Proceedings of the 2nd Applied International ...

Proceedings of the 2nd Applied International Business Conference (AIBC2013) 7 – 8 December 2013

0


All rights reserved. No part of this publication may be reproduced, distributed, stored in a database or retrieval system, or transmitted, in any form or by any means, electronics, mechanical, graphic, recording or otherwise, without the prior written permission of Universiti Malaysia Sabah, except as permitted by Act 332, Malaysian Copyright Act of 1987. Permission of rights is subjected to royalty or honorarium payment. Universiti Malaysia Sabah makes no representation, express or implied, with regard to the accuracy of information contained in the proceedings. Users of the information in the proceedings need to verify it on their own before utilizing such information. Views expressed in this publication are those of the author(s) and do not necessarily reflect the opinion or policy of Universiti Malaysia Sabah. Universiti Malaysia Sabah shall not be responsible or liable for any special, consequential, or exemplary problems or damages resulting in whole or part, from the reader’s use of, or reliance upon, the contents of this book.

© Universiti Malaysia Sabah, 2013 ISBN: 978-967-0521-26-8

1


TABLE OF CONTENTS Drivers for Green Practices among Manufacturers in Malaysia: Analysis between SMEs and LEs Azmawani Abd Rahman, Khairul Anuar Rusli & Jo Ann Ho…………………………………………………....11 Structural Relationships of Perceived Users Trust and Perceived Flow on Mobile Social Networking Service (SNS) Users’ Loyalty Norazah Mohd Suki & Norbayah Mohd Suki…………………………………………………............................17 Alternative Model for Micro Enterprises’ Human Capital Development in Malaysia Mohamad Asmy Bin Mohd Thas Thaker, Mustafa Omar Mohammed, Jarita Duasa & Mohd Asri Abdullah……………………………………………………………………………………………...28 Risk Decomposition: Systematic and Total Risks Variations Meng Horng, Lee & Meng Horng, Lee………………………………………………………….……………….36 The Independent Directors of Malaysian Listed Firms and Their Busyness Shamsul Nahar Abdullah………………………………………………….……………………………………..55 Determinants Affecting Outward Foreign Direct Investment (OFDI) By Selected Malaysian MNCs Nurul Azrin Ariffin…………………………………………………………………………………………….…67 A Brief Review on the Social and Economic Contribution: Evidence from International Financial Centre Rosita Chong, Ho Chong Mun & Ricky Chia Chee Jiun………………………………………………………...80 Vertical Intra-Industry Trade between ASEAN-5 and China in SITC 8 Mui-Yin Chin, Chen-Chen Yong & Siew-Yong Yew……………………………………………………………..84 Financial Assessment of Government Incentives on Broiler Production in Penisular Malaysia Mohd Mansor Ismail, Amin Mahir Abdullah & Tapsir Serin…………………………………………………....94 The Moderating Role of Informational Social Influence towards Online Group Buying Behaviour Tracie Chin Sook Harn, Geoffrey Harvey Tanakinjal, Stephen Liason Sondoh Jr & Hamid Rizal…………………………………………………………………………………………………….101 Do Malaysian CEOs Take More Debts Than Equities? Qian Long Kweh, Wei Kiong Irene Ting & Noor Azlinna Binti Azizan……………………………………..…116 Determinants of Repayment Performance in Microfinance Programs in Malaysia Norhaziah Binti Nawai & Mohd Noor Bin Mohd Shariff………………………………………………………127 Persepsi Pelajar IPTA di Terengganu Mengenai Gejala Sosial Siti Sa’adiah Binti Shafik, Mohd. Safri Bin Ali, Azyyati Binti Mohd Nazim & Basri Bin Ibrahim…………….137 Regulatory and Prudential Supervision Framework of Islamic Banking System in Nigeria: Lessons from Malaysia Experience Muhibat Ayoni. Oladimeji, Muhammad Ridhwan Ab. Aziz & Khairil Faizal Khairi…………………………..147 The Impact of Islamic Dressing Styles On Sexual Harassment Prevention of Tertiary Institution Students in Nigeria Muhibat Ayoni Oladimeji……………………………………………………………………………………….157 A comparative analysis of segment reporting in Hong Kong listed companies for pre- and post- IFRS No.8 periods Yuanyuan Li , Jamal Roudaki & Christopher Gan……………………………………………………………..168

2


The Determinants of Overeducation and Overskilling among Workers in the Manufacturing Sector in Malaysia Zainizam Zakariya……………………………………………………………………………………………...181 Financial Fragility of Malaysians in Urban Households Selamah Abdullah Yusof, Wan Jamaliah Wan Jusoh & Rohaiza Abd Rokis…………………………………..193 Reexamining Organizational Life Cycles Criteria: An Analysis of Service Sector in Growth and Maturity Stages Amizawati Mohd Amir & Sofiah Md. Auzair…………………………………………………………………...205 Investors’ Fortune and the Role of Lipper in Determining Unit Trusts Performance Differential Ahmad Ridhuwan Abdullah, Mohd Zulkifli Muhammad, Zakiah Hassan, Siti Salwani Abdullah & Razman Hafifi Redzuan………………………………………………………………217 Issues and Challenges in Medical Tourism: An Interdisciplinary Perspective Noor Hazilah Abd Manaf, Husnayati Hussin, Puteri Nemie Jahn Kassim, Rokiah Alavi & Zainurin Dahari………………………………………………………………………………………………...230 Maqasid, Social Responsibility and Islamic Investment Mohd Nizam Barom…………………………………………………………………………………………….243 Relationship between Facebook Functionality and Work Engagement: A Conceptual Framework Latifah Abd Latib & Jusang Bolong……………………………………………………………………………258 Potential Factors Influence E-Commerce Adoption among Small Medium Enterprises in Peninsular Malaysia: A Proposal Seng Chee Lim, Ahmad Suhaimi Baharudin & Numtip Trakulmaykee………………………………………...268 Examining the Critical Success Factors of Total Quality Management Implementation in Malaysian Higher Education Institution Norhayati Zakuan, Shalini Muniandy, Muhamad Zameri Mat Saman, Norzaidahwati Zaidin, Mohd Shoki Md Ariff & Zuraidah Sulaiman……………………………………………………………………280 The Sources of Country and Industry Variations in ASEAN Stock Returns Meng Horng, Lee, Chee Wooi, Hooy & Terrence Chong Tai Leung…………………………………………..286 Students Learning Experienced: The Teaching Philosophy Perspective in Relationship To Learning Effectiveness Among Generation-Y As Future Workforce Sabarudin Zakaria, Wan Fadzilah Wan Yusoff & Arnifah Asnawi…………………………………………….304 Investigating Determinants of International Tourists’ Intention to Use Mobile Tourism Guide in the Context of Thai National Parks Numtip Trakulmaykee, Seng Chee Lim & Chutima Wangbenmad……………………………………………..312 An Exploratory Study of Service Quality Effectiveness on Intention to Complain Among Mobile Phone Users in Kuching, Malaysia Zorah Abu Kassim & Tan Mei Fong…………………………………………………………………………...322 The Occurrences of Industrial Accident: An Insight from Malaysia Mohd Nasir Selamat & Lilis Surienty…………………………………………………………………………..334 Resolving Consumer Trade Disputes through Online Dispute Resolution: Issues to be Considered Sakina Shaik Ahmad Yusoff, Fahimeh Abedi, Rahmah Ismail, Azimon Abdul Aziz, Suzanna Mohamed Isa & Kartini Aboo Talib@Khalid ………………………………………………………..349 The Performance and Risk of Socially Responsible Investment Indexes: Dow Jones Sustainability Indices Wei Rong Ang & Hooi Hooi Lean……………………………………………………………………………...357

3


Branding Through Eco-Friendly Package Design Muhammad Sabbir Rahman, Rubiayah Bt Ab Rahman, Nazrul Islam & Abdul Highe Khan………………….373 Malaysian SMEs Performance and the Government Business Support Service Mohammad Basir Saud, Jauriyah Binti Shamsudin, Mohd Noor Mohd sheriff & Azwardi Md Isa…………...390 Examining the Dimensions of Workgroup Norms Construct: A Validation Study in the Nigerian Education Context Kabiru Maitama Kura, Faridahwati Mohd. Shamsudin & Ajay Chauhan…………………………………….398 Low Interest Rate Regime and the Transmission of Monetary Policy though the Lending Cannel in Malaysia: Evidence from Bank-Level Data Hussam I. Asbeig & Salina Hj. Kassim………………………………………………………………………...403 Does monetary policy work effectively in 10 European countries? New evidence from Fisher effect Tai-Hu Ling & Venus Khim-Sen Liew………………………………………………………………………….412 Environmental Management Accounting (Ema) and Performance of Construction Companies In Malaysia: A Research Framework Haslina Hassan, Ruhanita Maelah & Amizawati Mohd Amir………………………………………………….422 Harnessing the Online Platform for Accountability Reporting: Preliminary Evidence from Top 100 Malaysian Co-operative Movements Maslinawati Mohamad, Intan Waheedah Othman & Hairul Suhaimi Nahar………………………………….430 Simply Showing Off? The Impact of Materialism Value on Conspicuous Consumption Wan Nurisma Ayu Wan Ismail, Norhayati Zakaria & Asmat-Nizam Abdul-Talib……………………………..440 Exploring The Relationship between Firm’s Level Cultural Intelligence and Supply Chain Issues Nik Ab Halim Nik Abdullah, Sabariah Yaakub & Mohd. Sobri Don…………………………………………...449 Corporate Brand and Consumer Trust: Context Dependent Azwardi Md Isa, Mohammad Basir Saud & Md Daud Ismail………………………………………………….457 Intention to Use High Speed Broadband (HSBB): A Unified Theory of Acceptance and Use of Technology (UTAUT) Choon Yih Goh, Guan Gan Goh, Jee Wei Ong & Hasmida Binti Jamaluddin………………………………...465 Corporate Acquisitions of Malaysian Family-Controlled Firms: Is an Act of Minority Shareholders Expropriation? Lynn, Ling Yew Hua Ling, Junaid Shaikh & John Evans………………………………………………………474 Impress through Portraiture Photographs: The Case of Malaysian Award Winning Annual Reports over Time Mohammad Azhar Ibrahim, Mohd Hadzrami Harun Rasit & Michael John Jones……………………………490 Dive with the Sharks: Immersed in Medical Tourism Supply Chain Lee Hwee Khei & Yudi Fernando………………………………………………………………………………499 Ownership as the Moderating In the Relationship between Business Performance and Corporate Social Responsibility Yuvaraj Ganesan, Hasnah Haron, Azlan Amran, Nava Subramaniam & Arifur Rahman Khan………………510 Bai as-Salam and E-Commerce: A Comparative Analysis from Shariah Perspectives Ainnur Hafizah Anuar Mokhtar, Tamrin Amboala, Mohd Zulkifli Muhammad & Mohd Sarwar E-Alam…………………………………………………………………………………………..522

4


The-turn-of-month and Day of The Week Effects in Vietnamese Stock Market Between 2004 and 2012 Xuan Minh Pham……………………………………………………………………………………………….530 The Role of Ownership Concentration on the Value of International and Industrial Diversification: Insight from Indonesia Rayenda Brahmana, Doddy Setiawan & Chee-Wooi Hooy…………………………………………………….539 The Awareness to Increase Household Income through Entrepreneurial Capability: A case of the Indigeneous People in Sungai Pelek, Selangor Mohd Misuari Bin Abdullah & Marlin Marissa Malek Binti Abdul Malek…………………………………….566 What Resource-Based View Has Told Us? A Literature Review Ong Jeen Wei, Hishamuddin Bin Ismail & Yeap Peik Foong………………………………………………….576 The Acceptance of Mobile Filing (m-Filing) in Malaysia Aaron Pook Sow Yee, Ong Jeen Wei, Goh Choon Yih & Yuen Yee Yen………………………………………..585 Effect of Cultural Intelligence, Emotional Intelligence, Social Intelligence and Islamic Work Ethics on Individual Work Performance Hartini Husin, Sabariah Yaakub & Marlin Marissa Malek Abdul Malek……………………………………..593 Regulatory Incentives as a Moderator of Determinants for the Adoption of Malaysian Food Safety System Ng Hooi Huang & Yudi Fernando……………………………………………………………………………...605 Transformational Leadership Style and Knowledge Management among University Administrators in Malaysia: Examining the Moderating Effect of Organizational Structure Subramaniam Sri Ramalu & Amer Bin Hj. Darus……………………………………………………………...617 Monetary Policy in Islamic Framework for Malaysia Norhanim Mat Sari, Abbas Mirakhor & Syed Othman Alhabshi………………………………………………634 Measuring Business Cycle Fluctuations: An Alternative Precursor to Economic Crises Shirly Siew-Ling Wong, Chin-Hong Puah, Shazali Abu Mansor & Venus Khim-Sen Liew……………………645 The Relationship between Safety Climate and Safety Outcome in a Malaysian-Based Manufacturing Plant Siti Fatimah Bahari……………………………………………………………………………………………..655 Pursuing Undergraduates’ Interest on Academic Career Choice Jakaria Dasan…………………………………………………………………………………………………..665 Impact of Crude Oil Prices on the Malaysian Palm Oil Market Shri Dewi Applanaidu & Amna Awad Abdel Hameed………………………………………………………….680 Sustaining Port Competitive Advantage: An Application of Resource-Based View Approach Salwani Arbak & Nik Ab. Halim Nik Abdullah…………………………………………………………………690 Modeling the Discount Pricing Strategies of New Smart phones within Product Life Cycles Using System Dynamics Approach Nurul Afiqah Mat Zaib & Nor Erne Nazira Bazin……………………………………………………………...699 Investment in Malaysia: Agency Problem or Managerial Discretion? Ei Yet, Chu & Saw Imm, Song………………………………………………………………………………….709 Trading Volume and Price Effects of Going Private Announcements Pei-Ling Lee, Roy Wye Leong Khong, Suganthi Ramasamy & Chong Shu Wen………………………………719

5


Financial Crisis, Islamic Bank Efficiency and Risk: A Theoretical Framework Norfaizah binti Othman, Mariani binti Abdul Majid, Aisyah binti Abdul Rahman & Mansor bin Jusoh……………………………………………………………………………………………….727 The Role of Globalization in the Economic Process of Nigeria Abdussalam, Onagun Isiaka, Fuadah Johari & Muhammad Hj Alias…………………………………………748 Food Insecurity in Developing Countries Nur Marina Abdul Manap & Normaz Wana Ismail……………………………………………………………759 Proposed Efficiency Framework for Microfinance Institutions in ASEAN Izah Mohd Tahir & Siti Nurzahira Che Tahrim………………………………………………………………….770 The Effects of Customer-Brand Relationship Investments on Customer Engagement: Insights for Companies Competitiveness and Survival Zuraidah Zainol………………………………………………………………………………………………...781 Rationality of Business Operational Forecasts: Evidence from Malaysian Distributive Trade Sector Chin-Hong Puah, Shirly Siew-Ling Wong & Muzafar Shah Habibullah ……………………………………...791 Exploring New Opportunity and Mechanism for Islamic Waqf Bank Model Mohd Asyraf Yusof, Muhammad Ridhwan Ab Aziz & Yusof Ramli…………………………………………….805 Liability of Healthcare Providers towards Independent Contractors: Profiteering Vis A Vis Patients’ Rights Puteri Nemie Jahn Kassim……………………………………………………………………………………...817 The Market Response to the Public Reprimand on the Shanghai Stock Exchange Tan Han Wee & Pei-Ling Lee…………………………………………………………………………………..822 Indirect Financial Distress Costs: Evidence from Trading and Services Sector Norhisam Bulot, Norhana Salamudin, Norzaidi Mohd Daud & Hasyiella Abd Mutallib……………………...829 Open Source: The Readiness of Malaysian Industry? What’s New & What’s the Bottleneck? Syaiful-Rizal Hamid, Boon-Cheong Chew, Puvanasvaran Perumal & Sarah Halim………………………….839 The Impact of Democracy on Migration O. C. S. Wilson, Ambikai S. Thuraisingam, A. H. Baharom & Muzafar Shah Habibullah…………………….848 Shari’ah audit in Takaful undertakings: A case study of UAE Noor Takaful operation Abdussalam Ismail Onagun & Suliman Naeem Al Raei………………………………………………………..857 Balanced Scorecard as a Performance Management System Noor Raudhiah Abu Bakar, Nor Aziah Abu Kasim, Mazlina Mustapha & Rozita Amiruddin…………………864 The Effect of Monetary Policy on the Economy Sima Siami Namini……………………………………………………………………………………………...876 Social Entrepreneurship in the Philippines: The Students in Free Enterprise Case Carmelo John E. Vidal, Azucena F. Elegado, Esther B. Vedana & Dolores B. Bustillo……………………..…885 The Impact of Market Condition on Malaysian IPOs Initial Performance: Shariah Compliant versus Non-Shariah IPOs Nor Azizan Che Embi, Ruzita Abdul Rahim & Izani Ibrahim…………………………………………………..894 Oil Price Shock, Inflation and Economic Activities Nexus – The Case of Malaysia Siti Mariam Ali, Nor Halawah Ahmad & Ros Anita Yahya…………………………………………………….900

6


Understanding the Self-initiated Expatriate Academics in Institutions of Higher Education in Malaysia: An Exploratory Study Chye Kok Ho & Patricia Yin Yin Lau…………………………………………………………………………..912 Marketing Orientation in Relation to Entrepreneurial Orientation: A Case Study on Determinant Factor of Perceived Business Success among Small Accomodation in Pangkor Island Malaysia Rosmanizah bt Derahman………………………………………………………………………………………923 Establishing Human Well-being Framework based on Maqasid al-Shariah Principles Arifin Bin Md Salleh, Abd Halim Bin Mohd Noor, Hasan Bin Bahrom, Abd Rahim Ridzuan & Nur Fariza Binti Zainol………………………………………………………………………………………...938 Profiling Accounting Irregularities: Malaysian Cases Hafiza Aishah Hashim & Akmalia Mohamad Ariff…………………………………………………………….945 An Empirical Analysis of Benchmarking For Zakat Institutions R. Md. Yusof , A.H. Mohd Noor, S. M. Ali & M.S. Abdul Rasool……………………………………………...954 Factors that Influence the Acceptance of Airlines E-Ticketing Services among University Students in Selangor Darul Ehsan Azees Muthiu Abiodun & Mokthar Hj. Ismail………………………………………………………………….963 A Conceptual Analysis on Relationship Marketing: Malaysia as an Example Iftekhar Amin Chowdhury………………………………………………………………………………………973 How Satisfied are Users With Financial Information Websites? Azleen Ilias, Mohd Zulkeflee Abd Razak & Rahida Abdul Rahman……………………………………..……..999 Complex Systems in Financial Economics: A Historical Guide for the Uninitiated Yew Joe Ho, Mohd Rushdan Yasoa & Ai Yee Ooi…………………………………………………………….1013 Incorporating Kansei into Sonification Design as Intentional Sound of Products: A Review Paper Ag Asri Ag Ibrahim, Ryan MacDonell Andrias & Geoffrey Harvey Tanakinjal…………………………..…….1020 Factors Influencing Withdrawal Behavior of Malaysian Islamic Bank Customers: Empirical Evidence from Three Major Issues Muhamad Abduh……………………………………………………………………….…………………………..…….1026 An Analysis of the Commercial Aspects of Takaful Operation in Malaysia Kamaruzaman Noordin………….…………………………………………………….…………………………..…….1037 Factors Influeing the Performance of International Joint Venture (IJVs): Evidence From Malaysia Mohd Sobri Don, Mohd Najib Mansor & Osman Ahmad…………………………………………………........….1045 The Contract of Mudharabah and Musyarakah in Islamic Commercial Law: A Comparative Analysis Ahmad Aizuddin Hamzah, Farah Shazwani Ruzaiman & Iftekhar Amin Chowdhury…………………........….1054 The Implementation of Trade Related Environmental Measures: A Case of Malaysia Yanti Ahmad Shafie…………………………………………..………………………………………………….............1059 Household Characteristics On Life Insurance Acquisition: Preliminary Evidence in Sabah Zatul Karamah Ahmad Baharul Ulum, Lim Thien Sang, Zaiton Osman, Amer Azlan Abd Jamal, Rosle Mohidin……………………………….…………………….………………………………………….............….1066 Asia Pacifc Business Cycle: Ties with Islamic Stock Indices Shaista Arshad, Jaritabt. Duasa & Syed Aun Raza Rizvi………………………………………….………........….1072

7


PREFACE

T

he Applied International Business Conference 2013 (AIBC 2013) is initiated with the aim of bringing together scholars and practitioners to discuss contemporary issues in all areas of international business. This conference came to existence under the noble effort of the Labuan School of International Business and Finance, Universiti Malaysia Sabah, Labuan International Campus. The theme “Emerging Mega-trends in Asian Market” reflects relevant issues in today’s global economy especially in Asian Market. AIBC 2013 intends to provide a platform for various groups comprising of academics, researchers, practitioners, and policy makers to establish network and exchange viewpoints and research findings on present-day business and market issues related to the local region and the global world. The editors would like to express their thanks to all the paper presenters from all over the world for their contribution. Our heartfelt gratitude goes to all individuals and institutions who have contributed in one way or another to the success of this conference. Last but not least, thank you and congratulations to the organising committee for their tireless efforts to make this conference a reality.

Editors Rizal Hamid Geoffrey H. Tanakinjal Lee Hock Ann Lindsy Lorraine Majawat Labuan School of International Business and Finance Universiti Malaysia Sabah Labuan International Campus 2013

8


AIBC 2013 ORGANISING COMMITTEE Patron Professor Datuk Dr Harun Bin Abdullah Vice Chancellor Universiti Malaysia Sabah Advisers Associate Professor Dr Ismail Ali Director Universiti Malaysia Sabah, Labuan International Campus Associate Professor Dr Syed Nasirin Syed Zainol Abidin Dean Labuan School of International Business and Finance Conference Chairman Dr Geoffrey Harvey Tanakinjal Deputy Director Universiti Malaysia Sabah, Labuan International Campus Deputy Chairman Dr Lee Hock Ann Deputy Dean (Research and Innovation) Labuan School of International Business and Finance Secretary I Norhanizah Bte Adnan Secretary II Juliana Affendy Treasurers Rostinah Supinah Rushdan Yasoa Saini Mohilap

9


Secretariat Norasekin Angli Nancy Ignatius Sharinah Puasa Proceedings Rizal Hamid Geoffrey H. Tanakinjal Ahmad Farah Husna Lindsy Lorraine Majawat Azlan Yakob Nataniel Ebin Website, Promotion and Publicity Ryan Mcdonell Andrias Geoffrey H. Tanakinjal Hatta Yunus Zafarizal Sponsorship Raymond Liew Anak Lubang

Protocol Shamsulbahri M Nasir UMSKAL Protocol Team Special Issues in Labuan Bulletin of International Business and Finance Lee Hock Ann Rizal Hamid Geoffrey H. Tanakinjal Logistic and Technical Abdul Kamal Char Keynote Speaker and Invitation Mary Monica Norhaniza Adnan Juliana Affendy Programme Book and Abstract Book Emily Yapp Hon Tshin Ryan Mcdonald Andrias Sharinah Puasa Siti Nur Aqilla

Supporting Committee Ricky Chia Chee Jiun Asmadi Abas Conference Goodies Suddin Lada Daria Gom

10


DRIVERS FOR GREEN PRACTICES AMONG MANUFACTURERS IN MALAYSIA: ANALYSIS BETWEEN SMES AND LES

Azmawani Abd Rahman Faculty of Economics and Management Universiti Putra Malaysia [email protected]

Khairul Anuar Rusli National Centre of Excellent for Sensor Technology (NEST) Universiti Putra Malaysia [email protected]

Jo Ann Ho Faculty of Economics and Management Universiti Putra Malaysia [email protected]

ABSTRACT Many previous researches reported that environmental management is commonly adopted by large and established corporation whom takes green approach as preference, rather than compliance. This paper focuses on the influence of firm’s size (between SMEs and LEs) on drivers for green practices amongst SME. Case studies analyses were conducted on two SMEs and two LEs. Results indicate drivers for green initiative for SMEs are not different from LEs. The demand to adopt green initiative may due to the nature of industry and the product produce which relates to the requirement by their consumers and the law enforcement by the government. Firms including the SMEs can go beyond complying as they see benefits in terms of economic returns due to possible reduction in operational cost and improvement in competitiveness. The finding from this study is hopefully able to provide insight for the policy makers in policy setting towards encouraging more firms to adopt Green practices. Keywords: green operations, drivers, environment, SMEs, Malaysia

INTRODUCTION Environmental issues get the global attention due to increasing environmental damages like global warming, environmental degradation and ozone depletion. Globally, various efforts have been done between countries through various cooperation and agreements to address these issues. Signatories or parties that joined and ratified the international agreement towards environmental responsibility will generally adopt them as local laws, regulations and directives. This has indirectly affect business operations in terms of complying with the green requirement. Therefore, sooner or later, firms that have adopted the green supply chain into their business operations will have an added advantage in comparison to the firms that are not. Apart from becoming the political agenda, environmental concern has become a socio-demographic factor that affect consumer spending pattern, as they are increasingly aware of the environmental issues. According to Wisner et al. (2005), customers are increasingly demanding to know where the products come from, how they are made and distributed, and what impacts future legislation will have on the products they buy. Therefore many big corporations nowadays, especially in western world,

11


have taken initiative to involve in the social and environmental responsibility along the supply chain of their business. Apart from complying with the local regulation, it is done voluntarily as an effort to portray good corporate images, which indirectly enables firms to gain wider market share. In order to remain competitive and sustainable in the dynamic business world today, firms must be aware and responsive to the environmental issues. Greening the operations have been seen as means to response to the environmental awareness issues from the perspective of the practitioner. Green operations along the supply chain management are a method to design and/or redesign the supply chain which incorporates recycling and re manufacturing into the production process. This involves the minimization of a firms total environment impact from the start to the finish of a supply chain, and also from the beginning to the end of the product lifecycle (Beamon, 1999). Therefore, a lot of multinational companies have been making tremendous advances in the environmentally friendly manufacturing. As such, this issue is seen to continue to be an important research agenda amongst the practitioners and researchers.

GOING GREEN IN MALAYSIA Green policies and guidelines have been adopted by governments of developed countries to enhance the realization of sustainable production and consumption within their own society and at the global level. Majority of firms in these developed countries have also taken the same approach at the institutional level thus making green supply chain a concrete reality with significant impact on trade. Despite the importance of these issues, most of the studies have been conducted in Western countries, but less is understood under Malaysian scenario. Understanding green supply chain within the context of manufacturers in Malaysia is very important as the underlying values of Malaysian culture need to be considered when adopting western strategies or any management principles (Zabid, 2004). Values of certain countries play a significant role in determining and practicing the workforce culture and influencing the managerial practices (Abdullah, 1992), such as in green supply chain practices. Developing country like Malaysia faced great challenges in ensuring a balance between development and environmental sustainability. For many organizations in this region it is a way to demonstrate their sincere commitment to sustainability (Bacallan, 2000). Malaysia is one of the most industrially developed countries in the region. Many Malaysian firms however have yet to grasp the full impact of the environmental emphasis in the export market. The process can only be done when firms really understand the main principles, and the compliance of the green initiatives that happen in the current market. Without this understanding, the preference for environmentally-sound goods and services may be perceived more as a barrier for them to compete with firms from other countries.

Pressures and Drivers of Greener operations amongst SMEs in Malaysia Small and Medium enterprises (SMEs) are considered the lifeblood of modern economies. The role of SMEs in supporting the activities of larger companies in countries like Korea, Japan and Taiwan has successfully propelled these countries into industrialization. This has made Malaysia realize that, especially after the economic slowdown during the mid-1980, there is a need to promote the growth of these industries (Yusuff et al., 2005). SMEs were the most affected during the economic downturn, as most of them had no capacity and capability to deal with a crisis of that magnitude. In addition, the lack of proper research conducted on these companies makes it difficult for government to understand the difficulties they face (The-Star, March 27, 2009). The Malaysian government, through Small and Medium (SME) Corporation has provided various incentives to help SMEs prosper in business. From the grants to assist business start-ups, grants for product and process improvement, to the funding related to environmental impact such as Green Technology Fund. While policies have contributed to the expansion of SMEs, they still have to face a number of difficulties in their development. For example, their small size may constraint them form

12


achieving economies of scale and adoption of organizational functions like training, market intelligence, logistic and technology. Competition that relates more to innovation and upgrades than price require improvements to products, processes, technologies, and production, exert great pressure on SMEs as they usually lack the resources to meet these needs effectively. As such, with the increasing concerns about environmental issues and sustainability for industries, whether SMEs can survive and prosper under such pressure remains an interesting topic to explore theoretically and practically. As such, this paper will discuss the current pressures and drivers of GSCM among SMEs manufacturers in Malaysia. The literature suggests that different types of drivers have different relative level of importance for the firms to practise the GSCM (Rao, 2002). Drivers for SMEs may be different from LEs due to the differences in finances, infrastructure, human resources, and market. Through the identification of the related driver for SMEs, it is hope that understanding beyond these issues can be achieved. Research of drivers, pressures, and antecedents for adoption and improvement in environmental performance arises from a number of stakeholders. There are some explanations why firms were interested to be involved in GSCM activities. Different firms may have unique reasons to engage in GSCM practices. Teruyoshi, Utsumi and Matsui (2006) classified that into three major reasons. The first reason was compliance as many manufacturers only want to do business with those who met the environmental regulations. Second, to comply with the needs of the market and customers that prefers eco-products. The third reason was to improve competitiveness so that firms can have a good position in the market (An et al., 2006). But the motivations that are summarized were arguable and not conclusive. It is believed that motivations for firms to engage in GSCM can also come from another stakeholder’s perspective. The next section discussed the results from the case analysis from two SMEs and two LEs that are certified with the ISO14001.

Case Analysis Firm A manufactures high quality print inks including varnishes, solvent ink and water-based ink for the printing and packaging industry using modern machinery and state-of-the-art equipment. The firm is committed to fostering long-lasting customer relations by giving their best in sales support and quality assurance in all of their products. Firm A offers a wide product range to serve the printing and publishing industry. They also have a wide marketing and sales network covering Peninsular Malaysia and they focus on research and development of new ink formulations to meet customer’s needs, maintain competitive pricing for high quality products, provide a quick response to customer enquiries and have fully equipped laboratory facilities at their factory. Firm A adopted green practices to meet worldwide customers’ needs and demands since customers nowadays tend, and prefer, to do business with a company that has ISO 14001 certification or any other environmental standard that verifies them as an eco-friendly company. Firm A acknowledge that green practices, can be another value added for the company to survive in the challenging market today. Almost 30 competitors that offered the same product range as Firm A, but only 6 of them have the ISO 14001 certification, thus it makes a difference between them in the eye of customers’ perceptions. Furthermore, when the Department of Environment (DOE) checked Firm’s A premises, they would not have any problem since they have to comply with all the specifications needed by the authority body. Top management of Firm A also gave full support and commitment in emphasizing the importance of green practice implementation in Firm A. Thus, the green process becomes easier especially in budget allocation annually. Firm B manufactures high quality solder products. It also provides total soldering solutions to electronics and electrical and automotive manufacturing companies. The main factor for Firm B to get involved in green initiatives was their customer requirements. In business dealings with their customers, they have to comply with all the specifications and requirements needed by their customers such as the composition of certain substances in the products. This initiative was believed not only to maintain the current customers but also to attract more potential customers to do business

13


with them. In addition, to export and initiate business in other regions, especially in western and developed countries, Firm B has to meet the regulations in respect of environmental matters. Indeed, some of their customers set ISO 14001 certification as the basic requirement before they proceed with any business proposal. Within the company, Firm B focuses more on in practising pollution prevention activities. As such, they maximize the usage of materials in the production process in order to minimize waste within the process. For example, Firm B re-used plastic containers rather than throw them away directly. In addition, Firm B recycles their excess solder and tries to reuse it as raw materials. Green purchasing and eco design has become one of the main activities in Firm B. They were amongst the pioneers in the solder industry to develop lead free solders for the conservation of the environment. The usage of hazardous materials is also reduced from time to time depending on customer requirements. The green practices helped Firm B to reduce the consumption of hazardous materials directly and lead to a reduction of environmental degradation indirectly. Firm C produces various capacitors for electronics, electrical apparatus and power utilities. Their main customers are mostly Japan-based; companies such as TDK, Hitachi, Sony and Toshiba. Firm B participated in green practices because they perceived it as one of the marketing strategies for the company. Previously, Firm C focused more on the domestic and Japanese market, but nowadays they have shifted their focus to European countries as their main target market. For the European market, every company needs to comply with Restriction of Hazardous Substances direction (RoHS) especially in the raw materials used for certain products. For Firm C, they had to stop using plumbum (Pb) as it was one of the six banned materials listed in RoHS. Therefore by going green, Firm C believed that they can penetrate and attract more customers from the European countries. Moreover, since their parent company is from Japan, they are very strict and precise in the production process and emphasize green practices as their main priority. The parent company provides Japan Article Management (JAM) for each of their subsidiaries to conform with. Firm C introduced and implemented several activities that lead towards minimizing environmental problems such as selecting their suppliers properly and monitoring their suppliers in purchasing activities in order to make sure no hazardous materials are included within the production process. In addition, Firm C also segregates their production waste to ensure the disposal process becomes easier. In the production house, Firm C has its own insulator machines that control the temperature of all machines within the area. By doing this, they managed to reduce the amount of energy used and save the cost of the electricity at the same time. Internally, every bulb used in the factory is an eco-friendly bulb which uses less energy and releases less heat. As a result of these green practices, Firm B managed to reduce, energy used, waste, and minimize consumption of hazardous materials. Firm D manufactures springs, shock absorbers, seats, radiators, plastic and interiors. All of the manufacturing units in Firm D have their own ISO 14001 certification which is seen as a sign of commitment to make a difference in achieving a clean manufacturing environment. The driving factors for Firm D to get involved in green practices were customer requirements and marketing strategy. At the initial stage, most of their customers were Original Equipment Manufacturers (OEM) export customers. These group of customers requested Firm D to have ISO 14001 certification in the first place before they agreed to have business activities with them. As an international automotive parts manufacturer, the green commitment of the global market urged them to be greener in their production. For example, as the suppliers for Toyota, they must follow the guidelines in Toyota Green Purchasing Guidelines (TGPG) which required Firm D to have Substances of Concern (SOC) management in their plant. Suppliers are asked to use returnable boxes for supplying products. This effort is to ensure that the suppliers will return and collect the boxes and therefore help to minimize waste in Firm D. Moreover, in dealing with suppliers, the purchasing department will check and verify that the shipments from suppliers were free from hazardous materials in accordance with Substance of Concern (SOC) management guidelines. Internally, Firm D replaced the use of plastic bags with boxes for disposal purposes. To enhance the participation of every employee in the company to go green, Firm D had already launched a 3R campaign (re-use, recycle, reduction) to promote environmentally friendly

14


practices within the organization. Using less plastic bags has promoted a better and healthy working environment to all staff in Firm D. At the end of supply chain process, Firm D managed to reduce the number of complaints and products returned by their customers. The decreased consumption of hazardous materials also helps Firm D focus on their business production without need to worry about legislative action by the authorities. Table 1 provides a summary of the firms’ profiles and brief case analysis. Table 1 Summary of firms’ profile and case analysis

Case Studies Firm A

Firm B

Firm C

Respondent (Designation)

Factory Manager

Operations Senior Executive

Engineering & Quality Senior Production Executive Manager

Year Established

1979

1989

1990

1982

No of Employees

88

65

795

238

Solder Products

Capacitors

Shock absorbers, interiors plastic

2004

1998

2003

Customer requirement; competitiveness; regulations;

Customer requirement; regulations; management commitment

Customer requirement; marketing strategy

Main Products

Printing Ink

ISO14001 Certified 2008

Drivers for GSCM

Customer requirement; competitive-ness; regulations; management commitment

Firm D

and

Discussion and conclusion The result from the case comparison indicates that meeting the customer requirement as one of the most important drivers for both SMEs and LEs. Crotty (2007) highlighted that demand from customers has influenced firms to apply processes that lead to expected sustainability and environmental outcomes. Business customers from countries like Japan, the US and European often put pressure to their suppliers to comply with the environment requirement (Anbumozhi & Kanda, 2005). This signify that regardless of the company size, meeting the customer requirements can be one of the major drivers for firms adopting the green initiative in their operation. Three out of four firms under study indicates legislation and regulation as one of the important drivers for them adopting the green initiative. Previous research have indicate that environmental regulations and law that needs to be complied with by the manufacturers before can sell their products are the most important drivers in green initiatives adoption (Murphy et al., 1996; Rao, 2002; Zhu and Sarkis, 2004; Eltayeb et al., 2010). Result from the case comparison indicates that this may always be the case especially for LEs. This signifies that for LEs, adopting green may have gone beyond complying the rules and regulation. For both SMEs under study indicates complying the regulations as the important drivers for them adopting the green initiative. It is interesting to note that this study found that the management commitment is an important driver for adopting green initiative for both SMEs and LEs. This indicate that although SMEs often expected

15


to be lack of resources and capabilities due to its small size, it has not limits the SMEs from adopting green initiative especially when the awareness and commitment sparks from the internal management. Based on the result of the study, it can be concluded that drivers for green initiative for SMEs are not different from LEs. The demand to adopt green initiative may due to the nature of industry and the product produce which relates to the requirement by their consumers and the law enforcement by the government. Firms including the SMEs can go beyond complying as they see benefits in terms of economic returns due to possible reduction in operational cost and improvement in competitiveness.

REFERENCES Abdullah, A. (1992). The influence of ethnic values on managerial practices in Malaysia. Malaysian Management Review, 27(1), 3-15. An, H. K., Teruyoshi Amano, Utsumi, H. and Matsui, S. (2006). A framework for Green Supply Chain Management complying with RoHS directive. Paper presented at the Corporate Responsibility Research Conference. Ireland. Anbumozhi, B. and Kanda, Y. (2005). Greening the production and supply chain in asia: is there a role for voluntarily initiatives? IGES Kansai Research Center Discussion Paper, KRC-2005, No 6E. available online: http://www.iges.or.jp Bacallan, J. J. (2000). Greening the supply chain. Business and Environment, 6(5), 11-12. Beamon, B. M. (1999). Designing the green supply chain. Logistics Information Management, 12(4), 332-342. Crotty, J. (2007). Greening the supply chain? The impacts of take back regulations on the uk automotive sector. Journal of Environmental Policy and Planning, 8(3), 219-234. Eltayeb, T. K., Zailani, S. and Ramayah, T. (2010). Green supply chain initiatives among certified companies in Malaysia and environmental sustainability: Investigating the outcomes. Resource, Conservation and Recycling, 55(2), 495-506. Murphy, P.R., Poist, R.F. and Braunschwieg, C.D. (1996). Green logistics: Comparative view of environmental progressives, moderates and conservatives. Journal of Business Logistics, 17(1), 191-211. Rao, P. (2002). Greening the supply chain: A new initiative in South East Asia. International Journal of Operations and Production Management, 22(6), 632-655. The Star. (2009) Article on March 27. Available at www.thestar.com.my. Wisner, J., Leong, G.K. and Tan, K.C. (2005). Principles of Supply Chain Management. SouthWestern College Publications. Yusuff, R.M., Lo, W.C. and Hashmi, M.S.J. (2005). Advanced manufacturing technologies in SMEs. CACCI Journal, 1, 1-11. Zabid, A. R., Sambasivan, M. and Abd Rahman, A. (2004). The influence of organizational culture on attitudes toward organizational change. Leadership & Organization Development Journal, 25(2), 151-169. Zhu, Q. and Sarkis, J. (2004). Relationships between operational practices and performance among early adopters of green supply chain management practices in Chinese manufacturing enterprises. Journal of Operations Management, 22, 265-289.

16


STRUCTURAL RELATIONSHIPS OF PERCEIVED USERS’ TRUST AND PERCEIVED FLOW ON MOBILE SOCIAL NETWORKING SERVICE (SNS) USERS’ LOYALTY Norazah Mohd Suki

Norbayah Mohd Suki

Labuan School of International Business and Finance Universiti Malaysia Sabah

Labuan School of Informatics Science Universiti Malaysia Sabah

[email protected]

[email protected]

ABSTRACT Mobile-device-based social networking services (SNS) have become popular technology mediated communication modalities. Users actively access Facebook, MySpace, Twitter and LinkedIn for social communication and entertainment. This study aims to examine the structural relationships of (i) perceived information quality and perceived system quality on perceived user trust and perceived flow, (ii) perceived user trust on perceived flow, and (iii) perceived user trust and perceived flow on mobile SNS users’ loyalty simultaneously. Structural equation modelling (SEM) analysis via AMOS 21.0 computer program was used for data analysis as it has the ability to ensure the consistency of the model with the data and to estimate effects among constructs. Empirical results via SEM revealed that perceived information quality and perceived system quality significantly influence perceived users’ trust and perceived flow. Significant relationship also appears between perceived users’ trust and perceived flow. Moreover, mobile SNS users’ loyalty is significantly affected by both perceived user trust and perceived flow. The paper concludes with direction for future research. Keywords: perceived information quality, perceived system quality, perceived flow, perceived trust, mobile social networking service, loyalty, structural equation modelling

INTRODUCTION Social networking sites allow the individuals to create a profile and connect their profile to others, sharing text, images, and photos for the purpose of forming a personal network by applications and groups provided on the Internet (Boyd & Ellison, 2008). Social networking sites can also be accessed via mobile phones as it integrates the social connections brought about by social networking services and the communication channel and portability of the mobile device. The arrival of social network sites is rapidly changing human interaction (Counts & Fisher, 2010; Zhong, Hardin & Sun, 2011) that millions of people worldwide are living much of their lives on social networking sites such as Facebook, MySpace, Twitter and LinkedIn. The number of Facebook users continues increasing globally and is quickly becoming one of the most popular tools for social communication and entertainment. Facebook has 167,431,700 active users in United States and 13,577,760 active users in Malaysia in 2013 (Socialbakers, 2013). More than 30 billion pieces of content (web links, news stories, blog posts, notes, photo albums, etc.) are shared each month. There are over 900 million objects that people interact with (pages, groups, events and community pages). Facebook introduced features such as wall, pokes, status, photos, news feed, tag, market place, instant messaging and video. This study is helpful to mobile SNS providers as it discusses the effect of perceived user trust and perceived flow experience on users’ loyalty towards their platform. If the mobile SNS provider wishes to retain and increase their customers, special

17


attention will need to be paid towards the information and system quality provided. Apart from that, the variety of SNS management team such as Facebook and Twitter will benefit from this study as well because they are capable of altering and providing the perceived enjoyment to their users. Hence, this study aims to examine the structural relationships of (i) perceived information quality and perceived system quality on perceived user trust and perceived flow, (ii) perceived user trust on perceived flow, and (iii) perceived user trust and perceived flow on mobile SNS users’ loyalty simultaneously via SEM approach.

LITERATURE REVIEW Perceived Information Quality, Perceived System Quality and Perceived Users’ Trust Continuous exchanges of information, access to and understanding of information are necessary conditions for establishing a learning process. Users care about information quality, content richness and navigation (Ilsever, Cyr, & Parent, 2007). Information quality is found as important trust building mechanism (Fung & Lee, 1999; Keen, Balance, Chan & Schrump, 2000). Reliability, relevance and personalisation of information exchanges encourage the creation of a trust-based relationship (Yvette & Karine, 2001). System quality such as navigational structure and visual appeal influences user trust in mobile commerce technologies (Vance, Christophe, & Straub, 2008). Website quality tends to be a stronger predictor of trusting beliefs (McKnight, Choudhury, & Kacmar, 2002). For example, technical aspects of IT artefacts affect users’ willingness to trust (Gefen, Pavlou, Benbasat, McKnight, Steward, & Straub, 2006). Without efficient system quality, provision of quality services is difficult which in turn diminishes flow experiences (Aladwani & Palvia, 2002). Hence, the following hypothesis is proposed. H1. Perceived information quality of mobile SNS significantly influences perceived user trust. H3. Perceived system quality of mobile SNS significantly influences perceived user trust. Perceived Information Quality, Perceived System Quality and Perceived Flow Information quality presented on the Internet has a significant impact on the user flow experience (Chau, Au & Tam, 2000) in terms of the pleasure in using mobile SNS when conduct multiple tasks while surfing the Internet to acquire information or entertaining themselves. For instance, users will most likely form negative perceptions about the information quality of mobile SNS platform if the mobile service provider cannot provide accurate, comprehensive and timely information to its users. System quality is related to the presence of a fast, reliable connection for navigation (Hsu & Lu, 2004; Nelson & Todd, 2005). The interplay of interactions between the system and the user, such as design factors like user interface, the navigation structure, the time that the system requires to process a request (Chiou, 2005; Garrett, 2003) influences their cumulative satisfaction. Deighton and Grayson (1995) affirmed that flow generated during specific tasks at a website creates memorable experiences that are believed to strengthen relationships. The optimal experience significantly influences the user’s intention to revisit a website. Accordingly, it is posited that: H2. Perceived information quality of mobile SNS significantly influences perceived flow. H4. Perceived system quality of mobile SNS significantly influences perceived flow. Perceived User Trust and Perceived Flow Trust, i.e. believes that using mobile service will be free of security and privacy threats (Doney & Cannon 1997; Wang, Wang, Lin, & Tang, 2003), will reduce perceived uncertainty and risks, thus reduce the effort spend on monitoring the mobile service provider, subsequently enhancing users’ perceived control (Pavlou, Liang, & Xue, 2007) and improving their experience. If users trust mobile

18


service providers, they expect positive future experiences (Kim, Shin, & Lee, 2009). Trust affects the online travel community users’ flow experience (Wu & Chang, 2005). Therefore, it is proposed that: H5. Perceived user trust significantly influences perceived flow. Perceived User Trust and Loyalty Trust is one of the key factors when it comes to mobile success in commerce, as when customers register with a Mobile SNS, they are giving away private information or personal data. Trust has been shown to be a key determinant of loyalty in offline and online environments (Berry & Parasuraman, 1991). For instance, m-loyalty was found to be influenced by trust (Lin & Wang 2006). Trust and satisfaction positively influenced e-loyalty (Cyr, Head & Ivanoc, 2006). Corbitt, Thanasankit and Yi (2003) noted a strong positive effect on trust on loyalty to online firms. Accordingly, it is hypothesized that: H6. Perceived user trust significantly influences loyalty. Perceived Flow and Loyalty Flow affects online consumers’ purchase and return intention in a different study (Hausman & Siekpe, 2009; Zhou & Lu, 2011). Users’ satisfaction further determines their continuance usage of mobile Internet services (Deng, Turner, Gehling & Prince, 2010). User finds the flow experience in using a certain mobile SNS to be satisfying and will most likely continue the usage which thus promotes loyalty. Understanding the influence of flow on the trusting belief-loyalty relationship can therefore ensure positive loyalty outcomes (Gupta & Kabadayi, 2010). Thus, it is posited that: H7. Perceived flow significantly influences loyalty. Figure 1 illustrates the proposed theoretical framework based on the aforementioned literature. H1

Perceived Information Quality

Perceived User Trust

H6 Loyalty

H3 Perceived System Quality

H2

H5 Perceived Flow

H4

H7

Figure 1 Theoretical framework

METHODOLOGY The completed and usable close-ended questionnaire was collected from 200 university students studying at the Universiti Malaysia Sabah Labuan International Campus from January 15 to January 22 of 2012 utilizing convenience sampling technique as the method does allow the researcher to have any control over the representativeness of the sample. Initially, a total of 250 questionnaires were administered, leading to a response rate of 80%. They were randomly intercepted in the university campus that have at least a social networking site account such as Facebook, MySpace, Twitter or LinkedIn and have experience browse it via mobile phone. The questionnaire comprised three sections. Section A consisted of demographic profile of respondents. Section B requested the respondents to provide responses on their mobile SNS experiences in terms of the amount of time mobile SNS used in a week, experience of mobile SNS usage, and the most frequently visited mobile SNS. Section C examined the effect of flow experience on mobile SNS users’ loyalty which aimed to measure their perceived flow, perceived system quality, perceived information quality and perceived user trust on mobile SNS users’ loyalty. The questionnaire items were adapted from the following

19


sources: perceived information quality (DeLone & McLean, 1992), perceived system quality (Armstrong & Hagel, 1996; Chiou 2005; Nelson & Todd, 2005), perceived enjoyment (Davis, Bagozzi, & Warshaw, 1992; Koufaris, 2002), perceived control (Macan, Shahani, Dipboye, & Phillips, 1990), attention focus (Intriligator & Cavanagh, 2001; Pylyshyn & Storm, 1988), perceived user trust (Berry & Parasuraman, 1991), and loyalty (Cyr, Head & Ivanoc, 2006; Lin & Wang, 2006). This items were measured on a five-point Likert scale ranging from 1 (strongly disagree) to 5 (strongly agree). Structural equation modelling (SEM) was utilised to empirically test and estimate the proposed hypothesised relationships by using the AMOS version 21.0 computer software as it has the ability to ensure the consistency of the model with the data and to estimate effects among constructs instantaneously. Data Analysis Table 1 portrays frequency analysis of the demographic profile of respondents with 49% males, and 51% females. More than three-quarter of the respondents aged 21 to 25 years earn a monthly allowance of lesser than RM300. In terms mobile SNS experiences, 18% of the sample group uses mobile SNS for more than 15 times in a week. There is more than one-quarter of the respondents’ have the experience using mobile SNS for a period of more than 6 months. Facebook is the most frequently visited mobile SNS as compared to Twitter and MySpace. Table 1 Socio-demographic profile of respondents Frequency

Percentage

Male

98

49.0

Female

102

51.0

Gender

Age (years old) < 20

26

13.0

21 – 25

168

84.0

26 – 30

4

2.0

> 31

2

1.0

< RM 300

160

80.0

RM 301 - RM 400

13

6.5

RM 401 - RM 500

7

3.5

> RM 501

20

10.0

Monthly Allowance

Amount of time mobile SNS used in a week 1 to 5 times

125

62.5

6 to 10 times

32

16.0

11 to 15 times

7

3.5

> 15 times

36

18.0

Experience of mobile SNS usage 0 to 2 months

97

48.5

2 to 4 months

34

17.0

4 to 6 months

14

7.0

> 6 months

55

27.5

Most frequently visited mobile SNS Facebook

147

73.5

MySpace

2

1.0

Twitter

5

2.5

MSN

9

4.5

20


Yahoo Messenger

10

5.0

Others

27

13.5

Factor Analysis Perceived flow, which combined three dimensions: perceived enjoyment, perceived control and attention focus, was developed via factor analysis using varimax rotation. This dimensions are interchangeable and significantly correlated among each other (Huang, 2006; Koufaris, 2002), are driven by the same underlying construct as it has the same determinants and consequences that reflected perceived flow (Siekpe, 2005; Wang, Baker, Wagner, & Wakefield, 2007). Item loadings ranging from 0.685 to 0.848 with item ‘I felt that using this mobile SNS is interesting’ has a relatively highest loading on perceived flow with Kaiser-Meyer-Olkin Measure of Sampling Adequacy value of 0.896. Results have suppressed small coefficients of absolute value below 0.50 for item ‘when using this mobile SNS, I felt confused’ was deleted as it does not meeting this requirement. Structural Equation Modelling (SEM) SEM is performed via two-step SEM approach (i.e. measurement model and structural model). The measurement model was checked by inspecting item loading, construct reliability, and average variance extracted (AVE) as summarized in Table 2. The Cronbach’s alpha values and composite reliability values of all variables exceeded the acceptable level of 0.70, implying all variables are reliable and have high internal consistency. Moreover, each of the standardised loadings items is greater than 0.50 on their expected factor, except PC2, PC3, AF4, signifying the construct validity is acceptable. Convergent validity is also acceptable as all AVE values are greater than the cut-off value 0.50. Table 2 Item loadings and validities Estimate

Cronbach’s Alpha

Composite Reliability

Average Variance Extracted

0.915

0.729

0.824

0.870

0.628

0.926

0.920

0.601

Perceived Information Quality 0.962 PIQ1

0.804

PIQ2

0.838

PIQ3

0.869

PIQ4

0.902

Perceived System Quality PSQ1

0.691

PSQ2

0.737

PSQ3

0.846

PSQ4

0.881

Perceived Flow PE1

0.920

PE2

0.916

PE3

0.927

PE4

0.910

PC1

0.603

AF1

0.635

AF2

0.610

AF3

0.544

21


Estimate Perceived User Trust TR1

0.791

TR2

0.756

TR3

0.756

Loyalty LO1

0.863

LO2

0.871

LO3

0.841

Cronbach’s Alpha

Composite Reliability

Average Variance Extracted

0.865

0.812

0.590

0.853

0.894

0.737

Discriminant validity is examined by comparing the shared variances between factors with the squared root of AVE for each construct. The results in Table 3 shows the shared variances of the construct with other constructs were lower than the squared root of AVE of the individual factors, confirming discriminant validity. Hence, each construct was statistically different from the others. Correlations between the variables are positively significant at 0.01 level and finds that all of them correlate. Table 3 Inter-construct correlations 1

2

3

4

5

(1) Perceived Information Quality

0.854

(2) Perceived System Quality

0.756(**)

0.792

(3) Perceived Flow

0.564(**)

0.750(**)

0.775

(4) Perceived User Trust

0.625(**)

0.608(**)

0.643(**)

0.768

(5) Loyalty

0.628(**)

0.705(**)

0.701(**)

0.662(**)

0.858

Notes: ** Correlation is significant at the 0.01 level (2-tailed), Diagonals represent the square root of the AVE.

The structural model was evaluated by examining fit indices and variance-explained estimates. The measure of the fit of the tested model was done through examining several goodness-of-fit indices (Table 4). The results indicated that the χ2 of the model was 493.859 with 187 degrees of freedom (χ2/df=2.641). The fit indices value for comparative fit index (CFI), goodness of fit index (GFI), and normed fit index (NFI) were above 0.90 and root mean square error of approximation (RMSEA) below 0.08, indicating a satisfactory fit. Table 4 Goodness-of-fit indices for structural model χ2

df

χ2/df

CFI

GFI

NFI

RMSEA

PNFI

PCFI

Recommended Values

N/A

N/A

< 3.0

> 0.9

> 0.9

> 0.9

< 0.08

> 0.5

> 0.5

Hypothesised Model Values

493.859

187

2.641

0.938

0.962

0.982

0.061

0.746

0.714

The standardised path coefficients for the hypotheses testing is summarized in Table 5 and Figure 2, implying all hypothesized paths were significant at p

Loyalty

0.683*

10.533

H7 Supported

* p .05) becomes insignificant; this suggests that a full mediator relationship is present. This shows perceived ease of use positively affects purchase intention towards online group buying indirectly through perceived usefulness. Similarly, perceived ease of use also positively affects purchase intention indirectly through perceived enjoyment. Thus, H2 and H3 are supported. Table 6 Hierarchical regression analysis on the mediating variables

Dependent Variable

Variables

Purchase Intention

Independent Variables: Perceived ease of use

Std. beta without mediator (Model 1)

.374**

Mediator: Perceived usefulness Perceived enjoyment

Std. beta with mediator (Model 2)

.019

full mediation

.491 ** .242**

R2

.140

.421

Adjust R2

.134

.409

R2 change

.140

.281

F change

Result

24.047**

35.402**

Note: Significant levels: **p < 0.01, *p < 0.05

As illustrated in Table 5, the analysis suggests that there is no moderating effect of informational social influence on independent variables (i.e. perceived usefulness, perceived ease of use, perceived enjoyment, and perceived concentration) and purchase intention towards online group buying. In the first model only two variables: perceived usefulness (β = .444, p < .001) and perceived enjoyment (β = .240, p < .001) significantly influences purchase intention. On the contrary, the second and third model show no significance at p>0.05. Thus, H4 is rejected. Table 6 shows the summary of hypotheses results.

110


Table 7

Moderating effect of informational social influence

Dependent Variable Variables Purchase Intention

Std. beta (Model 1)

Std. beta (Model 2)

Std. beta (Model 3)

.444** .044 .240** -.005

.444** .044 .241** -.005

1.286 -.526 -.692 .812

-0.03

-.133

Independent Variables: Perceived usefulness Perceived ease of use Perceived enjoyment Perceived concentration Moderator: Informational social influence Interaction Terms: Informational social influence x Perceived usefulness Informational social influence x Perceived ease of use Informational social influence x perceived enjoyment Informational social influence x perceived concentration

-1.238 .906 1.400 -.996

R2

.625

.625

.645

Adjust R2

.367

.361

.364

R2 change F change

.391 16.674**

.391 .001

.417 1.095

Note: Significant levels: **p < 0.01, *p < 0.05

Table 8

Summary of results

Hypothesis

Relationship

Result

Description

H1

PU  PIOGB

supported

positive relationship

H2

PEOU  PIOGB

not supported

-

H3

PEJ  PIOGB

supported

positive relationship

H4

PC  PIOGB

not supported

-

H5

PEOU  PU  PIOGB

supported

complete mediation

H6

PEOU  PEJ  PIOGB

supported

complete mediation

H7

ISF moderating effect

not supported

-

Note: PU = perceived usefulness, PEOU = perceived ease of use, PEJ = perceived enjoyment, PC = perceived concentration, ISF = informational social influence, PIOGB = purchase intention towards online group buying

DISCUSSION The factor analysis produces a 2 factor loading solution, which is also similar in a study by Ramayah et al. (2003) on the impact of the motivation variables towards Internet usage in Malaysia. The new factor matches Moon and Kim’s (2001) description of “concentration”. The authors initially describe

111


concentration as the extent to which the person loses self-consciousness and becomes absorbed in the activity. Based on the semantic meaning, we termed the new factor as “perceived concentration”. The findings suggest perceived usefulness and perceived enjoyment positively influence consumers purchase intention towards online group buying. Specifically, the results imply that consumers are making online purchase via online group buying because it is considered as very useful and entertaining. Perhaps, the respondents feel online group buying as useful because buying in group is more practically secure and cheaper. Likewise, the significant of perceived enjoyment on purchase intention suggest that consumers are also enjoying the interaction with others which are offered by the online group buying. Interestingly, both determinants of perceived ease of use and perceived concentration are not a significant antecedent of consumers purchase intention towards online group buying. Perhaps, since majority of respondents are Internet savvy, the determinant dictated by the ease of use to maneuver the interface of online group buying has no longer been considered as an important factor for purchase intention. Likewise, because for most of the time, making a purchase via online group buying would entail a group of consumers with similar interest, an individual might relies on others to make the best decision; thus, contributing to the insignificant of perceived concentration on purchase intention. The insignificant relationship of perceived ease of use on purchase intention offers further validation for Heijden and Verhagen (2004) that suggest usefulness and enjoyment may influence one’s attitude in using a technology more strongly than by ease of us. The analysis shows both determinants of perceived usefulness and perceived enjoyment fully mediates the relationship between perceived ease of use and purchase intention. This finding is consistent with the previous study by Ramayah et al. (2003) on the mediation of perceived usefulness which is also supported in previous findings by Teo et al. (1999) on internet usage in Singapore and Ndubisi et al. (2001) on IT usage of entrepreneurs. However, the final research hypothesis was not supported (H4), implying that there was no moderating effect by informational social influence. Perhaps, consumers do not rely on other sources of information when before making an online purchasing. The result was consistent with a study by Ramayah, Osman, Jantan, Chow and Nasirin (2003) on buyers’ intention towards buying counterfeit CDs. From the conceptual perspective, the present study offers credence for Davis et al. (1989) technology acceptance model, which suggest a strong direct link between perceived usefulness and intention. The data analysis for the present study suggests perceived usefulness have the strongest influence on purchase intention as compared to other motivation drivers. This suggested that consumers find using online group buying to be useful and this influenced their purchase intention.

IMPLICATIONS This study offers important theoretical and managerial implications for e-marketers, merchants and scholars. The study indicates that motivating individual’s perception of usefulness and enjoyment can enhance their purchasing intention towards online group buying. The information on consumer drivers would enable marketers and group buying websites to build effective strategies to attract online group buying users and increase sales profit. Correspondingly, the finding contributes to fill the current scat gaps of research on online group buying in the Malaysian context.

LIMITATION AND FURTHER RESEARCH Although the study makes essential contributions to the literature, several caveats for the study should be acknowledged. First, the sample was collected using respondents from Malaysia. Therefore, generalizing the results should be used with caution. Future studies need to extend the present

112


investigation by including other online consumers from different regions and countries, to validate our theoretical model. Second, the present study used information social influence as a moderator, which also suggested the possibility for this construct to be used as a mediator. Third, these determinants were only tested using multiple regression analysis. This warrants for statistical testing with better explanatory power and more advance statistical technique such as the structural equation modelling.

REFERENCES Ahn, T., Ryu, S., and Han, I. (2007) 'The impact of web quality and playfulness on user acceptance of online retailing', Information and Management, Vol. 44 No. 3, pp. 263-275. Ajzen, I. (1991) 'The theory of planned behavior'. Organizational Behaviour and Human Decision Processes, Vol. 50, pp. 179-211. Ajzen, I., and Fishbein, M. (1980). Understanding attitudes and predicting social behavior, PrenticeHall ,Englewood Cliffs, New Jersey. Asia Pacific Digital Marketing Yearbook 2011. [online] http://www.asiadigitalmarketingyearbook.com/ (Accessed 20 October 2012). Bearden, W. O., Calcich, S. E., Netemeyer, R., and Teel, J. E. (1986) 'An exploratory investigation of consumer innovativeness and interpersonal influences', Advances in Consumer Research, Vol. 13 No. 1, pp. 77-82. Boush, D. M., Kim, C. H., Kahle, L. R., and Batra, R. (1993) 'Cynicism and conformity as correlates of trust in product information sources', Journal of Current Issues & Research in Advertising, Vol. 5 No. 2, pp. 71-79. Burnkrant, R. E., and Cousineau, A. (1975) 'Informational and normative social influence in buyer behavior', Journal of Consumer Research, Vol. 2 No. 3, pp. 206-215. Chen, L. D., Gillenson, M. L., and Sherrell, D. L. (2002) 'Enticing online consumers: An extended technology acceptance perspective', Information & Management, Vol. 39 No. 8, pp. 705-719. Chen, W. Y., & Wu, P. H. (2010) 'Factors affecting consumer's motivation in online group buying' in Proceeding of the Sixth International Conference on Intelligent Information Hiding and multimedia Signal Processing (IIH-MSP). Darmstadt, Germany, pp. 708-711. Chung, J., & Tan, F. (2005) 'Validating the extended technology acceptance model: Perceived playfulness in the context of information-searching websites'. Paper Presented at the Australasian Conferences on Information Systems (ACIS 2005). Perth, Australia. Davis, F. D. (1989) 'Perceived usefulness, perceived ease of use, and user acceptance of information technology', MIS Quarterly, Vol. 13 No. 3, pp. 319-340. Davis, F. D., Bagozzi, R. P., and Warshaw, P. R. (1989) 'User acceptance of computer technology: A comparison of two theoretical models', Management Science, Vol. 35 No. 8, pp. 982-1003. Deutsch, M., & Gerard, H. B. (1955) 'A study of normative and informational social influences upon individual judgment', Journal of Abnormal and Social Psychology, Vol. 51 No., pp. 629-636. Emmanuel, M. (2012) Group-buying sites in Malaysia gaining visibility. http://www.btimes.com.my/Current_News/BTIMES/articles/mvie-2/Article/ (Accessed November 2012). Erdoğmus, I. E., and Çiçek, M. (2011) 'Online group buying: What is there for the consumers?', Procedia - Social and Behavioral Sciences, Vol. 24 No., pp. 308-316. Gefen, D., Karahanna, E., and Straub, D. W. (2003) 'Trust and TAM in online shopping: An integrated model', MIS Quarterly, Vol. 27 No. 1, pp. 51-90. Gefen, D., and Straub, D. W. (1997) 'Gender differences in the perception and use of e-mail: An extension to the technology acceptance model', MIS Quarterly, Vol. 21 No. 4, pp. 389-400. Heijden, H. v. d., Verhagen, T., and Creemers, M. (2003) 'Understanding online purchase intentions: Contributions from technology and trust perspectives', European Journal of Information Systems, Vol. 12 No., pp. 41-48. Heijden, V. D., and Verhagen, T. (2004) 'Online store image: Conceptual foundation and empirical measurement', Information and Management, Vol. 41 No. 5, pp. 609-617.

113


Ho, S. (2011) Online shopping trend rising in Malaysians, RM1.8bil spent in 2010. http://thestar.com.my/news/story.asp?file=/2011/4/21/nation/20110421190449&sec=nation (Accessed January 2012). Huang, E. (2008) 'Use and gratification in e-commenrce', Internet Research, Vol. 18 No. 4, pp. 405426. Igbaria, M., Schiffman, S. J., and Wieckowski, T. J. (1994) 'The respective roles of perceived usefulness and perceived fun in the acceptance of microcomputer technology', Behaviour & Information Technology, Vol. 13 No. 6, pp. 349-361. Jantan, M., Ramayah, T., and Chin, W. W. (2001) 'Personal computer acceptance by small and medium sized componies evidence from Malaysia', Journal of Management and Business, Vol. 3 No. 1, pp. 1-14. Kauffman, R. J., Lai, H., Lin, H. C., and Chang, Y. S. (2009) 'Do textual comments and existing orders affect consumer participation in online group-buying?,. Paper Presented at the 42nd Hawaii International Conference on System Sciences. 5-8 January. Waikoloa, Hawaii. Kim, H. K., and Song, J. (2010) 'The quality of word-of-mouth in the online shopping mall', Journal of Research in Interactive Marketing, Vol. 4 No. 4, pp. 376-390. Ko, H., Cho, C. H., and Roberts, M. S. (2005) 'Internet ues and gratification', Journal of Advertising, Vol. 34 No. 2, pp. 57-70. Lau, E. K. W. (2011) 'Adoption of online group buying', European Journal of Management, Vol. 11 No. 4, pp. 54. Lee, M. K. O., Shi, N., Cheung, C. M. K., Lim, K. H., and Sia, C. L. (2011) 'Consumer's decision to shop online: The moderating role of positive informational social influence', Information & Management, Vol. 48 No. 6, pp. 185-191. Lo, A., Wu, J., and Law, R. (2012) 'A study of hospitality and travel-related deals on Hong Kong group-buying websites'. Paper Presented at the Information and Communication Technologies in Tourism 2012. January 25-27. Helsingborg, Sweden. Lu, A. (2011) The deal is on! http://thestar.com.my/metro/story.asp?file=/2011/5/1/sundaymetro/8576472 (Accessed May 2011). Monsuwé, T. P., Dellaert, B. G. C., and Ruyter, K. d. (2004) 'What drives consumers to shop online? A literature review', International Journal of Service Industry Management, Vol. 15 No. 1, pp. 102-121. Moon, J. W., and Kim, Y. G. (2001) 'Extending the tam for a world-wide-web context', Information & Management, Vol. 38 No. 4, pp. 217-230. Ndubisi, N. O., Jantan, M., and Richardson, S. (2001) 'Is the technology acceptance model valid for entrepreneurs? Model testing and examining usage determinants', Asian Academy of Management Journal, Vol. 6 No. 2, pp. 31-54. Nysveen, H., Pedersen, P. E., and Thorbjørnsen, H. (2005) 'Intentions to use mobile services: Antecedents and cross-service comparisons', Journal of the Academy of Marketing Science, Vol. 33 No. 3, pp. 330-346. Park, J., and Feinberg, R. (2010) 'E-formity: Consumer conformity behaviour in virtual communities', Journal of Research in Interactive Marketing, Vol. 4 No. 3, pp. 197-213. Pavlou, P. A., and Fygenson, M. (2006) 'Understanding and predicting electronic commerce adoption: An extension of the theory of planned behavior', MIS Quarterly, Vol. 30 No. 1, pp. 115-143. Ramayah, T., and Ignatius, J. (2005) 'Impact of perceived usefulness, perceived ease of use and perceived enjoyment on intention to shop online', ICFAI Journal of Systems Management, Vol. 3 No. 3, pp. 36-51. Ramayah, T., Jantan, M., and Ismail, N. (2003) 'Impact of intrinsic and extrinsic motivation on internet usage in Malaysia'. Paper Presented at the 12th International Conference on Management of Technology. 13-15 May. Nancy, France. Ramayah, T., Osman, M., Jantan, M., Chow, J. L. W., and Nasirin, S. (2003) 'Counterfeit music cds: social and personality influences, demographics, attitudes and purchase intention: Some insights from malaysia'. Paper Presented at the Proceedings of the 2nd European Conference on Research Methods in Business and Management. 20-21 March. Reading University, United Kingdom.

114


Sun, P.-C., Luo, J. J., and Liu, Y. L. (2010) 'Perceived risk and trust in online group buying context'. Paper Presented at the 3rd International Conference On Information Management, Innovation Management and Industrial Engineering. 26-28 November. Kunming, China. Teo, T. S. H., Lim, V. K. G., and Lai, R. Y. C. (1999) 'Intrinsic and extrinsic motivation in Internet usage', Omega: The International Journal of Management Science, Vol. 27 No. 1, pp. 25-37. Venkatesh, V. (2000) 'Determinants of perceived ease of use: Integrating control, intrinsic motivation, and emotion into the technology acceptance model', Information Systems Research, Vol. 11 No. 4, pp. 342-365. Venkatesh, V., and Davis, F. D. (1996) 'A model of the antecedents of perceived ease of use: Development and test', Decision Sciences, Vol. 27 No. 3, pp. 451-481. Venkatesh, V., and Davis, F. D. (2000) 'A theoretical extension of the technology acceptance model: Four longitudinal field studies', Management Science, Vol. 46 No. 2, pp. 186-204. Wilkerson, G. L., Bennett, L. T., and Oliver, K. M. (1997) 'Evaluation criteria and indicators of quality for Internet resources', Educational Technology, Vol. 37 No. 3, pp. 52-58. Wolfinbarger, M., and Gilly, M. C. (2001) 'Shopping online for freedom, control and fun', California Management Review, Vol. 43 No. 2, pp. 34-55. Xie, G., Zhu, J., Lu, Q., and Xu, S. (2011) 'Influencing factors of consumer intention towards web group buying', Journal of Hospitality and Tourism Technology., Vol. 1 No. 3, pp. 1397-1401. Xiong, L., and Hu, C. (2010) 'Harness the power of viral marketing in hotel industry: a network discount strategy', Journal of Hospitality and Tourism Technology, Vol. 1 No. 3, pp. 234-244.

115


DO MALAYSIAN CEOS TAKE MORE DEBTS THAN EQUITIES? Qian Long Kweh Universiti Tenaga Nasional [email protected]

Wei Kiong Irene Ting Universiti Tenaga Nasional [email protected]

Noor Azlinna Binti Azizan Universiti Malaysia Pahang [email protected]

ABSTRACT This study investigates whether human governance affects leverage decisions of publicly listed companies in Malaysia. The balanced panel sample covers 110 companies listed on Bursa Malaysia for the period 2002 – 2011. Multiple regression models with balanced panel data are used to examine the impact of human governance on leverage decision. The study develops five hypotheses to examine the influence of CEOs’ personal attributes on capital structure decisions. Five leader’s attributes (age, founder, tenure, duality and gender) have been selected as explanatory variables based on previous studies. Moreover, this paper also intends to find out whether CEO ownership will strengthen the leverage decision. We conclude that human governance is an important antecedent in influencing leverage decision of public-listed firms in Malaysia. The result of the paper can fill the gap of the literature on the human governance and its relationship with capital structure. Keywords: human governance, leverage decision, CEO ownership, public-listed companies

INTRODUCTION Identifying antecedents of capital structure is one of the issues which are often faced by finance managers. Eriotis, Vasiliou, and Neokosmidi (2007) emphasize that it is crucial for a financial manager to get the optimal level of capital structure as an improper financing decision may contribute to financial distress and eventually bankruptcy. Therefore, it is recommended that managers need to utilize different levels of debt and equity in the firm’s capital structure in searching for performance improvement (Gleason, Mathur, and Mathur, 2000). Traditional approaches to capital structure suggest there is an optimal capital structure; however, there is no specified method to help the finance managers to decide an optimal leverage level (Eriotis et al., 2007). Thus, finance managers are primarily concern about whether their firm are overleveraged or underleveraged, and much less concerned about the precise optimal level of debt. The antecedents of leverage are theoretically complex and empirically ambiguous. Since the Modigliani and Miller (1958) proposition, three major theories have emerged to explain firm capital structure: the Tradeoff theory, the Pecking Order Theory, and the Market Timing Theory. In recent years, applied researchers have become increasingly interested in investigating the importance of firm structure, ownership structure, and corporate governance in influencing a firm’s leverage decision. The focus of most empirical work has been on market, industry, and firm characteristics. Overall, the results of prior studies prove that firms that are similar in terms of these fundamentals often choose very different corporate leverage. Typically, many of the existing empirical studies rely on firm fundamental characteristics in explaining capital structure, largely ignoring the possible role of human, specifically individual managers may play a role in capital

116


structure choice (Oliver, 2005). Friend and Hasbrouck (1986) suggest that many managers with their large proportions of personal wealth invested in firm’s common stock will try to reduce the bankruptcy risk. Therefore, these risk-averse managers may seek to eliminate this risk by using less amount of debt in the firm’s capital structure. Zwiebel (1996) states that decision of capital structure is voluntarily chosen by manager are a fact that cannot be denied. Berger et al. (1997) explain empirically that entrenched managers who are not effectively disciplined by governance mechanism prefer lower debt ratios. Friend and Hasbrouck (1988) further explain that managers have their own personal agenda in firms in ways that benefit themselves personally. With this opportunistic behaviour managerial insiders will tend to avoid taking any risk due to their personal wealth. One of the options is to use less optimal amount of debt in order to reduce the bankruptcy risk. Fosberg (2004) agrees that agency problems arise because managers have the opportunity to use assets of the firm in ways that benefits themselves personally but decrease the wealth of the firm’s shareholders. Kim et al. (2007) pointed out the crucial issue here for a firm’s shareholder is how to induce management to make decisions that maximize shareholder wealth while minimizing agency costs. One alternative to increase block holder’s control and reduce agency costs is to force the firm to increase debt. Salleh, Ahmad, and Kumar (2009) claim that human plays a role in helping a corporation to realize its potential by setting rule-based framework to deploy resources and to resolve conflict. Drakos and Bekiris (2010) state that it is reasonable to consider that a conflict of interests between managers, whose primary target is the maximization of their own utility function, and the owners who have traded their involvement in the decision making process in favour of higher profits, was generated by an allegedly more efficient management. Furthermore, Cronqvist, Makhija, and Yonker (2012) state that several researchers have recently taken the position that differences in terms of personal preferences across CEOs may eventually impact firms’ capital structure decisions. Block holders with high control motivations would definitely prefer to choose external financing and maintain their authority in firm’s decision. Indeed, financial economists have recently examined some observable CEO characteristics as potential determinants of corporate leverage. In consequence, it is important to know the effect of CEOs characteristics towards the capital structure in order to well develop it. Thus, the study believes that there should be an association between leadership personal attributes and firm leverage with different types of human characteristics. Although there has been increasing awareness and concern at the CEO ownership and debt financing but little has been done in the Malaysian context. Gomez and Jomo (1997, 1998) and Gomez (2002) report close links between business and politics in Malaysia. Johnson and Mitton (2003) reveal that Malaysian firms with political patronage tend to carry more debt. Fraser, Zhang and Derashid (2006) find a positive link between political patronage and capital structure. However, no studies empirically examine the capital structure of human governance in Malaysia. This study fills this gap. Thus, this paper attempts to bridge the gap and shed some lights to the literature. Other than that, economic growth and structural changes raise new issues concerning the leadership role in firm’s decision making. During the economic reformation, leader of the firm plays a crucial role in leverage decision. In other words, leader’s ownership might provide a control mechanism to discipline the management’s self-interest behaviour more in line with the company’s objectives and hence improving the performance. Hence, how should the Malaysian listed companies act, welcome the intervention or reject the CEO involvement through their ownership? This paper intends to examine the impact of CEO personal characteristics on leverage decision in Malaysia. Furthermore, the paper wishes to evaluate the interaction effect between CEO personal characteristics and their ownership to leverage decision. With that, we hope to provide some relevant information to the market players on the accountability and transparency of Malaysian listed firm in validating their firm leverage decision. The paper makes several contributions to the literature. First, this study uses a larger data sample and a longer study period than the previous studies in the literature. Second, the sample is divided into two groups for with and without CEO ownership in order to make a further comparison on the impact of CEO personal characteristics as human governance point of view which is missing in the literature for

117


the case of Malaysia. Third, the paper also makes a methodological contribution. Fourth, the paper presents fresh evidence on the interaction between CEO personal characteristics and CEO ownership to affect firm’s leverage. It is hoped that the findings of this study could serve as an indicator in assessing the impact of human governance on leverage decision. The remainder of the study is divided into four chapters. The remainder of this paper is organized as follows. Section 2 reviews the literature. Section 3 records the data and methodology while Section 4 shows the empirical findings and discussions. Finally, conclusion and recommendation are presented in Section 5.

Literature Review CEO Personal Characteristics Sanders (2009) states that CEOs in firms have been known to play a significant part in the key decisions of firms. However, these important decisions could be based on the behaviorists of the CEO’s themselves. Richard and Shelor (2002) agree that changes in age will affect an individual’s perspective, belief systems and network. Vroom and Pahl (1971) conclude that that older managers tend to be more risk averse whereas young manager are more willing to undertake risky innovative growth strategies. Prendergast and Stole (1996) claim that younger CEOs take on riskier investments to make an impression of their ability as compared to older CEOs. Bertrand and Mullainathan (2003) explain that older CEOs who have an influence over the board of directors, might be less aggressive in financial policies because of that capability to do so. Yim (2013) states that the firms' acquisition behaviour is negatively related to CEO’s age, suggesting less risky financial behaviour in younger executives than older executives. Other than that, CEO is believed to have greater personal identification with and commitment to the firm, as well as a higher level of trust from the firm’s employees than a nonfounder-CEO. Fischer and Pollock (2004) confirm that when the CEO is also founder of the firm, he or she will fully involve in the growth and success of a firm. This is mainly due to the perception and it may motivate the CEO to derive the benefits of a firm. The study extends this line of research by examining the impacts of CEO tenure on leverage decision. Based on previous studies, the paper believes that tenure is another important characteristic in influencing leverage decision as it reflects CEOs’ experiences and affects their level of risk aversion. Murphy (1999), Perry and Zenner (2001) and Milbourn (2003) show that CEOs’ tenure is negatively related to performance. They argue that as CEOs’ experience with the firm increases, boards of directors have more opportunities to observe CEOs’ behaviours over time such that they can assess CEOs’ productivity more accurately. Moreover, Berger, Ofek, and Yermack (1997a) argues that CEOs with longer tenures more likely to avoid risk. While these studies provide robust evidence that tenure is associated with capital structure decision, recent studies have also documented that duality plays an important role in financial leverage decisions. Goyal and Park (2002) explain that a dual relationship in an organization enables an operative monitoring mechanism. Fosberg (2004) further confirms that a firm where there is a dual effective leadership structure, it will increase the amount of debt. Consistently, Abor (2007) concludes that there is a positive relationship between CEO duality and capital structure. Almeida, Ferreira, and Adams (2005) also agree that if CEO is also the chairman of the board of directors, they tend to be more powerful, thus they prefer to choose more aggressive capital structure, which is debt financing as compared to equity financing. The result implies that CEOs will be more likely in taking the risk when they become more entrenched. In a nutshell, previous studies also find out gender is another main variable n describing the characteristic of CEO. Abor and Biekpe (2007) argue that women-owned businesses are less likely to use debt for a variety of reasons, including discrimination and greater risk aversion. The result is consistent with Faccio, Marchica, and Murac (2012) claim that female CEOs are more risk averse as compared to male CEOs. They agree that when the firm is run by female CEOs, it will normally have

118


lower leverage, less volatile earnings, and a higher chance of survival as compared to male CEOs. The result is consistent with Heminway (2007) who explains that woman is more trustworthy than man, thus less likely to manipulate corporate financial and other disclosures. However, Coleman and Cohn (2000) suggest that there is no significant difference in the usage of debt between male CEO and female CEO. In other words, gender is not an important determinant in predicting financial leverage of the firm. CEO Ownership and Leverage Friend and Hasbrouck (1986) reveal that leaders have a personal incentive in influencing the firm to use less than the optimal amount of debt due to their large proportion in shareholding. Because of their personal wealth, it makes the managers reluctant to use the optimal amount of debt financing for the firm to avoid the additional bankruptcy risk from higher levels of debt. Consistent to it, Friend and Lang (1988) discover a negative relationship between manager’s self-interest and financial leveraging of firms. Berger, Ofek, and Yermack (1997b) explain that entrenched CEOs try to stay away from taking on debt and leveraging levels will be lower when there is no demand from the owners of the firms. This finding is supported by Fosberg (2004) who agrees that the amount of debt in a firm will be reduced when the percentage of the firms’ common stock held by the CEO’s shareholding percentage increases. On the other hand, Short, Keasey, and Duxbury (2002) however find that a positive relationship exists between manager’s ownership and leveraging ratios whilst there is a negative relationship between large outsider ownership and leveraging. The relationship between CEO ownership and leverage decision is so complex that no single model can hope to capture all of the relevant capital structure decisions. The empirical results have been mixed. Therefore, the paper wishes to study whether there is any interaction effect between CEO personal characteristics and their ownership to leverage decision.

Data and Methodologies Sample Selection The data used in this study are drawn from two separate databases which are company’s annual report and data stream. The sample comprises all companies listed on the Main Board of the Bursa Malaysia (Malaysian Stock Exchange) as at 3 September 2012. Finance, insurance and unit trust companies are excluded, due to differences in regulatory requirements that pertain to them. After conducting the first data screening, the study manages to collect 310 companies to maintain their survivorship and report their annual accounts without any substantial gaps for the period of 2002 to 2011. Furthermore, the study proceeds with second data screening for additional variables such as CEO information. After dropping firms with incomplete data, the remaining sample contained 110 public listed companies from 7 sectors (Plantation, property, consumer, construction, trading and service, technology and industrial product). Variables and Measurement Independent variables: CEO Age (CEOA) is a numeric variable by expressing age of an executive adjusted by year; CEO-Founder (CEOF) is a dummy variable which code as 1 if the founder of the company is CEO at the time and 0 otherwise; CEO Tenure (CEOT) is expressed by number of years in CEO position of firm; CEO duality (DUA) is a dummy variable, 1 = if CEO is chairman, 0 = is otherwise; CEO gender (GEN) is a dummy variable1 = if firm male-owned, 0 = is otherwise. Dependent variables: Leverage (DEBT) is measured by 2 different leverage ratios which are total debts to total assets (DEBT) and total debts to total capitals (DTC) Moderating variable: CEO Ownership (CEOOW) is measured by the percentages of shares owned directly by CEO:

119


Control variables: Return on Assets (ROA) is the ratio of net income to total assets; Size (SIZE) is measured by the natural log of total assets; Board independence (BIND) is the number of independent non-executive directors; Board Size (BSIZE) is the number of directors.

Research Model In this paper, we test the regression models, with dependent variables, LEVE which are DEBT and DTC as follow. LEVEit= £΄HGit + δ΄CONTRLit + εit Where subscript i and t represent the firm and time, respectively. In this case, i represents the crosssection dimension and t represents the time series component. It is common to only use total debts to measure capital structure in analyzing leverage antecedents (Ting and Lean (2011). However, Hall, Hutchinson, and Michaelas (2000) and Barclay, Marx, and Smith Jr (2003) argue that any analysis of leverage determinants based only on total debt may screen the important difference of other debts’ measurement. Therefore, to get a better understanding of capital structure and its determinants, this paper also analyses DTC as leverage decision. Besides that, CONTRL is a vector of control variables including ROA, SIZE, BIND and BSIZE.

Empirical Results Descriptive Statistics Table 1 presents the descriptive statistics of companies by differentiating the sample into two groups which are companies with CEO ownership and without ownership. The report indicates that companies with CEO ownership account for approximately 71.8 per cent of the total sample companies. The findings for difference-in-means tests are summarized as follows. CEOs with ownership are significantly elder than those without ownership. Moreover, most of the CEOs with ownership are founders of the companies, as compared to CEOs without ownership. The average tenure of CEO with ownership is about 15.907 years, which is significantly longer than that of CEO without ownership (10.764 years). Moreover, CEOs with ownership have significantly higher percentage of the combination of Chairman and CEO positions than those without ownership. From the findings, we know that most of the CEOs are male. In terms of the control variables, we only find a significant difference between the mean of SIZE. In summary, we find statistically significant differences on our main testing variables between companies with CEO ownership and companies without CEO ownership. However, univariate test is weak in that it does not control for the variables used simultaneously in an empirical model. Therefore, we proceed and run multivariate regression analysis to provide a more robust test to evaluate whether CEO ownership strengthens the relationship between leaders’ attributes and the level of leverage. Before performing our final OLS regression, we perform some diagnostic tests. First, we conduct the diagnostic of variance inflation factors (VIF) and we do not find evidence of collinearity18 among the variables in our regression models. Second, we check for heteroskedasticity of residuals in Equations (1) and (2) using White test (White, 1980). The results suggest that we should use the White (White, 1980) heteroskedasticity-consistent standard errors to report our significance levels. Note that the dataset of this study is a panel dataset.

18 VIF values: CEOA =1.687, CEOF = 1.826, CEOT = 1.704, DUA = 1.723, GEN = 3.160, ROA = 1.523, SIZE = 2.016, BIND = 2.704 and BSIZE = 1.802

120


Table 1 Descriptive statistics of independent variables

With CEO Ownership Without CEO Ownership (N = 797 firm-year observations) (N = 313 firm-year observations) Variables

Difference in Means (t-stat)

Mean

S.D.

Mean

S.D.

CEOA

52.966

7.746

50.655

9.091

–4.253***

CEOF

0.319

0.466

0.118

0.323

–6.976***

CEOT

15.907

9.525

10.764

9.861

–8.015***

DUA

0.280

0.449

0.166

0.373

–3.972***

GEN

0.991

0.106

0.971

0.167

–2.370**

ROA

0.052

0.116

0.053

0.145

0.120

SIZE

12.197

1.376

12.642

1.669

4.552***

BIND

0.425

0.108

0.430

0.117

0.650

BSIZE

7.493

1.822

7.419

1.855

–0.610

Note: **, and *** denote the statistical significance at the 5%, and 1% level, respectively.

The Relation between Human Governance and Leverage Table 2 presents the results of multiple regression analysis, using pooled regression techniques from two different groups which are the firm with CEO ownership and without ownership. The results indicate that CEOA is significantly negative related to DEBT in firm CEO with ownership but insignifantly in firm CEO without ownership. In other word, elder CEOs tend to be more risk averse and thus taking less debt when they are holding more shares in the company. However, another interesting finding is female CEOs tend to be risk taker in choosing the debt as compared to male in both firms (CEO with ownership and CEO without ownership). Although some prior studies show that male CEOs prefer debt, we demonstrate that male CEOs will take less risk, after controlling for the impact of other relevant variables. Of the main variables, the study also finds statistically significant and negative coefficients on CEOF in firms without CEO ownership. These results imply that founder-CEOs may also avoid risk to benefit themselves when the CEO is not carrying any ownership title. Furthermore, nonfounder firms benefit from greater monitoring which presumably leads the firm to distinguish genuine entrepreneurial opportunities hence need more debts as compared to founder firms (Randøy and Goel, 2003). Also of interest to this study are CEOT and DUA. The results show positive coefficients on CEOT and DUA in both samples. However, only that of CEOT reaches the conventional significance level. The results indicate that a long-serving CEO may become more aggressive and inclined to borrow more. This could be because a CEO having served a company for a long period has gained experience and thus are more tactful in taking risk. Table 3 tests the effects of human governance to another leverage measurement, DTC to ensure the robustness of the results. Basically, the tenor of the results is not changed except for DUA. This indicates that CEO duality is significantly positive affecting firm’s debt to capital in both samples (companies with CEO ownership and without CEO ownership). This implies that when CEO is also a chairman of the firm, they will tend to choose more debt to capital in their capital structure decision Despite growing evidence about the effect of CEO ownership to leverage decision, there is a lack of evidence with respect to the interaction of CEO ownership to leverage decision in Malaysia. This study also attempts to test the interaction effects between CEO ownership as interaction terms to leverage decision by adding interaction terms to first model (DEBT). The model is as follow. LEVEit= £΄HGit + λ΄CEOOWit + δ΄(HGit x CEOOWit)+ χ΄CONTRLit + εit

121


Table 2 OLS Regression –DEBT

With CEO Ownership (N = 797 firm-year observations)

Without CEO Ownership (N = 313 firm-year observations)

Variable

Coefficient

t

Coefficient

t

Constant

0.255**

2.089

1.644**

2.059

CEOA

-0.006***

-5.433

0.001

0.348

CEOF

-0.008

-0.447

-0.359**

-2.332

CEOT

0.002*

1.736

0.007**

2.454

DUA

0.023

1.122

0.009

0.093

GEN

-0.087***

-3.134

-0.366***

-2.613

ROA

-1.117***

-2.990

-1.031***

-3.233

SIZE

0.056***

6.558

-0.032

-0.671

BIND

0.043

0.424

-0.244

-1.186

-0.015***

-3.699

-0.040

-1.400

BSIZE 2

Adjusted R F-statistic

0.257

0.105

31.659***

5.023***

Note: **, and *** denote the statistical significance at the 5%, and 1% level, respectively. Table 3 OLS Regression –DTC

With CEO Ownership (N = 797 firm-year observations)

Without CEO Ownership (N = 313 firm-year observations)

Variable

Coefficient

t

Coefficient

t

Constant

32.306**

2.345

42.048*

1.781

CEOA

-0.634***

-5.221

-0.223

-1.320

CEOF

-4.343**

-2.261

-12.966***

-3.267

CEOT

0.128

1.063

0.338**

2.340

DUA

6.906***

2.709

15.863***

3.493

GEN

-10.517***

-2.779

-37.605**

-2.264

ROA

-51.260***

-2.826

-103.006***

-4.415

SIZE

4.296***

4.813

4.115***

3.854

BIND

5.307

0.424

-14.149

-1.108

-1.889***

-3.506

-0.765

-0.864

BSIZE 2

Adjusted R F-statistic

0.108 11.706***

0.311 16.565***

Note: *, **, and *** denote the statistical significance at the 10%, 5%, and 1% level, respectively.

122


Table 4 presents the OLS regression results. The two equations are statistically significant with Fstatistics of 22.683 and 15.104, respectively. To highlight and evaluate the impact of CEO ownership on the association between leadership’s attributes and leverage, we include an interaction variable between the five leadership’s attributes and CEO ownership. Based on the results of Equation (2) in Table 4, the interaction terms are all positive, with the interaction terms on CEOF*CEOOW, CEOT*CEOOW, and GEN*CEOOW reaching the conventional significance level. These results noticeably illustrate the advantages of CEO ownership in a company and they are consistent with our hypothesis xx. In other words, the higher the CEO ownership in a company, the more likely the CEO is to take risks. For brevity purpose, we do not discuss the results on the control variables. Table 4 OLS Regression (N = 1,110 firm-year observations)

Equation (1)

Equation (2)

Variable

Coefficient

t

Coefficient

t

Constant

0.579**

0.010

0.652***

0.005

CEOA

–0.005***

0.000

–0.004***

0.000

CEOF

–0.053***

0.006

–0.068**

0.010

CEOT

0.002**

0.015

0.003***

0.000

DUA

0.017

0.542

0.023

0.473

GEN

–0.193***

0.005

–0.199***

0.006

ROA

–1.116***

0.000

–1.084***

0.000

SIZE

0.039***

0.001

0.034***

0.007

0.000

0.999

BIND

–0.013

0.884

BSIZE

–0.016***

0.005

–0.020***

0.001

–0.011

0.180

CEOA*CEOOW

0.000

0.250

CEOF*CEOOW

0.003*

0.052

CEOT*CEOOW

0.000***

0.000

DUA*CEOOW

0.000

0.786

GEN*CEOOW

0.016**

0.013

Interaction terms: CEOOW

Adjusted R2 F-statistic

0.150 22.683***

0.161 15.104***

Note: *, **, and *** denote the statistical significance at the 10%, 5%, and 1% level, respectively.

123


Conclusion This paper tests the impact of CEO personal characteristics on leverage decision of publicly listed companies in Malaysia. We also evaluate the moderating effect of CEO ownership on the association between CEO personal characteristics and leverage. The conclusions can be summarized as follows. (1) CEO age is significantly and negatively related to leverage in firms with CEO ownership only; (2) a founder-CEO is significantly and negatively related to leverage; (3) CEO tenure is significantly and positively related to leverage; (4) CEO duality is positively related to DTC only; (5) Female CEOs take more debts as compared to male CEOs; and (6) CEOs owning shares in a company will more likely to take risk. While having leverage means higher risk, we suggest that companies may increase their CEO shareholdings so that CEO will align their personal interest with the ultimate company’s goal. Although our study refutes the findings of previous studies (Abor, 2007; Berger et al., 1997a; Coleman and Cohn, 2000; Faccio, Marchica, and Mura, 2012; Fischer and Pollock, 2004; Murphy, 1999), our results are not difficult to justify. There are several reasons why CEOs personal characteristics (founder, tenure and gender) in Malaysia do not have consistent results with previous studies. First, these results imply that founder-CEOs in Malaysia may also avoid risk to benefit themselves especially when they are not holding any ownership title. This could be explained as Malaysian firms when the CEO is the founder prefers to look for new equity financing as compared to debt financing in their capital structure decision. Second, in terms of tenure, the results indicate that a long-serving CEO may become more aggressive and inclined to borrow more in Malaysia. This could be because a CEO having served a company for a long period has gained experience and thus are more tactful in taking risk. Third, from gender perspective, we find that 99% and 97% are male CEOs from firms with CEO ownership and without CEO ownership, respectively. From here, it implies that less than 5% of the Malaysian public listed companies are having female CEOs. Due to the fact they are minority among all, Malaysian female CEOs tend to be more aggressive as they want to enhance their authority. When they are aggressive, they prefer challenges. With that, they behave as risk taker leaders. More precisely, firms run by female CEOs tend to more risky financing thus, they choose in taking the debt as compared to male CEOs. We stress that this study focuses only on CEOs personal characteristics and their ownership as explanatory variables in order to evaluate its impact on leverage decision. While there may have been other incentives that we have not examined, we have shown that the most obvious (at least to us) possible CEO personal characteristics in determining leverage decision. While this study is based on a relatively small sample, and hence has to be viewed as suggestive only. Other aspects of human governance, such as CEO network, educational background and such characteristics as corruption, are excluded from this study and could be considered in future studies with different objectives. It was also particularly time-consuming to hand collect the CEO information from the annual reports of our sample companies.

References Abor, J. (2007). Corporate governance and financing decisions of Ghanaian listed firms. The International Journal of Effective Board Performance, 7 (1), 83-92. Abor, J. and Biekpe, N. (2007). Corporate governance, ownership structure and performance of SMEs in Ghana: Implications for financing opportunities. Corporate Governance, 7 (3), 288-300. Almeida, H., Ferreira, D. and Adams, R. B. (2005). Powerful CEOs and their impact on corporate performance. Review of Financial Studies, 18, 1403-1432. Barclay, M. J., Marx, L. M. and Smith Jr, C. W. (2003). The joint determination of leverage and maturity. Journal of Corporate Finance, 9 (2), 149-167. Berger, J. S., Ofek, E. and Yermack, D. (1997a). Managerial entrenchment and capital structure decisions. Journal of Finance, 52, 1411-1438.

124


Berger, P. G., Ofek, E. and Yermack, D. L. (1997b). Managerial entrenchment and capital structure decisions. Journal of Finance, 52 (4), 1411-1438. Bertrand, M. and Mullainathan, S. (2003). Enjoying the quiet life? Corporate governance and managerial preferences. Journal of Political Economy, 111 (5), 1043-1075. Coleman, S. and Cohn, R. (2000). Small firm use of financial leverage: Evidence from 1993 national survey of small business finance. Journal of Business Entrepreneurship, 12 (3), 81-98. Cronqvist, H., Makhija, A. K. and Yonker, S. E. (2012). Behavioral consistency in corporate finance: CEO personal and corporate leverage. Journal of Financial Economics, 103 (1), 20-40. Drakos, A. A. and Bekiris, F. V. (2010). Corporate performance, managerial ownership and endogeneity: A simultaneous equations analysis for the Athens stock exchange. Research in International Business and Finance, 24, 24-38. Eriotis, N., Vasiliou, D. and Neokosmidi, Z. V. (2007). How firm characteristics affect capital structure; An empirical study. Managerial Finance, 33 (5), 321-331. Faccio, M., Marchica, M.-T. and Mura, R. (2012). CEO gender, corporate risk-taking, and the efficiency of capital allocation. Available at SSRN http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2021136. Fischer, H. and Pollock, T. (2004). Effects of social capital and power on surviving transformational change: The case of initial public offerings. Academy of Management Journal, 47 (4), 463-481. Fosberg, R. H. (2004). Agency problems and debt financing: Leadership structure effects. Corporate Governance, 4 (1), 31-38. Friend, I. and Hasbrouck, J. (1986). Determination of capital structure. Rodney L. white center for financial research. The warton School, University of Pennsylvania, Philadelphia. Friend, I. and Lang, L. H. (1988). An empirical test of the impact of managerial self‐interest on corporate capital structure. Journal of Finance, 43 (2), 271-281. Gleason, K. C., Mathur, L. K. and Mathur, I. (2000). The interrelationship between culture, capital structure and performance: evidence from European retailers. Journal of Business Research, 50, 185-191. Goyal, V. K. and Park, C. W. (2002). Board leadership structure and CEO turnover. Journal of Corporate Finance, 8 (1), 49-66. Hall, G., Hutchinson, P. and Michaelas, N. (2000). Industry effects on the determinants of unquoted SMEs' capital structure. International Journal of the Economics of Business, 7 (3), 297-312. Heminway, J. M. (2007). Sex trust and corporate boards. Hastings Women's Law Journal, 18, 173193. Milbourn, T. T. (2003). CEO reputation and stock-based compensation. Journal of Financial Economics, 68 (2), 233-262. Modigliani, F. and Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48 (3), 261-297. Murphy, K. J. (1999). Executive Compensation, in Ashenfelter, O., Card, D. (Ed.): Handbook of Labor Economics Elsevier Science North Holland. Oliver, B. R. (2005). The impact of management confidence on capital structure (Publication no. Available at SSRN: http://ssrn.com/abstract=791924 or http://dx.doi.org/10.2139/ssrn.791924). Perry, T. and Zenner, M. (2001). Pay for performance? Government regulation and the structure of compensation contracts. Journal of Financial Economics, 62 (3), 453-488. Prendergast, C. and Stole, L. (1996). Impetuous youngsters and jaded old-timers: Acquiring a reputation for learning. Journal of Political Economy, 1105-1134. Randøy, T. and Goel, S. (2003). Ownership structure, founder leadership, and performance in Norwegian SMEs: Implications for financing entrepreneurial opportunities. Journal of Business Venturing, 18 (5), 619-637. Richard, O. and Shelor, R. (2002). Linking top management team age heterogenity to firm performance: Justaposing two mid-range theories. International Journal of Human Resource Management, 13 (6), 958-974. Salleh, A., Ahmad, A. and Kumar, N. (2009). Human governance: A neglected mantra for continuous performance improvement. Performance Management, 48 (9), 26-30.

125


Sanders, K. (2009). The effects of an action plan, staff training, management support and monitoring on restraint use and costs of work‐related injuries. Journal of Applied Research in Intellectual Disabilities, 22 (2), 216-220. Securities Commission. (2005). Guidelines for initial public offerings and listings on the MESDAQ market. Retrieved 29 November 2005 Short, H., Keasey, K. and Duxbury, D. (2002). Capital structure, management ownership and large external shareholders: a UK analysis. International Journal of the Economics of Business, 9 (3), 375-399. Ting, I. W. K. and Lean, H. H. (2011). Capital structure of government linked companies in Malaysia. Asian Academy of Management Journal of Accounting and Finance, 7 (2), 137-156. Vroom, V. H. and Pahl, B. (1971). Relationship between age and risk taking among managers. Journal of Applied Psychology, 55 (5), 399-405. White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48 (4), 817-838. Yim, S. (2013). The acquisitiveness of youth: CEO age and acquisition behavior. Journal of Financial Economics, 108 (1), 250-273. Zwiebel, J. (1996). Dynamic capital structure under managerial entrenchment. The American Economic Review, 86, 1197–1215.

126


DETERMINANTS OF REPAYMENT PERFORMANCE IN MICROFINANCE PROGRAMMES IN MALAYSIA Norhaziah Binti Nawai Faculty of Economics & Muamalat Universiti Sains Islam Malaysia [email protected]

Mohd Noor Bin Mohd Shariff College of Business Universiti Utara Malaysia [email protected]

ABSTRACT This paper analyses the repayment performance in microfinance programmes in Malaysia that applies in individual lending approach. The research framework of this study is built by four factors namely individual/borrower factors, firm/business factors, loan factors and institutional/lender factors as independent variables and repayment performance either paid on time, delinquent and default as dependent variables. The study used mixed methodology, combining between quantitative and qualitative data through questionnaire survey, in-depth interviews, published and unpublished reports. The data of this study is gathered from 401 respondents in Peninsular Malaysia through multistage random sampling. The data is analysed by descriptive analysis and multinomial logit model. Meanwhile, for qualitative data, a total of 21 respondents (7 respondents who paid on time, 7 respondents who delinquent and 7 respondents who default) were selected randomly and structured interviews with 6 MFI’s State Managers. The results show that in terms of borrower characteristics, only microentrepreneur’s religious education level is statistically significant in the relationship between delinquent and good borrowers and between default and good borrowers. Whereas, in firm/business characteristics, the result shows that distance, business formality and total sales are statistically significant. The finding shows that total loan received, loan type and repayment schedule are the loan characteristics that affect microentrepreneur’s loan repayment. In terms of institutional/lender characteristics, the finding shows that loan monitoring is statistically significant in the relationship between delinquent and good borrowers. This study contributes significantly to the knowledge of microfinance programme at large, wherein it explains the factors affecting repayment performance and repayment performance plays an important role to ensure that MFIs can continue providing microfinance to the microentrepreneurs without depending on subsidies. Keywords: repayment performance, individual lending, microfinance, Malaysia

INTRODUCTION Microfinance has been recognized as an essential socio-economic and financial mechanism for poverty alleviation, promoting entrepreneurial development and increasing the profile of disadvantaged people in numerous countries throughout the world (Hossain et al., 2012). Microfinance serves to promote rural livelihoods and urban poor by the creation of entrepreneurship opportunities that encourage the elimination of unemployment by creating potential business based on their interest and skill. Microfinance targets to poor people because these people usually lack of collateral, no steady employment and verifiable credit history, which therefore, cannot even meet the most minimal qualifications to gain access to normal banking. Besides, it can avoid poor people lend with illegal banking such as moneylender or loan shark that charge unreasonable interest rate. However repayment problem that because of adverse selection and moral hazard has become an obstacle to the Micro Finance Institutions (MFIs) especially that offer microfinance based on

127


individual lending approach to maintain their funds. This is because most of the MFIs are NonGovernmental Organisations (NGOs) that received funds from donors and government and they are not profit-oriented organisation. In Malaysia, repayment problem faced by many semi- formal financial institutions that offer credit to micro enterprises and Small Medium Enterprises (SMEs) is on the high side (Starbiz, 2 June 2010). For example, in 2008, the Non-Performing Loans (NPLs) for TEKUN Nasional are 29 per cent, SME Bank is 8 per cent, Suruhanjaya Koperasi Malaysia (SKM) is 13.8 per cent and Permodalan Nasional Berhad (PNB) is 11 per cent (Utusan Malaysia, 16 December 2008). While, the NPLs for Perbadanan Usahawan Nasional Berhad (PUNB) is 30 per cent for Retail PROSPER Scheme and 20 per cent for Graduate PROSPER Scheme and PKS Scheme (Berita Harian, 16 February 2009). Until 2012, the NPLs for TEKUN Nasional is still high which is 20 per cent (TEKUN Nasional, 2012). Therefore this paper tries to analyse the repayment performance in microfinance programmes in Malaysia that apply individual lending approach. This paper is divided into five sections where section one is the introduction followed by literature review in section two. Section three discusses the methodology used and section four explains the result and discussion. While the last section is the conclusion and research recommendations.

LITERATURE REVIEW The concept of microfinance has been existed in the early 1700s initiated by Jonathan Swift in Ireland. The organization provides small loans to rural poor with no collateral known as Irish Loan Fund System. The principal purpose was making small loans with interest for short periods (CGAP, 2006). In 1864, the concept of credit union was developed by Friedrich Wilhelm Raiffeisen in Germany to assist the rural population break out of their dependence on moneylenders. The focus of this institution was mostly on savings mobilization in rural areas in an attempt to help poor farmers how to save. The benchmark model for many microcredit programmes in the world is Grameen Bank in Bangladesh that was established in 1983 by Mohammad Yunus, a Professor at Chittagong University (Hossain, 1988; Yunus, 1999). Majority of the literature on repayment performance of MFIs focused on group- based lending or group liability because group based lending is synonym with microfinance activities such as Ghatak and Guinnane (1999), Godquin (2004), Sharma and Zeller (1997), Zeller, (1998), Besley and Coates (1995), and Silwal (2003). Much theorizing has been done to show the advantages of group loan in minimizing the default rate compared to an individual loan (Ghatak, 2000; Ghatak & Guinnane, 1999; Besley & Coate, 1995; Maata, 2004). Much of the studies emphasized the role of joint liability in group lending, such as peer selection (Ghatak, 1999), peer monitoring (Stiglitz, 1990; Varian, 1990; Banerjee et al., 1994), and peer enforcement (Besley & Coates, 1995). It proved that through group lending, it could mitigate moral hazard, adverse selection and information asymmetries faced by the MFIs. Microfinance programmes that used peer selection, peer monitoring, dynamic incentives, regular repayment schedules, and social collateral help maintain high repayment rates (Silwal, 2003; Tesfaye, 2009). However, not all MFIs offer microfinance based on group lending because of many reasons such as the borrowers need larger loans, have difficulty to find group members and difficulty to attend weekly meeting. The literature on repayment performance in individual lending approach is very sparse and limited mainly to microfinance experience in low-income countries (Suraya Hanim Mokhtar, 2011; Derban et al., 2005; Silwal, 2003). Many researchers have emphasized the importance of loan repayment performance such as Sangoro et al., (2012), Stearns (1995) and Hulme and Mosley (1996). Examining repayment performance is important because if borrowers do not repay, then there may not be sufficient funds to ensure that the liquidity position of the MFI is maintained. When there is a loss in the bank liquidity due to high levels of non-repayment, the cyclical flow of funds between the MFI and the borrowers will be interrupted.

128


There are various factors including individual/borrower characteristics, borrower’s firm characteristics, MFI characteristics and loan characteristics that will affect the willingness and the ability of borrowers to repay their loans. On the other hand, the borrowers may not able to repay their loans due to factors beyond their control such as flood, earthquake and economic recession. The borrowers may default when the return of their business is too small or when the return is just enough to cover the scheduled payment and they decide not to pay their loans by choice (strategic default). Before the lender grant credit to the borrower, he must predict the probability of the borrower to repay the loan and usually financial institutions use credit scoring model to characterize the repayment behaviour of borrowers (Frydman et al., 1985; Boyes et al., 1989; Turvey, 1991). However, the credit scoring used in financial institution is not relevant for most borrowers in MFIs because their business is small and involved in informal activities and some businesses are just start their operation, so the financial information of the business is unavailable. Therefore, MFIs need to construct a relevant probability model mainly rely on the data that observable and can be estimated by loan officer.

METHODOLOGY The study applies mixed methodology by combining between quantitative data and qualitative data through questionnaire survey, in- depth interviews with selected MFI’s state managers and borrowers. According to Creswell (2002), the mixed methods design can be used to generalize findings to a population and develop detailed views of the meaning of a phenomenon or concept for individuals. Mixed methods research is a combination of quantitative and qualitative approaches in many phases in the research process. As a method, it focuses on collecting, analysing, and mixing both quantitative and qualitative data in a single study for better understanding of research problems. Some researchers also called mixed methods as triangulation methods (Bryman, 2004; Denzin & Lincoln, 2000; Morse, 1991). However, the quantitative methodology is the main study and the qualitative methodology as explanatory or supporting method. For questionnaire survey, a total of 401 respondents were selected randomly based on multi stage random sampling from all states in Peninsular Malaysia. The study uses descriptive analysis and multinomial logit analysis to analyse the data. For analysis purpose, the borrowers are classified into three groups as good borrowers who repaid on time, delinquent borrowers who repaid three months from the due date and default borrowers who did not repay in full after six months from the due date. The data is based on their credit status on sampling date. The general approach is intended to explain why a particular population group falls under the three credit repayment categories. Based on past literature, the variables which may significantly affect repayment performance on the basis of the study are determined quantitatively in the model implicitly specified as follows: Repayment Performance = f (individual/borrower characteristics, firm/business characteristics, loan characteristics, institutional/lender characteristics) Or, Y = f( AGE, SEX, EDU, RELEDU, BUSEXP, MNTHINCM, BUSSTAT, LIFEBUSS, DISTNC, BUSSEC, AREAOPT, BUSFOM, FIRMPFT, AMNTLOAN, LOANTYP, PYMTPER, PYMTSCHD, LOANMON, TRANCOST) Where, Y = repayment performance with values reflecting the repayment status of the borrowers either 1 (paid on time), 2 (delinquency) and 3 (default). Age AGE Age of the respondent in years Sex SEX 0 if male and 1 if female Education Level EDU 0 if respondent has attend secondary and below and 1 if respondent has professional certificate and above Religious RELEDU A vector of dummy variables indicating religious

129


Education Level

education level between borrowers where [dummy 1 = 1 if none and 0 if otherwise, dummy 2 = 1 if respondent attend primary level only and 0 if otherwise and, dummy 3 = 1 if respondent attend until secondary level and 0 if otherwise.] Business Experience BUSXEP Respondent business experience (in years) Monthly Income MNTHINCM Total household income per month (in RM) Business Status BUSSTAT 0 if permanent and 1 if temporary Life of Business LIFEBUS Number of years Distance from DISTNC in kilometres Lender Office Business Sector BUSSEC A vector of dummy variables indicating business sector of the borrowers where [dummy 1 = 1 if services and 0 if otherwise, dummy 2 = 1 if manufacturing and 0 if otherwise and dummy 3 = 1 if agriculture and 0 if otherwise.] Area of Operation AREAOPT 0 if rural areas and 1 if urban areas Business Formality BUSFOM 0 if registered with SSM and 1 if not Firm’s profit FIRMPFT Total sales per month (in RM) Amount of Loan AMNTLOAN Total amount received (RM) Received Loan Type LOANTYP A vector of dummy variables indicating loan type between borrowers where [dummy 1 = 1 if first loan and 0 if otherwise, dummy 2 = 1 if second time loan and 0 if otherwise, dummy 3 = 1 if third time loan and 0 if otherwise, dummy 4 = 1 if fourth time loan and 0 if otherwise and, dummy 5 = 1 if fifth time and 0 if otherwise.] Repayment Period PYMTPER Repayment period in years Repayment Schedule PYMTSCHD A vector of dummy variables indicating repayment schedule between borrowers where [dummy 1 = 1 if weekly and 0 if otherwise, dummy 2 = 1 if bi-weekly and 0 if otherwise and dummy 3 = 1 if monthly and 0 if otherwise] Loan Monitoring LOANMON number of times borrowers were visited by loan officer in a month. Transaction Cost TRANCOST 1 if loan processed and disbursed in time and 0 if otherwise.

To support the data from questionnaire survey, informal interviews with 21 selected borrowers and structured interview with 6 MFI’s State Managers were conducted to identify the factors that affect borrower’s repayment performance.

RESULT AND DISCUSSION The aim of descriptive statistics is to summarize large quantities of data by a few numbers and, to highlight the most important numerical features of the data (Antonius, 2003). Based on descriptive analysis, the results show that the mean age of respondents is 42 and most of the respondents are married. 229 respondents are female, and the rests are males who contribute 172 from total respondents. In terms of education level, majority of respondents just finish their secondary school and below. Average of respondents has nine-year business experience and the average of total household income per month is RM4, 149 (USD1,484). In terms of business location, majority of respondents operate their business in rural areas where most of them involved in services and retail

130


activities such as retail shop, hawker stalls, salon and restaurant. Based on 401 respondents, 208 (51.9%) respondents are categorised as good borrowers, while 123 (30.7%) respondents are delinquent and 70 (17.5%) respondents are default borrowers. In terms of factors affecting repayment performance, table 1 has shown the multinomial logit estimation model of loan repayment performance. A positive coefficient indicates that an increase in the independent variable score will result in an increase probability of being in the delinquent and default category than that of being in the paid on time category. On the other hand, a negative coefficient indicates that an increase in the independent variable score will result in a decreased probability of being in the delinquent and default category (Pallant, 2011; Hair et al., 2010). In terms of relationship between delinquent borrower with good borrower, table 4.2 has shown that gender, business experience, education level, distance, total loan and transaction cost have positive coefficient while, age, religious education level, total income, business sector, business status, year of establishment, business area, register with SSM, total sales, loan type, repayment schedule, repayment period and loan monitoring have negative coefficient in relationship between delinquent borrowers and good borrowers. However, only religious education level, distance, register with SSM, total sales, repayment schedule and loan monitoring are statistically significant with a significant level 90 per cent and 95 per cent (p ≤ 0.05 or p ≤ 0.1). Table 1 Multinomial logit estimation model of loan repayment performance Delinquent

Default

Variables

Coefficient

Z

p-value

Coefficient

Z

p-value

Gender

0.351567

1.404

0.1604

0.153033

0.4668

0.6406

Age

-0.018921

-1.197

0.2311

0.008383

0.4307

0.6667

Business Experience

0.010103

0.3749

0.7077

-0.013039

-0.3787

0.7049

Education Level

0.131965

0.3865

0.6991

-0.137517

-0.2627

0.7928

Religious Education Level

-0.401959

-1.867

0.0619*

-0.721468

-2.641

0.0083***

Total Income

-0.000030

-0.9512

0.3415

-0.000146

-1.547

0.1218

Business Sector

-0.138629

-0.5111

0.6093

0.041813

0.1253

0.9003

Business Status

-0.043884

-0.1161

0.9076

-0.079565

-0.1702

0.8649

Year of Establishment

-0.000971

-0.03528

0.9719

0.040552

1.192

0.2331

Distance

0.027291

2.05

0.0404**

0.063982

3.698

0.0002***

Business Area

-0.022344

-0.07892

0.9371

0.474397

1.225

0.2206

Register SSM

-1.250172

-2.229

0.0258**

-0.612843

-1.074

0.2827

Total Sales

-0.000122

-1.906

0.0566*

-0.000646

-3.230

0.0012***

Total Loan

0.000034

1.255

0.2093

0.000055

1.791

0.0733*

Loan Type

-0.037775

-0.222

0.8243

-0.495149

-2.032

0.0421**

Repayment Schedule

-0.352202

-1.794

0.0728*

0.087092

0.345

0.7301

Repayment Period

-0.010031

-0.07494

0.9403

0.146832

0.8263

0.4086

Monthly Installment

-0.000397

-0.4738

0.6356

0.000898

0.8842

0.3766

Loan Monitoring

-0.248618

-2.033

0.0420**

0.202647

1.294

0.1958

Transaction Cost

0.120762

0.4755

0.6344

-0.025788

-0.0725

0.9422

Reference category = Paid on-time *** Significant @ 1% level, ** significant @ 5% level, * significant @ 10% level Number of cases 'correctly predicted' = 235 (58.6%) Likelihood ratio test: Chi-square(40) = 111.727 [0.0000]

While, in terms of relationship between default borrower with good borrower, the findings has shown that gender, age, business sector, year of establishment, distance, business area, total loan, repayment schedule, repayment period, monthly installment and loan monitoring have positive coefficient while,

131


business experience, education level, religious education level, total income, business status, register with SSM, total sales, loan type and transaction cost have negative coefficient. However, only religious education level, distance, total sales, total loan and loan type are statistically significant with a significant level at 1 per cent (p ≤ 0.01), 5 per cent (p ≤ 0.05) and 10 per cent (p ≤ 0.1). Based on the findings above, the result shows that only borrower’s religious education level is statistically significant at p ≤ 0.1 level for the relationship between delinquent borrower and good borrower and highly significant at p ≤ 0.01 in the relationship between default borrower and good borrower. The result has shown that the higher religious education level of the borrowers, the higher probability of the borrowers to repay their loan on time. In Islam, responsible to pay debt is highly important where even the borrowers were dead, they still have to pay their debt or their soul will be hanging. The result has shown that borrowers who belief in Islam is more responsible to payback their loans even they are in difficult time because they know the consequence of not paying the loans. Such actions could be faith-related and it has been argued that borrowers may be more likely to repay their loans because their religious values dictate the fulfilment of their contracts or repayment of debts (Khan & Thaut, 2010). The result is parallel with the result from interviews with respondents where majority of the good borrowers repay their loans because they know the consequences of not payback the debt in Islam. In terms of firm characteristics factor that affect loan repayment performance, the result has revealed that distance, register with SSM and total sales are statistically significant. The result has shown that distance to the lender office may influence borrower’s repayment status where the farther the borrower’s business to the lender office, the higher probability of borrowers to delinquent and default. The result is statistically significant at p ≤ 0.1 level in the relationship between delinquent borrower and good borrower and highly statistically significant at p ≤ 0.01 in the relationship between default borrower and good borrower. The result is in line with other previous studies (Oke et al., 2007; Onyenucheya & Ukoha, 2007; Bhatt & Tang, 2002; Arene, 1992) who found that an increase in distance between borrower’s business premise and lender office will reduce repayment rate. The formality of the business is another factor that influences borrower repayment status where the finding has shown that businesses who registered with Company Commission of Malaysia (Suruhanjaya Syarikat Malaysia (SSM)) are more likely to repay the loan on time compared with businesses that did not registered with SSM. A higher degree of business formality demonstrated a better repayment rate (Pisani & Yoskowitz, 2004). The result also shows that total sales is an important factor in determining borrower’s loan repayment performance where the finding has revealed a strong effect at p ≤ 0.01 in the relationship between default borrower and good borrower and at p ≤ 0.1 in the relationship between delinquent borrower and good borrower. The result shows that borrowers who get higher total sales per month are more creditworthy than borrowers who get less total sales per month. The result is parallel with the result found by Nannyonga (2000); Onyenucheya & Ukoha (2007); Oke et al., (2007); Von Pischke (1991) who found that borrowers who get higher profit, have higher chance of repaying their loans compared to borrowers who declare less profit. The finding has shown that total loan received, loan type and repayment schedule are the loan characteristics factor that statistically significant at p ≤ 0.1 and p ≤ 0.01 level. The result shows a strong effect at p ≤ 0.01 in the relationship between default borrower and good borrower where the bigger total loan received by the borrowers, the higher probability of the borrowers to default. When the borrowers received more loans, there is the tendency that the excess loan may be diverted to other unproductive, non for business uses such as for personal use, children’s school fees and pay other debt (Norell, 2001). Even the Grameen Bank clients used their loans for many different purposes such as food consumption, health, and education (Collins et al., 2009). Based on the interview with respondents, six of them admit that they use some of the loan given for other things such as to renovate house, children education and to buy things such as hand phone.

132


Besides, the result has revealed that loan type (dynamic incentive) is statistically significant at p ≤ 0.1 level in the relationship between default borrower and good borrower where the increasing number of time the borrowers received loan from the same MFI, the higher probability of the borrowers to pay on time. Dynamic incentives consist of a threat and an opportunity which is the threat of being cut off from future loans and the opportunity of borrowing larger amounts in the future (Berglind & Karimi, 2007). The finding also shows a negative effect between delinquent borrowers and good borrowers in terms of repayment schedule where the repayment schedule is statistically significant at p ≤ 0.1 level. The result shows that the monthly type of repayment schedule is more likely to be a good borrower than a delinquent borrower. The result is contradict with previous study such as Guttman (2007) who found that weekly repayment basis is more suitable because it can identified defaulters early and can be pushed by the bank officer to “keep step” in their loan repayment. However, Field & Pande (2008) found that no significant effect of type of repayment schedule either weekly or monthly on client delinquency and default. They suggest a more flexible schedule to the clients because it can reduce transaction costs. In terms of institutional factors that affect loan repayment performance, the findings has shown that loan monitoring is statistically significant at p ≤ 0.05 level in the relationship between delinquent borrowers and good borrowers. The result shows that the more frequent the MFIS officers visit borrowers’ business premise, the higher probability of the borrowers to pay on time. The result is parallel with previous studies such as Deininger and Liu (2009); Papias and Ganesan (2009) and Olomola (2000) which found that loan monitoring is an important factor in increasing loan repayment rate among borrowers.

CONCLUSION AND RECOMMENDATION The importance of microfinance facilities to the development of micro entrepreneurs in the world have been proven that microfinance can help micro entrepreneurs to get credit to finance their business activities or to get capital to set up the business. This is because majority of them are denied from commercial banking credit because lack of collateral as needed by the banks. However, giving credit to the micro entrepreneurs is high risk because of limited financial capabilities and the business has not been stable. Therefore, to help MFIs especially that using individual-lending approach to mitigate adverse selection and moral hazard problems and to determine factors affecting micro entrepreneur’s loan repayment, the study suggests imposing maximum current loan instalment per monthly income like practiced by commercial banks where the current instalment not more than two third of the monthly income. Besides, the MFIs should matching the repayment schedule and the expecting of receiving income such as agriculture borrower that usually receive income after harvesting time, the repayment is based on harvest time not based on regular repayment period. The MFIs can also differentiate between applying loan for start up the business and for working capital purpose because normally who apply for start up the business are new entrepreneurs and have less experience in business. They not only need credit but more than credit such as business training like how to promote their product, prepare financial statement and the presentable of the product. Therefore, it is suggested to provide related training skills to the new entrepreneurs to enhance their business skills. Moreover, the lower the number of months the business operated, the higher the risk for the business to survive because businesses are more likely to fail within the first year of operation. While to increase the loan repayment, it is proposed to MFIs to increase the monitoring system by introducing peer monitoring like imposed in the group lending approach. This can be applied through Entrepreneur Club where success borrowers can monitor new or problem borrowers to manage and to solve their business problems like mentor mentee programme. Besides that, this can reduce the operational cost of MFIs in monitoring their clients. In addition to the dynamic incentive where on time borrowers and borrowers who finish repay their loan will be offered for bigger loan, the MFIs can also give rebate to those who succeed paying their instalment on time or make full repayment

133


early. This can encourage the borrowers to repay on time and to make full repayment early when they have extra income. Besides that, this can eliminate borrower’s perception towards microfinance loans where a microfinance loan is not important and can delay the payment.

REFERENCES Antonius, R. (2003). Interpreting quantitative data with SPSS. United Kingdom, London: Sage Publications. Arene, C.J. (1992). Loan repayment and technical assistance among smallholder maize farmers in Nigeria. African Review of Money and Banking. A Supplement of Savings and Development Journal, 1, 64-72. Banerjee, A.V., Besley, T., Guinnane, T.W. (1994). Thy neighbor’s keeper: the design of a credit cooperative with theory and a test. The Quarterly Journal of Economics, 109(2), 491-515. Berglind, V., & Karimi, A. (2007). Repayment performance in microfinance: A theoretical analysis. Retrieved from Uppsala University Web site: uu.diva portal.org/smash/get/diva2:131739/FULLTEXT01 Berita Harian. (2009, 16 February). PUNB sasar salurkan pinjaman RM164.3 juta. Besley, T., & Coates, S. (1995). Group lending, repayment incentives and social collateral. Journal of Development Economics, 46, 1-18. Bhatt, N., & Tang, S.Y. (2002). Determinants of repayment in microcredit: evidence from programs in the United States. International Journal of Urban and Regional Research, 26(6), 360-376. Boyes, W.J., Hoffman, D., & Low, S. (1989). An econometric analysis of the bank credit scoring problem. Journal of Econometrics, 40, 3-14. Bryman, A. (2004). Social Research Methods (2nd Edition ed.). New York: Oxford University Press. Consultative Group to Assist the Poor (CGAP).(2006). The New Vision of Microfinance: Financial Services for the Poor. Retrieved from http://www. globalvision.org/library/4/1051/. Creswell, J.W. (2002). Research design: qualitative, quantitative and mixed method approaches. 2nd Ed. Sage Publication, Thousand Oaks, California, U.S.A. Deininger, K., & Liu, Y. (2009). Determinants of repayment performance in Indian micro-credit groups. Washington D.C: The World Bank. Denzin, N., & Lincoln, Y. (2000). Handbook of Qualitative Research. London: Sage Publications. Derban, W., Binner, J., & Mullineux, A. (2005). Loan repayment performance in community development finance institutions in the UK. Small Business Economics , 25, 319-332. Field, E., & Pande, R. (2008). Repayment frequency and default in microfinance: evidence from India. Journal of the European Economic Association, 6(2-3), 501-509. Frydman, H., Altman, E.I., Kao, D.L. (1985). Introducing recursive portioning for financial classification: the case of financial distress. Journal of Finance, 40(1), 269-291. Ghatak, M. (1999). Group lending, local information and peer selection. Journal of Development Economics, 60, 27-50. Ghatak, M. (2000). Screening by the company you keep: joint liability lending and the peer selection effect. The Economic Journal, 110, 601- 631. Ghatak, M., & Guinnane, T.W. (1999). The economics of lending with joint liability: Theory and practice. Journal of Development Economics, 60, 195- 228. Godquin, M. (2004). Microfinance repayment performance in Bangladesh: how to improve the allocation of loans by MFIs. World Development, 32(11), 1909-1926. Guttman, J.E. (2007). Repayment performance in microcredit programs: theory and evidence. Working Paper. Networks Financial Institute. Indiana State University. March 2007. Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2010). Multivariate Data Analysis (7nd Edition ed.). New Jersey: Pearson Prentice Hall. Hossain, M. (1988). Credit for Alleviation of Rural Poverty: the Grameen Bank in Bangladesh. Research Report; 65. International Food Policy Research Institute in Collaboration with the Bangladesh Institute of Development Studies. February 1988.

134


Hossain F, Rees C and Millar T.K. (2012). Success factors of microcredit: What can we learn for international development? in Microcredit and international development: Contexts, achievements and challenges. Routledge. New York. USA. Hulme, D., & Mosley. P. (1996). Finance Against Poverty, 2, London, UK. Khan, A.A., & Thaut, L. (2010). The opportunities and challenges of Islamic microfinance in G. ter Heer. Transforming Development. Maata, D. (2004). Examining determinants of group loan repayment in the Dominican Republic. Unpublished Master Dissertation. The Ohio State University. United States. Morse, J. M. (1991). Approaches to qualitative-quantitative methodological triangulation. Nursing Research , 40, 120-123. Nannyonga, H. L. (2000). Determinants of repayment behaviour in the Centenary Rural Development Bank in Uganda. Unpublished Doctoral Dissertation. The Ohio State University. United States. Norell, D. (2001). How to reduce arrears in microfinance institutions. Journal of Microfinance, 3(1), 115- 130. Oke, J.T.O., Adeyemo, R., & Agbonlahor, M.U. (2007). An Empirical Analysis of Microcredit Repayment in Southwestern Nigeria. Humanity & Social Sciences Journal, 2(1), 63-74. Olomola, A.S. (2000). Determinants of smallholder loan repayment performance: evidence from the Nigeria micro-finance system. Retrieved from http://www. economics.ox.nc.uk/CSAEadmin/conferences/2000-oiA/pdfpapers/olomola.pdf. Onyenucheya, F., & Ukoha, O. (2007). Loan Repayment and Credit Worthinessof Farmers under the Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB). Agricultural Journal , 2 (2), 265-270. Pallant, J. (2010). SPSS Survival Manual: A Step by Step Guide to Data Analysis Using SPSS (4th Edition ed.). United Kingdom, Berkshire: McGraw Hill. Papias, M.M. & Ganesan, P. (2009). Repayment behaviour in credit and savings cooperative societies. Empirical and theoretical evidence from rural Rwanda. International Journal of Social Economics, 36(5), 608-625. Pisani, M., & Yoskowitz, D. (2004). Microcredit and micro and small enterprise development in Belize, Central America: A qualitative study of the Small Farmers and Business Bank, Ltd. Latin America Business Review , 5 (1), 45-69. Sangoro, O., Ochieng, P., & Bureti, P. (2012). Determinants of loan repayment among women-owned enterprise in Kenya: A case of Eldoret Municipality. German: Lambart Academic Publishing. Silwal, A.R. (2003). Repayment performance of Nepali Village Banks. Unpublished Master Dissertation. Swarthmore College, Swarthmore. Sharma, M., & Zeller, M. (1997). Repayment performance in group based credit programmes in Bangladesh. World Development, 25(10), 1731-1742. StarBiz. (2009, 27 March). Ramon: SMEs in need of comprehensive plan-Nation lacks strategy to help sector weather crisis. The Star. Sterns, K. (1995). The hidden beast: delinquency in micro enterprise credit programme. ACCION Discussion Thesis Document No.6. Stiglitz, E.J. (1990). Peer monitoring and credit markets. The World Bank Economic Review, 4(3), 351-366. Suraya Hanim Mokhtar. (2011). Microfinance performance in Malaysia. (Unpublished PhD Thesis). Lincoln University, New Zealand. Tesfaye,G.B. (2009) Econometric analyses of microfinance credit group formation, contractual risks and welfare in Northern Ethiopia. PhD thesis Wageningen University, Wageningen, the Netherlands. Turvey., G.C. (1991). Credit scoring for agricultural loans: a review with applications. Agricultural Finance Review, 51, 43-54. Varian, H.R. (1990). Monitoring agents with other agents. Journal of Institutional and Theoretical Economics, 146, 153-174. Von Pischke, J.D. (1992). RoSCAs: State of the Art Financial Intermediation, in D. W Adams and D.A. Fitchett. Informal Finance in Low-Income Countries, Boulder. Westview. Yunus, M. (1999). Banker to the Poor. The autobiography of Muhammad Yunus, founder of Grameen Bank. Aurum Press Limited, London.

135


Zeller, M. (1998). Determinant of repayment performance in credit groups: The role of program design, intragroup risk pooling, and social cohesion. Economic Development and Cultural Change, 46(3), 599-621.

136


PERSEPSI PELAJAR-PELAJAR IPTA DI TERENGGANU MENGENAI GEJALA SOSIAL Siti Sa’adiah Binti Shafik Jabatan Usuluddin Universiti Sultan Zainal Abidin [email protected]

Mohd. Safri Bin Ali Jabatan Usuluddin Universiti Sultan Zainal Abidin [email protected]

Azyyati Binti Mohd Nazim Jabatan Dakwah Universiti Sultan Zainal Abidin [email protected]

Basri Bin Ibrahim Jabatan Syariah Universiti Sultan Zainal Abidin [email protected]

ABSTRAK Kajian ini akan cuba menyingkap persoalan gejala sosial di kalangan penuntut IPTA di negeri Terengganu dengan memfokuskan kepada sikap dan ketahanan mental mereka dalam menghadapi gejala sosial dengan membuat sedikit perbandingan terhadap konsep ‘ihsan’ sebagaimana teori yang dikemukakan oleh al-Imam al-Ghazali bahawa di antara punca kerosakan yang melanda jiwa manusia antara lain adalah berpunca daripada dua faktor tadi. Penyelidikan ini membatasi kawasan dan skop kajiannya di IPTA negeri Terengganu kerana IPTA juga tidak terlepas daripada tempias gejala sosial yang sedang merebak yang mana saban masa kedengaran rintihan masyarakat di media massa dan elektronik tentang kelakuan yang kurang menyenangkan telah tersebar sejak kebelakangan ini. Adalah difikirkan bahawa penyelidikan mengenai tajuk ini sangat mustahak dilakukan oleh penyelidik sebagai merintis jalan mendapatkan suatu pemikiran dan pemahaman yang menyeluruh mengenai perkembangan gejala sosial di kalangan pelajar IPTA di negeri Terengganu. Metodologi kajian ini melibatkan kajian dokumentasi: melibatkan pencarian dan pengumpulan maklumat di perpustakaan serta kajian- kajian lepas yang telah di buat di IPTA. Kajian yang kedua iaitu kajian lapangan yang melibatkan kepada pengumpulan melalui kaedah persampelan berkelompok, soal selidik dan temu bual. Populasi sasaran melibatkan pelajar IPTA (UMT, UDM dan UiTM Dungun) seramai 1500 orang. Bentuk persampelan adalah rawak berstrata berdasarkan kelompok populasi pelajar tahun satu, dua dan tiga di setiap IPTA. Jumlah sampel yang dipilih adalah seramai 500 orang pelajar daripada setiap IPTA yang terlibat. Semua data yang dikutip dianalisis menggunakan perisian SPSS (ANOVA) kerana melibatkan perbandingan lebih daripada dua pemboleh ubah. Daripada jumlah tersebut, sebanyak 980 orang pelajar telah memulangkan kembali borang soal selidik yang telah dijawab dengan lengkap, manakala bakinya tidak berbuat demikian. Jumlah ini mewakili 65.33% daripada keseluruhan borang soal selidik yang telah diagihkan. Menurut Oma Sakaran (1992), populasi seramai 600 orang memerlukan responden tidak kurang daripada 234 orang dan jika 320 orang pula memerlukan responden tidak kurang dari 120 orang. Ini bermakna, jika populasi ialah seramai 1500 orang maka jumlah soal selidik yang dikira sah untuk diambilkira ialah seramai 585 orang. Oleh yang demikian, kajian ini telah dikira menepati sasaran, meskipun kehendak sebenarnya ialah keseluruhan responden kajian. Katakunci: gejala sosial, pelajar IPTA, Terengganu

137


ABSTRACT Social problems among students in universities are spread so that every time people heard moans in the mass media about their behaviour is inappropriate. Since the research on issues of social problems need to be improved, research on this very important topic by researchers as paving the way to get an idea and a thorough understanding of the development of social problems among university students in the state. This paper discusses the problem of promiscuity among students in universities in the state. To view the public perception in the state of free association, a total of 1500 questionnaire consisted of six main sections: personal biodata, the perception of free association, free association and the level of negative symptoms, social factors and independent control over free association has been prepared and distributed randomly to students at three key Higher Education Institutions in the State, namely Universiti Sultan Zainal Aabidin (UniSZA), Universiti Malaysia Terengganu (UMT) and the Universiti Institut Teknologi MARA (UiTM). Of these, about 980 students were returning back questionnaires were answered completely, while the rest did not do so. This amount represents 65.33% of the total questionnaires distributed.The study found that awareness UniSZA students (36.1%) and UMT (35.4%), the issue of promiscuity is big and satisfying than the students of UiTM (28.5%). Besides the t-value for comparison of perceptions based on gender (t> 1.7369), ethnicity of students (t> 1.1013) and type of education (t> 2.5016) showed there were significant differences on the perception of promiscuity among students in universities in the state. This study suggests that society organizations NGOs cooperate in eradicating the symptoms of promiscuity through campaigns, seminars or courses of religion, creating a mass Guidance classes Ain and tazkirah as an alternative to the influence of sex education and the Islamic perspective. built environment, such as banners, buntings, screen or others as a 'monitor' the elements of free association. Keywords: social problems, students in universities, Terengganu

PENDAHULUAN Persoalan mengenai gejala sosial di dalam masyarakat telah menjadi isu yang telah lama dibincangkan. Malah, filem-filem klasik seperti “Anakku Sazali” yang diarahkan oleh Allahyarham P. Ramlee, adalah satu ungkapan secara visual yang menonjolkan kebejatan akhlak di kalangan muda mudi. Sekaligus, ia menunjukkan kepada kita persoalan tentang masalah gejala sosial telah menjadi perbincangan umum sejak hampir lima dekad yang lalu, selain persoalan yang dikaitkan dengan isuisu bohsia, bohjan, mat rempit, peragut, khalwat dan sebagainya seperti menjadi mimpi ngeri kepada ibu bapa yang ingin melahirkan sebuah masyarakat yang beretika dan bermoral melalui anak-anak mereka. Menginsafi kepada situasi negatif inilah, penyelidik dari UniSZA merasa bertanggungjawab memilih tajuk “Gejala Sosial di Kalangan Pelajar IPTA Di Terengganu” sebagai bahan penyelidikan kerana ia merupakan satu kemelut yang perlu dibendung daripada terus tersebar luas di IPTA di negeri Terengganu ini. Penyelidikan ini membatasi kawasan dan skop kajiannya di IPTA negeri Terengganu kerana IPTA juga tidak terlepas daripada tempias gejala sosial yang sedang merebak sehingga saban masa kedengaran rintihan masyarakat di media massa dan elektronik tentang kelakuan yang kurang menyenangkan telah tersebar sejak kebelakangan ini. Metodologi kajian ini melibatkan kajian dokumentasi: melibatkan pencarian dan pengumpulan maklumat di perpustakaan serta kajian- kajian lepas yang telah di buat di IPTA. Kajian yang kedua iaitu kajian lapangan yang melibatkan kepada pengumpulan kaedah persampelan berkelompok, soal selidik dan temu bual. Populasi sasaran melibatkan pelajar IPTA UMT, UDM, UiTM Dungun seramai 1500 orang. Bentuk persampelan adalah rawak berstrata berdasarkan kelompok populasi pelajar tahun satu, dua dan tiga di setiap IPTA Jumlah sampel yang dipilih adalah seramai 500 orang pelajar

138


daripada setiap IPTA yang terlibat .Semua data yang dikutip dianalisis menggunakan perisian SPSS (ANOVA) kerana melibatkan perbandingan lebih daripada 2 variable. Daripada jumlah tersebut, sebanyak 980 orang pelajar telah memulangkan kembali borang soal selidik yang telah dijawab dengan lengkap, manakala bakinya tidak berbuat demikian. Jumlah ini mewakili 65.33% daripada keseluruhan borang soal selidik yang diagihkan. Menurut Oma Sakaran (1992), populasi seramai 600 orang memerlukan responden tidak kurang daripada 234 orang dan jika 320 orang pula memerlukan responden tidak kurang dari 120 orang. Bermakna jika populasi seramai 1500 orang bererti jumlah soal selidik yang dikira sah untuk diambilkira ialah seramai 585 0rang. Dengan itu, kajian ini telah dikirakan menepati sasaran, meskipun kehendak sebenarnya ialah keseluruhan responden kajian. Adalah difikirkan bahawa penyelidikan mengenai tajuk ini sangat mustahak dilakukan oleh penyelidik sebagai merintis jalan mendapatkan suatu pemikiran dan pemahaman yang menyeluruh mengenai perkembangan gejala sosial di kalangan pelajar IPTA di negeri Terengganu.

DAPATAN KAJIAN Profil Pelajar Berdasarkan Jadual 1, pelajar perempuan didapati lebih ramai (73.2%) daripada pelajar lelaki (26.2%) mewakili daripada jumlah keseluruhan responden. Jadual 1 Bilangan peratusan responden menurut jantina Lelaki

Perempuan

257 (26.2%)

720 (73.5%)

PERSePSI PELAJAR TERHADAP PERGAULAN BEBAS Berdasarkan Jadual 2, Pelajar IPTA di negeri Terengganu mempunyai persepsi yang baik dan sihat terhadap pergaulan bebas. Misalnya di dalam soal selidik bagi melihat, adakah benar pergaulan bebas merupakan kebebasan jiwa remaja, didapati lebih daripada 70% responden menyatakan tidak bersetuju. Seramai 381 responden adalah terdiri daripada pelajar wanita dan bakinya adalah lelaki. Lebih daripada 73% daripada responden bersetuju, pergaulan bebas lebih banyak menyumbang kepada aktiviti sosial yang negatif di dalam masyarakat terutama di kalangan para pelajar itu sendiri. Persepsi ini satu persepsi yang baik, kerana seseorang yang berfikiran sihat tidak mungkin akan menyatakan gejala sosial boleh menyumbang kepada kebaikan kepada negara, agama dan bangsa. Negara-negara barat yang mengamalkan pergaulan bebas sendiri memperakui kesannya yang negatif. Misalnya di dalam kes pengguguran yang dilakukan remajanya di Amerika Syarikat, sebanyak 1.6 juta kes penggguguran bayi dilakukan dalam tahun 1990 sahaja Di kalangan responden ada yang berpendapat pergaulan untuk tujuan akademik boleh dilakukan, tetapi jumlahnya tidak sampai pun 50 % daripada keseluruhan responden yang menyerahkan borang soal selidik mereka.

139


Jadual 2 Persepsi pelajar terhadap pergaulan bebas Tanggapan pelajar Setuju

Tidak Setuju

Saya suka pergaulan bebas kerana ia adalah 61 trend pelajar IPTA masa kini 6.2%

Saya tidak peduli kepada pergaulan bebas kerana ia 179 tidak mengubah apa-apa pun kepada saya 18.3% Saya rasa pergaulan bebas lebih banyak menyumbang 717 kepada aktiviti sosial yang negatif 73.2% Tiada sebarang sekatan daripada universiti daripada 317 bergaul bebas. 32.3%

514 52.4%

307 31.3%

85 8.7%

145 14.8%

pergaulan bebas dapat meluaskan ikatan persahabatan 250 223 dan kenalan diantara lelaki dan perempuan 25.5% 22.8% persekitaran yang bebas mempengaruhi pelajar 697 untuk turut bergaul 6.1% 71.1% pergaulan bebas adalah lambang kemerdekaan jiwa remaja 79 50.4%

60 bebas

494

8.1%

pergaulan bebas adalah salah dari aspek moral dan agama 588

131 13.4%

60.0%

140


TAHAP PERGAULAN BEBAS Berdasarkan Jadual 3, sebanyak 82.2 % responden mengakui, tidak mahu terlibat dengan pergaulan bebas, yang menjerumuskan mereka kepada perbuatan yang bercanggah dengan ajaran agama dan moral. Hanya 8.57 % sahaja dari kalangan pelajar IPTA yang terlibat dengan pergaulan bebas yang keterlaluan, manakala bakinya sebanyak sebanyak 86.02%, tidak terlibat. Sebanyak 86% daripada kalangan pelajar mengakui tidak pernah melakukan perbuatan keji, kerana pergaulan bebas, manakala 59 orang sahaja yanag mengakui pernah melakukan perbuatan tersebut. Jumlah 59 orang responden yang terlibat dengan perbuatan keji ini, hanya mewakili sebanyak 6.02 %. Walaupun begitu, langkah positif perlu diambil untuk mempastikan perbuatan keji ini, tidak berterusan dan berjaya dibenteras sama sekali, kerana tidak sewajarnya Institusi Pengajian Tinggi mengandungi kes perbuatan keji, kerana tujaun penubuhannya adalah bertujuan melahirkan masyarakat yang sihat dan masyarakat yang sihat tidak mungkin akan muncul kalau perbuatan keji menjadi amalan hidup seseorang, apalagi melibatkan orang yang berilmu yang melibatkan graduan universiti. Jadual 3 Tahap pergaulan bebas pelajar-pelajar IPTA Tahap Pergaulan Bebas Setuju Setuju Anda fikir pergaulan bebas di kalangan 193 pelajar IPTA di Terengganu masih 19.7% terkawal. Anda bergaul bebas sekadar untuk 380 berkawan dan memenuhi masa lapang 38.8% sahaja. Anda bergaul bebas dan sanggup 24 melakukan perbuatan yang menyalahi 2.4% ajaran agama dan moral. Anda bergaul bebas kerana anda terikut 87 -ikut dengan kawan. 8.9% Anda melakukan perbuatan keji 59 kerana pergaulan bebas. 6.02%

Tidak

134 13.7%

142 14.5%

809 82.8%

419 42.8%

749 76.4%

141


PERGAULAN BEBAS DAN GEJALA NEGATIF Berdasarkan Jadual 4, lebih 81.0% responden setuju bahawa pergaulan bebas menyebabkan pegangan agama dan moral longgar, manakala 3.3% sahaja yang tidak setuju. Ini bererti pergaulan bebas bukan sahaja bercanggah dengan agama dan moral yang sihat, bahkan turut memberi kesan di dalam melonggarkan pegangan agama dan moral seseorang pelajar. Dari 85.9% orang tidak setuju bahawa Pergaulan bebas boleh mendorong nafsu dan syahwat kepada perzinaan yang di benarkan dalam agama dan moral berbanding dengan 6.6% orang setuju. Ini kerana majoriti para pelajar IPTA di negeri Terengganu mempunyai tahap kesedaran yang tinggi, yang pergaulan bebas boleh mendorong nafsu dan syahwat seseorang kepada perzinaan. Sebanyak 76% orang setuju bahawa penyelewengan disiplin pergaulan bebas mendatangkan kesan buruk manakala 11% sahaja tidak setuju. Maka dengan ini jelas kepada kita bahawa pergaulan bebas boleh menyumbang kepada pembuangan bayi dan tanggapan yang pembuangan bayi akibat terlanjur tidak salah dari segi agama dan moral. Tanggapan ini sangat merbahaya, kerana boleh merebak kepada tanggapan-tanggapan positif terhadap perkara-perkara keji yang lain, sebagaimana masyarakat nabi Lut ( a.s ) satu ketika dahulu menganggap orang-orang yang tidak bergaul bebas dan tidak melakukan hubungan seks sesama jenis, sebagai orang yang mendakwa diri mereka adalah suci. Jadual 4 Pergaulan bebas dan gejala negatif Pergaulan bebas dan gejala negatif

Tidak Setuju

Setuju

Pergaulan bebas boleh menyebabkan pegangan agama & moral longgar

32 3.3%

794 81.0%

Pembuangan bayi akibat keterlanjuran dibenarkan dalam agama dan moral

842 85.9%

65 6.6%

Penyelewengan disiplin pergaulan dan mendatangkan kesan buruk,

112 11.43%

743 76%

Pergaulan bebas punca kehilangan kehormatan diri.

49 5.0%

681 69.5%

Pergaulan bebas meruntohkan institusi kekeluargaan dan masyarakat

772 79.0%

34 3.47%

FAKTOR-FAKTOR MENYEBABKAN PERGAULAN BEBAS Berdasarkan Jadual 5, lebih daripada 80% daripada responden mengakui peranan media massa antara yang menyumbang kepada pergaulan bebas di atas. Sikap dan tingkah laku artis di atas pentas dan juga di luar daripada pentas, juga menyumbang kepada pergaulan bebas. Soal selidik yang dijalankan mendapati 65% orang responden memberikan jawapan bersetuju. Jumlah ini adalah lebih besar daripada jumlah yang menyatakan tidak bersetuju. Pengaruh kawan dan persekitaran yang tidak bermoral, memberi saham yang besar di dalam mewujudkan pergaulan bebas di kalangan remaja khususnya di kalangan pelajar-pelajar IPTA di

142


negeri Terengaganu. Dalam soal selidik yang dijalankan, didapati 83.6% orang responden memberikan jawapan bersetuju. .Responden yang memberikan jawapan tidak bersetuju pula ialah seramai 7.55% orang sahaja. Kejahilan terhadap ajaran agama membuatkan hidup seseorang mudah terumbang ambing dan hilang pedoman. Ajaran agama melibatkan akidah, ibadah dan juga akhlak. Soal selidik yang dijalankan mendapati, seramai 89.8% orang responden memberikan jawapan bersetuju.. Responden yang memberikan jawapan tidak bersetuju ialah seramai 4.38% orang. Jadual 5 Faktor-faktor yang menyebabkan pergaulan bebas Faktor-Faktor Menyebabkan Pergaulan Bebas Peranan Media Massa

Tidak setuju 29 2.9%

Setuju 792 80.8%

Kejahilan Terhadap Ajaran Agama

20 2.0%

Pengaruh Kawan Dan Persekitaran Yang Tidak Bermoral.

74 7.55%

819 83.6%

Pengaruh Pergaulan Bebas Daripada Barat

110 11.2%

715 73%

Pengaruh Artis Hiburan

144 14.6%

637 65%

Keterlaluan Mengiku Nafsu

57 71.25% 295 30.10%

842 86% 480 49 %

Keinginan Hidup Bebas Tanpa Terikat Dengan Peraturan.

97 9.89%

719 73 %

Ketiadaan Aktiviti Berfaedah Untuk Mengisi Masa Lapang.

169 17.24%

671 68%

Kecuaian Ibubapa

880 89.8%

KAWALAN TERHADAP PERGAULAN BEBAS Berdasarkan Jadual 6, didapati seramai 93% orang responden menyatakan bersetuju. Jumlah responden yang memberikan jawapan tidak bersetuju ialah seramai 3.26% orang Ini menunjukkan hampir keseluruhan responden bersetuju yang pengetahuan agama, penting untuk mengawal pergaulan bebas. Jumlah responden yang memberikan jawapan tidak bersetuju ialah seramai 3.26% daripada keseluruhan responden. Ini menunjukkan hampir keseluruhan responden bersetuju yang pengetahuan agama, penting untuk mengawal pergaulan bebas.

143


Soal selidik yang dilakukan mendapati seramai 73% orang responden menyatakan bersetuju, sikap tidak peduli merupakan punca pergaulan bebas yang melampau. Jumlah responden yang menyatakan tidak bersetuju ialah 11.83% orang sahaja.Seramai 79% orang responden bersetuju diwujudkan papan tanda ini. Responden yang menyatakan sangat tidak bersetuju pula ialah seramai 2.55% orang sahaja dan jumlah ini terlalu kecil, kalau hendak dibandingkan dengan jumlah yang menyatakan sangat bersetuju sebelum ini.Manakala soal selidik yang dijalankan mendapati 86% orang responden menyatakan bersetuju, pengetahuan moral sahaja tidak cukup untuk mencegah pergaulan bebas. Jumlah responden yang memberikan jawapan tidak bersetuju pula ialah seramai 4.79% orang. Ini menunjukkan majoriti pelajar IPTA di negeri Terengganu bersetuju dari segi keperluan mengadakan pendekatan lain termasuklah memperkenalkan subjek akhlak, syariat, akidah dan sebagainya, yang peru digabungkan sekali dengan pengetahuan moral, dalam usaha mengatasi pergaulan bebas. Dalam soal selidik yang dijalankan, jumlah responden yang menyatakan setuju ialah seramai 74 % daripada keseluruhan responden yang menghantar borang soal selidik. Responden yang menyatakan tidak setuju ialah seramai 12.24% orang.Soal selidik yang dijalankan berkaitan dengan tajuk ini mendapati, seramai 83% orang responden menyatakan bersetuju, kaki tangan akademik juga perlu memberi saham ke arah mengatasi masalah pergaulan bebas di kalangan pelajar IPTA. Manakala 17.24 oramg tidak setuju. Dalam soal selidik yang dijalankan berkaitan dengan memperkasakan HEPA, seramai 53% orang responden menyatakan setuju. Jumlah yang tidak bersetuju pula ialah seramai 22.9% orang, Ini kerana dalam soal selidik yang dijalankan bagi melihat adakah pelajar yang tiada couple dikira selamat daripada pergaulan bebas atau tidak, didapati seramai 339 orang pelajar menyatakan tidak bersetuju.Keseluruhannya ialah lebih kurang 52 % daripada pelajar. Jumlah responden yang memberikan jawapan bersetuju, adalah hanya 21% sahaja. Dengan ini kita dapat simpulkan tidak ada couple bukan satu jaminan yang pelajar di IPTA terselamat daripada gejala sosial, kerana itu sistem mentor mentee penting diperkasakan. Jadual 6 Kawalan terhadap pergaulan bebas KAWALAN TERHADAP PERGAULAN BEBAS

Tidak setuju

Setuju

Mengukuhkan Pengetahuan Agama

32 3.26%

920 93%

Mengambil Kira Tentang Kemudaratan Pergaulan Bebas.

116 11.83%

731 74%

Mewujudkan Papan Tanda Melarang Pergaulan Bebas.

25 2.55%

781 79%

Menggubal Undang-Undang Melarang Pergaulan Bebas

47 4.79%

843 86%

Mengambil Tindakan Tegas

120 12.24%

728 34%

Peranan Kakitangan Akademik

169 17.24%

811 83%

Memperkasakan HEP

224 22.9%

506 52%

511 52%

206 21%

Memperkasakan Sistem Mentor Mentee

144


CADANGAN 1. Bekerjasama dengan badan-badan pertubuhan NGO dalam membasmi gejala pergaulan bebas menerusi kempen-kempen, seminar ataupun kursus agama. 2. Mewujudkan kelas-kelas Bimbingan Fardhu Ain dan tazkirah sebagai satu alternatif kepada pengaruh pendidikan seks menurut perspektif Islam. 3. Menekankan keberkesanan sistem mentor-mentee dan hendaklah dilaksanakan mengikut langkah yang bersepadu dan terancang. 4. Membina suasana persekitaran seperti banner, banting,skrin atau lain-lain lagi sebagai ‘monitor’ kepada unsur-unsur pergaulan bebas. 5. Mewujudkan kegiatan Pimpinan Rakan Sebaya sebagai pemantau dan pelapor kepada yang terjebak dalam pergaulan bebas. 6. Mengadakan ‘Operasi Sifar Pergaulan Bukan Mahram’ yang tidak syari’e supaya memenuhi tuntutan “ Sadd al-Zara’i” untuk difahami oleh masyarakat awam.Garis panduan hendaklah dirasmikan seperti: Etika pakaian, pergaulan yang tidak menimbulkan syak wasangka. 7. Pengaruh media massa perlu ditapis menerusi peringatan dan kesedaran jati diri. Juga berperanan untuk mendidik masyarakat yang berakhlak baik dan luhur. 8. Mengenal pasti pelajar yang bermasalah dalam pergaulan bebas dan memberi bimbingan jati diri supaya menjadi contoh kepada yang lain seperti meraikan hari khas ikrar keinsafan. 9. HEPA juga penting di dalam sesebuah universiti . Ia perlu diperkasakan agar dilihat sebagai unit yang disegani dan dihormati oleh para pelajar.

RUJUKAN Dr. Ramle bin Abdullah, Dr. Lazim bin Omar dan Mohd. Afan di bin Salleh (2002): Kajian Masalah Sosial Di Pulau Perhentian. Sarah R. Baker (2006): Towards an idothetic understanding of the role of social problem solving in daily event, mood and health experiences : A prospective daily approach. Kamarul Rashdan Salleh. (1995). Remaja Hadapi Kebekuan Pembangunan Mental. Zanifah binti Md. Nor. Masalah Remaja Semakin Meruncing. Artikel akhbar Jaafar bin Rahim. Masalah Minda Pelajar. Artikel akhbar Siti Hatija binti Yusof. (1993). Merawat Minda Pelajar. Artikel akhbar Remaja Sering Hadapi Tekanan Mental (2000). Artikel akhbar Mahmood Nazar Mohamad. Jurnal Kebajikan Masyarakat Vol. 16 No. 2, Dis 1993 pada halaman 1823, Gejala Kehamilan Remaja dan Pembuangan Bayi : Perkhidmatan Pencegahan dan Kaunseling Jabatan Kebajikan Masyarakat. Rosnah Ismail dan Abdul Halim Othman. Jurnal Perkama: Tingkah Laku Psikososial Remaja: Kajian di Dua Buah Pusat Juvana Sabah. Akhbar tabloid “Siasah” yang bertarijh pada 21-27 Oktober 2007 .Gejala Sosial di Kalangan Pelajar UDM Membimbangkan. Akhbar Kosmo yang bertarikh pada 4 Februari 2008 artikel: Tidak Tahu Ada Pelajar Hamil.. Mohd. Shukri Hanapi di dalam Berita Harian yang diterbitkan pada 8 Mei 2007, artikel : Zina Punca Masyarakat Berpecah, Rosak Keturunan.

145


Muhd. Mansur Abdullah, penulis bab Renggangnya Hubungan Keluarga Punca Masalah Sosial Remaja daripada buku Pembangunan dan Dinamika Masyarakat Malaysia My Metro (edisi internet) pada 14 Feb. 2008 :Krim seks Mat Rempit. Dustin Taylor, Abortion in America, http//theological. Blogspot. Com. 31 oktober 2005.

146


REGULATORY AND PRUDENTIAL SUPERVISION FRAMEWORK OF ISLAMIC BANKING SYSTEM IN NIGERIA: LESSSONS FROM MALAYSIA EXPERIENCE Muhibat Ayoni Oladimeji Crescent University Abeokuta [email protected]

Muhammad Ridhwan Ab. Aziz Faculty of Economics and Muamalat Universiti Sains Islam Malaysia [email protected]

Khairil Faizal Khairi Faculty of Economics and Muamalat Universiti Sains Islam Malaysia [email protected]

ABSTRACT In order to reduce risks to the soundness of the banking system and enhance banks’ role as active players in the development of the economy, effective prudential supervision is necessary and desirable in an Islamic banking framework as in conventional banking. Therefore, the objective of this paper is to examine the regulatory and prudential supervision framework of Islamic banking system in Malaysia in order to draw lessons for Nigerian Islamic banking system, taking into consideration the Nigerian environment. The paper is both descriptive and exploratory which employs qualitative research methodology with presentation based on documents review. The paper however suggests that comprehensive study of Malaysian Islamic banking system practices is required by Nigerian Islamic banking regulatory authority. The study will have policy implication to the Central Bank of Nigeria (CBN), and will also be a source of reference for academicians, students, practitioners and other countries in formulating the similar concept of Islamic banking system. Keywords: Islamic banking system, regulatory, prudential supervision, Bank Negara Malaysia (BNM), Central Bank of Nigeria (CBN)

INTRODUCTION Banking system is an important component of the financial system for all countries. Especially, for developing countries, the banking system is the dominant component of the financial system. This is due to the special nature of banks as financial intermediaries that extend credit and administer the payment system. Banks are also the conduit for monetary policy. In addition, national and international policy makers, and researchers have focused on the banking industry as a key factor in causing, and preventing, financial and economic crises {Barth et al. (2004); Jamal (2006); Hosen and Nahrawi (2012); Siraj and Pillai (2012); Aldohi (2011); Ruy et al. (2012)}.Therefore, banking system play crucial and important roles in development of economy of a nation; it is a system that must not be neglected. It requires sufficient efforts from different segments of the society (especially the regulator), in order for the nation to be moving forward. Crucial and important roles of banking system were also noted by Fakhrul-Ahsan (1998); & Usman (2003) cited in Daud et al. (2011), they contended that the significant functions and roles of the banking system in any economy make it to be considered as the heart of every prosperous economy. This is due to its great paramount to the development process.

147


The Nigerian financial system, in which banking is one of its components, has undergone substantial changes over the years in both the money and capital markets. This is good for the economic environment and the regulatory framework within which it operates. But the system still remains under-developed because it yet to achieve that degree of financial intermediation or financial deepening which the economy requires to foster growth and development (Ofanson et. al. 2010). No doubt, the weakness of traditional banking system will be one of the major reasons for the failure of Nigerian banking system, for instance, according to Yakcop (2003) p. 7, “the conventional financial system has now produced 358 billionaires, while keeping 1.3 billion people living in absolute deprivation”. Due to weaknesses of traditional banking system, Islamic banking appears as an alternative to unrestraint activities of traditional financial markets. Islamic banking is a veritable means of providing access to capital to those who would ordinarily not qualify for debt financing. It can provide leverage for Nigeria’s economic development. It is a system which aims at contributing to the fulfillment of the socio-economic objectives and the creation of a just society. Therefore, it departs significantly from conventional banks, thus it must be encouraged. In view of this, the launching of Financial System Strategy (FSS) 20: 2020 by Nigeria government in 2005 was to engineer Nigeria’s evolution into Africa’s major International Financial Centre (IFC). Also, to aid and enable Nigeria’s transformation into one of the 20 largest economies in the world by 2020. Regarding the money market, the blueprint’s initiatives by Nigerian government is to create non-interest banking (Islamic banking) instruments to capture huge unbanked segments of the society. This is a signal that Nigerian is getting ready to consider Islamic banking system but all the necessary requirements must be prepared for and met. For instance, as at first week of June, 2011, Jaiz International Bank and Stanbic IBTC have obtained licence to provide full-fledged and window of interest-free banking services respectively. Finally, Jaiz bank commenced operation in January 2012 (Jaiz, 2012). However, in the global Islamic banking industry, new participants must incorporate Shariah as an underlying principle and as a key differentiating factor to all aspects of its operations from organization and governance, to efforts to innovate and brand. In order to achieve this effectively and efficiently, a new participant needs to learn and partner with banks that have already successfully implemented Shariah-compliant banking activities, thus the argument for the current study. Whilst the Islamic bank is a business and must be profit oriented, it must aim at promoting Shariah, Islamic values as well as protecting the needs of Islamic society as a whole, called balanced objective. Therefore, there is a need to learn from the experienced operator that has recorded significant success in the industry for more than three (3) decades such as Malaysia. Nigeria is at a cradle level started Islamic banking system just one year ago compare to Malaysia which is at most advanced, comprehensive and successful level over thirty (30) years’ experience in the industry and system. This suggests that there are a lot to be learnt from Malaysia. The benefits of Islamic banking in Nigeria are significant and numerous to extent that the opportunity cannot be neglected. Although, the viability of the system is faced with a lot of challenges and problems, but the benefits and opportunities are outweighed these challenges which means they must be adequately taken care of, as a result of doing this, the system will stay and continue to grow Bello A Dogarawa, (2012). Thus call for the present study in taking step to address these challenges. Therefore, the objective of this paper is to examine the regulatory and prudential supervision framework of Islamic banking system in Malaysia in order to draw lessons for Nigerian Islamic banking system, taking into consideration the Nigerian environment. The paper is both descriptive and exploratory which employs qualitative research methodology with presentation based on documents review. The study will have policy implication to the Central Bank of Nigeria (CBN), and will also be a source of reference for academicians, students, practitioners and other countries in formulating the similar concept of Islamic banking system. This paper is structure as follows: Section one introduces and discusses rationale for the study. In section two is discussion on potentials and benefits of Islamic banking institutions in Nigeria. Problems and challenges of Islamic banking system in Nigeria are highlighted in section three. Section four discusses Malaysian experience of Islamic banking system.

148


In the second to the last section is the lesson for Nigeria government/Central bank. The final section gives the conclusion.

POTENTIALS AND BENEFITS OF ISLAMIC BANKING INSTITUTIONS IN NIGERIA The release of the framework for supervision and regulation of non-Interest financial institutions (NIFIs) in Nigeria is important in line with the Nigerian government’s vision 20-20-20, of which one of the cardinal issues contained in the document, is poverty eradication through financial inclusion. Islamic banking products and services and other Islamic finance instruments are expected to serve as a tool that will be used to achieve the Vision (CBN 2011). As at first week of June, 2011, JAIZ International Bank and Stanbic IBTC have obtained licence to provide full-fledged and window of interest-free banking services respectively. Finally, JAIZ bank commenced operation in January 2012. A number of theoretical and empirical researches conducted over the years have confirmed the potentials of Islamic banking in Nigeria. For instance, in a study conducted by KPMG (2006) which used a number of proxies to estimate market size for Islamic finance industry in Nigeria for 2006 through 2010, although, the interpolation did not take into account the large informal sector, but the bankable and economically active population that was outside the banking system was estimated at 65% by the Islamic Banking and Finance Committee, (2010), cited in Bello, A. Dogarawa. (2011). In addition, according to Sanusi (2011), the following benefits are easily recognized for Islamic banking system in Nigeria: The high number of Nigerian Muslims who out of religious belief choose to keep the money outside the formal banking system (It has contributed to the high level of cash outside the banking system) raises the prospect and opportunity for Islamic banks to thrive in Nigeria. Due to the enormous market prospects, Nigeria has the potential to become Africa’s hub on Islamic banking and financial services. Of course, this would translate to multiple benefits for Nigeria that would have a salutary impact on the economy. These benefits include increase in foreign direct investments (FDI), infrastructure development, financial inclusion, increase in employment and development of the real sector of the economy. The very low leverage and very low level of speculation in Islamic banking means that developing Islamic banking products will in itself be a key component in the progress toward financial stability. Furthermore, Islamic banking is less prone to inflation and less vulnerable to speculations, which are currently being fuelled by the presence of huge quantities of debt instruments in Nigerian and other conventional markets. PROBLEMS AND CHALLENGES OF ISLAMIC BANKING SYSTEM IN NIGERIA Although, it is cleared that the opportunities abound for the growth and development of Islamic banking in Nigeria, but in order to achieve these, all the stakeholders in the area of Islamic banking system in Nigeria need to strive to address the following challenges as identified by Sanusi, 2011 pp. 19 -21. Dearth of knowledge, skills and technical capacity to regulate, and supervise Islamic banks. Lack of Shariah‐compliant liquidity management instruments. Absence of Islamic insurance (Takaful) to protect investments of Islamic banks against unforeseen hazards and facilitate the growth of the industry respectively. Lack of knowledge of accounting and auditing standards pertinent to Islamic financial institutions. Lack of a robust and comprehensive legal framework, especially at the level of adjudication of conflicts involving Islamic finance contracts, products or entities. In the discharge of its traditional role of lender of last resort, the Central Bank of Nigeria (CBN) provides loans to banks at times of liquidity crunch. Islamic banks cannot legitimately benefit from such a facility because such funds are usually provided on the basis of interest. Dearth of Shariah scholars knowledgeable in conventional economics, law, accounting, banking and finance, which places severe constraints on the regulatory Shariah‐compliance mechanism. Double taxation that would be levied on Islamic banks as a result of stamp duties and capital gains tax that is deductible upon asset transfer. Islamic banks face a tremendous challenge in this respect because their financial intermediation is asset-based. Another challenge in the area of taxation is that profits generated from the financial instruments offered by Islamic banks are not given the tax relief enjoyed by debt instruments in conventional finance.

149


For the regulatory aspect, it needs to be stressed that under an Islamic system, the role and operations of the apex bank will be multi-dimensional and complex than the traditional banking system (INCEIF, 2006b) cited in Daud et al. (2011). In order to reduce risks to the soundness of the banking system and enhance bank’s role as active players in the development of the economy, effective prudential supervision is just as necessary and desirable in an Islamic banking framework as in conventional banking. Under Islamic finance system, the regulatory authority such as Central Bank of Nigeria (CBN) is expected to play a dual role. First, is to provide prudential supervision especially in the areas of moral hazard considerations, safeguarding the interests of demand depositors and systematic considerations. The second role is to ensure that banks offering Islamic financial products are strictly complying with Shariah in their operations and reporting procedure. In addition, there is an inevitable need for training of bank staff and accounting professionals to expose them to the new system of financial reporting for Islamic financial institutions. On this same issue, Chapra (2009, p. 50) cited in Daud et al.. (2011) made it clear when he submits: “All financial institutions and not just the commercial banks need to be properly regulated and supervised so that they remain healthy and do not become a source of systemic risk”. Therefore, CBN needs to provide sufficient and comprehensive supervision of the Islamic banks.

MALAYSIAN EXPERIENCE OF ISLAMIC BANKING SYSTEM Beginning in the early 1980’s, along with country’s efforts of pursing well-rounded development in a multi-religious environment, Malaysia adopted the approach of gradually implementing a dual financial system. Bank Negara Malaysia (BNM) is empowered to regulate and supervise Islamic banking operations in Malaysia ISRA, (2012). It constantly monitors the operations of Islamic banks through off-site and on-site supervision. Regulatory tools include the minimum requirement for Islamic capital funds, the statutory reserve ratio and other prudential guidelines. Islamic Banking Act was legislated towards the end of 1982, and gazette in 1983, which is known as the Islamic Banking Act 1983. With the enacted of this Islamic Banking Act 1983, the first Islamic bank in Malaysian history, Bank Islam Malaysia Berhad (BIMB) was established in 1983. Bank Islam Malaysia Berhad (BIMB) which represents a full-fledged Islamic (commercial) bank in Malaysia was setup in July 1983 with paid-up capital of RM 80million. The bank commenced its operations on 1 July, 1983 Khir et al., 2008; Muhibat. et al. (2013a). On March 4, 1993, Bank Negara Malaysia introduced a scheme known as Skim Perbankan Tanpa Faedah, SPTF (Interest-free banking scheme). On a pilot basis the scheme involved the three biggest commercial banks in Malaysia, namely: Maybank, Bank Bumiputra Malaysia and United Malayan Banking Corporation. During the pilot period the scheme was successful Muhibat et al., (2013b). Thereafter, Bank Negara Malaysia issued three sets of guidelines on July 5, 1993, one each for the commercial banks, finance companies and merchant banks. With this scheme, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services. Almost all the conventional financial institutions in Malaysia quickly began to offer Islamic banking services. But these institutions are required to separate the funds and activities of Islamic banking transactions from that of the conventional banking business to ensure that there would not be any co-mingling of funds. (Mohamad, 2007; Muhammad Ridhwan, 2012). The evolution of Islamic banking and finance in Malaysia can be categorized in to three phases, Yakcop (2003) cited in Muhibat et al., (2013a) and (2013b), namely: (1) Familiarization phase I (1983-1992); (2) Mainstream acceptance and pervasiveness phase II (1993-2002); and (3) Moving forward- the next phase, phase III, beginning 2003, to be used as a strategic developmental tool. In Malaysia, the development of Islamic banking and finance began with a period of discovery, that is, initial period of familiarization (1983-1992). It was an exploratory or experimental stage, where the first Islamic bank, Bank Islam Malaysia, was set up in 1983 under a new Islamic banking Act. With the establishment of public confidence, Bank Islam Malaysia grew from strength to strength to extent that non-Muslims started patronizing Bank Islam Malaysia. The second phase, which is mainstream acceptance and pervasiveness phase (1993-2002), the entire financial system began to use and apply Islamic financial principles. Both the Islamic and conventional systems are equally comprehensive

150


and viable. Phase III, beginning in 2003, Islamic financial principles was used as a tool of competitive advantage. Both domestically and internationally, the ultimate objective of the Islamic financial system is to be, to design and put in place an economic system supportive of economic justice. A radical altering of the dominant culture and the restructuring of many important institutions will be required in order to achieve this objective (Yakcop, 2003; Muhammad Ridhwan, 2013). There are four main strategic approaches applied in development of Islamic banking in Malaysia, they are as follows: Dual banking system, the objective was a full-fledged Islamic banking system operating on a parallel basis with a full-fledged conventional system. A step-by-step approach with three basic elements, in the context of an overall long term strategy, namely: (a.) A large number of instruments, efforts was focusing on creating a large number of different types of Islamic financial instruments, during the first phase. (b.) during phase II, the creation of a large number of institutions that offering Islamic financial services, the Interest-free Banking Scheme, known as Skim Perbankan Tanpa Faedah (SPTF) was chosen because setting up new Islamic banks, even as subsidiaries of existing banks, in terms of logistics and infrastructure are expensive. For instance, in 1993, the cost of setting up one branch of a financial institution in Malaysia was about US Dollar $200,000, (Yakcop, 2003) cited in Muhibat et al, (2013a). (c.) An Islamic Interbank Money Market (IIMM) was set up in January 1994, thus the process of creating an Islamic banking system in Malaysia with all the three (3) maim ingredients in place was completed. A comprehensive set of Islamic banking legislation and a common Shariah Supervising Council for all Islamic banking institutions as shown in Figure I below: there is in place a comprehensive set of Islamic financial institutions in Malaysia, an important feature of the Malaysian model. In 1993, when Islamic banking was extended to the other financial institutions, the Shariah Supervisory Council was transferred to the Bank Negara Malaysia, to be the sole source of interpretation for all Islamic financial institutions in the country. A practical and open-minded approach in developing Islamic financial interest: the founding fathers of the system adopted a practical and open-minded approach from the beginning. And this is one of the key factors in Malaysia’s success in the implementation of Islamic banking and finance, (Yakcop, 2003; Muhammad Ridhwan, 2013). This approach laid emphasize on these three main elements: The need for a great deal of research and development work to be done. Realization from the beginning that an Islamic financial system cannot be implemented only on the basis of profit and loss sharing. In the implementation of the Islamic financial system emphasis was always placed on substance rather than label.

151


Source: BNM, Muhammad bin Ibrahim (2007). Figure 1 Instituting comprehensive regulatory and legal framework in Islamic financial system

LESSON FOR NIGERIAN GOVERNMENT/CENTRAL BANK OF NIGERIA The Economist intelligence unit (2009) described Malaysian achievements and milestones /steps taken as follows: 1. The recent financial crisis: Learning from the Malaysian experience: The experience of the Asian currency crisis in Malaysia suggested that there could be lessons for other regions in the way that the country handled that situation. 2. Islamic finance in Malaysia: There are two important factors that distinguish the Islamic finance sector in Malaysia: first, it is comprehensive. Second, it liberalised, which gives it good prospects for building links with other parts of the world. 3. A shift in underlying assets: In Malaysia, there had been a move away from real estate towards financing infrastructure and other long-term investments. The experience in Malaysia had been one of looking at developing Islamic finance in its broadest sense across financial markets, the banking sector, takaful, equity and debt capital markets, as well as other types of services. In terms of Islamic banking system, Nigerian government (Central bank of Nigeria), should followed the footsteps of Malaysia as follows: 1. To develop a comprehensive Islamic financial system this will have a greater outreach to the various segments of the society like that of Malaysia. 2. Introduction of one Islamic bank to spearhead the introduction of Islamic banking products and services. 3. Nigerian should expand its implementation approach by allowing the conventional banking institutions to offer Islamic banking products and services on a window basis. This will allow more players in the Islamic financial system and will also create platform for the establishment of an Islamic money market 4. The regulators should identify the relevant financial segments that will be required to support the expansion of Islamic banking. In terms of building of the required financial institutions such as: i. Islamic insurance (takaful) to complement Islamic banking operations. It will provide coverage for Islamic housing mortgages, among other things. ii. Developing of Islamic money market to allow Islamic financial institutions

152


to manage their short-term portfolio adjustments. Islamic capital market: Development of a private Islamic financial securities market. The issuance of Islamic financial instruments can be utilized to conduct open- market operations by the Central bank of Nigeria in the Islamic money market. This can be used to manage liquidity in the domestic financial system. The establishment of Shariah Advisory Council (SAC) for the Central bank of Nigeria and must be accorded the sole authoritative body on Shariah matters pertaining to Islamic banking, insurance (takaful) and finance. All Islamic financial institutions in Nigeria should have their own Shariah Advisory board/ committee to advise their management on the development and approval of Islamic products and services and other banking operations. Criteria for Shariah Adviser’s selection should be set out and properly implemented. And these Shariah advisers should have clear responsibilities and objectives. Promotion of greater financial integration with the global financial system through foreign entry and participation in the Nigerian financial system. Legal reforms: Nigeria should adopt a self-regulation approach and implemented measures to encourage market-based regulation. In addition, the level of governance in banking institutions must be strengthened with the following measures: i. Reviewing the responsibility and accountability of the board and management ii. Requiring the setting up of various board committees. iii. The high court of Nigeria should have dedicated high court judges to preside on litigated cases over matters relating to Islamic banking and finance. iv. Central bank of Nigeria should set up a review committee to review the common law-based domestic legislations to remove any impediments which may hinder the functioning of the Islamic banking and financial system. v. The passage of the capital markets and services Act or framework is required, which will be used to update Nigeria’s securities laws. A sound investor protection framework and orderly market-development will be reinforced through this Act or framework. This will also promote international best practices in the capital market among its participants. It will also clarify the legislative framework applicable to Islamic securities and provide for the universal nature of the Islamic banking. It will also position Islamic banks to take on a more pivotal role in the development of the Islamic capital market. Regulatory and supervisory framework: Nigeria should set up appropriate and effective regulations in terms of: i. Islamic bank activities. ii. Banking-commerce links iii. Domestic and foreign Islamic bank entries iv. Capital adequacy v. Deposit insurance design vi. Regulations to easing private sector monitoring of Islamic banks vii. Government ownership of Islamic banks. This framework also needs to be consistent with the requirements of Shariah principles, called for the establishment of a Shariah committee or and board. This will need to be supported by an effective and efficient court system that can deal with all Islamic banking and finance cases. Implementation/Enforcement: the decisions of this court must be properly enforced/ implemented over the range of financial issues such as: contracts, bankruptcy, collateral, and loan recovery. All of these are essential for businesses to operate. Relevant regulatory agencies: the legal framework should also deal with supervisory issues, such as the relevant regulatory agencies involved in the supervision of Islamic financial institutions that encompass the licensing and conduct of Islamic banking business. These agencies should have clear responsibilities and objectives to ensure effective financial supervision. Adoption of relevant Basel core principles for Islamic banking system taking in to account the unique characteristics iii.

5.

6.

7. 8.

9.

153


and risk involved in Islamic banking and its products and services, as set up by the Islamic financial services board (IFSB). Setting of prudent and appropriate minimum capital adequacy requirements for Islamic banks is a fundamental issue. 10. Existence of strong corporate governance: effective corporate governance practices are critical for the proper functioning of the financial system and economy as a whole. They are also essential to achieve and maintain public trust and confidence in the banking system. Poor corporate governance is capable of trigger a bank run or liquidity crisis. 11. Greater transparency and disclosure of information: Nigerian regulatory and supervisory authorities need to design and ensure proper implementation of effective disclosure standards. They should make it compulsory as well as enforce it, that each Islamic bank MUST provide timely, accurate, relevant, and sufficient disclosure of both quantitative and qualitative information in order to achieve transparency. The pace of transparency and corporate governance of Islamic financial institutions have been accelerated by the standards issued by the international organizations such as AAOIFI and IFSB. 12. Risk management framework: Essential parts of the risk management framework of a financial institution are: i. the identification and assessment of risks, and ii. The determination of risk mitigation and management strategies. The standards issued by International Islamic Liquidity Management Corporation (IILM) and IFSB should be followed by the Nigeria regulatory and supervisory authorities. 13. Effective and dynamic Shariah framework: the Nigeria supervisory authorities should tailor the Shariah framework adopted by Islamic financial institutions to suit market realities, and the stage of development of Nigeria Islamic financial services industry. 14. Tax neutrality should be accorded to Islamic finance instruments and transactions executed to fulfill Shariah requirements in Nigeria. Nigeria’s tax neutrality framework is to promote level playing field between conventional and Islamic financial products. This will reduce the cost of doing business in Islamic finance, thereby contributing to the overall competitiveness and spurs the development of Islamic finance. 15. Comprehensive human capital development: Nigeria should have various institutions target at all levels of Islamic finance education, training and research. Courses should be developed for professional talent enrichment, for diploma, undergraduate and postgraduate qualifications, for research and for thought leadership in Islamic finance and Shariah. Nigeria should establish an endowment fund for Shariah and other scholars in Islamic finance, to enhance knowledge, research, talent, and intellectual discourse in the field of Shariah and Islamic finance. 16. Finally, Nigerian Islamic banking regulatory authority should realized the need for a great deal of research and development works.

CONCLUSION In order to reduce risks to the soundness of the banking system and enhance its role as active players in the development of the economy, effective prudential supervision is just as necessary and desirable in an Islamic as in conventional banking framework. This paper has established that, although the viability of Nigerian Islamic banking system is faced with a lot of challenges and problems. But the benefits and opportunities outweighed these challenges which mean they must be adequately taken care of, as a result of doing this, the system will stay and continue to grow. Thus, the paper has taken step to address these issues of challenges based on Malaysia experience. This paper has examined Malaysian Islamic banking system practices. It also drew lessons for Nigerian Islamic banking system. The paper however suggests that comprehensive study of Malaysian Islamic banking system practices is required by Nigerian Islamic banking regulatory authority. The study will have policy implication to the Central Bank of Nigeria (CBN), and will also be a source of reference for academicians, students, practitioners and other countries in formulating the similar concept of Islamic banking system.

154


REFERENCES Abdul-Qadir, I. (2007) Islamic Banking under the Existing Laws in Nigeria: Problems and Prospects. (Doctor of Philosophy Thesis). International Islamic University Malaysia. Aldohni, A. (2011). Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia. Routledge-Cavendish, United Kingdom. Bank Negara Malaysia (BNM), MIFC (2012). Future Finance: Malaysia, Your Business Connection to Global Islamic Finance. BNM, Kuala Lumpur, Malaysia. Bank Negara Malaysia (BNM), (2010). Shariah Resolutions in Islamic Finance. Second Edition. BNM, Kuala Lumpur, Malaysia. Bank Negara Malaysia (BNM), MIFC (2011). Malaysia’s Value Propositions & Pioneering Achievements. BNM, Kuala Lumpur, Malaysia. Barth, J. R. Caprio, G., Nolle, D. E. (2004) Comparative International Characteristics of Banking. Economic and Policy Analysis Working Paper 2004-1. January. Central Bank of Nigeria (CBN) (2011a). Framework For The Regulation And Supervision Of Institutions Offering Non-Interest Financial Services In Nigeria, Fpr/Dir/Cir/Gen/01/010, Issued On 13 January. CBN, Abuja, Nigeria. Central Bank of Nigeria (CBN) (2011b). Guidelines on Non-Interest Window and Branch Operations of Conventional Banks and Other Financial Institutions. CBN, Abuja, Nigeria. Central Bank of Nigeria (CBN) (2011c). Guidelines for The Regulation and Supervision of Institutions Offering Non-Interest Financial Services In Nigeria. Issued on 21 June. CBN, Abuja, Nigeria. Daud, M., Yussof, I. & Abideen, A. (2011). The Establishment and Operation of Islamic Banks in Nigeria: Perception Study on the Role of the Central Bank of Nigeria. Australian Journal of Business and Management Research, 1(.2): 14-29. Dogarawa, A. B. (2012). An Exploratory Study of the Economic Viability of and Opportunities for Islamic Banking in Nigeria. International Journal of Research in Management, Economics and Commerce, 1(3): 1-16. Dogarawa, A. B. (2009). Islamic Microfinance as a Means of Poverty Reduction, Seminar Paper, Central Bank of Nigeria Forum, Kano. Dogarawa, A. B. (2010) Interest-free Banking in Nigeria: The Role of Professional Accounting Bodies under the Current CBN Reform. Paper Presented at the Annual Convention of the Institute of Chartered Accountants of Nigeria, Sheraton Hotels and Towers, Abuja. Dogarawa, A. B. (2011a). Global Financial Crisis and the Search for New Financial Architecture: Can Islamic Finance Provide Alternative? Paper Presented at the 1st African Accounting and Finance Conference, Accra, Ghana, September 7 – 9. Dogarawa, A. B. (2011c). Financial Inclusion in Nigeria and the Prospects and Challenges of Islamic Microfinance Banks. Paper Presented at the 2nd International Conference on Inclusive Islamic Financial Sector Development, Khartoum, Sudan, October 9– 11. Errico L. and Farahbaksh M. (1998). Islamic Baking: Issues in Prudential Regulations and Supervision. International Monetary Fund (IMF) Working Paper WP/98/30. Monetary and Exchange Affairs Department. March 1998. Fatai, B. O. (2011). Can Islamic Banking Work in Nigera? Journal of Sustainable Development in Africa, 14 (2): 25-39. Khir, K., Gupta, L, Shanmugam B. (2008). Islamic Banking: A Practical Perspective. Pearson Malaysia Sdn. Bhd, Kuala Lumpur, Malaysia. Kuwait Finance House Research (KFHS): www.kfhresearch.net. Retrieved on 28th October 2012. ISRA. (2012). Islamic Financial System, Principles & Operations. International Shariah Research Academy for Islamic Finance (ISRA). ISRA, Kuala Lumpur, Malaysia. Malek, M. (2012). Keynote Speech By En Musa Abdul Malek, Deputy Chief Executive Officer Bank Muamalat Malaysia Berhad , Islamic Banking And Finance Conference 2012. Innovation and Transformation in Islamic Banking and Finance: Issues, Opportunities and Challenges, at Islamic Science University of Malaysia (USIM) 2nd October.

155


Muhammad Ridhwan, A. A. (2012). Introduction to Islamic Institutions in Economics and Finance. USIM, Bandar Baru Nilai, Negeri Sembilan, Malaysia. Muhammad Ridhwan, A. A. (2013). Islamic Banking and Finance in Malaysia: System, Issues and Challenges.USIM, Bandar Baru Nilai, Negeri Sembilan, Malaysia. Muhibat Ayoni Oladimeji, A.Muhammad Ridhwan & K. F. Khairil, (2013a). Islamic Banking and Finance in Malaysia: Strategy and Current Performance, in Muhammad Ridhwan, A. A. (ed.) (2013). Celebrating 30 Years of Islamic Banking and Financial Institutions in Malaysia 1983 – 2013. USIM, Bandar Baru Nilai, Negeri Sembilan, Malaysia. Pp. 19 -43. Muhibat Ayoni Oladimeji, A.Muhammad Ridhwan & K. F. Khairil. (2013b). Developments of Islamic Banking System in Malaysia and Nigeria: An Analytical Review. Paper Presented at the 5th Islamic Economic System Conference (Iecons2013), Kuala Lumpur, Malaysia. 4 – 5 September. Malaysia International Islamic Financial Centre (MIFC) (2012). The MIFC Community Directory (2012). Connecting Business with Islamic Finance. MIFC, Kuala Lumpur, Malaysia. Muhammad bin Ibrahim (2007). Building an Effective Legal and Regulatory Framework for slamic Banking (IB). Financial Regulators Forum, 29 March. Ofanson, E., Aigbokhaevbolo O. & Enabulu, G. (2010). The Financial System in Nigeria: An Overview of Banking Sector Reforms, Ambrose Alli University, Journal of Management and Science. 1 (1): 1-17. Sanusi Lamido Sanusi (2011). Islamic Finance In Nigeria: Issues And Challenges, Lecture Delivered By Sanusi Lamido Sanusi (Con) Governor, Central Bank of Nigeria (CBN) at Markfield Institute Of Higher Education (Mihe), Leicester, UK, 17 June. Sudin, H. (2004). Towards Developing A Successful Islamic Financial System: A Lesson from Malaysia. Working Paper Series 003. Creating Dynamic Leaders, Kuala Lumpur, Malaysia. The Economist Intelligence Unit. (2009). Islamic Finance: What Role in the New World Order? Economist Conferences. Friday, 27 February. Brown’s Hotel, Albemarle Street, London. UK. Yakcop Nor M. (2003). From Moneylenders to Bankers: Evolution of Islamic Banking in Relation to Judeo –Christian and Oriental Banking Traditions. International Islamic Banking Conference PRATO, Italy, 9 – 10 September. Keynote Address: Developing an Islamic Banking System, The Malaysian Model. Online: http://www.treasury.gov.my/index.php?view=artcle&catid=53:uca. Retrieved on 21 February, 2013. Zeti Akhtar A. (2009). Legal issues in the Islamic financial services industry. Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the 4th IFSB Seminar on Legal Issues in the Islamic Financial Services Industry, Kuala Lumpur, 28 September.

156


THE IMPACT OF ISLAMIC DRESSING STYLES ON SEXUAL HARASSMENT PREVENTION OF TERTIARY INSTITUTION STUDENTS IN NIGERIA Muhibat Ayoni Oladimeji Faculty of Economics and Muamalat Universiti Sains Islam Malaysia (USIM ) [email protected]

ABSTRACT In order to reduce risks to the soundness of the banking system and enhance banks’ role as active players in the development of the economy, effective prudential supervision is necessary and desirable in an Islamic banking framework as in conventional banking. Therefore, the objective of this paper is to examine the regulatory and prudential supervision framework of Islamic banking system in Malaysia in order to draw lessons for Nigerian Islamic banking system, taking into consideration the Nigerian environment. The paper is both descriptive and exploratory which employs qualitative research methodology with presentation based on documents review. The paper however suggests that comprehensive study of Malaysian Islamic banking system practices is required by Nigerian Islamic banking regulatory authority. The study will have policy implication to the Central Bank of Nigeria (CBN), and will also be a source of reference for academicians, students, practitioners and other countries in formulating the similar concept of Islamic banking system. Keywords: Islamic banking system, regulatory, prudential supervision, Bank Negara Malaysia (BNM), Central Bank of Nigeria (CBN)

iNTRODUCTION Sexual harassment is an unwanted, persistent conducts of a sexual nature expressed by words, looking or actions by a person against another person which offend and distress the person at which it is aimed. It takes many forms ranging from different types of behaviour such as unwanted display of sexually offensive materials, different acts intimidation unwanted physical touch, kiss part or any other such gesture. The Vienna conference has identified women, especially female students in the universities (higher institutions) and female staff of corporate establishments and in the public services as group vulnerable in the international community and has treated all forms of discrimination on grounds of sex as an important objective. Although men can be victims, a large number of victims of sexual harassment are women and girls, who endure the indignity in silence. They do not know what to do, who to turn or who to ask for help. In certain situation some of them do not know what they are going through or what behaviour on their own part could have an influence on sexual harassment. Over the past 20 years, research has moved from prevalence studies to more sophisticated empirical and theoretical analysis of the causes and consequences of sexual harassment. Professor Oluyemisi Obilade is one of scholars who are known for her contribution to the discussion and action on sexual harassment in Nigeria especially. Katharine (2007) commended Professor Oluyemisi Obilade a lecturer in department of Adult Education at Obafemi Awolowo University Ile-Ife who formed WARSHE – Women Against Rape, Sexual Harassment and Exploitation, Nine (9) years after a student was gangraped. According to Katharine, Obilade has helped hundreds of female students and the odd male who have been attached by students or harassed by lecturers. According to Obilade, when one student needed reconstructive surgery after a particularly brutal attach, Obilade and some colleagues gave their year-end bonuses to help pay for the treatment. In a recent survey carried out by a

157


graduate student and funded by WARSHE, 80 per cent of over 300 women questioned at four universities in Nigeria said sexual harassment was their number one concern. Women are nine times more likely than the men to lose their jobs as a result of sexual harassment from 1997 report of the special Reporter on violence against women appointed by the commission on Human rights. The relationship between sexual harassment and power has been recognizing in Europe as well. For example, the European Union code of practice on measure to combat sexual harassment adopted in 1992 recognized that because 'sexual harassment is often a function of woman's status in the employment hierarchy, policies to deal with sexual harassment are likely to be most effective where they are linked to a broader policy to promote equal opportunities and to improve the position of women. According to Olaide A. Adedokun, Associate Professor of Sociology, Lagos State University, (2007) the preliminary assessment revealed the existence and prevalence of sexual harassment in the Lagos State University. The data provided evidence of the prevalence of sexual harassment on the campus, as every discussant and interviewee had either had an experience or knew of other peoples’ on the university campus. There was also a general perception by respondents that sexual harassment is prevalent on most other university campuses in Nigeria. There was also a consensus that the phenomenon had been on the increase in the last ten (10) years. Adedokun concluded his study by suggesting that sexuality as well as religious and moral issues (among others) be included in the General Studies Programmes for all students and introduction of a dress code. A large number of victims of sexual harassment are women and girls, who endure the indignity in silence. Some of them do not know what behaviour on their own part could have an influence on sexual harassment. Therefore the purpose of this study is to examine if Islamic dressing style contribute significantly to the sexual harassment prevention of higher institution students in Nigeria. The empirical evidence of this study will be in the best position to provide answer to these women and girls to be able to know what behaviour on their own part could have an influence on sexual harassment. The Authority/management in our tertiary institutions and the government, the religious bodies, the parents and the female students will be beneficiaries with the study in terms of being able of providing suggestion on how to prevent/curb sexual harassment in our higher institutions and in our society in general. This study will also open door for incoming researchers as another area of interest.

ISLAMIC DRESSING STYLES AND SEXUAL HARASSMENT Dressing generally has always been regarded as one of those areas covered by the constitutional freedom of expression. Despite this, cultural and religion's norm plays an important roles in determining which dressing styles is appropriate and which is not. In order to be respected by men, and protected from them, in public a woman should not flout her looks. Of equal importance is the stated Qu'ranic principle which requires women to dress modestly in public. Although definitions of what this entails vary regionally, many Muslim women cover themselves to some extent in deference to their religion. Qur'anic Text translations: And say to the believing women that they should lower their gaze and guard their modesty; that they should not display their beauty or ornament (zeenah) except what (must ordinarily) appear thereof; that they should draw their veil (khimar) over their bosoms and not display their beauty (zeenah) except to their husbands, their fathers ....and that they should not strike their feet so as to draw attention to their hidden (ornaments (zeenah). (Qur’an 24 Verses 31-32). O Prophet! Tell your wives and daughters and the believing women that they should draw over themselves their jilbab (outer garments) when in public; this will be more conducive to their being recognized (as decent women) and not harassed. But God is indeed oft-forgiving, most Merciful. (Qur’an 33 Verse 59).

158


These are the verses which address the issue of clothing so specifically. Clearly, the basic principle is that of modesty. The first verse emphasizes the importance of one guarding her or his modesty, lowering one's gaze in order to remain pure. This means that, in order for women and men to have respectful relationships (such as at work or school, etc.) they must focus on modesty in their behaviour. This is enhanced by dressing in a way that reinforces one's image as a modest person. It must be emphasized that behaviour and appearance are both important in setting the tone of respectful interaction between men and women. In addition, the second verse shows that the purpose of covering oneself is to "be recognized (as decent women) and not harassed." Many women who cover their hair and dress modestly do notice that they are more respectful by men and people are more inquisitive about their faith, so they are "recognized" not just as decent women but also as Muslims. Interestingly, the Qur'an is really not that explicit about the exact definition of modest dress. By reading the Qur'anic verses above, women are advised to cover their breasts and put on their outer garments in a way that enables them to avoid harassment. In addition, women are advised not to draw attention to their "beauty" (zeenah). This term has been translated as both beauty and ornaments (as women used to strike their feet to draw attention to hidden ornaments such as ankle bracelets). In context of the present research any female student with Islamic Dressing Style (modest dress) is called Hijabite. Anyone called Hijabite sister must have met the below-listed minimum specifications in her mode of dressing: 1. Wear a dress that is not tight-fitted. 2. The dress/garment must have gone below her ankle and long to her wrist. 3. Her Hijab should cover at least her buttocks. 4. The so-worn dress must not be transparent. 5. The shoes she wears must not make sound while walking to call others’ attentions. 6. She does not use fragrances (perfume) outside her home. Unarguably the vogue these days is semi - nudity. Girls wear suffocating tight trousers, mostly jeans, short skirts that barely cover the hips, sleeveless tight, see through blouse that, clearly reveal their anatomy. It is the craze in town. This sad spectacle has reached an alarming rate especially in our higher institution of learning, which in turn has a lot of motivating influence on sexual harassment. It is in the light of this that this research tries to investigate whether there is a relationship between Islamic mode of dressing and sexual harassment experience of tertiary institutions students. Taking two (2) tertiary institutions in Abeokuta (the Ogun State Capital) as a case study, namely: University of Agriculture Abeokuta (UNNAB) and Federal College of Education, Osiele, Abeokuta. Many people have argued that the provocative dressing of ladies contributes in no small measure to sexual harassment especially in our higher institutions of learning. Studies imply that women who dress in an "egalitarian way" in the workplace may be more susceptible to sexual harassment than "traditionally dressed" women. Results also point to the need for researchers to address the issue of how messages about a woman's sex role beliefs are conveyed. The study by Oladimeji and Alliu (accepted for publication) revealed that undergraduate female who appears in provocative dresses will be significantly targeted for sexual harassment. The work of Gutek and Morasch (1982) stated that men will be more likely to sexually harass egalitarian women simply because of their dressing as compared to women who appear on traditional dresses. This is in accordance with the study carried out by Dall and Mass, 1999; Etaugh 1973; Haddock and Zanna; 1994; Kaly, 1971; Swim S. Cohen 1997. “Sexual harassment of professional women” revealed that women who are viewed as being non – traditional in some way (e.g. dressing style) are judged hastily by their male colleagues. Fiske et al (1991) provide anecdotal evidence that women may be received more positively in the work place by sexually harassing men if they dress more traditionally while women who appear in non- traditional dresses may be received more negatively by sexually harassing men. Therefore, the objectives of this study are as follows: (1) To examine the role play by Islamic dressing styles on sexual harassment prevention. (2) To determine the pattern, either favourable or unfavourable, Islamic styles of dressing have on individual actual sexual harassment experience. (3) To examine the relationship between sexual harassment experiences of female students who adopted Islamic dressing style and demographic variables.

159


Different studies by different researchers have come to different findings about the influence of dressing styles on sexual harassment. Findings on provocative dressing issue have split in various cases. Some belief that there is no influence of Islamic dressing on sexual harassment, some belief that female does not convey a certain sex harassment attitudes with their appearance, some belief that female who wear Islamic dresses are not likely to be targeted for sexually harassing behaviour. Others questions pertain to whether Islamic way of dressing causes sexual harassment, at all and what motivational role does it play. Conclusively, the following hypothesis will be tested: 1. Tertiary institutions female students that appear in Islamic dresses will not be significantly targeted for sexual harassment behaviours. 2. There will be no significant difference in the experience of sexual harassment before and after adoption of Islamic styles of dressing. 3. There is no relationship between sexual harassment experience of female students who adopted Islamic dressing style and demographic variables.

RESEARCH METHODOLOGY AND RESULTS ANALYSIS Research Methodology The target population comprised of all Hijabite female students of the two (2) tertiary institutions in Abeokuta, namely: University of Agriculture Abeokuta (UNNAB) and Federal College of Education (FCT), Osiele, Abeokuta. A convenience sample of 200 Hijabite female students were selected from the two (2) tertiary institutions in Abeokuta, who have spent at least two (2) years in their respective institutions. The respondents comprised female students who are ages of 18 years and above. Results Analysis Out of 200, 175 questionnaires were recovered from the field of this study. Female Hijabbite students ONLY from two (2) tertiary institutions in Abeokuta (the Ogun State Capital) in Nigeria were interview. Background of the Respondents Tables one (1) to six (6) show the frequency and percentage of demographic information of the respondents for this study. Table 1 Location

Frequency Per cent Valid Per cent Cumulative Per cent Valid University of Agriculture Abeokuta Federal College of Education Osiele Total

68 107 175

38.9 61.1 100.0

38.9 61.1 100.0

38.9 100.0 100.0

Table 2 Gender

Frequency Valid Female Missing System Total

168 7 175

Per cent

96.0 4.0 100.0

Valid Per cent

Cumulative Per cent

96.0

96.0

100.0

100.0

160


Table 3 Age

Frequency Per cent Valid 15 – 20 years 21 – 30 years 31 – 40 years 41 years and above Total

62 110 2 1 175

Valid Per cent

Cumulative cent

35.4 62.9 1.1 0.6 100.0

35.4 98.3 99.4 100.0

35.4 62.9 1.1 0.6 100.0

Per

Table 4 Level

Frequency Valid 200 Level 300 Level 400 Level 500 Level Total Missing System Total

97 40 10 13 160 15 175

Per cent 55.4 22.9 5.7 7.4 91.4 8.6 100.0

Valid Per cent 60.6 25.0 6.3 8.1 100.0

Cumulative Per cent 60.6 85.6 91.9 100.0

Table 5 Marital status

Frequency Valid Single Married Total

163 12 175

Per cent 93.1 6.9 100.0

Valid Per cent 93.1 6.9 100.0

Cumulative Per cent 93.1 100.0

Table 6 Religion

Frequency Valid

Per cent

Valid Per cent

Cumulative Per cent

Islam 175

100.0

100.0

100.0

Table 7: Dress styles can bring about sexual arousal of anyone?

Valid Yes No Total Missing System Total

Frequency

Per cent

152 18 170 5 175

89.4 10.6 100.0 2.9 100.0



From the Table 7 above, 152 (89.4%) of the total respondents responded that dressing style can bring about sexual arousal for anyone, while the remaining 18 (10.6%) respondents mentioned it does not. This means that the way a person dresses determines whether she will be attracted sexually or not.

161


Table 8 Dressing styles cannot attract anyone?

Frequency Valid Yes No Total

32 143 175

Per cent

Valid Per cent

18.3 81.7 100.0

Cumulative Per cent

18.3 81.7 100.0

18.3 100.0

Considering the Table 8 above, 143 (81.7%) of the total respondents confirmed that dressing style can attract anyone to sexual harassment while only about 32 (18.3%) of the respondents replied that it cannot. This means that the way a person dresses determines whether she will be attracted sexually or not. It means that dressing is for a purpose. Table 9 Dressing styles keep someone off the opposite sex?

Frequency Valid Yes No Total Missing System Total

100 72 172 3 175

Per cent 57.1 41.1 98.3 1.7 100.0


Cumulative Per cent 58.1.4 100.0

The table above shows that 100 (58.1%) of the total respondents responded that dressing style keep someone off the opposite sex while only about 72 (41.9%) of the respondents confirmed that it cannot. This means that the way a person dresses determines whether she will be attracted sexually or not. It means that dressing is for a purpose. When you dress to attract sexual opponent you get it. Table 10 Islamic style of dressing is a way of keeping someone off the opposite sex?


128 45 173 2 175

Per cent 73.1 25.7 98.9 1.1 100.0

Valid Per cent

Cumulative Per cent

74.0 26.0 100.0

74.0 100.0

The table 10 above shows that 128 (74%) of the total respondents confirmed that Islamic style of dressing is a way of keeping someone off the opposite sex. While the remaining 45 (26%) replied no it does not keep ladies off the opposite sex. This means that the Islamic way of dressing keep someone off the opposite sex. When you dress religiously only your religious group may be attracted to you and this may keep you off the opposite sex.

Hypothesis number 1: Tertiary institutions female students that appear in Islamic dresses will not be significantly targeted for sexual harassment behaviours. Question 1: What impact does Islamic mode of dressing of female students in tertiary institutions have on sexual harassment?

162


Table 11 Correlation coefficient between Islamic mode of dressing and sexual harassment

Variable Islamic mode of Dressing Sexual Harassment

N Mean Std R 161 4.6273 0.73161 – 0.681 169 5.3609 0.85559

Significant value 0.001

From the result of the analysis carried out, the value of the correlation coefficient between Islamic mode of dressing and sexual harassment is –0.681, indicating that there is a strong negative correlation between Islamic mode of dressing and sexual harassment. This means that sexual harassment does not flow in the direction of Islamic mode of dressing. Meaning female in tertiary institution adopting Islamic mode of dressing are not exposed to sexual harassment. The significant value of the correlation coefficient between Islamic mode of dressing and sexual harassment is 0.001 and is less than 0.05 indicating that there is a linear relationship between Islamic mode of dressing and sexual harassment sloping down from left to right in figure one (1). Meaning the more a student dress Islamatically, the less is exposed to sexual harassment.

12 –

9–

Islamic Mode of 6 – dressing 3– 0

1

2

4

3

Sex harassment

Figure 1 Linear relationship between Islamic mode of dressing and sexual harassment

Hypothesis number 2: There will be no significant difference in the experience of sexual harassment before and after adoption of Islamic styles of dressing. Question 2a: What implication does your dressing mode has on sexual harassment before you started dressing Islamatically? Table 12 I have been sexually harassed?


34 133 167 8 175

Per cent 19.4 76.0 95.4 4.6 100.0



The table 12 above shows that 133 (79.6%) of the total respondents have not been sexually harassed while only about 34 (20.4%) of the respondents mentioned that, they have been harassed. This means that even without dress Islamatically you could even not be harassed sexually. Hypothesis 2b Question 2b: What implication does your dressing mode has on sexual harassment after you started dressing Islamically?

163


Table 13 I have been sexually harassed?


17 124 141 34 175

Per cent

Valid Per cent

9.7 70.9 80.6 19.4 100.0

Cumulative Per cent

12.1 87.9 100.0

12.1 100.0

The table 13 above shows that 124 (87.9%) of the total respondents have not been sexually harassed while only about 17 (12.1%) of the respondents replied that, they have been harassed. This means that dressing Islamically you will not be harassed sexually. From the result of the last two interpretations, sexual harassment is not only a function of dressing outside religion mode of dressing, it could also be within. Students in tertiary institutions should be encouraged to dress for a purpose e.g. When you are going for a lecture dress for that purpose, for weeding dress for the purpose.

Hypothesis Number 3: There is no relationship between sexual harassment experience of female students who adopted Islamic dressing style and demographic variables. Question 4: Is there any relationship between sexual harassment exposure of female student who adopted Islamic dressing style and demographic variables. Table 14 Age * Dressing style can bring about sexual arousal for anyone cross tabulation

Dressing style can bring about sexual arousal of anyone Yes No Age 15 – 20 years 21 – 30 years 31 – 40 years 41 years and above Total

45 106 1 0 152

14 2 1 1 18

Total 59 108 2 1 170

Chi–Square = 31.194, degree of freedom = 3 and the significant value = 0.001 From the analysis carried out, the significant value of the chi-square analysis is 0.001 indicating that there is a relationship between age and the Islamic mode of dressing. This means that the relationship between mode of dress and sexual harassment cut across all ages in this research work. It means that even the old and the young are of the same opinion. Table 15 Level * Dressing style can bring about sexual arousal for anyone cross tabulation

Dressing style can bring about sexual arousal of anyone Yes No

Total Level 200 Level 80 17 300 Level 38 1 400 Level 8 0 500 Level 13 0 Total 139 18 Chi–Square = 9.274, degree of freedom = 3 and the significant value = 0.026

97 39 8 13 157

164


From the analysis carried out, the significant value of the chi-square analysis is 0.026 indicating that there is a relationship between level of students and Islamic mode of dressing. This means that the relationship between Islamic mode of dress and sexual harassment cut across all levels in the academics in this research work. It means that students at any level in the academic believed that dressing style can bring about sexual arousal for anyone. Table 16 Marital Status * Dressing style can bring about sexual arousal for anyone cross tabulation

Dressing style can bring about sexual arousal of anyone Yes No

Total

Marital Status: Single 140 18 158 Married 12 0 12 Total 152 18 170 Chi–Square = 1.529, degree of freedom = 1 and the significant value = 0.249

From the analysis carried out, the significant value of the chi-square analysis is 0.249 indicating that there is no relationship between marital status and Islamic mode of dressing. This means that the relationship between Islamic mode of dress and sexual harassment does not cut across marital status in the academic in this research work. It means the married are to be attracted to their husband only, while the single are in the web of the problems of attraction or no attraction. As there is statistical evidence to support the null hypothesis one, which is tertiary institutions female students that appear in Islamic dresses will not be significantly targeted for sexual harassment behaviours. It can be concluded that alternative Hypothesis should be rejected. Although Islamic dressing style was not use in their studies Adedokun (2007) concluded his study by suggesting that sexually as well as religious and moral issues (among others) be included in the General Studies programmes for all students and introduction of a dress code. There is a statistically evidence to support the alternate hypothesis for hypothesis two, that is there will be significant difference in the experience of students before and after adoption of Islamic styles of dressing. Therefore it can be concluded that null hypothesis should be rejected. The finding revealed that the effect of Islamic dressing styles on sexual harassment prevention of tertiary institutions students is significant. The high rate of not been sexually harassed before adoption of Islamic dressing styles of the respondents might be as a result of adoption of moderate dress. All respondents are Muslims from Islamic upbringing, although they might not adopt Islamic dressing styles but no any normal Islamic home or Muslim parent will allow his/her wards to adopt provocative dressing styles. The results of the hypothesis one and two are a confirmation of the words of God/Allah in Qur'an 33 verse 59 which says: “O Prophet! Tell your wives and daughters and the believing women that they should draw over themselves their jilbab (outer garments) when in public; this will be more conducive to their being recognized (as decent women) and not harassed. But God is indeed oft-forgiving, most Merciful.” (Qur’an 33 Verse 59). This is also in support of the study of Oladimeji and Alliu (2012) which revealed that undergraduate female who appears in provocative dresses will be significantly targeted for sexual harassment. The result of this study is in accordance with the studies carried out by Gutek and Morasch (1982), Dall and Mass (1999), Etaugh (1973), Hadduck and Zanna (1994) Swim S. Cohen (1997), their studies provide anecdotal evidence that men will be more likely to sexually harass egalitarian women simply because of their dressing as compared to women who appear on traditional dresses. This study is also in support of the general argument of the many people that the provocative dressing of ladies contributes in no small measure to sexual harassment especially in our higher institutions of learning. The relationship between mode of dress and sexual harassment cut across all ages and all levels in this research work. This means that the old and the young and all levels in the academic believed that dressing style can bring about sexual arousal for any one. But on the other hand the relationship of dress does not cut across marital status. The general indication is that there is a relationship between

165


sexual harassment exposure of female student who adopted Islamic dressing style and demographic variables. There is a statistically evidence to support the alternate hypothesis for hypothesis three that is there is a relationship between sexual harassment experience of female students who adopted Islamic dressing style and demographic variables. General suggestion on how to curb sexual harassment: Table 17 Islamic dressing styles/decent dressing /proper dressing moral dressing is capable of curbing sexual harassment?

Frequency Valid

Per cent

Valid Per cent

Cumulative Per cent

Yes

No Missing System Total

137 Nil 38 175

78.29 Nil 21.71 100.0

100.0

100.0

Implications of Findings There are empirical evidence from this study that may increase our understanding of the impact of dressing styles, especially and specifically Islamic dressing styles, on sexual harassment prevention of tertiary institutions students in Nigeria. The implications of the study are directed to four (4) groups in our society namely: the Academics, the Authority/management in our tertiary institutions and the government, the religious bodies, the parents and the female students. 1. The Academics There is enough evidence to support the impact of dressing styles on sexual harassment prevention of tertiary institutions students: The study is conducted in Nigeria, a developing and multi-religion country, it should be of interest to academics in this field. This study makes use of Muslims students only, those who are dressing Islamically, this study proposes that the future research should incorporate students from other religion. And sample should be drew from public and private tertiary institutions. 2. Authority/management in tertiary institutions and the government. As these two bodies are policy makers. This study is suggesting to these two bodies that sexually as well as religious and moral issues (among others) be included in the General studies programme for all students. And introduction of a dress code in our tertiary institutions is of important. 3. Religious bodies There are two main religious in our society; Islam and Christianity. Divine laws in the two Divine books of both religious are in support of moderate dress for both female and male in our society. And cultural and religious norm also plays important roles in determining which dressing styles is appropriate and which is not. This study is imploring our religion leaders to lay emphasis on dress code in their preaching as laid down by Almighty God in the two revelations of both religions. AlQur’an and Bible. 4. Parents and female Students Many people have argued that the way lady dress influences male’s attitude towards sexual harassment of her. Although, dressing generally has always been regarded as one of those areas covered by the constitutional freedom of expression but in order to be respected by men and protected from them, in public a woman should dress moderately. Parents should educate their wards on implication of dressing styles on sexual harassment prevention.

166


CONCLUSION The arguments of many people have been confirmed by the empirical studies that the provocative dressing of ladies contributes in no small measure to sexual harassment especially in our higher institutions of learning. Results of this study imply that women who dress in an “egalitarian way” in the tertiary institutions and workplace may be more susceptible to sexual harassment than “traditionally dressed” women. Although men can be victims, a large number of victims of sexual harassment are women and girls, who endure the indignity in silence. Some of them do not know what behaviour on their own part could have an influence on sexual harassment. The empirical evidence of this study is suggesting to female students that they should inculcate moderate dress as their regular habit. The study did not attempt to determine a definition for sexual harassment. It attempted to identify the extent of how a person's dressing is judged as Islamic, how this judgment influences sexual harassment. The study likewise did not attempt to determine other factors or characteristics which should be included for understanding factors that affects sexual harassment behaviours. Since Islamic mode of dressing will be measured the pattern of behaviours result will therefore be limited to items within the test.

REFERENCES Al-Hilali, M.T. and Khan, M.M., (1998) The Noble Qur’an, English Translation of the meanings and commentary, Madinah Munawwarah, King Fahd Complex, 1998. Achampong, Francis. (1999). Workplace sexual Harassment law: Principles, Landmark Developments, and Framework for Effective Risk Management. Westport, CT: Quorum Books. Adedokun Olaide A (2007), Sexual Harassment in Nigerian Educational Settings: Preliminary Notes from a Qualitative Assessment of Lagos State University, Sexuality in Africa Magazine Anderson, C.A. (2001). Thinking within the box: How proof models are used to limit the scope of sexual harassment law. Hofstra labor and Employment Law Journal, 19, 125-171. Brant, Clare and Yun Lee Too. (Eds.). (1994). Rethinking Sexual Harassment. London: Pluto press. Buss, David M. and Neil M. Malamuth. (Eds.), sex, Power, and Conflict: Evolutionary and Feminist Perspectives-. New York: Oxford University press. Cortina, L.M. Fitzgerald, L.F., Drasgow, F. (2002). Contextualizing Latina experiences of sexual harassment: Preliminary tests of a structural mode. Basic and Applied Social Psychology, 24, 295311. Dobritch, Wanda and Steven Dranoff. (2000). The First Line of Defense: A Guide to Protecting Yourself Against Sexual Harassment. New York: John Wiley & Sons, Inc. Equal Employment Opportunity Commission EEOC (1980) Eisenman, R. (1995): Dubious value of the "reasonable women "standard in understanding sexual harassment. Psychological Reports, 77, 1145-1146. Fineran, S. (2002). Sexual harassment between same-sex peers: intersection of mental health, homophobia, sexual violence in schools. Social Work, 47, 65-74. Gardens, Louise. (Ed.). (1999).Sexual Harassment. San Diego, CA: Green haven Press. Goldberg, C. B. (2001). The impact of the proportion of women in one's workgroup, profession, and friendship circle on males' and females' responses to sexual harassment. Sex Roles, 45, 359-374. Jansma, L. L. (1999). Sexual harassment research: integration, reformulation and implication for mitigation efforts. Communication Yearbook 23, 163-25. Jones, Constance. (1996): Sexual New York: Facts on File. Http://www.washingonpost.com/wp-dyn/content/article/2007/03/25/ Oladimeji, Muhibat .A Alliu, Sadiaat.I.(2012). The Influence of Provocative Dressing styles on Sexual Harassment: Obafemi Awolowo University (OAU) Ile-Ife As A Case study. International Journal of Innovations in Managemennt Science. US Office of Personnel Management- OPM (1979).

167


A COMPARATIVE ANALYSIS OF SEGMENT REPORTING IN HONG KONG LISTED COMPANIES FOR PRE- AND POST- IFRS NO.8 PERIODS Yuanyuan Li East China Jiao Tong University [email protected]

Jamal Roudaki Faculty of Commerce Department of Accounting, Economics and Finance Lincoln University [email protected]

Christopher Gan Department of Accounting, Economics and Finance Lincoln University [email protected] ABSTRACT Today firms’ segment information has become the most important financial information for investment decisions. In order to improve the quality of firms’ segment disclosure, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard (IFRS) No.8 in 2006 which replaced the preceding standard IAS No.14 (International Financial Reporting Standards, 2010a). However, there is little understanding of the changes in the quality of firms’ segment disclosure as a consequence of implementing the new standard in Hong Kong’s unique political and economic environment. This study attempts to compare the usefulness of segment information disclosed by Hong Kong listed firms before and after the implementation of IFRS No.8. This research employs the value relevance of accounting information theory as a measure of usefulness of segment disclosure where segmental data are analysed by the regression test. The purposive sampling method was used to obtain samples from Hong Kong. This study contributes new empirical evidence of the usefulness of segment disclosure under IFRS No.8 within Hong Kong’s stock market. It concludes that IFRS No.8 has improved the usefulness of segment information disclosed by Hong Kong listed firms. Keyword: segment reporting, IFRS 8, Hong Kong listed companies, segment information

INTRODUCTION With the increasing complexity of business entities, consolidated financial statements may hide the profitability of firms which have various products and services. Segment reporting has become an important aspect of financial disclosure to understand a firm’s financial position. Financial statement analysts and users have expressed their concerns on segmental disclosure for a long time (Benjamin et al., 2010). As a result, International Accounting Standards (IAS) No.14, Segment reporting, was issued by the International Accounting Standards Board (IASB) in 1981. It requires a firm’s segmental information to be reported by line of business and by geographical area (Prather-Kinsey & Meek, 2004). However, previous research on IAS No.14 highlighted some problems, notably, it has been criticized for not providing segmental information based on an entity’s internal structure, which could significantly affect the prospects of an entity’s future cash flow (Street, Nichols, & Gray, 2000). Further, IAS No.14 leaves managers with considerable room for defining their reportable segments permitting some firms to exploit the standard’s flexibility in defining reportable segments to avoid providing

168


disaggregated segment disclosures (Association for Investment Management and Research, 1993; Berger, Hann, & Piotroski, 2003; Street et al., 2000). Therefore, to improve the quality of segment disclosure, the IASB issued International Financial Reporting Standard (IFRS) No.8, Operating segments, in November 2006. This new standard superseded IAS No.14 from 1st of January 2009. The new standard, IFRS No. 8, fundamentally changed the approach to identifying segments from the “industry approach” under IAS No.14 to the “management approach” (International Financial Reporting Standards, 2010a). The “management approach” required a firm to identify operating segments for external reporting purposes in the same manner that management views operating segments for internal decision-making purposes (Deegan & Samkin, 2011). The primary motivation for the change in segment reporting was to allow stakeholders to see the firm “through the eyes of management” (International Financial Reporting Standards, 2010b, p. B559). IAS No.14 came into effect in 1981, but there were no clear standards or requirements for segment disclosure in Hong Kong firms before 1986 when the Hong Kong Society of Accountants (HKSA) issued an accounting Guideline AG6 (also called Guidance statement 2.206) in response to the requirement of the Hong Kong stock exchange listing rules 1986 that listed companies disclose certain segmented information in their annual financial statements (Lo, 2002). This accounting guideline was not considered “mandatory” but just “highly recommended”. Therefore, Hong Kong listed firms disclosed their segment information voluntarily at that time (Lo, 2002). As the complexity of business enterprises increased and the popularity of diversified companies grew, the HKSA recognized segment information could provide financial statement users with a deeper insight into the whole operation of a firm by providing the whole picture of a firm’s profitability rates, growth opportunities, future prospects and investment risks (Lo, 2002). Therefore, in February 2000 HKSA issued the Statement of Standard Accounting Practice SSAP 2.126 Segment Reporting (hereafter SSAP 2.126) modelled on IAS No.14 (Lo, 2002). In order to harmonize Hong Kong accounting standards with International Accounting Standards, in 2004 HKSA issued an identical Hong Kong standard, HKAS No.14 Segment Reporting, with the same effective date and transitional provisions as IAS No.14, which superseded SSAP 2.126 (Hong Kong Accounting Standard, 2004). From that time, it became mandatory for Hong Kong firms to disclose their segment information (Lo, 2002). Furthermore, in order to keep Hong Kong Financial Reporting Standards up to date with International Accounting Standards, in 2009 the Hong Kong Institute of Certified Public Accountants (HKICPA) adopted IFRS No.8, namely, Hong Kong Financial Reporting Standard(HKFRS) No.8,Operating Segments, with the same effective date and transitional provisions as IFRS No.8, which superseded HKAS No.14,Segment reporting(Hong Kong Financial Reporting Standard, 2009; KPMG, 2007). Until now, the empirical evidence for the effectiveness of HKFRS No.8 (IFRS No.8 and HKFRS No.8 will be used interchangeable in this thesis) has been limited. As the fast growth of stock market in Hong Kong, Hong Kong stock market has played an important role as an international capital market for global companies to raise funds (Chen, 2005). Thus, in order to make appropriate stock investment, more and more investors are concern about the usefulness of accounting information disclosed by Hong Kong listed firms (Chen, 2005). Further, Hong Kong has a unique culture, political, economic system and business environment as a result of which its accounting practices differ significantly from those of mainland China and other advanced economies like the United States, United Kingdom and Europe (Lo, 2002). Additionally, Hong Kong has lots of large companies which conduct various operations representing different products or services segments. This makes the segment disclosure becoming quite essential and important for Hong Kong listed firms (Lo, 2002). So, it is believed that there is a necessity to examine whether the adoption of new segment standard, HKFRS No.8, has improved the quality of segment information disclosed by Hong Kong’s listed firms so that segment reporting has become more relevant and useful for investment analysis. Therefore this study addresses the research question of whether the changes in segment reporting rules under HKFRS No.8 indeed improve the usefulness of segment information disclosed in Hong Kong listed firms. This study aims to compare the usefulness of segment disclosure by Hong Kong listed firms before and after the adoption of new segment reporting standard, HKFRS No.8. Specifically, the study employs the value relevance of accounting information theory as a measure of the usefulness of segment disclosure where the segment disclosures of a total of 85 Hong Kong listed firms pre and post-HKFRS No.8 are analysed by the regression test. The findings

169


of this study show that the value relevance of segment information disclosed by those firms has improved under HKFRS No.8 implying the adoption of HKFRS No.8 has improved the usefulness of segment disclosure in Hong Kong listed firms.

LITERATURE REVIEW AND RESEARCH HYPOTHESISES DEVELOPMENT Segment disclosure has been a popular accounting research topic since the 1970s (Lo, 2002). However, empirical evidence regarding IFRS No.8 is currently sparse, since the new segment standard came into effect only in 2009. IFRS No.8 is indeed modelled on United States FASB statement No.131, Disclosures about Segments of an Enterprise and Related Information (hereafter SFAS No.131) issued by the United States Financial Accounting Standards Board (FASB) in 1997 to improve disclosure in respect of the diversity of multiple segment companies’ operations. SFAS No.131 identifies segments by using a “management approach”, which requires companies to disclose segmental information based on a company’s internal structure (Deegan & Samkin, 2011; International Financial Reporting Standards, 2010a). In order to harmonize accounting standards around the world, the IASB worked with the United States Financial Accounting Standards Board (FASB) to reduce the differences between US Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRSs). As a result, IFRS No. 8 was generated from the IASB’s consideration of SFAS No. 131 (Bouvier, 2006; International Financial Reporting Standards, 2010a, Deegan & Samkin, 2011). So IFRS No.8 corresponds to the SFAS No. 131 requirements except for minor differences (International Financial Reporting Standards, 2010a). There have been only few studies focused on the usefulness of segment disclosure under SFAS No.131 (see Lee, 2010; Berger et al., 2003; Ettredge,Soo Young, Smith,& Zarowin, 2005); Ettredge,Soo Young, Smith & Stone , 2006). Berger et al. (2003) investigated the usefulness of segment disclosure by testing the forecast ability of segment information for future earnings or incomes. They found that analyst forecast accuracy improved post-SFAS No.131 because SFAS No.131 provided the stock exchange with more information (Berger et al., 2003). Based on the findings of Berger et al. (2003), Ettredge et al. (2005) examined whether firms’ implementation of the segment disclosure requirements under SFAS No.131 increased the stock market’s ability to predict firms’ future earnings. They used the forward earnings response coefficient (FERC) as proxy for the stock market’s ability to forecast firms’ future earnings to investigate the association between currentyear and next-year firms’ earnings by regressing current returns against future earnings for sample firms for the pre and post SFAS No.131 periods. Their results showed that the FERC increased after the adoption of SFAS No.131, which means the stock price information for the sample firms increased under SFAS No.131, compared with SFAS No.14. This means an increase in the stock market’s ability to predict firms’ future earnings under SFAS No.131 (Ettredge et al., 2005). Moreover, Lee (2010) ascertained the usefulness of segment information by investigating the value relevance of segment disclosure under SFAS No.131 with particular reference to the impact of the change in the segment standards from SFAS No.14 to SFAS No.131 on the value relevance of segment disclosures. Lee demonstrated that compared with SFAS No.14, the value relevance of segment income improved under SFAS No.131 (Lee, 2010). Furthermore, Ettredge et al. (2006) investigated whether SFAS No.131 improved disclosure about the diversity of multiple segment firms’ operations by using the crosssegment variability metric. They indicated that transparency of segment profitability disclosures increased under SFAS No.131 in US (Ettredge et al., 2006). In sum, most previous researchers have demonstrated that the usefulness of segment disclosure under the “management approach” of SFAS No.131 has improved (see Lee, 2010; Berger et al., 2003; Ettredge et al., 2005; Ettredge et al., 2006). However, previous research has several limitations. For example, the main limitation of Berger et al. (2003) was that they did not provide explanations for inconsistent empirical results between their research methods so their empirical results are not clear. In Lee’s (2010) study, the validity of empirical designs and test results depended heavily on the nature of the summary measures. The summary measure used in Lee (2010) for investigating value relevance of segment disclosure under SFAS No.131 was segment income; however segment income is not an appropriate financial measurement for a firm’s performance. Also, Lee (2010) compared only two years of restated segment data in relation to SFAS No.131 and SFAS No.14 (or its equivalent IAS No.14), which may not

170


reflect the real situation of segment disclosure under SFAS No.131. Additionally, Ettredge et al. (2006) focused only on the largest companies in the U.S. They did not explore the impact of SFAS No.131 on the smaller companies. Overall, most previous relevant studies were based on United State evidence. The Hong Kong evidence on the segment disclosure after the adoption of HKFRS No.8 is minimal. In order to fill the gaps in previous literature, this study aims to investigate the usefulness of segment disclosure through comparative study of segment reporting in Hong Kong listed firms between the new segment standard, HKFRS No.8 and preceding segment standard, HKAS No.14. In order to make proper stock investment, stock investors need to investigate the fundamental value of firms so as to evaluate the stock prices of firms. Thus, one of the main objectives of accounting reporting is to provide relevant and useful financial information to investors for estimating a firm’s value (Liu & Liu, 2007). Value relevance research empirically investigates the usefulness of accounting information to stock investors (Chalmers, Clinch, & Godfrey, 2011; Hung, 2000; Lee, 2010). According to Ohlson(1995), Francis and Schipper (1999), Alford et al. (1993), Lang, Ready and Yetman (2003), Barth, Landsman and Lang (2008), Barth, Beaver and Landsman (2001), Hung(2000) and Lee (2010), value relevance is interpreted as the capability of an accounting measure to summarize or capture information which influences the value of a firm. It is operationalized as a statistical association between firm market returns and accounting information, regardless of source, which influences share values (Ohlson,1995, Alford et al., 1993; Francis and Schipper,1999; Barth et al., 2001; Hung, 2000; Lee,2010). Following Francis and Schipper (1999), Alford et al. (1993), Lang, et al. (2003), Barth et al. (2008), Barth et al.(2001),Hung(2000) and Lee (2010), this study employs the value relevance theory of accounting information as a measure of the usefulness of segment disclosure. In particular, this study investigates whether there has been an improvement in the usefulness of segment information disclosed by Hong Kong listed firms by comparing the value relevance of segment disclosure under HKAS No.14 (or its counterpart IAS No.14) and HKFRS No.8 (or its counterpart IFRS No.8). Alford et al. (1993), Lang, Ready and Yetman (2003) and Barth, Landsman and Lang (2008) arrived at a similar conclusion that there was an association between firms’ stock price and their annual accounting earnings by conducting an association test. The authors demonstrated that higher the relevance and usefulness of accounting figures, the higher the correlation between stock prices and accounting earnings (Alford et al., 1993; Lang et al., 2003; Barth et al., 2008). Based on previous regression models, Lee (2010) also conducted correlation tests to measure the relationship between stock price and the total segment income per share. They demonstrated that the multiple on the total reportable segment income per share disclosed by US firms after the implementation of SFAS No.131 was higher than before its implementation, which indicates the value relevance of segment disclosure improved under the new segment reporting standard (Lee, 2010). In order to examine the FASB’s argument that IFRS No.8 would provide more value-relevant segment information than IAS No.14, unlike Lee (2010), this study intends to conduct the same correlation tests to measure the relationship between firms’ stock prices and segment profits instead of segment income, because segment profits are the major determinant of a firm’s share price. It is hypothesised that a positive relationship exists between the total reportable segment profits per share disclosed by Hong Kong listed firms and their stock price after the adoption of HKFRS No.8, demonstrating that the adoption of HKFRS No.8 has improved the value relevance of segment disclosure in contrast to HKAS No.14. The following relationship is hypothesised. H1: The total reportable segment profit per share disclosed by Hong Kong listed firms positively influenced their stock prices after the adoption of HKFRS No.8. Francis and Schipper (1999) measured the value relevance of accounting information using a regression model to investigate the ability of book values of assets and liabilities per share to explain the firm’s stock price. They found that there was a positive relationship between the book value of assets per share and the firm’s stock price indicating the value relevance of accounting reporting increased (Francis & Schipper, 1999). However, the relationship between book value of liabilities per share and the firm’s stock price was negative indicating the value relevance of accounting reporting decreased. This implies that the ability of book values of assets per share and liabilities per share to explain firms’ stock price increased when the value relevance of financial statement information increased and the ability of book values of assets per share and liabilities per share to explain firms’ stock price declined when the value relevance of financial statement information declined (Francis & Schipper, 1999). Compared with HKAS No.14 and SFAS No.131, the disclosure requirement for segmental assets and liabilities under

171


HKFRS No.8 has changed (Hong Kong Financial Reporting Standards, 2009). Following Francis and Schipper (1999), this study uses the regression model to investigate whether the changed disclosure requirements regarding segmental assets and liabilities has improved the value relevance of segment information disclosed by Hong Kong listed firms under the new segment standard. It hypothesises an increase in the ability of book values of segmental assets per share or liabilities per share disclosed by Hong Kong listed firms to explain stock prices for those firms after the adoption of HKFRS No.8. The following relationships are hypothesised: H2: The segmental assets per share disclosed by Hong Kong listed firms have positive influence on the firms’ stock price after the adoption of HKFRS No.8. H3: The segmental liabilities per share disclosed by Hong Kong listed firms have positive influence on the stock price of Hong Kong firms after the adoption of HKFRS No.8.

RESEARCH METHODOLOGY In order to measure the value relevance of accounting information, most researchers have used a regression model to examine the relationship between firms’ accounting information and their market value (see Alford et al., 1993; Lang et al., 2003; Barth et al., 2008; Lee, 2010). The regression model shows a firm’s value can be expressed as a function of its book value and earnings. Lee (2010) using a regression model to measure the relationship between stock price and the total reportable and nonreportable segment income per share found a positive relationship between the total reportable segment income per share disclosed by US firms and their stock price after the adoption of IFRS No.8. Following Lee (2010), this study uses a regression model to measure the value relevance of segment disclosure when investigating the relationship between the stock prices of Hong Kong listed firms and their total reportable and non-reportable segment profits per share pre and post HKFRS No. 8 periods. This study classifies segments as reportable as opposed to non-reportable because under segment standards, firms can classify their segments as reportable or non-reportable (Lee, 2010). Specifically, the regression model aims to test the first hypothesis of this study that the total reportable segments profit per share disclosed by Hong Kong listed firms positively influences their stock prices after the adoption of HKFRS No.8. The regression model is expressed as follows: MVi= α0+α1BVi+α2RS_Pi+α3NRS_Pi + εi (1) Where: MVi= the Market Value of Hong Kong listed firm i’s equity three months after fiscal year end. . BVi= the Book value of Hong Kong listed firm i’s equity at the fiscal year end. RS_Pi= the total reportable segment profit for Hong Kong listed firm i at the fiscal year end. NRS_Pi= the total non-reportable segment profit for Hong Kong listed firm i at the fiscal year end. If the firm names a segment as “Other”, “Corporate”, “unallocated” or “eliminations”, the segments are classified as non-reportable as opposed to reportable segments. i = Hong Kong listed firms respectively. Equation (1) is based on Ohlson (1995) and Lee (2010) where the value of a company is expressed as a function of its book value and earnings. In this equation, segment profits are divided into two components: the total reportable and non-reportable segment profits. The study of Lev (1989) addressed the explanatory power approach which is the ability of earnings to explain returns as the appropriate measure of accounting information usefulness. Following Lev’s (1989) result, in order to measure the value relevance of accounting information, Francis and Schipper (1999) used the explanatory power approach to investigate the ability of book values of assets and liabilities to explain firms’ market value. They performed regression analysis to examine the relationship between the stock price of the firm and its assets and liabilities per share disclosed in firm’s financial statements (Francis & Schipper, 1999). Following Francis and Schipper (1999), this study uses a regression model to measure the value relevance of segment disclosure to investigate the relationship between the stock price of Hong Kong listed firms and their total reportable and non-reportable segment

172


assets per share and liabilities per share pre and post HKFRS No.8 period. The regression model is expressed as follows: MVi=β0+β1RS_ASSETi+β2NRS_ASSETi+β3RS_LIABi+β4NRS_LIABi+εi (2) Where: MVi= per share market value of firm i’s equity securities (stock price) at the end of the fiscal year. RS_ASSETi= per share book value of firm i’s reportable segment assets at the end of the fiscal year. NRS_ASSETi= per share book value of firm i’s non-reportable segment asset at the end of the fiscal year. RS_LIABi= per share book value of firm i’s reportable segment liabilities at the end of the fiscal year. NRS_LIABi= per share book value of firm i’s non-reportable segment liabilities at the end of the fiscal year. Equation (2) is based on the “balance sheet relation” model drawn from the study of Francis and Schipper (1999), where the firm’s stock price was regressed on the book value of its reportable and nonreportable segment assets and liabilities per share. This regression model aims to test the second and third hypotheses of the study (The segmental assets/liabilities per share positively influence the firms’ stock price as a consequence of HKFRS No.8 adoption). In Equation (2), segment assets are divided into two components: the total reportable and non-reportable segment assets. Similarly, segment liabilities are divided into two components: the total reportable and non-reportable segment liabilities.

SAMPLE SELECTION This study used the purposive sampling method to obtain samples firms. The segmental data for this study were retrieved from the Investor Relations Asia Pacific database which contains detailed financial statements of 301 Hong Kong listed firms. In order to fill the gaps in previous literature, the firms sampled in this study include not only large size companies, but also small to medium size companies are included. This study analyses yearly segment reports of sample firms from 2006 fiscal year to the 2011 fiscal year. The pre-HKFRS No. 8 period sample consists of observations from the 2006 to 2008 fiscal years and the post-HKFRS No. 8 period sample consists of observations from the 2009 to 2011 fiscal years. This study removed firms from the sample if any of the following conditions held: (1). A firm has not disclosed all 6 years (2006-2011) of financial statements on the Investor Relations Asia Pacific database; (2). A firm has missing segment information such as segment profits, segment assets or segment liabilities in the sample period; (3). A firm has not had segment reporting in the sample period because it only has one single-segment; (4). A firm’s stock price was missing in the sample period; and (5). A firm changed its segment disclosures because of acquisitions or a merger. In the end, a total of 85 multi-segment firms with the required segmental data available on the Investor Relations Asia Pacific database were selected as samples for this study. The stock prices information for sample firms was obtained from the DataStream database. All the segment information was directly manually-collected from sample firms’ annual financial statements.

RESULTS AND DISCUSSION This study uses the regression models to investigate the relationship between the stock prices of the Hong Kong listed firms and their reportable and non-reportable segment profits, assets and liabilities under two years before and after the adoption of HKFRS No.8. Specifically, this study uses two regression models to measure the value relevance of segment disclosure. This section shows the results of the first regression model, which examines the relationship between the market value of the Hong Kong firms’ equity and their equity book value and their reportable and non-reportable segment profits. Followed by the results of the second regression model, which looks the relationship between the Hong Kong firms’ stock prices and their segment assets and liabilities.

173


1. Results of First Regression Model The first regression model 1 (equation 1) is based on the framework of Lee (2010) where the value of a firm is expressed as a function of its reportable and non-reportable segment profits and book value. Following Lee (2010), the dependent and explanatory variables of model (1) are deflated by the number of shares in order to investigate whether a firm’s market value per share (stock price) is correlated to the total of reportable and non-reportable segment profits per share and the equity book value per share. The total sample size for model (1) is 85 firms but observations were eliminated when any of following conditions held: the observations showed a negative equity book value or revealed that each variable had an extreme value. Table 1 (in appendix) reports the regression results of the Hong Kong firms’ market value of equity on their equity book value and reportable and non-reportable segment profits. Table 1 Coefficient estimates of regression model (1) -market value of equity on sum of reportable and nonreportable segment profit, 2007 – 2011 Number of Shares as a Deflator Yearly Regressions

nb

α0

α1

α2

α3

Adj.R2

72

0.6**

0.48**

1.2

-0.88

0.52

(2.54)

(3.85)

(1.38)

(-0.99)

0.37*

0.34**

1.3**

0.07

(2.41)

(6.98)

(6.92)

(0.16)

0.485

0.41

1.25

-0.405

0.05

0.5**

3.42**

-0.72

(0.08)

(2.8)

(3.07)

(-0.63)

0.36

0.32**

3.15**

0.73

(0.67)

(2.8)

(4.5)

(0.65)

0.41

3.285

0.005

Pre-HKFRS No.8 Period: 2007

2008

73

Averagec

0.55

Post-HKFRS No.8 Period: 2010

2011

Average

75

74

0.205

0.55

0.51

Note: nb= the number of observations used to estimate the regression model (1). All t-statistics are in parentheses.* significant at the 0.05 level. ** significant at the 0.01 level. Averagec is a simple average of coefficients for two years within the pre- and post-HKFRS No.8 periods.

In the table 1, the results show the estimated coefficients of the firms’ reportable segment profits per share (α2) are positively correlated with their stock price (significant at 1% level) following the adoption of the new segment standard HKFRS No.8. This indicates that a firm’s higher reportable segment profit per share is associated with its higher stock price. This may be due to the fact that a firm with higher segment profits per share attracts more stock investors so that the firm’s stock price rises. Lee (2010) demonstrates this empirically, showing that there is significantly positive relationship between reportable segment profits per share and a firm’s stock price. This implies that a firm’s reportable segment profit significantly explains its stock price in the post-HKFRS No.8 period. Specifically, the estimated coefficient of the total reportable segment profits per share was 3.42 (significant at 1% level) in 2010 which means that a $1.00 increase in reportable segment profits per share translated into a $3.42 stock price increase. Similarly, in 2011, the coefficient of the total reportable segment profits per share was 3.15 (significant at 1% level) meaning that a $1.00 increase in reportable segment profit per share translated into a $3.15 stock price increase. However, compared with the post-HKFRS No.8 period, the estimated coefficients of the total reportable segment profits per share in the pre-HKFRS No.8 period were much smaller. For instance, the coefficient of the total reportable segment profits per share was only 1.20 (not significant in 2007) which indicates the change in a firm’s reportable segment profits per share did not correlate with its stock price change in 2007. Although the coefficient of the total reportable segment profit per share increased from 1.2 (not significant) in 2007 to 1.3 (significant at 1% level) in 2008, it was still much lower than the post-HKFRS No.8 period. This indicates that a firm’s

174


stock price had a stronger reaction to its reportable segment profit per share during the post-HKFRS No.8 period than the pre-HKFRS No.8 period. Similarly, on average, the estimated coefficient of the total reportable segment profits per share throughout the post-HKFRS No.8 period was 3.285, which was higher than 1.25 for the pre-HKFRS No.8 period. The adjusted R2 of regression model (1) for each sample year was around 50%, which means about 50% of the variability of the firms’ stock prices can be explained by the book value of equity per share and reportable- and non- reportable segment profit per share. The results indicate that compared with the pre-HKFRS No.8 period, Hong Kong listed firms’ reportable segment profits per share were more strongly associated with the firms’ stock prices in the post-HKFRS No.8 period implying that the segment profit disclosed by those firms under HKFRS No.8 were more reflective of the firms’ stock prices than under HKAS No.14. Thus, compared with HKAS No.14, HKFRS No.8 leads investors to make better stock investment decisions by looking at firms’ reportable segment profits. This is consistent with the finding of Lee (2010). While limited research has been carried out on the relationship between a firm’s reportable segment profits and its market value, Lee (2010) in what appears to be the only relevant study found that the multiple on the sum of reportable segment income per share for the post-SFAS No.131 period was higher than for the pre-SFAS No.131 period. This implies that the segment income recognition under the new segment standard, SFAS No.131 improved the value relevance of segment disclosure. Therefore, this study concludes that the reportable segment profit recognition under HKFRS No.8 improves the value relevance of segment disclosure in contrast to HKAS No.14 thus hypothesis one is accepted. However, unlike the reportable segment profits, the incremental coefficients of the sum of non-reportable segment profit per share (α3) are not statistically significant for the pre- and post-HKFRS No.8 periods. This implies that nonreportable segment profits have less economic value and indicates that changes in a firm’s total nonreportable segment profits per share are not related to changes in the firm’s stock price. The nonreportable segment profits are considered as common corporate profits which cannot be easily allocated to separate segments such as finance cost, interest income, and impairment on goodwill. This indicates that investors focus on a firm’s reportable segment profits instead of non-reportable segment profits when they make investment decisions. These results are also consistent with the findings of Lee (2010) who established that there is no relationship between a firm’s non-reportable segment profits and the market value of its equity under SFAS No.131. Additionally, Table 1 shows that the incremental coefficients of the book value of a firm’s equity per share are significant at 1% level and positively correlated to a firm’s stock price both pre- and postHKFRS No 8 period. That means that a firm’s higher equity book value is associated with its higher stock price. This differs from the finding of Lee (2010) that the incremental coefficient on equity book value per share is negative, but none of them are statistically significant in the post-SFAS No.131 period. The difference may be due to different investment environments and company sizes in Hong Kong and the US (Lo, 2002; Chen, 2005). The average incremental coefficient of the equity book value per share (α1) in the pre-HKFRS No.8 period is the same as in the post-HKFRS No.8 (0.41) period, indicating the correlation between a firm’s equity book value and stock price differs very little between the pre-and post-HKFRS No.8 periods. However, compared with the coefficients of the equity book value per share (0.41), the coefficients of the reportable segment profit per share (α2) for both pre HKFRS No.8 (1.25) and post HKFRS No.8 (3.285) periods are higher. This indicates that firms’ reportable segment profits have a higher explanatory power than their equity book value which means reportable segment profits have more influence on firms’ stock prices than book value. This may be because investors focus more on a firm’s segment profits than its equity book value when investing since segment profits are a better indicator of a firm’s performance than equity book value. The implication is that firms’ reportable segment profits play a more significant role in explaining their stock price than the book value of their equity. 2. Results of Second Regression Model Regression model 2 (equation 2) is created from the “balance sheet relation” model used in the study of Francis and Schipper (1999) where the market value of a firm’s equity is regressed on the book value of its reportable and non-reportable segment assets and liabilities. All segments for a multi-segment firm

175


can be classified as either reportable or non-reportable. If a segment is named “other”, “corporate”, or “elimination”, that segment is classified as a non-reportable segment. The total sample size for model (2) is 85 firms but observations were eliminated when any of following conditions held: the observations showed a negative BV or revealed that each variable had an extreme value. Table 2 Coefficient estimates of regressions model (2) market value of equity on sum of reportable and non-reportable segment assets and liabilities Yearly Regressions Pre-HKFRS No.8 period

nb

2007

73

T-statistics

2008

74

β0

β1

β2

0.57*

0.35**

1.19**

(2.02)

(2.65)

(4.19)

β3

β4

Adjusted R-squared

-0.007

-0.24

0.47

(-0.02)

(-0.92)

0.26

0.04

0.57**

0.1

0.04

T-statistics

(1.82)

(0.64)

(4.4)

(0.66)

(0.3)

Averagec

0.415

0.195

0.88

0.0465

-0.1

-0.22

0.3**

1.64**

0.13

-0.09

(-0.50)

(2.79)

(7.32)

(0.49)

(-0.34)

0.07

0.2*

0.92**

0.11

0.05

(0.16)

(2.43)

(4.16)

(0.66)

(0.17)

0.46

Post-HKFRS No.8 period

2010

76

T-statistics

2011 T-statistics

74

0.68

0.46

Averagec -0.075 0.25 1.28 0.12 -0.02 NOTE: nb is the number of observations used to estimate the regression model (2).All t-statistics are in parentheses.* significant at the 0.05 level. ** Significant at the 0.01 level. Averagec is a simple average of coefficients for two years, pre- and post- HKFRS No.8.

Table 2 (in appendix) shows the slope coefficients of a firm’s reportable segment assets per share (β1) are positively correlated with its stock price after the adoption of HKFRS No.8. This implies an increase in the reportable segment assets per share appears to be associated with a higher stock price. Thus, a firm’s reportable segment assets per share significantly explain its stock price post-HKFRS No.8 period. This result is consistent with Francis and Schipper (1999) who found a positive relationship between a firm’s total assets (liabilities) per share and its stock price where the book values of assets (liabilities) can explain the variation in equity market values. Specifically, the slope coefficient on reportable segment assets per share was 0.3 (significant at 1% level) in 2010, whereby an increase of $1.00 in the book value of reportable segment assets per share translated into a $0.3 stock price increase in Hong Kong listed firms. Similarly, the estimated coefficient of reportable segment assets per share was 0.2 (significant at 5% level) in 2011, whereby an increase of $1.00 in the book value of reportable segment assets per share corresponded to a $0.2 stock price increase in the sample firms. However, not all the estimated coefficients of the total reportable segment assets per share were statistically significant in pre-IFRS No 8 period. For instance, although the coefficient of the sum of reportable segment assets was 0.35 (significant at 1% level) in 2007 the coefficient was not statistically significant in 2008, indicating that a firm’s reportable segment asset per share was not associated with its stock price in 2008. Furthermore, the average coefficient on the total reportable segment assets per share in the post-HKFRS No.8 period is 0.25 indicating that on average, the reportable segment asset per share disclosed by the sample firms explains 25% of the variation in their equity market values. The comparable average coefficient of the total reportable segment assets per share was lower (0.195) in the pre-HKFRS No.8 period. Thus, the comparison of the average estimated coefficients of the total reportable segment assets per share in the pre- and post-HKFRS No.8 period indicates that the segment

176


assets reported by Hong Kong listed firms under HKFRS No.8 have a closer correlation to their stock price than those reported under HKAS No.14 since the average estimated coefficients of the total reportable segment assets per share in the post-HKFRS No.8 period were higher than those in the preHKFRS No.8 period. The adjusted R2 of model (2) for each sample year was 47% in 2007. This means that about 47% of the firms’ stock price variability could be explained by the book value of reportableand non-reportable segment assets and liabilities per share that year. The corresponding adjusted R 2 was respectively 46% in 2008 and 2011 and 68% in 2010. These results indicate an increase in the ability of book values of segmental assets disclosed by Hong Kong listed firms to explain the market value of their equity after the adoption of HKFRS No.8. Therefore, Hypothesis two of this study is accepted. Table 2 also shows the slope coefficients of the total non-reportable segment assets per share (β2) are positive and statistically significant at 1% level for both in the pre-and post-HKFRS No.8 periods, indicating that a firm’s total non-reportable segment assets per share significantly correlates with its stock price. The non-reportable segment assets are considered as the corporate common assets which cannot easily be allocated to each segment such as finance interest and good will. Similar to the total reportable segment assets per share, the average coefficient estimates of a firm’s total non-reportable segment assets per share in the post-HKFRS No.8 period was 1.28, which is higher than 0.88 in the preHKFRS No.8 period. This indicates that a firm’s non-reportable segment assets classified under HKFRS No.8 are more highly associated with the firm’s stock price than under HKAS No.14. Overall, the results indicate that both reportable and non-reportable segment assets per share disclosed under HKFRS No.8 had a greater influence on a firm’s stock price than under HKAS No.14. There appears to be no previous research on the relationship between firms’ stock prices and segment assets and liabilities. Francis and Schipper (1999) indicate that there is an improvement in the value relevance of accounting information representing an increase in the slope coefficients of the total assets (liabilities) per share of firms. The results of this study demonstrate that the slope coefficients of both reportable and nonreportable segment assets per share have increased since the adoption of HKFRS No.8. This is consistent with the study of Francis and Schipper (1999) since total assets are considered as a combination of reportable and non-reportable segment assets. Therefore, this study concludes that the value relevance of segment assets has improved under HKFRS No.8. On the other hand, unlike segment assets, none of the coefficients of reportable and non-reportable segment liabilities per share for both pre- and post-HKFRS No.8 periods have had a significant correlation with stock prices. This implies that there is no relationship between a Hong Kong listed firm’s stock price and reportable or non-reportable segment liabilities per share. This indicates that investors consider a firm’s segment assets per share rather than its liabilities when investing in stocks. This may be because segment assets are a measure of a firm’s value and a firm with higher value will always attract more investors, thus its stock price goes up. For example, firm size is considered one of the most important aspects for evaluating stocks (CHEUNG & Ng, 1992; Fama & French, 1995). Investors consider the smaller the firm, the more volatile and risky the investment so they prefer to invest in large international firms or state-owned enterprises (Brennan, Jegadeesh, & Swaminathan, 1993; Fama & French, 1995). This finding differs from Francis and Schipper (1999) who suggested that there was a negative relationship between a firm’s total liabilities per share and its stock price. This is due to the socio-economic differences in the US and Hong Kong. Therefore, Hypothesis three cannot be accepted.

Conclusions This study aims to fill the gap by using empirical measures to assess the quality of segment disclosure in Hong Kong listed firms under the HKFRS No.8. The objective of this study is to ascertain whether HKFRS No.8 has actually improved the usefulness of segment reporting by Hong Kong listed firms compared to HKAS No 14. This study uses the regression to compare the value relevance of segment information disclosed by Hong Kong listed firms two years before and after the adoption of HKFRS

177


No.8.Specifically, Particularly, this study uses two regression models to measure the value relevance of segment disclosure. The first regression model is based on Ohlson (1995) and Lee’s (2010) study where the value of a firm is expressed as a function of its book value and earnings. The model examines the relationship between the market value of the Hong Kong firms’ equity and their equity book value and their reportable and non-reportable segment profits. The results of the first regression model show that there has been a more significant positive relationship between the sums of reportable segment profits disclosed by the firms and the market value of their equity after the adoption of HKFRS No.8 compared with the preceding standard HKAS No.14. On the other hand, the second regression model is a development of an empirical framework for balance sheet relation based on Francis and Schipper (1999)’s study. The model tests the relationship between the Hong Kong firms’ stock prices and their segment assets and liabilities. The results of the second regression model demonstrate that the sum of reportable segment assets disclosed by the Hong Kong listed firms exhibits a more significant positive correlation with the market value of a firm’s equity as a consequence of the adoption of HKFRS No.8 compared with the position under the previous standard, HKAS No.14. There is no evidence that segment disclosure about liabilities is correlated to the market value of their equity. Table 3 (in appendix) summarizes the results of this research. Table 3 The summary of research results Model No

1

2

Models

MVi= α0+α1BVi+α2RS_Pi+α3NRS_Pi + εi

MVi=β0+β1RS_ASSETi+β2NRS_ASSETi+β3RS_LIABi+β4NRS_LIABi+εi

firms' stock price had a stronger reaction to its reportable segment profit per share during the post-HKFRS No.8 period than the pre-HKFRS No.8 period.

The segment assets reported by Hong Kong listed firms under HKFRS No.8 have a closer correlation to their stock price than those reported under HKAS No.14

firms' total non-reportable segment profits per share are not related to changes in the firm’s stock price for both pre- and post-HKFRS No.8 periods

Firms' non-reportable segment assets classified under HKFRS No.8 are more highly associated with the firm’s stock price than under HKAS No.14.

firms’ reportable segment profits have a higher explanatory power than their equity book value which means reportable segment profits have more influence on firms’ stock prices than book value

None of the coefficients of reportable and non-reportable segment liabilities per share for both pre- and post-HKFRS No.8 periods have had a significant correlation with stock prices.

Hypothesis one is accepted

Hypothesis Two is accepted Hypothesis Three is rejected

Results

Hypothesises Conclusion

The adoption of HKFRS No.8 has improved the value relevance of segment information disclosed by the Hong Kong listed firms implying the usefulness of segment disclosure improved under HKFRS No.8

Therefore, this study concludes that the adoption of HKFRS No.8 has improved the value relevance of segment information disclosed by the Hong Kong listed firms implying the usefulness of segment disclosure improved under HKFRS No.8. This is because the management approach under HKFRS No.8 requires a firm’s segment disclosure to be consistent with its internal management organization which enables the segment disclosure to reflect a firm’s financial status more accurately and transparently. This helps investors to make better-informed stock investment decisions in reliance on more detailed reportable segment profit disclosure under HKFRS No.8 than HKAS No.14 (Li, 2013). However, many accounting researchers has claimed the weakness of the IFRS No.8 “management approach”. Notably, IFRS No.8 leaves much room for managerial discretion because operating segment disclosure is heavily based on how management determines its internal business activities under IFRS No.8 (Lee, 2010).In order to improve segment disclosure under IFRS No.8, this research suggests one recommendation for the standard setter, IASB. Specifically, IASB could decrease the quantitative threshold requirement for an operating segment under IFRS No.8.Currently, the threshold is 10% or more of the combined revenue, internal and external, combined reported profit/loss, combined assets of all operating segments under the IFRS No.8. This threshold may be decreased down to 5% so that more operating segments should be identified. This can limit the managerial discretion to manipulate the identification of operating segment.

178


This research project contributes to accounting literature in two ways: first, previous researchers have not investigated whether fir ms’ disclosure of all the segment profits, segment assets and segment liabilities under the new segment reporting standard, IFRS No.8 is enhanced than under the previous standard, IAS No.14. This study therefore takes all the segment profits, segment assets and segment liabilities into consideration to extract the results. To the best of the author’s knowledge, this is the first investigation of the wider aspects of segment information. Thus, this study contributes to the literature by providing a deeper insight into whether segment disclosure actually improved under the new segment reporting standard, IFRS No.8. Second, this study also investigates the value relevance of financial information from an investment perspective by examining firms’ stock prices and returns which are of benefit to accounting standard-setters seeking to revise accounting standards according to the needs of the wider firms’ investors. In order to improve the reliability of research results and to increase the generalizability of the research findings, in the future research projects the number of sample firms for investigation should be increased to make generalisation more sensible. Also, the longer-term impact of IFRS No.8 should be investigated for a longer time span (possibly five years) than the pre and post comparison of the current study.

References Alford, A., Jones, J., Leftwich, R., & Zmijewski, M. (1993). The relative informativeness of accounting disclosures in different countries. Journal of Accounting Research, 31(00218456), 183-183. Association for Investment Management and Research. (1993). Financial Reporting in the 1990's and Beyond:A position paper of the Association for Investment Management and Research., Barth,M.E.,Beaver,W.H., & Landsman,W.R.(2001).The relevance of the value relevance literature for financial accounting standard setting:another view.Journal of Accounting and Ecomonics,31(1-3),77104. Barth, M. E., Landsman, W. R., & Langsman, M. H. (2008). International accounting standards and accounting quality. Journal of accounting research, 46(3), 467-498. Benjamin, S. J., Muthaiyah, S., Marathamuthu, M. S., & Murugaiah, U. (2010). A Study Of Segment Reporting Practices: A Malaysian Perspective. Journal of Applied Business Research, 26(3), 31-41. Berger, P. G., Hann, R., & Piotroski, J. D. (2003). The impact of SFAS no. 131 on information and monitoring. Journal of Accounting Research, 41(2), 163-163. Bouvier, S. (2006). IASB Revises Segment Reporting Standard to Align with FASB's Statement No. 131. Accounting Policy & Practice Report, 2(24), 1000-1000. Brennan, M. J., Jegadeesh, N., & Swaminathan, B. (1993). Investment analysis and the adjustment of stock prices to common information. Review of Financial Studies, 6(4), 799-824. Chalmers, K., Clinch, G., & Godfrey, J. M. (2011). Changes in value relevance of accounting information upon IFRS adoption: Evidence from Australia. Australian Journal of Management, 36(2), 151-173. Chen, B. H. (2005). A study on Value Relevance of Hong Kong Stock Market: Comparison on Constituent Stocks and Non-constituent Stocks (Honours Degree Project). Hong Kong Baptist University, Hong Kong. CHEUNG, Y. W., & Ng, L. K. (1992). Stock price dynamics and firm size: an empirical investigation. The Journal of Finance, 47(5), 1985-1997. Deegan, C., & Samkin, G. (2011). New Zealand Financial Accounting. North Ryde: McGraw-Hill Australia Pty Ltd. Ettredge, M. L., Soo Young, K., Smith, D. B., & Zarowin, P. A. (2005). The Impact of SFAS No. 131 Business Segment Data on the Market's Ability to Anticipate Future Earnings. The Accounting Review, 80(3), 773-804. Ettredge, M. L., Soo Young, K., Smith, D. B., & Stone, M. S. (2006). The Effect of SFAS No. 131 on the Cross-segment Variability of Profits Reported by Multiple Segment Firms. Review of Accounting Studies, 11(1), 91-117. doi:10.1007/s11142-006-6397-9 Fama, E. F., & French, K. R. (1995). Size and book‐to‐market factors in earnings and returns. The Journal of Finance, 50(1), 131-155.

179


Francis, J., & Schipper, K. (1999). Have financial statements lost their relevance? Journal of Accounting Research, 37(2), 319-352. Hong Kong Accounting Standard. (2004). Hong Kong: Hong Kong Institute of Certified Public Accountants. Hong Kong Financial Reporting Standard. (2009). Hong Kong: Hong Kong Institute of Certified Public Accountants. Hung, M. (2000). Accounting standards and value relevance of financial statements: An international analysis. Journal of accounting and economics, 30(3), 401-420. International Financial Reporting Standards. (2010a). London: International Accounting Standards Board. International Financial Reporting Standards. (2010b). London: International Accounting Standards Board. KPMG. (2007). HKFRS 8: Revised requirements for segment reporting. Retrieved 01/05/2011, 2012,fromhttp://www.kpmg.com.hk/en/virtual_library/Audit/financial_reporting/FRU0736.pdf Lang, M., Raedy, J. S., & Yetman, M. H. (2003). How Representative Are Firms That Are Cross-Listed in the United States?An analysis of Accounting Quality. Journal of Accounting Research Vol. 41 No. 2 Lee, S.-K. (2010). A Comparative analysis of segment disclosures for pre-and post-SFAS No.131 periods. JOURNAL OF Business and Accounting, 2(1). Lev, B. (1989). On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research. Journal of Accounting Research, 27, 153-192. Li,Y.Y.(2013).Segment Reporting in Hong Kong Listed Firms: An Empirical Assessment of IFRS No.8 (Thesis), Lincoln university, New Zealand Liu, J., & Liu, C. (2007). Value Relevance of Accounting Information in Different Stock Market Segments: The Case of Chinese A-, B-, and H-Shares. Journal of International Accounting Research, 6(2), 55-81. Lo, H. R. (2002). An empirical study of the characteristics of Hong Kong listed companies that practised discretionary segmental disclosure (AF Theses). The Hong Kong Polytechnic University, Hong Kong. Retrieved from http://hdl.handle.net/10397/919 Ohlson, J. A. (1995). Earnings, book values, and dividends in equity valuation. Contemporary accounting research, 11(2), 661-687. Prather-Kinsey, J., & Meek, G. K. (2004). The effect of revised IAS 14 on segment reporting by IAS companies. European Accounting Review, 13(2), 213-234. Street, D. L., Nichols, N. B., & Gray, S. J. (2000). Segment disclosures under SFAS No. 131: Has business segment reporting improved? Accounting Horizons, 14(3), 259-285.

180


THE DETERMINANTS OF OVEREDUCATION AND OVERSKILLING AMONG WORKERS IN THE MANUFACTURING SECTOR IN MALAYSIA Zainizam Zakariya Department of Economics Universiti Pendidikan Sultan Idris

[email protected] ABSTRACT This paper explores the influence of workplace characteristics on the determinants of overeducation and overskilling in the manufacturing sector in Malaysia. Using the 2007 Productivity Investment Climate Survey (PICS-2), about 19% of workers are overeducated and 29% are overskilled (7% moderately overskilled and 22% severely overskilled), respectively. The multinomial logit reveals that workplace characteristics such as firm size, the share of university workers at the workforce, the types of ownership, the number of competitors, and the different types of hiring practices all influence overeducation. For instance, overeducation was more likely for individuals working in small firms, firms with greater number of workers with university qualifications (> 50%), and firms that emphasise education as the main criterion for recruitment. Nevertheless, the severely overskilled individual is less evident in firms with higher share of university workers, lower proportion of foreign ownership, higher number of competitors (> 25 competitors), and a firm where education and technical skills are of highest priority for hiring workers. Keywords: overskilling, overeducation, workplace characteristics, Malaysia JEL classifications: J24, J31

INTRODUCTION Over the last two decades, the number of studies on over-education has risen considerably, especially in developed countries (for reviews, see McGuinness, 2006; and Battu, 2008). In this research, workers who have higher schooling than what their jobs require are deemed ‘overeducated’, while those with lower schooling than what is required are considered ‘undereducated’. However, it is broadly accepted in the literature that over-education is a far from perfect indicator of mismatch in the labour market. Measures of over-education may not capture the extent to which workers’ skills and abilities are utilised in employment while workers who are well matched in terms of educational qualifications may well be underutilising their skills and abilities (McGuinness and Sloane, 2010). In this paper, apart from overeducation, we use alternative measures of labour market mismatch, namely measures of overskilling. Overskilling can be defined as the extent to which workers are unable to utilise all their skills and abilities in doing their current jobs.19 Although a small but important body of literature has demonstrated the presence of overskilling in the labour market (Mavromaras et al., 2009; Mavromaras et al., 2010; McGuinness and Sloane, 2010), no such studies exist for developing countries.20 The main reason why mismatch is not examined in developing countries stems from poor 19

Following Allen and van der Velden (1997), underutilised skills or overskilling can be seen as a counterpart of over-education whilst skills deficit/underskilling is equivalent to under-education. This is because working in jobs below one’s actual educational level may impose a limitation on the utilisation of skills. Conversely, being employed above one’s educational background raises the producti vity ceiling and allows workers to be more productive than they would have been when working at their own educational level. 20 The research on overeducation in developing countries is similarly scant (Mehta et al., 2010). The reviews of the mismatch literature by Hartog (2000), Sloane (2003), McGuiness (2006), Oosterbeek and Leuven (2011) make no or very little mention of matching in low or middle income labour markets.

181


data, i.e. there is a lack of data regarding the education or skills required to perform in a job (Mehta et al., 2010). We are fortunate in that we have here a dataset that allows us to examine the phenomena of both overskilling and over-education within the context of Malaysia. In particular, our dataset contains extensive information on the skills and education required for any particular job. The aim of this paper is to explore what factors drive the determinants of over-education and overskilling in the Malaysian labour market. Based upon the job mismatch literature, particularly over-education, the examination of the job mismatch determinants have been heavily focused on the role of individuals’ characteristics (i.e. based on human capital model), individual heterogeneity in skills and ability, job characteristics and spatial factors. There is a very little attention investigate the relationship between workplace and overeducation apart from Levin and Tsang (1985) and Belfield (2010). Levin and Tsang (1985) developed a model to demonstrate how over-education can adversely affect individual and firm productivity and they argued that if over-education leads to a reduction in the workers’ productivity, this would reflect workplace performance in terms of profits. This suggest that since the primary goal for firms is profit-maximisation, it is important for them to identify which characteristics of the workplace can either minimise or rise the incidence of over-education or overskilling at the workplace. Belfield (2010) in a study in the UK reveals that the management– labour relationship, hiring practice, supervision, and incentive schemes play important roles on the workplace determinants of overeduction. Therefore, the effects of workplace characteristics on overeducation remain unexplored. Indeed, there is no study available in the literature emphasises the relationship between workplace and overskilling in terms of determinants and its consequences. Since both over-education and overskilling are two different incidences in the labour market (Allen and van der Valden, 2001), the characteristics of workplace could play different effects on overeducation and overskilling determinants. This paper then focuses mainly on the role of workplace characteristics on over-education and overskilling determinants as well in the manufacturing sector in Malaysia. This sector-specific analysis (manufacturing) has an advantage over the existing literature since very few studies focus on particular sectors or firms, a notable exception being Tsang (1987). Malaysia is also an interesting case in its own right. It is a middle income country which has, since the 1970s, moved from being a primary goods exporter to one that is much more reliant on manufacturing and services. Education has played a pivotal role in this transformation with higher levels of investment and educational attainment (UNDP, 2009). The proportion of the population with secondary and tertiary education increased from 46% in 1985 to 77% in 2004. Inevitably, questions have been raised about the quality of matching workers in the labour market (World Bank, 2009). Despite this, to date no study has addressed the utilisation of education and skills in the Malaysian labour market. This paper is organised as follows. Section 2 outlines dataset and the measurement of overeducation and overskilling while section 3 details out empirical estimation methods. The effects of workplace characteristics on the determinants of over-education and overskilling are explored in sections 4 and the final section 5 provides a few concluding remarks.

DATA DESCRIPTION The data used in this paper is taken from the second survey of the Productivity Investment Climate Survey (PICS-2) which was carried out in 2007.21 This is a workplace survey and a collaborative effort between the World Bank and the Malaysian Government via the Economic Planning Unit and the Department of Statistics. The survey attempts to understand the investment climate faced by enterprises and how this impacts upon business performance. The dataset covers the manufacturing and business support services sectors. Yet, this paper only focus on the manufacturing sector alone

21

The first (PCIS-1) was administered in 2002, and though it had an individual and firm survey, we have no access to the individual-level data.

182


due to the fact that it is representative of the manufacturing sector as a whole (World Bank, 2009). In particular, 1,115 establishments were selected from nine manufacturing industries.22 For each of the workplaces, two interviews were structured- employer and employee. For the former, interviews were conducted with the Chief Executive Officers (CEOs) or general managers or business owners (and, where appropriate, managers) seeking data, for example, on the level and composition of employment, product market characteristics, workplace performance, and management practices. For the latter, 10 employees were randomly selected for each workplace where the senior manager had agreed to employee involvement. This latter questionnaire sought information on the usual array of demographic and work-related information as well as human capital endowments (i.e. earnings, previous and current job, education, training, and work experience). Samples in this paper however are confined to workplaces where more than four workers had responded to the worker survey and respondents who were in full-time employment, aged between 15 and 64 years. The final sample then comprise of 10,302 workers (50.4% male and 49.6% female) across 1,043 manufacturing-based firms. Table 1 provides some descriptive statistics for the key variables in our analysis. Generally, respondents were on average 34 years of age and reported to have had about 10.5 years of schooling which is equivalent in Malaysia to upper secondary qualifications. With respect to other human capital variables, respondents on average accumulated about 157 months of work experience, 7.6 (years) job tenure, and nearly 40% had once attended a training course. By gender, women are slightly younger than men (34 versus 36 years) and men have more work experience and job tenure within firms than women (181 months and 9 years respectively vs. 149 months and 7 years respectively). However, women are slightly better educated with 25% holding higher degree qualifications (both diploma and university qualifications) relative to 20% among men. In terms of occupation distribution, a quarter of the women (25%) occupy higher job levels (management and professional) with a corresponding figure of 22% for men. However, women are twice more likely than men to be working in non-production level jobs, i.e. clerical jobs. Meanwhile, men work on average two hours longer per week than their female counterparts. With regard to firm characteristics, on average, firms are well established and mature, with an average life of 33 years. Around 40% of the firms have less than 50 employees while nearly 70% are purely domestically-owned. The PICS-2 provides a direct measure of required education based on a worker’s assessment. Specifically, workers were asked the following questions “What is the most appropriate level of education for the work you are doing?”. For overskilling measure, respondents were asked directly about the skills and knowledge required for their job via the following statement “Your current job offers you sufficient scope to use your knowledge and skill”.23 For the first question, there are seven educational levels to choose from, 1 (degree) to 7 (no qualification). In the second question, four responses were available, from 1 (do not agree at all), 2 (somewhat agree), 3 (agree), and to 4 (agree completely). Table 2 provides the raw responses for question one (top panel) and question two (bottom panel). Roughly, 36% of workers believed that an upper secondary qualification was the most appropriate educational requirement. Lower secondary level was the second most appropriate (23%), followed by diploma (17%). Only 11% of workers reported that a degree was the most appropriate educational level for the job they currently held. The gender differences are small. Nevertheless, the corresponding responses of question 2 are 8.1%, 22.9%, 54.7% and 14.3% respectively. By gender, the responses were quite similar between males and females.

22

23

The nine manufacturing sectors are - food processing, textiles and garments, wood and furniture, chemical and chemical products, rubber and plastics, machinery and equipment, electrical machinery and electronics, equipment and components, and motor vehicles and parts. The statement is similar to that used elsewhere. Allen & van der Velden (2001) measure overskilling from the statement: “My current job offers me sufficient scope to use my knowledge and skills”. Green and McIntosh (2002) combine responses to two statements: “In my current job I have enough opportunity to use the knowledge and skills that I have”; and “How much of your past experience, sk ills and abilities can you make use of in your present job?”

183


Table 1 Descriptive statistics (mean and standard deviation) All (n = 10,302) Mean SD 34.89 9.83 10.35 3.52

Male (n = 5,610) Mean SD 35.86 9.99 10.21 3.63

Female (n = 4,692) Mean SD 33.91 9.56 10.92 3.34

0.03 0.12 0.25 0.38 0.13 0.09 165.45 0.42

0.18 0.33 0.43 0.49 0.34 0.29 120.05 0.49

0.04 0.13 0.28 0.36 0.11 0.08 181.26 0.43

0.21 0.33 0.45 0.49 0.31 0.29 123.15 0.50

0.02 0.12 0.21 0.41 0.15 0.09 149.38 0.40

0.14 0.33 0.41 0.49 0.36 0.29 114.61 0.49

0.55 0.65 0.94

0.45 0.48 1.18

0.68 1.02

0.47 1.23

0.62 0.87

0.49 1.12

Malay Chinese Indian

0.55 0.35 0.10

0.50 0.48 0.29

0.58 0.33 0.09

0.49 0.47 0.29

0.52 0.39 0.10

0.50 0.49 0.30

Central North South East coast Malaysia East

0.35 0.23 0.33 0.03 0.07

0.48 0.42 0.47 0.16 0.25

0.35 0.24 0.31 0.03 0.07

0.48 0.42 0.46 0.18 0.25

0.34 0.23 0.34 0.02 0.07

0.47 0.42 0.47 0.13 0.25

Work distance (km) Commuting time (minutes) Occupation

12.44 20.53

14.64 15.24

13.49 21.18

16.86 15.15

11.39 19.88

11.87 15.31

Managerial Professional Skilled job Clerical/Non-production Unskilled job Hours of work (weekly)

0.15 0.08 0.37 0.23 0.17 45.82

0.36 0.28 0.48 0.42 0.38 12.23

0.13 0.09 0.45 0.22 0.12 46.81

0.33 0.28 0.50 0.41 0.32 12.56

0.17 0.08 0.28 0.24 0.23 44.81

0.38 0.27 0.45 0.43 0.42 11.81

0.22 0.04 0.07 0.08 0.25 0.09 0.04 0.11 0.11

0.41 0.19 0.26 0.27 0.44 0.28 0.18 0.31 0.31

0.23 0.04 0.02 0.09 0.25 0.12 0.03 0.11 0.11

0.42 0.19 0.15 0.28 0.43 0.32 0.18 0.31 0.32

0.21 0.04 0.12 0.07 0.26 0.05 0.04 0.11 0.10

0.41 0.19 0.33 0.25 0.44 0.23 0.19 0.31 0.31

Variable Age Years of schooling completed Education level No/informal qualification Primary education Lower secondary Upper secondary Diploma University Exp (month) Train Female Married Children under 12 years Ethnicity

Region

Industry Food processing Textiles Garments Chemical Rubber & plastics Machinery & equipment Electric & electronic Auto parts Wood & furniture

184

Proceedings of the 2nd Applied International Business Conference (AIBC2013) 7 – 8 December 2013 Continued…

% workers with university qualification at the workplace Graduates less than 25% 0.76 Graduates 25 to 50% 0.19 0.05 Graduates more than 50% Firm size Firm size less than 50 Firm size 50 to 150 Firm size more than > 150 Ownership Purely domestically-owned Less than 30% foreign-owned More than 30% foreign-owned Firm providing on-the-job training

0.42 0.39 0.22

0.76 0.18 0.06

0.43 0.38 0.23

0.77 0.19 0.04

0.42 0.39 0.20

0.40 0.31 0.29

0.49 0.46 0.45

0.43 0.30 0.27

0.50 0.46 0.44

0.37 0.32 0.31

0.48 0.47 0.46

0.68 0.05 0.27

0.47 0.21 0.45

0.68 0.05 0.27

0.47 0.22 0.44

0.68 0.04 0.28

0.47 0.21 0.45

0.52

0.49

0.49

0.50

0.55

0.50

By comparing the survey respondents’ educational attainment (see Table 1) with the perceived minimum education requirement for the job (question one), I derived conventional estimates of overeducation. Where an individuals’ actual schooling exceeds what the job requires they are considered to be over-educated (Sa > Sr). Where an individuals’ actual level of education is below that required for the job they are classified as under-educated (Sa < Sr). Those whose actual educational attainment is appropriate for the job (i.e. actual and required education are the same) are deemed wellmatched (Sa = Sr). With respect to second question, I collapsed the four responses into three categories in order to aid my later empirical estimations. Here, those with response 1 are classified as severely overskilled, those with response 2 are classified as moderately over-skilled, and those with responses 3 or 4 are classified as well-matched.

Table 2 Education required for current job (percentage) and the degree of skills utilisation

Most appropriate education level Degree Diploma Upper secondary Lower secondary Primary Informal/None Total Overskilling (skills underutilisation ) Do not agree at all Somewhat agree Agree Agree completely Total

All (n = 10,302)

Male (n = 5,610)

Female (n = 4,692)

10.5 17.1 35.5 23.1 8.2 5.6 100

10.7 15.1 34.3 24.6 8.4 6.9 100

10.2 19.5 36.9 21.4 8.0 4.0 100

8.1 22.9 54.7 14.3 100.0

8.8 23.5 53.0 14.7 100.0

7.3 22.1 56.7 13.9 100.0

Source: Second Private Investment Climate Survey (2007)

Table 3 shows the incidence of over-education (top panel) and overskilling (bottom panel) among workers in the manufacturing sector and the key finding is that the majority of workers, around 52%, were employed in jobs matched to their educational level. Only 18% are over-educated and 29% are

185


under-educated. For overskilling, 72% of workers were reported as working in jobs that were in line with their knowledge and skills. Only 28% of them were in jobs that did not fully utilise their skills. In particular, moderately and severely overskilled workers represented 21.6% and 6.7% of the sample survey, irrespective of gender. It is difficult to compare these estimates with those elsewhere since there is considerable variation in the incidence of over-education across the different measures used. Nevertheless, the incidence of overeducation in Malaysia seems to be at the lower end of the existing estimates. Groot and Maassen van den Brink (2000) undertake a meta-analysis based on data from 25 over-education studies and find that the incidence of over-education varies from 10% to 42% with the unweighted average for overeducation standing at 23.3%. A recent review by Leuven and Oosterbeek (2011) reports a mean overeducation rate across studies of 30% with self-assessment approaches having an average overeducation rate of 37%.24 The extent of overskilling (both severely and moderate) in Malaysia is then low at around 28% compared with 53% (severe and moderate) reported in Belfield (2010) for the UK, and 44% in Mavromaras et al. (2010) for Australia.25 Table 3 The incidence of overeducation and overskilling (%) Pooled (n = 10,302)

Male (n = 5,610)

Female (n = 4,692)

51.9 18.5 29.6 100.0 71.7 21.6 6.7 100.0

48.7 18.5 32.8 100.0 72.3 21.4 6.3 100.0

55.7 18.6 25.7 100.0 71.2 21.8 7.0 100.0

Education level Well-matched Overeducated Total Skills underutilisation Adequately-skilled Moderately overskilled Severely overskilled Total

Source: Second Productivity Investment Climate Survey (PICS-2)

EMPIRICAL METHODS The determinants of overeducation and overskilling are gauged via multinomial logit. as the dependent variable consists of more than two categories and the response is not ordinal in nature as with an ordered logit. As mentioned earlier, three categories of match quality were distinguished (overeducated, undereducated and well-matched, and skill-matched, moderately overskilled and severely overskilled). The probabilities of each outcome are defined as: ( ∑

) (

)

where for the ith worker, yi is the observed outcome (dependant variable) and x’ is a vector of explanatory variables (individuals’ characteristics, job attributes and firm characteristics), whilst j is the particular outcome and J refers to all outcomes. When using the multinomial regression, one category of the dependent variable is chosen as the comparison or baseline category (Long, 1997) and, in this case, having a job that corresponds to individuals’ education (well-matched group, j=1) is specified as the baseline category. The probability of being well-matched (outcome 1) can be expressed as follows: ∑

(

)

24

As stated earlier, there are very few comparable developing country studies. Hung (2008), using data for Taiwan, finds an overeducation rate of 46% using a measure which is similar to ours while Yue and Yang (2005) find that 21% of Chinese graduates in 2003 were overeducated. 25 McGuiness and Wooden (2007) and Mavromaras et al. (2009) for Australia report a rate of severe overskilling of up to 15% and moderate overskilling of up to 29%.

186


The probability of a worker being overeducated or moderately overskilled (outcome 2) relative to the probability of being in the default group (well-matched) is given by: ( ∑

) (

)

and, finally, the probability of being undereducated or severely overskilled (outcome 3) is stated as: ( ∑

) (

)

The unknown parameter (βj) for a multinomial logit is estimated via the maximum likelihood method (ML). Following Schmidt and Strauss (1975), the ML can be written as: ∏

∏

∏

where j = [i|jth mismatches is observed (2, 3)] Hence ∏

∑

∏ ∏

∑

where j = 2 and 3 ∐(

∑

)∐ ∏

As usual, I estimate  j by maximising (L) using the STATA program. Separate regressions are performed on a combined sample, male only sample and female only sample.

DETERMINANTS OF OVERSKILLING AND OVEREDUCATION Table 4 reports the marginal effects estimated from the multinomial logit at the sample means. For the sake of the discussion, only the results of over-education and severely overskilled are discussed here. Overskilling thereafter refers to severely overskilled unless stated.26 Before focusing on the effects of workplace characteristics, let us start by discussing the effects of individuals’ human capital endowments on educational and skill matching. In accordance with the overeducation literature and a priori expectation, over-education increase with education whilst more trained and experienced workers increase the probability of being in a well-matched job. By contrast, overskilling decreases with education where the higher the education individuals gain, the lower the risk of overskilling. This holds in particular for those with a college diploma compared to the primary education (reference group).27 This perhaps as argued by Mavromaras et al. (2010), formal education could be used as a signalling device where employers have incomplete knowledge of t h e s k i l l s l e v e l of potential employees. Consequently, individuals with higher educational attainment will obtain jobs for which their knowledge and skills are appropriate.28 Better trained workers also reduce the risk of 26

Full results of the determinants of overeducation and overskilling are available upon request. The risk of severe overskilling is also lower for those with degree qualifications but these effects are somewhat smaller than the effects for diploma and only significant for the pooled sample. This may have to do with the notion that diploma qualifications are more closely tied to careers and the labour market whereas university degree qualifications are more general. 28 This is perhaps not surprising since college diplomas are more closely tied to job requirements and are offered in Malaysia by polytechnic institutions, vocational training centres and private colleges. A college diploma reduces the risk of being severely overskilled by 3%. This finding is in line with those found in Mavromaras et al. (2009) for Australia where the risk of severe overskilling is reduced by 31% for those with a certificate/diploma and degree or higher. 27

187


being overskilled, particularly true for males. This perhaps due to one would expect (as it is tied to the workplace) that it would improve the quality of the skill-match (Mavromaras et al., 2009; Green and McIntosh, 2007). Table 4 The determinants of over-education and severely overskilled (marginal effects) Overeducation

Severely overskilled

All

Male

Female

All

Male

Female

0.074 ***

0.069 ***

0.084 ***

-0.025 ***

-0.013 *

-0.036 ***

0.020

0.025

0.031

0.006

0.008

0.008

Upper secondary

0.193 ***

0.194 ***

0.204 ***

-0.037 ***

-0.031 ***

-0.037 ***

0.019

0.025

0.029

0.006

0.008

0.008

College diploma

0.315 ***

0.319 ***

0.329 ***

-0.049 ***

-0.037 **

-0.054 ***

0.022

0.031

0.033

0.010

0.015

0.013

University degree

0.568 ***

0.599 ***

0.541 ***

-0.038 ***

-0.029

-0.047 ***

Educ (ref - no/primary education) Lower secondary

Exp

Train

Profcert

Female

0.025

0.037

0.036

0.013

0.019

0.016

-0.001 *

0.000

-0.001 **

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

0.000

-0.097 ***

-0.118 ***

-0.070 ***

-0.020 ***

-0.036 ***

0.000

0.011

0.015

0.015

0.005

0.008

0.007

-0.036 **

-0.054 **

-0.015

0.000

0.008

-0.006

0.016

0.023

0.023

0.009

0.011

0.013

-0.007

-0.001

-0.007

0.005

0.010

0.005

Married

0.003

-0.008

0.013

-0.004

0.011

0.016

0.016

0.005

0.007

0.006

child12

-0.014 ***

-0.016 **

-0.010

-0.007 ***

-0.006

-0.007 **

0.005

0.007

0.007

0.003

0.004

0.003

-0.039 ***

-0.015

-0.053 ***

0.000

0.002

-0.001

0.012

0.018

0.016

0.005

0.008

0.007

-0.006

-0.016

0.002

-0.010

-0.012

-0.011

0.019

0.029

0.024

0.009

0.014

0.010

-0.086 ***

-0.058

-0.096 ***

0.009

0.014

0.004

0.028

0.044

0.036

0.015

0.023

0.018

0.196 ***

0.238 ***

0.169 ***

0.031 ***

0.035 **

0.027 **

0.020

0.033

0.025

0.010

0.017

0.012

Non-Production

0.175 ***

0.262 ***

0.131 ***

0.035 ***

0.058 ***

0.018

0.021

0.036

0.024

0.011

0.018

0.013

Unskilled workers

0.316 ***

0.346 ***

0.306

0.065 ***

0.065 ***

0.063 ***

0.021

0.034

0.026

0.010

0.017

0.012

-0.006

-0.038

0.047

0.002

-0.003

0.012

0.026

0.037

0.037

0.009

0.012

0.013

0.039 **

0.040

0.049 **

-0.027 ***

-0.049 ***

-0.015 *

0.018

0.032

0.024

0.008

0.016

0.009

-0.013

-0.017

-0.009

-0.047 ***

-0.035 **

-0.058 ***

0.020

0.029

0.029

0.011

0.014

0.018

0.002

-0.020

0.025

-0.008

-0.012

-0.006

0.014

0.019

0.020

0.005

0.007

0.007

Race (ref - Malay) Chinese

Indian Occupation (ref – managerial) Professional

Skilled workers

Industry (ref – food processing) Textiles

Garments

Chemical

Rubber & plastics

188

Proceedings of the 2nd Applied International Business Conference (AIBC2013) 7 – 8 December 2013 Machinery & Equipments

0.022 0.020

0.025

Electrics & Electronics

-0.019

-0.011

Auto parts

Wood & Furniture

0.035

-0.015

-0.014 *

-0.015

-0.005

0.034

0.008

0.010

0.013

-0.021

-0.012

0.015

-0.047 **

0.028

0.040

0.038

0.014

0.018

0.023

-0.038 *

-0.041

-0.034

-0.068 ***

-0.074 ***

-0.060 ***

0.019

0.029

0.026

0.013

0.019

0.015

0.017

0.012

0.015

-0.016 **

-0.021 **

-0.009

0.016

0.022

0.025

0.007

0.009

0.010

-0.005

-0.001

-0.009

Share of workforce with university qualifications (ref – graduates less than 25%) Graduates 25 to 50%

Graduates more than 50%

-0.023

-0.033

-0.010

0.014

0.020

0.019

0.006

0.008

0.008

-0.064 ***

-0.042

-0.093 ***

-0.052 ***

-0.062 ***

-0.035 *

0.032

0.036

0.014

0.018

0.021

-0.038 **

-0.047 **

0.011 **

0.019 **

0.001

0.024 Firm size (ref – firm size less than 50) Firm size 50 to 150

-0.039 *** 0.013

0.018

0.018

0.005

0.008

0.007

-0.015

-0.004

-0.027

-0.002

0.015

-0.014

0.015

0.021

0.021

0.007

0.010

0.009

0.006

-0.043

-0.058 ***

-0.053 ***

-0.072 **

0.024

0.031

0.039

0.017

0.020

0.029

0.005

-0.009

0.020

-0.007

-0.008

-0.004

0.013

0.018

0.017

0.005

0.008

0.007

Competitor less than 25

-0.007

-0.046

0.017

-0.012

-0.018

-0.003

0.021

0.032

0.027

0.008

0.013

0.009

Competitor more than 25

-0.020

-0.029

-0.025

-0.024 **

-0.042 ***

-0.001

0.026

0.039

0.036

0.010

0.016

0.012

-0.023 **

-0.023

-0.016

-0.010 **

-0.012 **

-0.009

0.010

0.014

0.014

0.004

0.006

0.005

Work exp-based

-0.015

-0.041 **

0.026

0.010 *

0.010

0.010

0.013

0.018

0.019

0.006

0.007

0.008

Technical-based

0.033 ***

0.055 ***

-0.005

-0.010 **

-0.010

-0.009

0.012

0.017

0.016

0.005

0.007

0.006

Firm train

-0.025 **

-0.047 ***

-0.010

-0.007

-0.005

-0.009

0.013

0.018

0.018

0.005

0.007

0.006

No. of obs

9,700

5,217

4,483

9,814

5,285

4,529

No. of firm

1,013

1,013

1,013

1,013

1,013

1,013

Firm size more than 150

Ownership (ref – purely domestically-owned) Less than 30% foreign-owned

More than 30% foreign-owned

0.015

Competitors (ref – no competitor)

Hiring practice Education-based

Pseudo R-sq Log-likelihood

0.180

0.196

0.185

0.081

0.092

0.083

-8069.0

-4315.0

-3616.0

-7148.0

-3851.0

-3208.0

Robust standard error in italics Other covariates – household size, region (5), work distance (km), job tenure, unionisation and number of job held in the past *, **, and *** respectively 0.1, 0.05 and 0.01

With respect to demographic variables, gender plays no role in determining the risk of both overeducation and overskilling. However, the presence of children under 12 in a household does matter in that it increases the likelihood for women being in matched jobs. This seems a little counterintuitive since one would expect the presence of children to be greater constraint for females perhaps generating more mismatch. Ethnic group does not matter for overskilling, instead, being a minority ethnic, particularly Chinese female significantly reduces the risk of overeducation. Nevertheless, the effects of

189


occupation seems in accordance with the previous studies where being in managerial jobs in general reduce the risk of over-education and overskilling. Now, I focus my attention to the effects of a range of workplace characteristics on the job matching process. In general, the results show that workplace characteristics are found to be important for predicting educational and skills mismatch. First, I begin with types of industry. As expected, there is evidence that workers employed in capital-intensive industry increase the likelihood of being in well-matched job than workers employed in labour-intensive industry. In particular, workers in firms specialising in auto parts products less likely to be overeducated than workers in the reference group (food-processing firms) whereas workers in garment industry increase the risk of overeducation. Perhaps highly educated workers are more needed in the former than in the latter, resulting in a lower overeducation risk. For overskilling, the risk of overskilling as a whole is not only lower in the capitalintensive industry, i.e. chemicals and auto parts products but also in the labour-intensive firm where firms in the garment industry reduce the workers’ probability of being overskilled as compared to the reference group (food processing firm). There is similar finding with respect to workforce composition. The probability of being overeducated and overskilled are found to be lower for workers in a firm which employs more highly- educated workers. For example, relative to the reference group (graduates less than 25% at the workplace), the risk of over-education is 6 to 9 percentage points lower for workers (women in particular) who work in firms where over 50% of the workforce (Graduates more than 50%) having a university qualification. Similarly, Firms where graduate workers account for over 50% of the workforce reduce the risk of overskilling by 3.5 to 6.2 percentage points as compared to the reference group. This holds true irrespective of gender. These are the expected results as workplaces that are skewed towards hiring more educated workers perhaps have more scope for improving match quality. Perhaps workplaces that are skewed towards hiring more educated workers have better scope for improving match quality. One argument may have been that larger firms may be more likely to employ graduates and where they do they may find it easier to accommodate their skills and education. There has some support for this. It is evident that overeducation risk is higher in a small firm (reference group) than a medium-sized firm. Working in a small-sized firm is associated with a 4 to 5 percentage points increase in the risk of overeducation as compared to working in a medium-sized firm. Yet, there seems to be no discernible relationship between firm size and skills mismatch. Working in a medium- firm size increases by one and two percentage points the risk of men being severely overskilled than working in small-size firms. As such, the result contradicts expectation and the overeducation results. It is perhaps much easier for employers to see the level of education each applicant has, but their skills may not be fully observed. Once individuals are hired, they are matched in terms of education but they may be mismatched in terms of skills. Ownership does not matter for over-education. Instead, the effects of firm’s ownership on overskilling seem clear. Firms with foreign ownership (less than 30%) is associated with reduced overskilling by 5 to 7 percentage points regardless of gender compared to purely domestically-owned (base group). One may also argue that capital intensive-firms may require more highly skilled workers relative to labour-intensive firms so that skills underutilisation may be more evident in the latter. Following Battu et al. (2003) and Belfield (2010), firms where labour costs account for less than 25% of total costs are assumed to be capital intensive while an establishment where labour costs denote over 75% of total costs is classified as labour-intensive. It is difficult to draw any conclusion with regards to a firm’s labour costs from the table. The results show that a higher risk of overeducation for more labourintensive firms (where labour costs account for 51 to 75% of the total cost) in the pooled and female samples. For overskilling, the results here support the hypothesis that overskilling is more prone to labour-intensive firms. A higher risk of overskilling is evident at firms where labour costs account for over 75% of the total cost as revealed in the male sample. The results also reveal that the extent of educational and skill mismatch differs by how much competition a firm faces. Firms with a high number of competitors (competitors more than 25) reduce the workers’ probability of being overeducated although the results do not statistically significantly different from zero. To some extent, the result here in line with Belfield (2010) who finds no effect

190


via competition though his focus is upon overeducation. Nevertheless, relative to a firm which is considered to have a monopoly, i.e. no competitors, a higher number of competitors (more than 25) decreases the likelihood for being overskilled, men in particular. Increased competition perhaps keeps firms more “on their toes” in terms of ensuring good matches. Belfield (2010) argues that mismatch may be higher where firms have weak hiring systems and where they do not properly check worker capabilities before hiring. There are some evidences that over-education is related to hiring practice. Workers have a lower risk of over-education at firms that emphasise education as the main criteria for recruitment (albeit for the pooled sample).29 Where work experience (technical skills) is a priority for hiring practice, it reduces (increases) the risk of overeducation (albeit for men). Nevertheless, workers have lower severe overskilling when they work at firms that emphasise technical skills in hiring and this is evident for the combined and male samples. On top of that, firms which place emphasis technical skills in recruitment also reduce the probability of workers being overskilled although this is only evidence for the pooled sample. For women, there is a weak evidence at 10% that being employed in firms where education is the most important consideration for hiring reduces the risk of overskilling. The evidence also indicates that firms providing on-the-job training at the workplace (firmtrain) increase the likelihood of workers being in jobs that correspond to their educational background (albeit for the male and combined samples). This is in line with our earlier finding that workers with greater participation in on-the-job training have a better job-match quality.

CONCLUSIONS This paper aimed to find out the factors that drive the incidence of over-education and overskilling. The studies of mismatch have examined the individuals’ characteristics and spatial factors to explore the determinants of over-education. They tend not to examine the possible effects of workplace characteristics due to lack of employer-employee dataset. To fill this gap, this study explores overeducation and overskilling in the context of a developing country such as Malaysia as we have at our disposal a unique workplace dataset that contains extensive workplace and individual worker level of information. Using the workers’ own self-assessment of their skills, nearly 30% of workers are overskilled (yet only 6% are severely overskilled) while 18% were overeducated. The majority are in well- matched jobs. Using multinomial logit, apart from individuals and spatial elements, there was some evidences that the characteristics of the workplace where the respondents work at play significant impacts on the overeducation/overskilling determinants. As a whole, the risk of being overeducated was lower in the capital-intensive industry, firms with a higher number of graduates in the workforce, medium-sized firms, a greater number of competitors, firms in favour of education and work experience in hiring practices and firms that provided on-the-job training programmes. Firms with higher foreign ownership, firms in favour of technical-based skills in hiring practice in general increased the risk of mismatch. Nevertheless, overskilled individual was less evident in firms with higher share of university workers, lower proportion of foreign ownership, higher number of competitors (> 25 competitors), and a firm where education and technical skills are of highest priority for hiring workers. Since many studies have provided evidence on the negative impact of over-education and overskilling on either individuals earnings or job satisfaction, it is important for firm to reduce both incidence at the workplace so that firm can ensure that labour inputs are optimally productive. Hence, increases firm performance.

29

PICS-2 has information on the key factors that employers consider when hiring (hiring methods) and in particular managers were asked to list the important criteria used to hire workers. The three that were deemed the most important for hiring employees were edu cation, experience, and technical skills. Other factors such as loyalty and interpersonal skills were seen as less important. We therefore control for these three criteria in hiring and ascertain their impact on over-education and overskilling.

191


REFERENCES Allen, J., and van der Velden, R. (2001). Educational mismatches versus skill mismatches: Effects on wages, job satisfaction, and on-the-job search. Oxford Economic Papers, 53(3), 434-452. Battu, H., Belfield, C. R., and Sloane, P. J. (2003). Human capital spillovers within the workplace: Evidence for Great Britain. Oxford Bulletin of Economics and Statistics, 65(5), 575-594. Battu, H. (2008) Overeducation amongst the young, Report for the OECD. Bauer, T. K. (2002). Educational mismatch and wages: A panel analysis. Economics of Education Review, 21(3), 221-229. Belfield, C. (2010). Over-education: What influence does the workplace have? Economics of Education Review, 29(2), 236-245. Büchel, F., and Mertens, A. (2004). Overeducation, undereducation, and the theory of career mobility. Applied Economics, 36(8), 803-816. Daly, M. C., Büchel, F., and Duncan, G. J. (2000). Premiums and penalties for surplus and deficit education: Evidence from the united states and germany. Economics of Education Review, 19(2), 169-178. Green, F., and McIntosh, S. (2007). Is there a genuine under-utilization of skills amongst the overqualified? Applied Economics, 39(4), 427-439. Hartog, J., and Oosterbeek, H. (1988). Education, allocation and earnings in the Netherlands: Overschooling? Economics of Education Review, 7(2), 185-194. Jones, M. K., Jones, R. J., Latreille, P. L. and Sloane, P. J. (2009). Training, Job Satisfaction, and Workplace Performance in Britain: Evidence from WERS 2004. LABOUR, 23: 139–175 Mavromaras, K., McGuinness, S., and Fok, Y. K. (2009). Assessing the incidence and wage effects of overskilling in the Australian labour market. Economic Record, 85(268), 60-72. Mavromaras, K., McGuinness, S., O'Leary, N., Sloane, P., and Fok, Y. K. (2010). The problem of overskilling in Australia and Britain. Manchester School, 78(3), 219-241. McGuinness, S., (2006). “Overeducation in the Labour Market.” Journal of Economic Surveys 20(3): 387-418. McGuinness, S., and Sloane, P. J. (2010). Labour market mismatch among UK graduates: An analysis using REFLEX data. Economics of Education Review. Mehta, Aashish, Felipe, Jesus, Quising, Pilipinas, and Camingue, Shiela. (2010). Overeducation in Developing Economies: How can we test for it, and what does it mean?. UC Santa Barbara: Global and International Studies. Retrieved from http://www.escholarship.org/uc/item/6b07h5p5 Leuven, Edwin and Oosterbeek, Hessel. (2011). Overeducation and Mismatch in the Labor Market IZA DP No. 5523. Robst, J. (2008). Overeducation and college major: Expanding the definition of mismatch between schooling and jobs. Manchester School, 76(4), 349-368. Sattinger, M. (1993). Assignment models of the distribution of earnings. Journal of Economic Literature, 31(2), pp. 831-880. Sicherman, N., and Galor, O. (1990). A theory of career mobility. The Journal of Political Economy, 98(1), pp. 169-192. Sicherman, N. (1990). ‘Overeducation’ in the labour market. Journal of Labour Economics, 9(2), 101–22 Sloane, P. J., Battu, H., and Seaman, P. T. (1999). Overeducation, undereducation and the British labour market. Applied Economics, 31(11), 1437-1453. Voon, D., and Miller, P. W. (2005). Undereducation and overeducation in the Australian labour market. Economic Record, 81(SUPPL. 1) Wald, S., and Fang, T. (2008). Overeducated immigrants in the Canadian labour market: Evidence from the workplace and employee survey. Canadian Public Policy, 34(4), 457-479.

192


FINANCIAL FRAGILITY OF MALAYSIANS IN URBAN HOUSEHOLDS Selamah Abdullah Yusof International Islamic University Malaysia [email protected]

Wan Jamaliah Wan Jusoh International Islamic University Malaysia [email protected]

Rohaiza Abd Rokis International Islamic University Malaysia [email protected]

ABSTRACT Household debt in Malaysia has been on an upward trend and increasing at a relatively fast pace which increases households’ exposure to shocks. This study examines the level of financial fragility among individuals in urban households in Malaysia and factors that contribute to their financial fragility. Using a recent strictly random sample, it is found that Malaysians are financially vulnerable. Only 11.5 per cent of the individuals are resilient to shocks related to unemployment, physical disability, divorce, death or changes in interest rate or stock market. More than a fifth of the households the individuals live in are not able to survive for at least three months if the household income is cut off. Additionally, more than a fifth do not have enough savings or any other source to turn to if there is a need to raise RM10,000 within a short period. The inability to cope with financial shocks differs across age and ethnic groups. Initiatives must be undertaken to assist the individuals and households in facing these challenges and for them to exercise financial prudence. Additionally, household debt must be closely monitored to ensure that it is sustainable. Keywords: household debt, financial shocks, ethnic, age

INTRODUCTION The 2008 – 2009 recessions was triggered by an unsustainable expansion of the housing sector and subsequent failures in the over-leveraged financial sector, primarily in the United States and Western Europe. An IMF research published in the April 2012 World Economic Outlook finds that recessions preceded by larger increases in household debt are more severe. This crisis underscores the importance of household credit market and household financial management in determining the stability of the financial system and the level of economic activity. Buyukkarabacak and Valev (2010) showed that rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis. In another study, Japelli et al. (2008) find evidence to suggest that insolvencies tend to be associated with greater household indebtedness. This can help explain why even moderate shocks can precipitate a huge wave of household defaults, in a situation where households are already heavily indebted. On the other hand, household credit does not seem to have made any significant contribution to economic growth, as shown in Beck et al. (2008). At a micro level, the increase in indebtedness means that the household sector is more exposed to interest rate risks and shocks to household income, whether arising from global or domestic recession. Households whose debt carries mostly floating interest rates are vulnerable to rising interest rates. Increases in debt servicing costs result in a reduction in disposable income, and hence, consumption.

193


Financial shocks to income can lead to consumption volatility which can have short run and long-run effects on household welfare. A household is said to be vulnerable to future loss if welfare falls below socially accepted norms caused by risky events such as short or long term economic crisis. Moser and Holland (1997) define risk as “the insecurity of the well-being of individuals, households, or communities in the face of a changing environment.” Household risk and economic vulnerability status are determined by a combination of circumstances that include capabilities, prospects for earning a living, and deprivation or exclusion of help (Smelser and Lipset, 2005; Loughhead and Mittai, 2000; and Narayan, et. al., 2000). The degree of risk depends on the characteristics of the risk and the household’s ability to respond to risk. The latter depends on household characteristics, especially their asset base such as their savings, property ownership and occupation, among others. The asset base, in turn, can be affected by the level of education, marital status and number of children in a household (Mok et al. 2007). For the poor, financial shocks can trigger food insecurity in the short run, while in the long run it can result in destitution, landlessness, irreversible malnutrition, and termination of school (Heltberg and Lund, 2009). The poor are more often exposed to risky events (Sharma, et. al., 2000) and they also have less access to assets that can be used to manage risk (Devereux, 1999; Sharma, et. al., 2000). Uninsured risk may also induce households to engage in low-return activities which may hamper households to grow their incomes and escape poverty. Financial stress and financial wellness may also have an effect on productivity. Delafrooz et al. (2010) define financial stress as the negative feelings about and reactions to one’s own financial situation, while financial wellness is the level of financial health, which includes satisfaction with material and non-material aspects of one’s financial situation, perception of financial stability including adequacy of financial resources, and the objective amount of material and non-material financial resources that each individual possesses. They found that financial stress negatively affect job performance, while financial wellness is a positive factor in job performance. In Malaysia, as in many other economies, household debt has been on an upward trend and at a relatively fast pace, and has been the fastest growing segment of total credit for Malaysia (see Figures 1-3). The increase in household debt continued in recent years despite the measures implemented by the Central Bank in 2010 to curb the trend.30 The debt service ratio far exceeded the 30 per cent acceptable level in recent years, and Malaysia household debt as a percentage of disposable income surpassed U.S.A, Korea and the neighbouring countries in 2009. The number of bankruptcies cases has also risen in tandem with household debt, from 13,238 cases in 2007 to 19,167 in 2011.31 In July 2013, the Central Bank announced new measures, to complement those introduced in 2010, aimed at avoiding excessive household indebtedness and to reinforce responsible lending practices by key credit providers.32 These measures are undertaken partly as a response to the significant increase in personal financing by non-bank financial institutions in which the majority of the borrowers of these institutions earn a monthly income of less than RM3000. Additionally, the proportion of younger borrowers in the age group of 20 to 29 years has risen to account for 29.2 per cent of total outstanding personal financing by these institutions. The wide distribution of financing packages by these institutions has resulted in the build-up of leverage among households and compressed the buffers available for households to cope with income shocks. Furthermore, the attractive packages 30

The measures were implemented to mitigate excessive investment and speculative activity in the property market and to contain substantial increases in property prices which resulted in houses becoming less affordable for genuine house buyers. A 70% loan-to-value (LTV) ratio was applied to individual borrowers with more than two housing loans, while capital charges on banks were increased for residential property loans with LTVs exceeding 90%. http://www.bnm.gov.my/files/publication/fsps/en/2011/fs2011_book.pdf. Retrieved on July 17, 2013. 31 http://www.insolvensi.gov.my/images/stories/statbank0912eng.pdf 32 The measures are: (i) maximum tenure of 10 years for financing extended for personal use; (ii) maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties; and (iii) prohibition on the offering of pre-approved personal financing products. http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press_all&ac=2841&lang=en. Retrieved on July 17, 2013.

194


300

100

250

80

200

60

150 40

100

20

50 0

hh debt to GDP ratio (%)

hh financial assets to debt ratio (%)

offered encourage households to spend beyond their means as reflected in the higher delinquencies of the lower-income. The young adults are also at risk given their propensity to borrow and their relatively lower financial buffers. It is recorded that individuals in the 30 to 40 year old age group continued to top the list of borrowers under the debt management programme of the Bank Credit Counselling and Debt Management Agency (Malaysia, 2013).

0 2002

2003

2004

2005

2006

2007

household financial assets to debt ratio (%)

2008

2009

2010

2011 2012p

household debt to GDP ratio (%)

Source: Financial Stability and Payment Systems Report, Bank Negara Malaysia, various years. Figure 1 Household debt to GDP ratio (%) and financial assets to debt ratio (%)

40 30 20 10 0 2006

2007

2008

2009

2010

2011

2012p

Source: Financial Stability and Payment Systems Report, Bank Negara Malaysia, various years. Figure 2 Debt service ratio (%)

195


160 140 120 100 80 60 40 20 0

140 123 105

101

53 38

Malaysia

Singapore

USA

Korea

Thailand

Indonesia

Source: The Edge, Nov 22, 2010. Figure 3 Household debt for selected countries, as a % of disposable income, 2009

An analysis of household debt and household vulnerability based on aggregate data provide a representation of the overall situation. However, micro level data is crucial to complement the aggregate information to provide a clearer picture regarding the distribution of leverage and debt service burden across individuals and households and to give an in-depth examination of their vulnerabilities and risks. The purpose of this paper is to provide such analysis at the household and individual levels. It focuses on individuals living in urban households as the Central Bank anticipates that borrowers in the lower-income categories and residing in urban areas are the ones who will face more challenges in managing their financial obligations (Malaysia, 2012). The research uses a recent household data which was obtained from a strictly random process where the selection of households was determined entirely by the Department of Statistics, Malaysia. To date, there has not been any study that provides current comprehensive data and information at the household and individual levels with regards to their financial fragility in dealing with small or large shocks. It analyses the extent of Malaysian urban households’ and the individuals’ vulnerability to financial shocks and the socio-economic factors that are associated with financial fragility. The findings would provide a better understanding of the issue and will be beneficial to policy makers to develop appropriate measures to be implemented in a timely manner to contain the financial risks faced by individuals and households.

SAMPLE AND METHOD The selection of sample was restricted to households in Klang Valley 33 to represent the urban population of Malaysia. To ensure randomness and representativeness, the selection of the sample was strictly determined by the Department of Statistic (DOS) Malaysia using its 2010 Census sampling frame. Klang Valley comprises of five administrative districts and each district is divided into enumeration blocks, and each enumeration block consists of 80 to 120 living quarters or households. Based on a margin of error of 0.06, an expected response rate of 80 per cent, and design effect of 2,34 the number of enumeration blocks from each administrative district was determined proportionately. From each selected enumeration block, households were randomly selected, resulting in a sample size of 672 households. 33 Klang Valley is an area in Malaysia comprising of its capital Kuala Lumpur and its suburbs, and adjoining cities and towns in the state of Selangor. 34 As cluster random sampling is utilized, the sample is not as varied as it would be in a simple random sampling. The selection of an additional member from the same cluster adds less information than would a completely independent selection. The design effect measures this loss of effectiveness, which is computed as the ratio of the actual variance under the sample method actually used to the variance computed under the assumption of simple random sampling. Thus, a design effect of 2 implies that the sample variance is 2 times bigger than it would be if the survey were based on the same sample size but selected using simple random sampling.

196


Four sets of identical questionnaires were prepared in 3 different languages – Malay, English, Chinese/Malay and Chinese/English – to cater to the different ethnic groups in Malaysia. The selected households were either interviewed, or given the questionnaire for them to complete on their own. The data collection was conducted in June to October 2012, in which the response rate was 69.8 per cent. The sample description is given in Table 1. The sample households are made up of 56.7 per cent Malay, 30.9 per cent Chinese, 9.6 per cent Indian and 2.9 per cent. Others, which are somewhat comparable to the population percentages. 35 The breakdown according to the age groups also generally reflects the population proportions.36 Majority of the respondents who are over 25 years of age are married, either the head or spouse of the head of the household, and are the main wage earners (the person with the highest income in the household). The respondents in younger age groups have higher levels of education. Although those 25 years of age or below have relatively lower levels of individual income and wealth, but there is no marked difference in the household income and wealth across respondents of different age groups.

FINDINGS Financial Fragility and Capacity to Bear Risk Respondents were asked about their household current financial situation in relations to their income and expenditure, whether they were having debts, or have no debts but have to use their savings to supplement their income, or just about manageable, or are able to save money with their income. Overall, more than half of the households are not able to save money. This finding is of concern as it gives a general indicator of the level of strength of a household to withstand any financial shock (see table 2). For the measurement of vulnerability of households to shocks, respondents were asked whether under which unforeseen circumstances it would be difficult for them to pay for their household living expenses. The results show that Malaysian urban households are financially vulnerable to shocks. Temporary unemployment of the household’s breadwinner will affect 64.1 per cent of the respondents and their households. The percentage is significantly higher for those in the age group of 26 to 35 years compared to those above 60 years old. This result is expected as the former would be young couples who just started their married life. The problem is more serious, as expected, if the unemployment is a permanent one, in which over three-quarter of the households will be at risk. The respondents most affected are those in the age group of 36 to 50 years old. A slightly lower percentage of households are vulnerable if the circumstance is that of disability of the breadwinner. Divorce or death of spouse or partner has a relatively lesser impact on households, and respondents in the age groups of 25 or below, or above 50 years old are less affected financially by these circumstances. Only 32.6 and 25.0 per cent of respondents 25 and below, and above 60 years old stated that it will be difficult to pay for their living expenses if their spouse or partner dies, compared to almost half or more for other respondents.

35

The population estimates for 2011 are 54.65% Malay, 24.33% Chinese, 7.30% Indians and 13.73% others, out of the total Malaysian citizens population (Malaysia, 2011). Klang Valley Malaysian population in 2010 was made up of 49.56% Malay, 36.72% Chinese, 11.59% Indian and 2.12% others. (http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=1354&Itemid=111&lang=en). Retrieved on March 22, 2013. 36 The sample proportions are 19.8% 25 years or below; 29.6% between 26-25; 31.3% between 36-50; 14% between 51 to 60; and 5.3% are above 60 years of age. The urban population percentages are 27.3% for 15-24; 23.6% for 25-34; 26.5% for35-49; 12.5 for 50-59; and 10.55% for 60 years and above. http://www.statistics.gov.my/portal/download_Population/files/census2010/Taburan_Penduduk_dan_Ciri-ciri_Asas_Demografi.pdf

197


Table 1 Sample description

Position in household

head of household spouse/partner other

Main wage no earner of household? yes Marital status

married/living together separated/divorced/widowed never married

Gender

female male

Highest level of education completed

secondary below

education

master's degree/PhD Ethnicity

Malay Chinese Indian Other

Total (450)

10 41.7 3 12.5 11 45.8 15 62.5 9 37.5 13 54.2 11 45.8 0 0.0 5 20.8 19 79.2

192 43.0 131 29.3 124 27.7 215 48.1 232 51.9 325 72.2 23 5.1 102 22.7 178 39.8 269 60.2

31 23.3 44 33.1

68 48.2 30 21.3

45 71.4 7 11.1

21 87.5 1 4.2

185 41.1 118 26.2

51 38.3 7 5.3 76 57.1 37 27.8 14 10.5 6 4.5

36 25.5 7 5.0 74 52.5 44 31.2 17 12.1 6 4.3

10 15.9 1 1.6 37 58.7 18 28.6 7 11.1 1 1.6

0 0.0 2 8.3 13 54.2 10 41.7 1 4.2 0 0.0

128 28.4 19 4.2 255 56.7 139 30.9 43 9.6 13 2.9

26-35 (133)

36-50 (141)

8 9.0 11 12.4 70 78.7 75 86.2 12 13.8 22 24.7 0 0.0 67 75.3 44 49.4 45 50.6

49 36.8 56 42.1 28 21.1 66 50.0 66 50.0 103 77.4 1 0.8 29 21.8 64 48.5 68 51.5

20 22.5 36 40.4 31 34.8 2 2.2 55 61.8 30 33.7 4 4.5 0 0.0

or

vocational/college diploma bachelor's/professional degree

61+ (24)

80 58.0 49 35.5 9 6.5 45 31.9 96 68.1 128 90.8 8 5.7 5 3.5 51 36.4 89 63.6

5160 (63) 45 71.4 12 19.0 6 9.5 14 22.2 49 77.8 59 93.7 3 4.8 1 1.6 14 22.6 48 77.4

RM20,000

1

11.11

8

88.89

9

Period of patronizing < = 3 years Islamic bank > 3 years

71

44.10

90

55.90

161

71

34.30

136

65.70

207

Subsidiary

47

34.56

89

65.44

136

Full-fledged

95

40.95

137

59.05

232

Foreign

23

34.85

43

65.15

66

Local

119

39.40

183

60.60

302

Don't know

65

41.67

91

58.33

156

Know

77

36.32

135

63.68

212

96

37.21

162

62.79

258

46

41.82

64

58.18

110

Don't use

100

40.98

144

59.02

244

Use

42

33.87

82

66.13

124

Gender Age Marital

Level of Education

Working Status

Income

Bank’s Status Bank’s Ownership Deposit Insurance Interaction patronized bank Internet Banking

with More than once per-month Once every month

Total

Table 3.Descriptive Statistics of Demography and Independent Variables

Logistic Models Model 1: Shariah Non-Compliant For Model 1 where Y1 is non-Shariah compliance, the significant predictors are type of account X1(1), working status X4(1), bank status X6(1), bank ownership X7(1), and the main reason of patronizing Islamic bank is to avoid riba X12(1). In addition, its Nagelkerke R-Square is 0.57, its HosmerLemeshow Test is 8.49, and its classification is 88.7% correct. The Nagelkerke R-Square is similar to the R-square in OLS and it indicates that 57% of variation in Y1 can be explained by the predictors. The Hosmer-Lemeshow test is like the F-test in ANOVA of regression, which is to measure the goodness of fit of the overall model. The null hypothesis of the Hosmer-Lemeshow test is that ‘the model fits the

1032


data’. Therefore, since the Hosmer-Lemeshow statistics is not significant, it can be concluded that the hypothesis of ‘model fits the data’ cannot be rejected statistically. In term of the result of classification, it can be said that, by using the significant predictors, discriminating methods developed by the logit model can classify the variation in Y1 correctly as high as 88.7%, which can be considered as very good. Y1 = Non-Shariah compliance (1 = will withdraw)

Y2 = Uncompetitive Rate of Return (1 = will withdraw)

Y3 = Rumor about Banking Crisis (1 = will withdraw)

β

Exp(β)

β

Exp(β)

β

Exp(β)

X1(1) (Investment acc.)

2.55**

12.82

-0.53

0.59

-1.96*

0.14

X2(1) (deposit > RM 10K)

-0.37

0.69

0.73

2.08

2.28*

9.79

X3(1) (IB cust. > 3 years)

-0.58

0.56

-0.06

0.94

0.78

2.19

X4(1) (Employee)

-2.25**

0.09

1.54***

4.66

0.13

1.14

X5(1) (Use Internet Banking)

1.35

3.87

0.47

1.61

0.06

1.06

X6(1) (Full-fledged IB)

4.20***

66.75

-0.35

0.71

-1.08

0.34

X7(1) (Local IB)

3.62***

37.16

-0.97*

0.38

-0.76

0.47

X10(1) (Aware Deposit Ins.)

N/A

N/A

N/A

N/A

-4.58***

0.01

X11(1) (Main reason: return)

0.09

1.10

0.12

1.12

0.19

1.20

X12(1) (Main reason: no Riba)

1.56**

4.74

-0.29

0.75

-1.27**

0.28

X13(1) (Main reason: affected by banking crisis)

0.19

1.22

-0.18

0.84

-1.83***

0.16

Variable

less

Nagelkerke R-Square

0.209

0.715

Hosmer-Lemeshow Test (Chi8.49 Square)

12.185

5.298

Correctly Classified (%)

71.8

86.6

Note.

0.57

88.7

* significant at alpha 10%; ** significant at alpha 5%; *** significant at alpha 1%.

IB = Islamic banking; CB = conventional banking.

Table 4. Estimated Coefficients (β) and Odd-ratios (Exp(β)) for All Logit models

Model 2: Uncompetitive Rate of Return In Model 2, only working status (X4) and bank ownership (X7) are significantly affecting withdrawal behavior due to uncompetitive rate of returns. Positive relationship of X4(1) denotes that employees have a tendency to withdraw their fund from Islamic banks due to an uncompetitive rate of return as compared to non-employees. This is consistent with the findings in previous models that show a negative relationship of employee (X4(1)) with shariah-compliant related issues (Y1). The Nagelkerke R-Square of 0.209 indicates that 20.9 percent of variation in Y2 can be explained by the model. The Hosmer-Lemeshow goodness of fit test of 12.185 indicates that the model is acceptable. With regard to the classification method, Model 2 can classify 71.8% of observations correctly. Model 3: Rumor about Banking Crisis in the Near Future that Will Affect the Islamic Bank From Table 4, there are five explanatory variables that are significant in model 3 i.e. type of account (X1), total deposits (X2), awareness on deposit insurance (X10), reason is “to avoid riba” (X12) and reason is “Islamic bank is less affected by banking crisis” (X13). Estimated coefficient for X1(1),

1033


X10(1), X12(1) and X13(1) is negatively correlated with Y3 which indicates that the reference category of these variables will reduce the log-odds of the model. The model fit measurement indicates that the model fits the data and approximately 71.5 percent of variation in Y3 can be explained by the model. Moreover, 86.6 percent of the observations can be classified correctly, which is a very good classification process.

Discussion From the descriptive analysis results, it is believed that the respondents are well familiar with Islamic banking and they may have already possessed basic knowledge on Islamic banking principles and products. This is due to the fact that most of the respondents have already become customer of Islamic banks for more than three years (56.25%). About half of the respondents patronized full-fledged Islamic banks and 82 percent of the respondents had chosen local Islamic banks instead of foreign Islamic banks. This, somehow, shows that people are trying to support their local bank to grow and develop particularly in term of assets size. For Model 1, the directions of relationships between dependent and significant independent variables reveal quite an interesting result. For X1(1), investment account holders tend to make a withdrawal with a probability of 12.82 times higher as compared to non-investment account holders e.g. saving account. This indicates that investment account holders are really concerned about the shariah-compliance of their investments and any breach committed by bank will destroy their trust, thus motivating them to withdraw their funds. Variables X6(1), X7(1) and X12(1) also significantly influence the withdrawal behavior in Model 1 positively. This indicates that customers who consider avoiding riba, patronizing full-fledged Islamic banks, and choose local Islamic banks will have higher probability to withdraw their money when their Islamic banks breach shariah principles as compared to customers that have opposite characteristics. These findings support the results found by Ahmed (2003) and Abduh (2011). Negative relationship for X4(1) will reduce the log-odds of the model. In term of the odds ratio of 0.09, it indicates that the probability of employees to withdraw because of the violation of shariah principles is only 0.09 as compared to non-employee customers. In other words, the probability of non employee customers to withdraw due to this situation is 11 (i.e. 1/0.09) times greater than employees. In Model 2, negative and significant relationship between X7(1) and Y2 shows that local Islamic bank customers have less probability to withdraw if the Islamic bank that they patronize cannot give them a competitive return for several periods. The probability of foreign Islamic bank customers to withdraw is 2.63 (i.e. 1/0.38) times compared to local Islamic bank customers. The reason for this is perhaps due to people who had patronized foreign Islamic banks assumed that foreign banks are more stable, thus resulting in them to expect a higher return as compared to local Islamic banks. However, when they realized that their bank could not fulfill their expectation for certain periods they would rather move to other banks instead of staying with the current bank. This result supports findings from Ahmed (2002), Currie (2004), and Ismal (2011). Lastly, Model 3 presents the result for X1(1) which indicates that those with investment accounts are more reluctant to withdraw deposits due to the rumor of banking crisis that may affect the respective Islamic bank. In contrast, the likelihood of other account holders (e.g. savings account) to withdraw due to this rumor is 7.14 (i.e. 1/0.14) times greater as compared to investment account holders. A similar relationship applies to X10(1), X12(1) and X13(1). Customers who are not aware of deposit insurance (X10) have a probability to withdraw in equivalent of 100 (i.e. 1/0.01) times greater than those who are aware about deposit insurance. This result supports findings from Lambert and Simon (2000), Takemura and Kozu (2009), and Yada et al (2009). It will also strengthen the argument that media can significantly influence someone’s decision when they have not enough information or awareness regarding the issue. Customers who attempt to avoid bank interest (X12(1)) as well as those who indicated ‘less affected by banking crisis’ as their main reason in patronizing Islamic bank (X13(1)) also have less probability to withdraw because of the banking crisis rumors. However, as anticipated, large fund customers (X2(1)) have a greater possibility to withdraw as compared to small fund customers of up to almost 10 times.

1034


One of the implications from these results is that Islamic banks and regulators should have educational and awareness program for the public on certain issues, particularly the issue of Islamic banking resilient towards banking crisis. Other important issues such as the similarities and dissimilarities between Islamic and conventional banks, basic intention of the Islamic contracts, and deposit insurance are also necessary to be informed to the public.

Conclusion This study discusses factors affecting withdrawal behavior of Islamic bank customers based on the logistic regression model framework for three different dependent variables i.e. non shariah compliance, uncompetitive returns, and rumor on a banking crisis happening in the near future that will affect the bank. Model 1 confirms that intention to avoid bank interest (X12), type of account (X1), working status (X4), bank status (X6) and bank ownership (X7) are the factors that influence withdrawal behavior due to violation in shariah principles by the bank. In Model 2, only the working status (X4) and bank ownership (X7) are significantly affecting withdrawal decision of the customers. Lastly, for Model 3, type of account (X1), total deposit in bank (X2), awareness on deposit insurance (X10), intention to avoid bank interest (X12) and perceiving that Islamic banks are less affected by banking crisis (X13) are the significant factors influencing withdrawal decision of the customers. As a contribution, these models can be used by bankers and academia to predict the withdrawal probability of one Islamic bank customer by collecting the required information in the model. As a limitation of this study, it incorporates only individual customers who have an Islamic banking account only. Therefore, in order to enhance the analysis, suggestions for future researches are: (i) to include the corporate customers and (ii) those who have accounts in Islamic as well as conventional banks.

References Abduh, M. (2011). Islamic banking service quality and withdrawal risk: The Indonesian experience. International Journal of Excellence in Islamic Banking Finance, 1(2), pp.1-15. Abduh, M., M.A. Omar and J. Duasa. (2011). The impact of crisis and macroeconomic variables towards Islamic banking deposits. American Journal of Applied Science, 8(12), pp.1413-1418. Ahmed, H. (2002). A Microeconomic Model of an Islamic Bank. Islamic Research and Training Institute, Jeddah, Saudi Arabia. Ahmed, H. (2003). Withdrawal risk in Islamic banks, market discipline and bank stability. Proceedings of the International Conference on Islamic Banking: Risk Management, Regulation and Supervision, September 13-14, 2003, Jakarta, Indonesia, pp: 36-49. Bolton, R.N. and Bronkhurst, T.M. (1995). The relationship between customer complaints to the firm and subsequent exit behavior. Advances in Consumer Research, 22, pp. 92-100. Currie, L. (2004). The behavior of deposits. J. Econ. Stud.,31: 340-346. Garson, G.D. (2010). Logistic Regression. College of Humanities and Social Sciences, North Carolina State University, North Carolina. Gerard, P. and Cunningham, J.B. (2004). Consumer switching behavior in the Asian banking market. Journal of Services Marketing, 18(3), pp. 215-223. Haron, S. and N. Ahmad. (2000). The effects of conventional interest rates and rate of profit on funds deposited with Islamic banking system in Malaysia. Intl. J. Islamic Financial Services, 1: 1-7. Haron, S. and W.N.W. Azmi. (2008). Determinants of Islamic and conventional deposits in the Malaysian banking system. Managerial Finance, 34: 618-643. Hosmer Jr., D.W. and S. Lemeshow. (2000). Applied Logistic Regression. 1stEdn., John Wiley and Sons, USA. Ismal, R. (2011). Depositors’ withdrawal behavior in Islamic banking: Case of Indonesia. Humanomics, 27: 61-76.

1035


Kasim, S.H., M.S.A. Majid and R.M. Yusof. (2009). Impact of monetary policy shocks on the conventional and Islamic banks in a dual banking system: Evidence from Malaysia. J. Econ. Coop. Dev., 30: 41-58. Kasri, R. and S. Kassim. (2009). Empirical determinants of saving in the Islamic banks: Evidence from Indonesia. J. King Abdulaziz Univ.: Islamic Econ., 22: 181-201. Lambert, R.B. and A. Simon. (2000. An ideal regulatory model for dealing with retail financial institution runs and failures. J. Fin. Reg. Compliance., 8: 309-325. Mark Colgate, Rachel Hedge. (2001). An investigation into the switching process in retail banking services. International Journal of Bank Marketing, 19(5), pp.201 – 212 Menard, S. (1995). Applied Logistic Regression Analysis. SAGE Publications, California. Studenmund, A.H. (2006). Using Econometrics: A Practical Guide. 5th Edn., Pearson Education Inc, New York. Takemura, T. and T. Kozu. (2009). An empirical analysis on individuals’ deposit-withdrawal behaviors using data collected through a web-based survey. Eurasian J. Bus. Econ., 2: 27-41. Yada, K., T. Washio, Y. Ukai and H. Nagaoka. (2009). Modeling bank runs in financial crises. Rev. Socionetwork Strategies, 3: 19-31. Zang, R., K. Wang, K. Chen and R. Rong. (2007). Customer switching intention in service industries and the effect of customer perceived value. Proceedings of the IEEE International Conference on Service Operations and Logistics and Informatics, August 27-29, 2007, Philadelphia, PA., USA.,pp: 1-6.

1036


AN ANALYSIS OF THE COMMERCIAL ASPECTS OF TAKAFUL OPERATION IN MALAYSIA Kamaruzaman Bin Noordin University of Malaya [email protected]

ABSTRACT Many Muslim scholars maintain that the commercial insurance contract is invalid from the Sharià perspective based on the fact that it is a financial exchange contract, which is overwhelmed by banned elements such as gharar, riba, and maysir, Alternatively, a Sharià-compliant insurance scheme, known as takaful, was introduced in the late 1970s that supposedly operate on the principles of mutual cooperation. Nonetheless, since the majority of existing initiators of this lawful scheme are mainly jointstock or public limited companies, it seems that the initial concept of takaful was later overshadowed by the element of profit-making observed in commercial insurance entities. This paper therefore sets out to examine those issues which directly relate to this form of commercialisation. It argues that since the establishment of insurance companies based on commercial model is impermissible, it could possibly affect the validity of present takaful arrangement. This study is mainly qualitative and relies greatly upon the documentation method. It is also based on a fieldwork method, since the business models adopted by several takaful operators in Malaysia are carefully examined. In general, it is found that the characteristics of a commercial takaful entity may not necessarily be similar to that of its conventional counterpart. Keywords: Takaful, mudarabah, jiàlah, wakalah, tabarru`. .

INTRODUCTION Efforts towards the establishment of Sharià -compliant insurance providers have been initiated since the early 20th century, concurrent with a series of fatwa (legal rulings) issued on the impermissibility of commercial insurance as well as the legitimacy of mutual or co-operative insurance. In fact, the latter fatwa tend to reflect the vision of Muslim scholars to see the establishment of Islamic insurance providers based on the mutual or co-operative principle. Despite the fact that the above fatwa have been issued since as early as 1961, the institutionalization of Islamic insurance based on the above principle only materialized in the late 1970s (al-Qarradaghi, 2005). Yet, recent development tends to show that modern takaful arrangement may differ from mutual or co-operative entity.While the insurance fund in a mutual or co-operative entity is completely owned and managed by its own members, a takaful fund, on the other hand, can possibly be managed by a joint-stock commercial entity (whilst its ownership maintains with the participants) (IFSB, 2009). Hence, based on this feature, takaful may not necessarily be restricted to a purely mutual structure but could also involve a commercial setup, as the company who manages the fund (i.e. the takaful operator) is actively seeking profits by charging certain fees from the takaful fund. In reality, almost all takaful operators these days are joint-stock or public limited companies instead of pure co-operative or mutual organizations. As a result, takaful could be well described as a hybrid of a mutual and a commercial form of company. The mutual form of takaful could be inferred from the relationship amongst the participants, while the relationship between the participants (or takaful fund) and the takaful operator would constitute the commercial form of the arrangement.

The Commercialization of Takaful As previously stated, the majority of the takaful schemes available today are initiated and managed by joint-stock or public limited companies (which are obviously commercial in nature), rather than purely

1037


mutual organizations. Thus, it is perhaps right to suggest that takaful cannot be separated from the notion of commercialization. Before a thorough analysis can be conducted with regards to the above issue, it is crucial at the very outset to define the meaning of commercialization. The Meaning of ‘Commercialization’ The word ‘commercialization’ comes from from the root word ‘commerce’, which refers to the activity of buying and selling, especially on a large scale. It originates from the middle of the 16th-century French or Latin word ‘commercium’, which means trade or trading (Allen, 1990). As an adjective, the word ‘commercial’ can mean relating to commerce (i.e. involving or relating to the buying and selling of goods) as well as done for profit (i.e. done with the primary aim of making money) (Rooney and Jellis, 2005). When a particular organization or activity is labeled as commercial (e.g. commercial bank or insurance) it is concerned with making money or profits rather than, for example, with scientific research or providing a public service (Collins, 2004). Related to the above, the word ‘commercialize’, a verb, means to manage or exploit (an organization, activity, etc.) in a way designed to make a profit. If something is commercialized, it is used or changed in such a way that it makes money or profit, often in a way that people disapprove of (Collins, 2004). It also means to apply business principles to something or run it as a business and to exploit something for financial gain (Rooney and Jellis, 2005). Therefore, the word ‘commercialization’, which is a derivative (noun) of ‘commercialize’, can be defined as a process or state of managing, exploiting or altering something in a way that would make it very much synonymous with the notion of business, whereby the element of profit is undoubtedly sought after. This profit-seeking motive can sometimes have a negative connotion, as it tends to denote the enrichment of one party at the expense of another. In this article, takaful is considered to be greatly affected by the notion of commercialization, since most of the current takaful organizers, if not all, are business entities or corporations that see the opportunity of making money and profit out of providing/instigating management services to a rather sociallyinspired undertaking. In the context of the Malaysian takaful industry, in particular, it appears that the mutual or co-operative-based organizational structure is almost irrelevant to the operators. In fact, it was identified earlier by the author that all the takaful schemes in Malaysia are initiated, marketed and organized by commercial organizations backed by the leading financial giants (which are obviously profit-seeking entities). Of all the 12 takaful companies currently operating, only one appears to be jointly owned by a co-operative body (Noordin, 2012). Nevertheless, as will be explained next, this may not necessarily render the takaful arrangement similar to commercial insurance, which is considered forbidden by the majority of Muslim scholars. Yet its commercialization can still invoke certain issues which need to be carefully analyzed in order for the former to be completely dissociated from the latter. For instance, some possible gharar incidences can be detected in the operation of certain operators that might render the commercial side of takaful invalid (Noordin, 2012).

Commercial Takaful vis-à-vis Commercial Insurance At first sight, takaful providers may seem to be similar to commercial insurers due to the fact that they are mostly, if not all, joint-stock companies or corporations which aim to make money or profit from the services rendered. Nevertheless, upon deeper investigation the notion of ‘commercial’ may prove to be different in both entities, and thus would lead to different legal rulings. It appears that the notion of ‘commercial’, which is synonymous with a profit- seeking motive, has led to the banning of conventional insurance but not takaful in general. Perhaps this distinction can be best explained by the fact that Sharià law views a profit- seeking motive as legitimate so long as it conforms to the rules, ethics and norms of a business. This includes the avoidance of dealing with riba, gharar, maysir and other forms of unfair practice. As maintain by many scholars, the operation of a commercial insurer is very much affected by the above elements, particularly gharar, and thus has led to its prohibition. On the other hand, the revenue and profit for a commercial takaful operator should only be sought through legitimate or Sharià -compliant means, which are supposed to be free from those prohibited elements. In Malaysia, and perhaps

1038


worldwide, this is mainly done through the application of several nominate contracts such as wakala bi ajr (remunerated agency), mudaraba (profit sharing), and jiàla (reward). As will be explained in detail later on, these contracts appear to allow the operators to legally secure their revenue and profit consistent with their role as a hired agent, entrepreneur or worker respectively. Yet these contracts, which are obviously not in the tabarru` category, are still subjected to the rules of gharar and thus can possibly be judged as invalid (due to gharar) if their conditions are not fully met. Moreover, in most cases, the takaful operators are also seen as taking advantage of combining two or more of these contracts in order to obtain higher revenue and profit. In addition, the drive to secure higher profits can sometimes inspire the takaful operator to engage in rather controversial practices. These may include the modification of the contract’s original specifications (such as the altered definition of profit in the mudaraba contract) and the application of the contract in a disputed area (such as applying the jiàla contract to justify the sharing of an underwriting surplus). Regardless of these controversies, the correct application of these contracts is considered to be the main reason for the validity of commercial takaful as opposed to commercial insurance. Perhaps the application of these contracts has made certain specifications of the commercial notion in takaful substantially different from that found in commercial insurance. The explanations of why the notion of ‘commercial’ in takaful is different from commercial insurance due to the application of the abovementioned contracts follow in the next sections. Responsibility to Indemnify In commercial insurance, the concept of risk transfer is applied whereby the insurance company is seen as taking full responsibility to indemnify the insured (during the occurrence of an insured peril) in exchange for premiums received from the latter. This transaction is obviously muàwada (financial exchange), in which the insurer aims to make a profit out of the insurance operation (AAOIFI, 2007). In other words, the whole insurance arrangement is initiated and endorsed by the company’s own name under the notion of a pure sale contract. Conversely, the concept of risk sharing amongst the participants (instead of risk transfer) is applied in takaful whereby the operator only assumes the role as an agent, worker or entrepreneur to the takaful arrangement, but not as an insurer (al-Qarradaghi, 2005). It is the group of participants that is actually considered to be the insurer (as well as the insured) in this arrangement, similar to mutual or co-operative types of insurance, based on the principles of tabarru` and taàwun (AAOIFI, 2007). In short, the commercial aspect of the takaful operator in this regard is limited to the aspect of providing management services to the insurance undertaking, which in principal is initiated by the participants. Even though this can also be considered as muàwada, it is obviously underlain by several contracts other than sale, i.e. wakala bi ajr, mudaraba or jiàla. Accounts Management Following the above feature, the takaful operator is required to maintain two separate accounts, one for the shareholders’ rights and liabilities and the other for the rights and liabilities of the participants or policyholders (IFSB, 2009, AAOIFI, 2007). To be specific, all contributions paid by the participants are credited into the latter account, which is commonly known as the Participant’s Risk Fund (PRF), to cover all the expenses related to the provision of the insurance services. Any residual amount recorded by the account (after deduction of expenses and indemnity amounts) is considered as surplus and remains the property of the participants collectively (AAOIFI, 2007). The company, or to be specific, the shareholders, has no rights to whatever amount that is credited to or remains in this account apart from their stipulated proportion of wakala charges, and in some cases may also include performance fees. On the other hand, there is no need for the commercial insurer to hold two different accounts, since all premiums collected are immediately owned by the company in exchange for its insurance protection (Ma’sum Billah, 2007, al-Qarradaghi, 2005). Obviously, this is parallel to the characterization of insurance as a contract of sale, whereby the premium (paid by the policyholder) is considered to be the price, while the financial protection (offered by the insurer) is regarded as the object of sale. Consequently, any remaining premiums (after deducting claims and other operating expenses) also belong to the latter.

1039


The Sources of Profit As a result of the previous two characteristics, the definition and recognition of profit for both takaful and insurance companies should also be different from one another. Perhaps this could be the ultimate test for a commercial takaful operator, since the over-emphasis on maximization of profit could possibly lead it beyond the limit of a legitimate commercial entity due to its tendency to engaging in prohibited elements such as gharar, jahala and so on. The revenue and profit for commercial insurers are mostly sourced from the premiums paid by the policyholders, since they constitute part of the former’s assets (AAOIFI, 2007). The more premiums it collects and the less compensation it pays, the bigger profit it will make. Technically, an underwriting surplus, which is generally defined as the difference between the premiums collected and the subsequent outflow (i.e. claims, reserves, operational expenses, etc.), is recognized as profit attributable to the shareholders in commercial insurance (Ismail and Abdul Razak, 2009). Apart from this primary source, an insurer will also gain revenue and profit from investing its own capital as well as the above premiums in various fields including those associated with riba, gharar, maysir and other prohibited elements. This is not the case for a commercial takaful operator, since it does not automatically own all the contributions paid by the participants as well as the surplus recorded in the latter’s account. Due to its role as a mere trustee, any remaining amount in the PRF is not regarded as the shareholders’ profit. Instead, it remains the property of the policyholders as a group, and could partly or wholly be distributed between them under the notion of surplus-sharing.(al- Qarradaghi, 2005, AAOIFI, 2007). Notwithstanding that, a commercial takaful operator can still acquire revenue and profit from the participants’ contributions consistent with its role as an agent or manager of the pooled fund. This can be in the form of fees and charges imposed on contributions and the PRF or through a share in the profit or surplus of the Fund, which corresponds to the application of several specific contracts that underlie the relationship between the participants (or PRF) and the operator. In the latest guidelines issued by BNM, which takes effect on 1st October 2011, the following requirements need to be observed by takaful operators in determining the appropriate amount of the above incomes (BNM, 2011): 1. There must be a specific and clear intended outcome from the work undertaken to justify the remuneration. There shall not be double charging within a takaful product; 2. The remuneration to be taken shall be appropriate and reasonable, and determined with due regard to provide fair treatment to stakeholders; 3. Implications on takaful funds, in particular on the fund’s long-term viability, shall be considered; and 4. The level of of remuneration to be taken must be commensurate with the complexity of the services rendered and the associated risks. Below is a summary of possible income for takaful companies, particularly in Malaysia, that may constitute profits for the shareholders. Fixed Wakala Fees and Charges As an agent who manages the whole takaful operation, the company is entitled to charge fees from the participants’ contributions based on the contract of wakala bi ajr (remunerated agency). In most cases, a fixed general wakala fee is charged upfront in the form of an agreed percentage, up to 40 per cent of the participants’ contribution. According to Wan Deraman and Ismail, this upper limit is regulated by the Central Bank of Malaysia (BNM), though the specific guidelines pertaining to this rule could not be found by the author (Noordin, 2012). In contrast to this general fee, some companies, such as PrudentialBSN Takaful Berhad (PBTB), may charge a more specific wakala fee from the participants’ contributions such as a service wakala charge and a risk management wakala charge to differentiate between two main types of agency tasks (PBTB, 2011). Another company, MAA Takaful Berhad (MATB), seems to charge a wakala tharawat fee for investing the takaful fund. Basically, the rates of these upfront charges is determined by two main factors: (1) the level of management expenses expected to be incurred by the shareholders’s fund in servicing the takaful certificates throughout the contract

1040


term; and (2) an appropriate provision of margin to compensate shareholders for the effort taken in managing takaful operations (BNM, 2011). From these charges, the shareholders’s account may be supplied with profit (at the end of a particular financial year) if the operational expenses are lower then the overall wakala fees received. In practice, however, the wakala fees are argued to be only sufficient to cater for distribution (agent’s commission) and management expenses (Mohd. Kassim, 2007). Yet by referring to the operators’ income statement, it is obvious that the fees are normally insufficient to cover both expenses, even for companies that have recorded huge profits such as Etiqa Takaful Berhad (ETB). In most cases, however, this deficiency leads to a net loss for the companies for that particular financial year. This is especially true for newly established companies such as Sun Life Malaysia Takaful Berhad ([SLTB] formerly known as Commerce Aviva Takaful Berhad) during 2008–2009 financial year, PBTB (during 2007–2008) and Hong Leong MSIG Takaful (HLMT) in almost every year. Share of Direct Investment Profits (as an Entrepreneur) In general, it is assumed that every takaful operator will venture into a mudaraba contract with the participants, especially when the latter’s fund is to be invested by the former (al- Qarradaghi, 2005). In practice, however, the application of this contract is perhaps inevitable in almost every Family Takaful product, since savings are obviously considered an integral part, but may not necessarily be applicable to General Takaful schemes (Noordin, 2012). This is due to the short-term nature of the latter schemes and the absence of a particular savings account (i.e. Participant’s Investment Account or PIF) for the participants. Yet the application of mudaraba to general products is deemed relevant by some operators in Malaysia such as Syarikat Takaful Malaysia Berhad (STMB) and PBTB, whereby the PRF is invested according to the contract mentioned above. Although this practice appears to be consistent with the AAOIFI’s general guidelines, it is suggested that the standard is meant specifically for Family Takaful lines where the PIF is present. The new guidelines issued by the Central Bank appear to concur with this suggestion (BNM, 2011). Moreover, the fact that most operators do not engage in this kind of practice (i.e. investing the PRF via a mudaraba contract) tends to support the above statement. According to this contract, the amount accumulated in the takaful fund (either the PRF or PIF) is invested by the operator as mudarib, entrepreneur, in various Sharià -compliant investments. Any profit generated therefrom over and above the original amount of capital is shared according to a pre-agreed ratio. In practice, the profit sharing ratio varies across operators as well as products and can range from 40:60 to 80:20 to the participants and operators respectively (Noordin, 2012). Accordingly, the higher the profit generated from the investment, the larger the amount attributable to the shareholders. However, if the investment is unsuccessful, the operators will not receive anything. In addition, the operators can be held liable for the loss if they are found to be guilty of misconduct or mismanagement. It should be mentioned however, that the definition of mudaraba profit as given above has been altered to a certain extent by one particular takaful operator, i.e. STMB, who claim to apply a modified mudaraba model. Instead of sharing direct investment profit, the company shares the underwriting surplus under the name of mudaraba profit. This practice is controversial and will be dealt in other research paper. In a nutshell, it could be suggested that the application of mudaraba has marked the commercial feature of takaful, since an element of profit-seeking is without a doubt present. Performance-Related Charges Apart from the above two sources of revenue, takaful operators may also charge various types of fee contingent upon the achievement of certain desired qualities or output in regard to the management of the takaful undertaking. This performance-related income is obviously variable in nature, as opposed to the fixed wakala charges mentioned earlier. The takaful operators who employ this practice, particularly Takaful Ikhlas Sendirian Berhad (TISB), HSBC Amanah Takaful Sendirian Berhad (HATSB), ETB, SLTB and MATB, suggest that it is consistent with the contract of jiàla (reward) for achieving certain desired objectives (Noordin, 2012). Notwithstanding that, there seems to be no specific reference made to the above contract as far as the written policy documents and guidelines for these operators are

1041


concerned. Basically, the contract of jiàla ties the reward payment (for the operator) to the actual output and performance of the takaful operations. If the output or performance is short of what is prescribed, the reward will not be due and payable (Engku Ali and Odierno, 2008). This sort of income is argued to be crucial in securing profits for the companies’ shareholders, since the previous two sources are hardly sufficient to cover all the incurred expenses. For example, in the case of ETB, one the most profitable operators in Malaysia, this type of revenue contributed between 42 to 89 per cent of the total gross profit (before zakat and taxation) recorded by the company between 2007 and 2010 (Etiqa 2008, 2010). There are at least two areas or tasks where the contract is said to be relevant/applicable by the respective takaful operators in Malaysia, namely: (1) in investing the participants’ fund (either PRF or PIF) so that a desired level of profit is achieved; and (2) in managing the PRF prudently so that an underwriting surplus is attained. The first task is probably similar to the application of mudaraba, as explained earlier. The only difference is that the operator is acting as an investment agent instead of an entrepreneur and will charge a certain percentage (e.g. 10 per cent) of the profit realized as a reward, or to be specific, as an investment performance fee (TISB, 2011). Obviously, the end result of both contracts, particularly the share of investment profit attributable to the shareholders, would be relatively the same. Few operators declare the above charge in investing the PRF, including TISB and SLTB. However, by referring to their financial reports, it seems that the above performance-related fees have yet to be implemented by both companies. Conversely, HLMT, despite being silent regarding the above fee, actually charges between 9 to 12 per cent of the PRF investment profit (HLMT, 2008, 2011). The application of jiàla on the second task appears to be more significant, as it tends to justify the sharing of an underwriting surplus from the PRF (by the operator), which is deemed by many to be inappropriate. This is due to the nature of an underwriting surplus, which is commonly viewed as the exclusive property of the policyholders. Since an underwriting surplus is actually derived from the remains of the participants’ contributions (after deducting claims and other related expenses), it is argued to technically and legally belong to the participants as a group (Ayub, 2007 and Arbouna, 2008). Nevertheless, the sharing of PRF surplus by the operator is legally recognized by BNM under the notion of ‘performance fees’, provided that certain requirements are observed (BNM, 2011). Some companies, such as TISB, prefer to call this sort of charge a ‘surplus administration charge’. In practice, the operators are seen as applying different surplus sharing ratios which range between 80:20 and 50:50 to the operator and participants respectively (Noordin, 2012). Amongst the operators which have been identified to implement this practice are ETB, TISB, SLTB, MATB and HATSB. Due to the controversial nature of this practice, it will be extensively studied in other research paper. In conclusion, it can be suggested that the categorization of takaful as a commercial entity is only limited to the extent of initiating a business organization (which is profit-oriented) to manage and organize insurance schemes which in fact are mutually undertaken by the policyholders under the principle of tabarru` and taàwun. This is different from commercial insurance in which all insurance activities are undertaken and treated by the insurance company as a pure business endeavour, thus do not necessitate the initial mutual arrangement amongst the insured. Perhaps the commercialization of takaful is unavoidable these days, since it is required by the law of most countries, including Malaysia that the takaful operator must be registered and hold a valid licence prior to the commencement of its operation. In general, the licence will only be granted to any organization which fulfils certain requirements, which amongst others include the acquisition of vital skills or experience and a considerable amount of capital to set off the schemes. As a result, one can expect to see most of the licences given to business corporations or public limited companies instead of groups of participants or co-operative bodies. Nevertheless, it is anticipated that the notion of commercialization will gradually lessen in the future, as more co-operative movements will be ready to organize such an undertaking. Until then, it is perhaps right to say that current takaful operators are in fact commercial entities, but (theoretically) within the permitted boundaries and do not have the same characteristics as the forbidden type of commercial insurance.

1042


Conclusion The categorization of modern takaful companies as commercial entities is mainly due to the fact that they are mostly structured as joint-stock or public limited companies, which basically are profit-seeking entities. Nevertheless, this will not necessarily render the takaful arrangement similar to conventional insurance, which is forbidden due to its commercial characteristics. One of the key reasons for the above divergence is that the former only acts as a remunerated agent who undertakes to manage and organize all the insurance-related matters on behalf of the policyholders. It is the participants who are actually willing to provide insurance protection amongst themselves under the notion of tabarru` and taàwun. This is not the case in conventional commercial insurance whereby the insurer takes full responsibility to indemnify the insured in exchange for the premium received in parallel to the contract of sale. The validity of this commercial type of takaful arrangement is perhaps very much dependant upon the specific and correct roles that the operator plays consistent with the application of several specific nominate contracts. In the Malaysian takaful environment there appears to be three main contracts widely applied by the takaful operators, either in its solitary form or as a combination of two or more contracts, in order to underlie the above relationship as well as to gain profit. These contracts include wakala bi ajr (remunerated agency), mudaraba (profit- sharing), and jiàla (reward). It is suggested, however, that only if these contracts are correctly and appropriately applied will the subsequent acquired revenue and profits be valid for the commercial takaful operator. Otherwise they could possibly be deemed invalid due to their association with gharar, jahala and other unfair practices.

REFERENCES AAOIFI.(2007). Sharià Standards for Islamic Financial Institutions 1429H-2008. Bahrain, AAOIFI. Arbouna M.B.(2008). Regulation of Takaful Business : A Shariàh Overview of Contractual Aspects of Takaful Models. in Bakar M.D. and Engku Alwi E.R.A, eds. Essential Readings in Islamic Finance. Kuala Lumpur, CERT Publications Sdn. Bhd. Ayub M. (2007). Understanding Islamic Finance. England, John Wiley and Sons Ltd. BNM (2011). Guidelines on Takaful Operational Framework. http://www.bnm.gov.my/guidelines/06_others/Concept%20Paper%20%20Guidelines %20on%20Takaful%20Operational%20Framework.pdf [Accessed: 15 June 2011]. Collins. (2004). Collins Cobuild Advanced Learner’s English Dictionary. U.K., HarperCollins Publisher. Engku Ali E.R.A. and Odierno H.S. (2008). Essential Guide to Takaful (Islamic Insurance). Kuala Lumpur, CERT Publications Sdn. Bhd. Etiqa. (2008). Director’s Report and Audited Financial Statements. http://www.etiqa.com.my/English/AboutUs/Financials/Documents/fs_2008/fin_stat_et b08_eng.pdf [Accessed: 18 June 2011]. Etiqa. (2010). Director’s Report and Audited Financial Statements. http://www.etiqa.com.my/English/AboutUs/Financials/Documents/fs_2010/Etiqa%20 Takaful%20Berhad%20-%20June%202010%20(Eng).pdf [Accessed: 18 June 2011] . http://www.hlmsigtakaful.com.my/images/AuditedFinancialStatementsFY2010.pdf [Accessed: 23 June 2011] . HLMT. (2008). Financial Statements. http://www.hlmsigtakaful.com.my/images/HLTMTFinancialStatementsFY0708.pdf [Accessed: 23 June 2011]. IFSB.(2009). Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings. http://www.ifsb.org/standard/ED8Takaful%20Governance%20Standard.pdf [Accessed: 7 July 2011]. Ismail E. and Abdul Razak S.H. (2009). Takaful and Actuarial Practices. Kuala Lumpur , INCEIF. Ma`sum Billah, M. (2007). Applied Takaful and Modern Insurance: Law and Practice. Petaling Jaya, Sweet & Maxwell Asia. Noordin K. (2012). The Commercialisation of Islamic Insurance (Takaful): A Critical Study of Takaful Business Models in Malaysia. PhD Thesis. United Kingdom, University of Wales. PBTB. (2011). Downloads : PruBSN Gadai Janji & Takaful Rumahku. https://www.prubsn.com.my/uploads/downloads/PruBSN_gadaijanjirumahku- latest.pdf [Accessed: 25 June 2011].

1043


PBTB. (2008). Financial Statement. https://www.prubsn.com.my/uploads/downloads/FIN%20REPORT%202008.p df [Accessed: 25 June 2011]. Al-Qarradaghi A.M.(2005). al-Ta’min al-Islamiyy Dirasa Fiqhiyya Ta’siliyya Muqarana bi al-Ta’min alTijariyy Maà al-Tatbiqat al-Àmaliyya. Beirut, Dar al- Basha’ir al-Islamiyya. Rooney K. and Jellis S, eds. (2005). Bloomsbury Concise English Dictionary. 2nd ed. London, A & C Black Publishers Limited. TISB. (2011). Corporate Profile. http://www.takafulikhlas.com.my/corporateProfile/aboutUs.asp [Accessed: 21 June 2011]. TISB. (2011). Product Disclosure Sheet. http://www.takafulikhlas.com.my/GUI/pdf/downloads/general/Guidelines%20on%20Product%20 Transparency%20and%20Disclosure_PDS_INDV%20PA_21.12.09.pdf [Accessed: 21 June 2011]. TISB. (2011). Proposal Forms. http://www.takafulikhlas.com.my/GUI/pdf/downloads/application_proposal_forms/Motor_Propos al_Form. [Accessed: 21 June 2011] . Zainal Abidin M.K. (2007). Takaful : A Question of Surplus. in Jaffer S.,ed. Islamic Insurance Trends, Opportunities and the Future of Takaful. London, Euromoney Institutional Investor Plc.

1044


FACTORS INFLUENCING THE PERFORMANCE OF INTERNATIONAL JOINT VENTURES (IJVS): EVIDENCE FROM MALAYSIA Mohd Sobri Don Universiti Utara Malaysia [email protected]

Mohd Najib Mansor Universiti Utara Malaysia [email protected]

Osman Mohamad Multimedia University Malaysia [email protected]

ABSTRACT Studies on the performance of international joint venture (IJV) companies in the Asian economies are still lacking. This study therefore, attempts to investigate the influence of partner control on the performance of IJV companies in Malaysia. Foreign parent dominated control is predicted to positively influence IJV performance. The findings are discussed in relation to other previous findings and in the cultural context of the present study. Keywords: International joint ventures; Malaysia; partner sharing of control; performance.

INTRODUCTION Many multinational firms have been using joint venture as a mode of entry into foreign markets. Regarded as an important tool to improve firms’ competitiveness, joint ventures are found in many economic sectors, industries, and product groups. Joint venture companies formed between local and foreign firms are motivated by the needs to expand markets, acquire complementary resources, access new technologies, learn new skills and know how as well as share risks. Joint ventures are also used to bridge the gap between the firms’ present resources and their expected future requirements (Hoffman & Schlosser, 2001). Despite their growing importance, IJV firms have often been reported to encounter various problems that affect their performances (Sulaiman et al., 1999). Literature on inter organizational relationships revealed that the failure rate or the instability of IJV is more than thirty percent - a figure that is higher compared to other modes of foreign market entries (Makino & Beamish, 1998; Yan & Zeng, 1999). Swierczek and Hirsch (1994) reported that half of the joint venture companies that were formed between Asian and Western partners resulted in a failure, while Czinkota, Ronkainen, & Moffet (2002) reported that seven out of ten joint ventures that were formed fall short of expectations and/or were disbanded. The high failure rate of IJV is alarming, thus warranting a good and complete understanding of the nature of IJV relationships (Robson, Leonidou, & Katsikeas, 2002). RESEARCH GAP Unfortunately, there is a huge gap in understanding joint venture management despite the rise in academic interests in IJVs’ performance in recent years (Spekman, Forbes, Isabella & MacAvoy, 1998). A review of literature has revealed that there are lots of concerns among IJV researchers and practitioners on managing successful IJVs. Many previous studies attempting to examine IJV

1045


performance were not able to resolve questions relating to IJV performance. These have left researchers as well as managers with limited knowledge on what factors really affect the success or failure of IJV. This issue is especially relevant to IJVs in the Asian economies (Kauser; & Shaw, 2002, Sim & Ali, 1998; Park & Russo, 1996) and emerging South East Asian countries (Lee & Beamish, 1995; Luo, 1999; Sim & Ali, 1998; Sulaiman et al., 1999) because to date there has been not been much empirical evidence on IJV performance in these regions. In Malaysia, cases of poor performing IJVs or IJV failures are rarely reported. Nevertheless, from my personal recollection of news, there were a number of IJVs in Malaysia that were reported to perform poorly due to various reasons. Some of these IJV companies have ceased operations, while some others have found new joint venture partners. Based on the above discussion, this paper attempts to investigate the performance of IJV in Malaysia by examining partner control factors, specifically the sharing of control between partners. This paper contends that partner control influence the performance of IJV in Malaysia. LITERATURE REVIEW A joint venture company is an independent organizational entity that is formed by two or more partners in order to create certain new competitive advantages (Beamish & Banks, 1987). In this entity, two or more firms pool a portion of their resources within a common legal organization (Kogut, 1988). It is a dominant form of business organization for multinational enterprises, regardless of whether it is required by a host country as a condition of entry (Beamish & Banks, 1987). Sulaiman et al. (1999) associated joint venture with power disparities, multiple stakeholders, inter-organizational exchanges and emerging goals and systems. Depending on how they are managed and harnessed, these characteristics could provide strengths or weaknesses to IJVs (Sulaiman et al., 1999). Even though IJV activities and academic interests on IJVs in Asia are on the rise, it is quite surprising to note the little amount of research done on IJVs in this part of the world (with the exception of China). There is even much lesser research work in ASEAN countries. The foundation for control is based on the transaction cost theory. Kogut (1988) posit that the transaction cost theory addresses joint ownership and mutual commitment issues through creating superior monitoring mechanism. These mechanisms provide protection and incentives to reveal information, share technologies, and guaranteed performance. Figure 1 depicts the relationship between control and performance. The general prediction of this model is that there is a positive relationship between sharing of control and IJV performance. Sharing of Control Local Parent Control Foreign Parent Control

Performance

Figure 1. Research Model

Control One of the key challenges in managing international joint venture companies is exercising effective control over the direction of the companies. Control in IJVs can be defined as the process through which a parent ensures that the way IJV is managed conforms to its own interests (Schaan 1983 cited in Ding 1997). This conceptualization of control, however makes managing IJV to become complicated, as two or more parent companies may want to influence the activities of the IJV (Yan & Gray, 1994). A parent company uses control to ensure that the attainment of benefits from the IJV is achieved without undue costs. Yet, IJV by nature is a cooperative arrangement, and the ability of a parent company to exercise control is a function of both the influence it has over the IJV managers and its influence in relation to the other parent company (Glaister & Buckley, 1998). Geringer and Herbert (1989) identified three dimensions of control in international joint ventures: focus, extent, and mechanisms. The focus of control or the scope of control refers to the scope of activities over which a parent seeks to exercise

1046


control. The extent of control is the degree to which the parents exercise control, while the mechanisms of control refer to the means by which control is exercised. ”. In this study, management control refers to the extent of control exercised by parent partners over specific value creation activities of the IJVs. This study looks at the extent to which the control exercised by parent firms over eight value creation of the IJVs is shared or dominated by parent companies. In this respect, sharing of control refers to the extent to which decision-making responsibilities regarding IJV are shared by parent companies. Sharing Of Control Studies that looked at the link between control and performance (Killing 1983) shed some doubt on the argument that different types of control structures will lead to better performance. . Beamish (1984) in the study of IJV in less developed countries however find that foreign dominant control strongly correlated with unsatisfactory performance. Dominance by one parent might frustrate the other parent and lead to lost opportunities to realize synergies. Shared control fosters trust between partners and as such provides very little incentive for opportunism. Blodgett (1992) observes that joint ventures that are built on shared ownership control have greater longevity than dominant ownership ventures because dominant control ventures lead to higher incidence of contract renegotiations and conflicts, thus eroding venture stability. Killing (1983) cited in Ding (1996) as well as Glaister and Buckley (1998) found that dominant parent were more successful that shared management ventures. They related this finding to the transaction cost framework arguing that coordination between partners entails significant costs making many alliances transitional rather than stable arrangements. Dominant parent control might reduce the risks associated with coordination and thus minimize the transaction costs and stabilize the joint venture. Based on the above discussion, therefore, it is hypothesized that: H1:

Sharing of control will lead to better IJV performance.

METHODOLOGY Unit of analysis for this study is international joint venture companies in Malaysia. Based on the Listing of Companies in Production with Foreign Participation obtained from Malaysian Industrial Development Authority (MIDA), 1142 sample of manufacturing companies have been identified. The sample companies are from a wide cross-section of industries, including agriculture, food processing, mining, light industries, metal working, electronic, chemical, and others. These companies have applied and obtained manufacturing licenses from MIDA and also have foreign equity participation. A final sample of 230 companies has been identified as IJVs that meet the selection criteria stipulated in this study. The selection criteria are: (1) The IJVs have been in operation for at least two years; and, (2) At least 20 percent of equity of the IJVs must be held by one partner. The first criterion was to have stabilization in performance of IJVs, as studies have shown that a minimum of two years in operation was needed in order for the performance to stabilize (Woodcock, Beamish, & Makino, 1994). The second criterion was intended to capture active participation and commitment of partners, as recent studies have reported that holding a minimum of 20% of equity indicated commitment and influence in IJV management (Ainuddin, Beamish, Hulland, & Rouse, 2007; Makino & Beamish, 1998) Data Collection And Questionnaire This cross-sectional study employed mail survey questionnaire to collect data. The questionnaires were sent to IJVs’ top managers (e.g. CEOs and General Managers), who have good knowledge and/or are responsible for the IJVs. A cover letter explaining the purpose and importance of the study together with the questionnaire and a return envelope was mailed to 230 IJV companies. A total of 65 questionnaires were completed and returned (28% response rate). Six of the returned questionnaires had to be excluded due to extensive missing information or because they were completed by lower level executives. A final total of 59 useable questionnaires were then analyzed, giving an effective response rate of 25.6%.

1047


Measurement Of Constructs The IJV performance in this study is measured using subjective business performance measures employed by R. Ainuddin et al. (2007). IJV top managers were asked to assess IJV performance in comparison to the performance of competitors, based on a 5-point Likert-type scale (ranging from 1=very poor to 5=very good). IJV top managers were also asked to assess IJV performance in comparison to their expectations, based on a 5-point Likert-type scale (ranging from 1=very poor to 5=very good). Control was measured by the extent of control that partners attempted to exercise over eight value creation activities of the IJVs. Choi and Beamish (2004) identified eight value creation activities of IJVs in Korea. They are product R&D, process R&D, manufacturing, local marketing, international marketing, brand names/trademarks, management of local labor force, and management of legal/government relations. Partners were asked to assess the extent to which one partner exercises control over each of the eight activities. A three point-Likert type scale was used to measure the extent of control (ranging from 1=Malaysian partner’s full control; 2= equally shared control; 3=Foreign partner’s full control).Hebert (1996) used similar scale to indicate the extent of control. Control of an IJV was considered to a shared-control one if the average scores for all the eight items was between 1.66 and 2.32. An IJV with the average score of between 2.32 and 3.00 was considered having foreign parent’s full control.

THE SURVEY FINDINGS The background data of the respondents’ IJVs is presented in Table 1. About 75% of the sample companies have been in operation for 9 years or more, and most of them (49.2%) are large companies. In term of nationality of parent companies, 32 firms (54.2%) have Malaysian and Asian parents (54.2%) while 27 (45.8%) firms have Malaysian and Western parents. With regard to Malaysian parent characteristics, 16 out of 59 IJVs parents are government linked companies, 24%are private limited companies, while the rests are public listed companies, individual shareholding and state economic development corporation. Out of 59 firms, 25 are in resource- based industry and the remaining 34 are in non-resource based industry. Variables

Description

Age of IJVs

< 8 years 9 – 16 years 17 – 24 years > 24 year

Frequency 14 30

% 23.7 50.8

6 15.3

9

10.2

Size of Small (150 employees) 29

13

Motives of IJVs (Multiple Response)

23 37.3

Market Seekers Resource Seekers Both Market and Resource Seekers

Nationality of Asian Countries Foreign Western Countries Parents

32

17 49.2

14

27

22.0 28.2

39.0 23.7

32 45.8

Malaysian Partner Government-Linked Companies 16 Characteristics State Economic Development Corp. 1 Private Limited companies 24 40.7

54.2

27.1 1.7

1048


Public Listed Companies Individual Shareholding Majority Equity Foreign Majority Owners Malaysian Majority

14

23.7 4

6.8

34 25

57.6 42.4

Table 1. Profile Of Firms

Goodness Of Measure Due to sample size limitation a within-factor, factor analysis was conducted. Factor analyses for control revealed two control factors. The first factor (operational control) involved control over local marketing, international marketing, management of local labor force, and management of legal/government relation. The second factor (technological control) involved control over product R&D, process R&D, manufacturing, and brand management/trademarks Table 2 presents the result for factor analysis on control. Cronbach’s alpha for technological control, operational control, and performance were .88, .91and .94, respectively. Variables

Loadings

Technological Control Product R&D Process R&D Manufacturing Brand name/trademarks

0.62 0.95 0.70 0.62

Operational Control Local marketing International Marketing Management of local labor force Management of legal/ government relations

0.91 0.60 0.92 0.92

Performance Business Volume Market share Profit Business Volume Market share Profit Achievement of planned goals

0.91 0.88 0.87 0.86 0.85 0.84 0.81

Eigenvalue

Variance

Reliability

4.83

60.40

0.88

1.50

79.10

0.91

5.20

74.00

0.94

Table 2. Factor Analysis Of The Independent And Dependent Variables

Variables

Results

Age of IJV Size of IJV Motives Nationality Malaysian Partner Characteristics Majority Equity Owned

NS S (Marginal) NS NS NS NS

Note: NS = Non-significant, S= Significant

1049


Table 3. Test of differences for performance by IJV characteristics

Table 4 shows the descriptive statistics and correlation between the independent and dependent variables. Pearson correlation coefficient was used to determine the strength of association. Correlations among several variables were statistically significant (ranging from r=.230, p