to the rosy picture presented. In spite the potential help rendered to the poor Muslim masses in general, the system as such is not able to reach the hard-core poor of the population. This is because, in order to get the services of the pawnshops, the poor has to be owning some forms of wealth. By virtue of being the bottom lot of the society, this is rather not likely. Islamic Unit Trust: Ibe Case ofASDI One of the popular and conscious efforts in trying to achieve the "redistribution-with-growth" goal in Malaysia is through the creation of various trust funds. In general, they are some kind of financial intermediaries with built-in features to enable small investors to individually own shares in the corporate sectors, and in doing so, gain access to wider corporate equity ownership. The funds are formed usually for the purpose of achieving certain specific objectives. For example, Amanah Saham National, was created with the objective of raising Bumiputeras ownership of capital and equity in various industries. The appeal of the trust funds to the general masses is as follows. First, they are relatively low-risk and high return investment due to the diversification of the investment portfolios as well as the professional handling of the funds. The client gets high dividends every time, which is the main incentive to participate in the first place, while at the same time does not have to worry about the handling of the investments as well as the risks involved. Second, the mechanisms involved are highly simplified, and the amount of sales and purchases are carried out in any convenient amount above some low minimum. In this manner, the clients can conveniently participate at their own pace.

206

Humanomics

However, the existing funds are viewed with some suspicions by some Muslims. This stems from the concerns as to whether the funds have: (1) conducted transactions based on riba, and (2) involved themselves in business activities which run counter to the Islamic principles. While the relevant authorities have gone a long way in trying to convince as well as allaying the fears of the potential Muslim clients regarding these maners, and have largely succeeded in those anempts, there are still some groups who are not convinced. It is for these reasons that the establishment of Amanah Saham Darul !man (ASDI), the first Islamic-based trust fund in the country, was viewed with relief by Muslims. Not only that now they can participate and indirectly own shares in the corporate sectors like other conventional funds clients, but they do so by consciously knowing that their participations are Islamically "legitimate". ASDI has assured their clients of this by appointing a three- person Shariah Advisory Panel, whose functions are to ensure that ASDI engage in non-riba and Islamically clean business activities only. In principle, ASDis clients can be the same kind of clients as those who participate in the "similar" conventional funds except for certain provisions which impose otherwise. In addition, it is still able to bring in those Muslims who have refused to participate in the conventional set-up. Looked in this way, it appears to have the potential to contribute to the "redistribution-with-growth" objective, much more than the similar conventional trust funds. Having more potential clients than the latter means more potential sources of funds (savings) get mobilized, more investments occurs as the result, and hence more growth. In the like argument, more potential clients get involved, means more people (especially Muslims) acquire the chance to better themselves, and hence better living standards. Private Islamic Financial Companies: 7he Case of Commerce Majestic Global Investments (CMGI) Sdn Bhd The full-functioning financial system will not be complete without the corresponding development in the private sector. The birth of the Islamic financial system in Malaysia, as we have seen, owes so much


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to the desire and the political will of the present government. Out of the governments efforts, we have witnessed the establishment of various institutions in support of further expansion of the system. However, such expansion will not be as far-reaching without the parallel growth in the private sector. Indeed, it is in this light, that we view the positive contributions of the private Islamic financial companies such as CMGI, to the rapid expansion of the Islamic financial system. The roles that the private institutions can play in the expansion of the system such as this, can be seen as follows. The governments role, if any, will only be as far as the laying of the foundations or frameworks and the setting of the rules of the games are concerned. Further growth of the system will be determined by the extent and level of participations by the relevant bodies or institutions, private as well as public, that make up the system itself. In this regard, the private institutions have the edge by virtue of the fact that, (1) as many of them can be formed, (2) they can easily deal with each other directly, and (3) it is much easier for them to forge direct links with similar groups existing elsewhere in other countries. CMGI, being the joint venture efforts between an international Islamic investment company (Majestic Global Investment or MGI) and local companies, has played a significant role as far as expanding the Islamic financial system is concerned, not just in the local sense but also in the international arena. Firstly, the local companies involved can gain access to the high professionalism of the management practices of a company which is of international standard and repute. Secondly, all parties involved can learn from each other as far as Islamic financial practices are concerned; the local companies involved can have access to the advice and Jatwa rulings of the renowned Islamic scholar, Dr. Yusof Abdullah Al-Qaradawi who chairs the Shariah board of MGI, while the other party (MGI) can learn from the Malaysian experience. As far as achieving the "redistribution-with-growth" objective is concerned, CMGI is seen to be more tilted towards supporting

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growth than redistribution. The joint venture with an international company such as MGI would have lifted the professionalism in the management practices and organization of the local companies involved, not to mention the opening of the international market that exists at their disposal. This directly affects growth. However, the consequences as far as redistribution is concerned, are more indirect. If the operation of the local parties before the joint venture, were already in line with the redistribution objectives, then the partnership would have enhanced the effort. Conclusion The conclusions of the paper can be summarized as follows. First, it has been argued here that the "redistribution-with-growth" objective has been part and parcel of the governments overall policies as expressed in various forms. In particular reference is the New Economic Policy {1970 -1990) which was specifically introduced to redress the economic imbalances between races especially between the Malays and Chinese. This policy, which called for the reduction of poverty irrespective of race and the restructuring of the society so as to remove the identification of races by their economic functions, together with other policies that followed, have clearly embodied the elements of growth and distribution simultaneously. These policies, were not only directed towards removing poverty such as the setting of the minimum target of 30 per cent equity ownership by the Bumiputeras, who are in general the poorer group, but also set strategies for growth, such as that of inviting foreign investments to participate in the countrys development. Indeed, the results were measurably successful as Malaysia managed to achieve on average more than 8 per cent growth per annum for many years, and the hard-core poverty has been reduced. Second, the government policies and hence their successful implementation were directly linked to the credible performances of the financial sector just as much as the roles played by other sectors. In other words, those successes would not have been made possible without the financial system playing their respective roles much in


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concert with the rest of the sectors in the economy. Thus, viewed in this way, the activities in the financial system, in sum, have contributed one way or the other to the achievement of the goal of "redistribution-with-growth" of the government. Third, with regard to the dual financial system in existence, the successful performances achieved so far can be attributed mainly to the roles played by the conventional system, and only to a much lesser extent, to its Islamic counterpart. This is so because the latter is still new and thus constitutes, at the moment, a much smaller fraction of the total system. This, however, in no way demeans the role of the Islamic financial system in contributing to the economic performances and fulfillment of socioeconomic objectives of the nation. Firstly, it plays a much vital role in filling in the void, which otherwise would not have been met by the conventional system. In this regard, we can cite as examples, had it not been for some Islamic institutions such as Islamic Bank Malaysia, Pilgrimage Management and Fund Board, Islamic insurance companies and others, idle savings of Muslims, either due to ignorance or out of deep devotion to religion, would not have been successfully mobilized. Secondly, the system has the potential to grow further, and its record so far in this regard has been phenomenal. This, among others, can be attributed mainly to the political will of the present government who desire to see the system grow to finally be at par with the conventional system. And by the look of it, this is not a wishful thinking. Last, but not least, the two systems, the conventional and its Islamic counterpart, should not be viewed as "rivals" with each other. In many areas, their roles are complementary, in the sense that the two systems can work together for the mutual benefits of the nation. For instance, in the event that big financing is required to accomplish a mega project which does not contradict Islamic principles such as constructing an oil-refinery, sources from one system alone may not be sufficient, not to mention the lack of interest in the project which might prevail. In this particular case, the relevant parties from the two systems may join hands to see it through. However, more importantly, the role of the Islamic financial system is to help fill the

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present void. The conventional system deals in riba, and yet Islam forbids any transaction based on riba. Thus, the majority of Muslims (and they form the majority of the population) especially the devout ones cannot participate in the economic development of the nation. It is in this respect that the Islamic system plays its most important role. All said, what sort of future awaits the Islamic financial system?. In one aspect, one can say with almost certainty, that it is here to stay. Given the conducive environment it is in at the present time such as, (1) the political will of the government, (2) the receptiveness of the non-Muslims, and (3) present level of Islamic resurgence pervading the Muslim world, it has all the potential to grow further.lt is possible that it will one day reach the level of the conventional system. Will it ever merge or even replace the conventional system? This is rather hard to see happening given the scenario that the Malaysian partners the world over are still practising and dealing in the conventional system. In all likelihood, the Islamic system will be brought from the periphery to the mainstream of the countrys financial system, thus creating a dual system in which the Islamic system and the conventional system are both equally sophisticated and strong.


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Notes 1. Since the rich tend to save more out of their incomes and the poor spend more on consumption, it is argued that the more unequal the income distribution, the more saving the nation will have, and hence bigger growth. 2. Michael P. Todaro (1982) for instance, had observed that despite such rapid growth, a greater majority of the population of these countries in Africa, Asia and Latin America had remained backward, with the income-distribution gap becoming wider and urban and rural unemployment rates increasing. 3. The argument is premised on the fact that: (a) The propensities to save and invest among the rich in the developing countries may not be that high, thus having unequal distribution may not necessarily result in high growth. (b) More equal distribution means the poor can have better health care, nutrition and education. This will increase productivity which will promote growth. (c) Similarly, increase in income among the poor will spur demand for locally produced goods, and hence encourages the growth of the local production , employment and investment. 4. A former adviser to the Central Bank of Malaysia who involved directly in the formation and was regarded as one of the founders of Islamic financial system in Malaysia attributed such encouraging support to the political will of the Prime Minister Mahathir Mohamed, the Deputy Prime Minister Anwarlbrahim and the vision of the then Governor of the Malaysian Central Bank Jaffar Hussein (Nor Mohamed Yakcop, 1996: viii) 5. Today there is an Islamic Bank and a total of almost 50 conventional financial institutions adopting Interest Free Banking Unit (IBU) system through their more than 1,400 branches throughout the country with total deposit exceeding RMS billion (Nor Mohamed Yakcop, 1996: vi and WanMohamad Hasni Wan Sulaiman, 1996:3)

6. For further details on the Islamic capital market in general and the Islamic financial products introduced by Abrar Group International


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References Abdul Halim Ismail, Dato Dr., 1996. "The Role of Islamic Instruments in Deepening Equity Markets", a paper presented at the International Islamic Capital Market Conference, organized by Securities Commission, Kuala Lumpur, 21-22 March 1996. Anwar Ibrahim, Y AB Dato Seri, 1996. "Special Address and Official Opening", a speech at the opening of the International Islamic Capital Market Conference, organized by Securities Commission, Kuala Lumpur, 21-22 March 1996. ASDI, 1994 (31 October). Prospektus ASDI- Amanah Saham Darul !man, Kuala Terengganu. Bank Islam Malaysia, 1993. Annual Report, Kuala Lumpur. Bank Islam Malaysia, 1994. Annual Report, Kuala Lumpur. Bank Islam Malaysia, 1995. Annual Report, Kuala Lumpur. Bank Negara Malaysia, 1991. Annual Report, Kuala Lumpur. Bank Negara Malaysia, 1992. Annual Report, Kuala Lumpur. Bank Negara Malaysia, 1994. Annual Report, Kuala Lumpur. Bank Negara Malaysia, 1989. Wang dan Urusan Bank di Malaysia, Kuala Lumpur. Commerce MGI Sdn Bhd, n.d., pamphlet. Hasnita Dato Hashim, Dr., 1996. "Evolution of the Stock Market Microstructure", a paper presented at the International Islamic Capital Market Conference, organized by Securities Commission, Kuala Lumpur, 21-22 March 1996. Ismail Zakaria, Datuk, 1996. "Islamic Debt Securities and the Financing of Development", a paper presented at the International Islamic Capital Market Conference, organized by Securities Commission, Kuala Lumpur, 21-22 March 1996.

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Jaffar bin Hussein, Tan Sri, 1990. "Sistem Kewangan Islam Dalam Dekad 1990-han", an open lecture at Universiti Sains Malaysia, Pulau Pinang, 9 March. Majestic Global Investments Ltd, n.d., Islamic Principles as a Foundation for Financial Innovation. Majid Bader A.H. Al-Refai, 1996. "Structuring Islamic Asset-Backed Securities", a paper presented at the International Islamic Capital Market Conference, organized by Securities Commission, Kuala Lumpur, 21-22 March 1996. Nor Mohamed Yakcop, 1996. Teori, Amalan dan Prospek Sistem Kewangan Islam diMalaysia, Kuala Lumpur: Utusan Publications and Distributors. Syarikat Takaful Malaysia. Profile. Todaro, Michael P ., 1982. Economic Development in the Third World, New York: Longman. Wan Mohamad Hasni Wan Sulaiman, 1996. "Tawards Developing An Islamic Financial Supermarket - The Malaysian Experience", a paper presented at the International Islamic Capital Market Conference, organized by Securities Commission, Kuala Lumpur, 21-22 March 1996.