New Developments in Islamic Economics: Examples from Southeast Asia 1787562840, 9781787562844

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NEW DEVELOPMENTS IN ISLAMIC ECONOMICS

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NEW DEVELOPMENTS IN ISLAMIC ECONOMICS: EXAMPLES FROM SOUTH EAST ASIA EDITOR ASMAK AB RAHMAN Department of Shariah and Economics, Academy of Islamic Studies, University of Malaya, Malaysia

United Kingdom – North America – Japan – India – Malaysia – China

Emerald Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2019 Copyright © 2019 Emerald Publishing Limited Reprints and permissions service Contact: [email protected] No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. Any opinions expressed in the chapters are those of the authors. Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78756-284-4 (Print) ISBN: 978-1-78756-283-7 (Online) ISBN: 978-1-78756-285-1 (Epub)

Table of Contents List of Contributors

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PART I: SOCIAL FINANCE Chapter 1 Entrepreneurship Development in Islamic Economics Akilu Aliyu Shinkafi and Nor Aini Ali

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Chapter 2 Application of the Concept of Maslahah in Household Debt Management Nor Aini Ali, Wan Marhaini Wan Ahmad, Suhaili Sarif, Nor ‘Azzah Kamri and Raihanah Azahari

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Chapter 3 Role of Infaq in Financing Students in Malaysian Public Universities Noor Ain Alin @ Nordin and Asmak Ab Rahman

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PART II: WAQF Chapter 4 Cash Waqf From the Perspective of Majelis Ulama Indonesia (MUI) and the Scholars of Aceh: An Analysis Muhammad Ikhwan Mauluddin and Asmak Ab Rahman

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Chapter 5 The Potential of Cash Waqf in the Socio-economic Development of Society in Kelantan: A Stakeholder’s Perspective Siti Nur Asmad Che Hassan and Asmak Ab Rahman

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Chapter 6 Empowering Society Through Waqf Bazars: A Case Study in Kelantan, Malaysia Nur Aliza Binti Ahmad and Asmak Ab Rahman

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PART III: TAKAFUL Chapter 7 Micro-Takaful in Aceh: Does Society Need it? Rafiza Zuliani and Asmak Ab Rahman

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Chapter 8 Women and Risk: Does Takaful Have the Solution? Nuurshiraathal Firdaws Abd Rani and Asmak Ab Rahman

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Chapter 9 The Islamic Perspective on the Underwriting of Health Takaful Products: A Study of Selected Takaful Operators in Malaysia Aisyah Mustafa and Asmak Ab Rahman

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Chapter 10 Society’s Understanding of Family Takaful: A Study in Southern Thailand Mirwanee Ha, Asmak Ab Rahman and Azizi Che Seman

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PART IV: BANKING INSTITUTIONS Chapter 11 The Application of Bay’ Al-Tawarruq in Islamic Banking Institutions in Malaysia: A Study of Bank Muamalat Malaysia Berhad Mohd Izuwan Mahyudin and Azizi Che Seman

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Chapter 12 Determinants of the Asset Structure of Malaysian Islamic Banks: A Panel Study Ahmad Azam Sulaiman @ Mohamad, Mohammad Taqiuddin Mohamad and Siti Saidatul Akmal Arishin

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Chapter 13 Islamic Versus Conventional Banking: Characteristics and Stability Analysis of the Malaysian Banking Sector Ahmad Azam Sulaiman @ Mohamad, Mohammad Taqiuddin Mohamad and Siti Aisyah Hashim

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Index

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List of Contributors Ahmad Azam Sulaiman @ Mohamad Aisyah Mustafa Akilu Aliyu Shinkafi Asmak Ab Rahman Azizi Che Seman Mirwanee Ha Mohammad Taqiuddin Mohamad Mohd Izuwan Mahyudin Muhammad Ikhwan Mauluddin Noor Ain Binti Alin @ Nordin Nor ‘Azzah Kamri Nor Aini Ali Nur Aliza Ahmad Nuurshiraathal Firdaws Abd Rani Rafiza Zuliani Raihanah Azahari

University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia Zamfara State College of Education Maru, Nigeria University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia Princess of Naradhiwas University, Narathiwat, Thailand University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia State Islamic Institute (IAIN) Langsa, Indonesia Taman Maluri Primary School, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia State Islamic Institute (IAIN) Langsa, Indonesia University of Malaya, Kuala Lumpur, Malaysia

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List of Contributors

Siti Aisyah Hashim

National University of Malaysia, Selangor, Malaysia

Siti Nur Asmad Che Hassan

University of Malaya, Kuala Lumpur, Malaysia

Siti Saidatul Akmal Arishin Suhaili Sarif

National University of Malaysia, Selangor, Malaysia University of Malaya, Kuala Lumpur, Malaysia University of Malaya, Kuala Lumpur, Malaysia

Wan Marhaini Wan Ahmad

PART I: SOCIAL FINANCE

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Chapter 1

Entrepreneurship Development in Islamic Economics Akilu Aliyu Shinkafi and Nor Aini Ali Abstract Purpose – Entrepreneurship development has become a goal of many countries to achieve economic development. Islamic economics is concerned with marketing, trading, business and entrepreneurship activities. This chapter examines the role of entrepreneurship development in Islamic economics. Methodology/approach – This chapter is purely theoretical in nature. Thus, the Glorious Qur’an, Hadith and other related documents are its major sources. Findings – The discussion reveals that entrepreneurship development has the potential to promote economic growth and development, employment, self-reliance and national growth. The discussion identifies a lack of capital and financial support as a principal obstacle to the development of entrepreneurship and entrepreneurs. This chapter further reveals that the success of entrepreneurship development and other commercial activities requires organisation in terms of coordination, networking and sharing of resources, as well as cooperation between government, public sector, private sector and enterprise. Originality/value –The chapter is original in its form and arrangement having emerged as a novel attempt and the first of its kind. The chapter has a pearl of value to the Islamic economists, entrepreneurs, academic circle, and all those who may consider it relevant for application in their desirable business and cherish the value of its standing. Keywords: Entrepreneurship; entrepreneur; enterprise; Islamic economics; development

1. Introduction Islam is a comprehensive way of life that encompasses all aspects of human endeavour, be they economic, spiritual, social or political. An economic system of an Islamic nature concerns itself with social well-being, business activities and New Developments in Islamic Economics, 3–18 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181001

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relations, and the promotion of socioeconomic justice. The term ‘social well-being’ here refers to the quality of life that involves value systems, cultural and belief systems, lifestyles and ways of living together, fostering the connection and individual sense of being socially included. Islam provides human beings with sound economic principles that govern their daily economic activity. These principles remind people to believe and behave within the limits of Islamic law. The Islamic world has no intention of rivalling and competing with conventional economies; rather, it aims to strictly adhere to the law and worship of Allah (ibadah). Islamic economics aims not only for benefit and profit in this world but for benefit in the afterlife as well. That is why it is different from its conventional counterpart, which is profit-centred and delivers benefits limited to this present existence. The principles and dictates of conventional economics are of human origin and may become outdated or be turned against humans. That is why Friedman (2009) emphasised political and economic freedom, international finance and trade, fiscal policy, monetary control, capitalism and discrimination, social welfare, distribution of income and poverty alleviation. The quality of Islamic economics is established, particularly its potential of promoting economic development and the development of human society by its objective of well-being. Its capacity for socioeconomic welfare can reduce poverty and improve standards of living through practices such as zakat (almsgiving), waqaf (endowment), sadaqah (voluntary charity), infaq (spending for the sake of Allah), khums (one-fifth surplus of annual income) and qard hasan (benevolent lending). Islamic economics is also known for its prohibition of usury or interest (riba) (Qur’an, 2:276–281), corruption (Qur’an, 2:188; 4:29) and other fraudulent economic and financial practices. Islamic entrepreneurship is integral to the Islamic economics of development. In fact, it has great potential for generating employment, developing the economy and promoting social welfare. The Islamic way of life encourages business, marketing, trade and commercial activities. Although Allah permits business and makes it lawful in the Holy Qur’an, scripture also prohibits interest and prohibited businesses, such as those concerning pork, alcohol and gambling. Islamic economics has its own mode of financing that is different from conventional economics; such financial products are key drivers of economic growth and development. The financing products most suited to Islamic entrepreneurship development are musharakah (joint venture) and mudarabah (trust financing contract). Before the advent of Islam, Mecca was already a religious and commercial centre for the Arabs of the jahiliyyah (the period of ignorance). Prior to becoming a prophet, the Apostle of Allah (s.a.w.) would join the caravans with his uncle and eventually served as an entrepreneur (mudarib) for Ummul Muminin Khadijah (r.a.), travelling from Mecca in Saudi Arabia to Sham in Syria, before his uncle married her. The prophet (s.a.w.) stated, ‘A sincere and truthful merchant will be raised up among the company of prophets, trustworthy people, and martyrs’ (Tirmidhi records this tradition in his book of Sahih). This tradition shows the extent that being a good and honest entrepreneur can be encouraged and rewarded. Studies on entrepreneurship that are relevant to this study include those on microenterprise and micro-entrepreneurship development (Choudhury, 2002;

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Zapalska & Wingrove-Haugland, 2013), entrepreneurship by women (Anggadwita, Mulyaningsih, Ramadani, & Arwiyah, 2015; Nazamul, Abdullahil, & Abdullah, ¨ 2014; Tuzin, Masurel, & Nijkamp, 2003; Ullah, Mahmud, & Yousuf, 2013), entrepreneurship and profit and loss sharing (Kayed, 2012), youth entrepreneurship (Solaiman & Yasmin, 2012), entrepreneurship in Jordan (Al-Shaikh, 2013), Islamic ¨ usay, ¨ entrepreneurship (Faizal, Ridhwan, & Kalsom, 2013; Gum 2015; Kayed & Hassan, 2013; Nazamul et al., 2014), entrepreneurship and poverty alleviation (Mamman, Aminu, & Adah, 2013) and rural entrepreneurship development (Kolawole & Ajila, 2015). While some of the above literature is on specific areas such as women, youth and rural entrepreneurship, other scholars write on subjects such as microenterprise development, entrepreneurship and poverty alleviation, and micro-entrepreneurship. Although some articles on entrepreneurship are recent (such as Bollino & Botti, 2016; Kim, 2016; Lamb, 2016; Zulkhibri, 2016), this does not imply that everything is adequately examined about entrepre¨ usay ¨ neurship. Gum (2015) laments the limited attention scholars give to this matter. Research in Islamic entrepreneurship is under-represented (Kayed & Hassan, 2010). Furthermore, most of these publications do not link Islamic entrepreneurship with the primary theme of Islamic economics. Nevertheless, the work of Zapalska and Wingrove-Haugland (2013) should not be ignored: they link their work on micro-entrepreneurship to an Islamic economic system. More work like this is needed.

2. Objective of the Chapter The purpose of this chapter is to discuss entrepreneurship development with an emphasis on its concepts, principles, mode of development financing and the development characteristics of its realisation from an Islamic economic perspective. The methodology employed is library research, and the major sources are the Glorious Qur’an and Hadith. Other sources include books, journals and related publications.

3. Islamic Economics: Concept and Definition The excellence of Islam and the sincerity of its economic philosophy deserve our attention. This system differentiates between that which is lawful (halal) and unlawful (haram) in order to guide humans toward the attainment of their goals in this world and the hereafter. Islamic economic thought is known for its concern for human and social well-being, including legitimate forms of consumption, wealth (distribution and management), monetary policies, debt, market exchange, taxation, social security, investment and capital, business and trade, commerce and industry, and the law of transaction. The main concern of Islamic economics is the promotion of human wellbeing in an Islamic society. That is why Allah (s.w.t.) established the institution of zakat (almsgiving) in solidarity with the poor and made it an obligation for every Muslim whose possession of wealth reaches the nisab (minimum of property or wealth due for the payment of zakat). The Glorious Qur’an

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mentions zakat several times; some references are Qur’an, 2:43, 83, 177; 3:85; 4:77; 5:12, 55; 6:141; 7:156; 9:5. Almighty Allah clearly defines the beneficiaries of obligatory charity (2:273; 9:60). This is with a view to relieving impoverished individuals in difficulty. Allah (s.w.t.) also encourages supererogatory charity (sadaqah) as a supplement to zakat (Qur’an, 2:196, 263–264; 4:114; 57:18; 58:12–13). Other institutions of humanitarian aid include (but are not limited to) voluntary spending, or infaq (Qur’an, 2:3, 215, 262); one-fifth surplus of annual income, or khums (Qur’an, 8:41); bequests, or wasiyyah (Qur’an, 2:181–183); and endowments, or waqf. Although there are no Qur’anic directives regarding waqf, there are various traditions that support this institution. Among such traditions, the Apostle of Allah (s.a.w.) is reported to have said: ‘When an individual person died, all his deeds are cut-up, only three of them will continue to flow: acts of endowment, the knowledge he revives, and a good child who showers prayers upon him.’ In Islamic economics, loans and debts are considered charity. Therefore, the lender may not add any fixed return on the repayment of the borrower. The lender should also be kind in the treatment of the borrower and extend the due date should the borrower experience difficulty repaying by then. Debts should be in writing and for a fixed period; the writer is called to justice and there must be a witness of two men or one man and two women (Qur’an, 2:282). ‘And if you are on a journey and cannot find a scribe, let there be a pledge (mortgaging)…’ (Qur’an, 2:283). On the other hand, Islam discourages people from entering into debt, in spite of its permission for borrowing, except where there is a need for it. Allah (s.w.t.) in the Glorious Qur’an enjoins justice – adl – (Qur’an, 2:282; 4:58, 65,135; 7:29), and kindness or benevolence – ihsan – (Qur’an, 16:90) for the wellbeing of society. Islamic economics prohibits interest or usury (riba), which is universally regarded as a major corruption which can impede the economic growth and development of any society. Riba is a feature of capitalism that empowers the rich as superior and enslaves the poor as inferior. The Glorious Qur’an considers interest or usury as injustice. ‘Neither should you commit injustice nor should you be subjected to it’ (Qur’an, 2:279). The fundamental goal of this Islamic economic principle is to eliminate exploitation in trade, commerce and other business and financial transactions. On the consumption of food, the Glorious Qur’an makes lawful (halal) and unlawful (haram) certain land and sea creatures, birds, trees, rainfall, plants and other agricultural products. The lawful ones are those kinds of foods which Allah (s.w.t.) has made lawful (tayyibat), such as edible animals, milk products, vegetables, fruit and animals butchered in the name of Allah (Qur’an, 2:168, 172; 5:1, 4–5, 88; 6:118). Unlawful foods for consumption are dead animals, blood, swine meat, sacrifices to idols and animals butchered where Allah’s name is not mentioned (Qur’an, 2:173; 5:3; 6:121), as well as intoxicants (Qur’an, 2:219; 5:90). There is no blame for those who do good regarding what they ate in the past (Qur’an, 5:93). One should not make unlawful that which Allah has made lawful (Qur’an, 5:87; 7:32; 16:116). It is also haram to ‘eat’ the wealth of orphans and to make unlawful accumulation and earnings.

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In the spending of wealth, Islam encourages moderate spending and prohibits extravagance (tabdhir) or waste (israf). It further encourages the purification of wealth (tazkiya) through the payment of zakat, sadaqah, infaq and waqf. These institutions also serve as potential sources for promoting the public good, wellbeing, livelihood and the common good of society. Islam has strict warnings about the hoarding of wealth (Qur’an, 9:43), parsimony and prodigality. The Glorious Qur’an prohibits, as immoral pleasures, attitudes to wealth which are arrogant, proud, niggardly, luxurious, opulent and indulgent (Qur’an, 11:116; 17:16); such might lead to self-destruction. Thus, there is a need for generosity, kindness, humility, morality, moderation, charity and the preservation of honour. On market exchanges, Islam emphasises the quality of products, goods, commodities, money, silver and gold. These should be equal in weight, measure or value. Islam forbids business fraudulence in weights and measures (Qur’an, 83:1), dishonesty and illegal earnings. Islamic systems of taxation are known for their distinct fiscal and distributional ethics. Taxation is a vital tool of social and economic policy, particularly for transferring resources from the private to the public sector, with a view to equitably distributing the cost of governance within a state. Taxes might be from individuals or private businesses. An Islamic fiscal levy is collected from all Muslims whose wealth necessitates the collection of zakat (almsgiving). A poll tax (jizyah) is levied on those non-Muslims who enjoy the security and protection of an Islamic state. This is justifiable, considering that non-Muslims neither partake in military service nor pay zakat. The holy Qur’an states ‘Until you pay the jizyah with submission and feeling themselves subdued’ (Qur’an, 9:29). Nevertheless, those non-Muslims who choose to participate in military service are excused from paying the jizyah. Similarly, during the period of the second caliph, Umar bin Khattab, the kharaj was introduced. This is a tax levied on fertile land owned by non-Muslims, which had been conquered by Muslims. Other taxes include land tax, sales tax, excise tax, export tariffs, import tariffs and fees for government services. Islam has its own principles regarding social security and preventing situations which may lead people to criminal and immoral actions. These provisions include employment and aid to the aged, orphans and sick, and for those suffering from accident, drought and disaster. The institutions that commend help for the common people, the poor, the needy, slaves and orphans in the Glorious Qur’an include zakat (compulsory alms), infaq (voluntary spending), sadaqah (supererogatory charity), ihsan (kindness or generosity), it’am (food charity), waqf (endowment), kaffarah (expiation), khums (one-fifth surplus of the annual income), manila (free-lease) and baitul mal (government treasury). Other areas of social security comprise the institution of marriage, which involves nafaqa (maintenance), sadaq (the bride price) and khitba (betrothal). Consideration of social security is incomplete without mentioning zakatul fitr (compulsory charity paid at the end of the Ramadan period), fidya (ransom), wirathah (inheritance) and qard al-hasan (benevolence loan). The above-mentioned Islamic practices remind entrepreneurs some of their obligatory and supererogatory responsibilities in various areas of human

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endeavour. These economic responsibilities are not limited to entrepreneurial transactions and activities but are all-encompassing in nature, be it regarding social well-being, economic transactions, social security, and social intermingling with the rights of others in traditional society. For instance, in Islam, giving out both obligatory and supererogatory charities to the needy is an act of worship and increases blessings on businesses’ wealth security. Furthermore, these Islamic economic principles and practices highlight the responsibilities of individual Muslim entrepreneurs. These rights include the rights of Allah (s.w.t.), the right of entrepreneurs, their family, neighbours, the needy, customers and others. This enables individual entrepreneurs to fulfil their duties and obligations, which in turn reduces poverty in Muslim societies, creates opportunities for employment and actualises a positive entrepreneurship development and development in a Muslim society.

4. Definition of Islamic Economics Many recent scholars have attempted to define Islamic economics using different approaches, but their meanings are similar. Islamic economics is considered as ‘A field of knowledge that prepare[s] the realisation of human wellbeing through an allocation and distribution of scarce resources that conform with the Islamic point of view without unduly curbing … individual freedom or creating continued macroeconomic and ecological imbalances’ (Chapra, 2001). Another definition is that it is a ‘…systematic approach that determines the economic problem and human attitude that relate[s] to that problem from Islamic teaching’ (Ahmad, 1992). Islamic economics is seen as ‘…a response by the Muslim thinkers towards overcoming the economic challenges of their day through the sources of Shari’ah’ (Siddiqi, 1992). Similarly, Islamic economics is ‘…an area that functions as a representative of Muslim conduct in a distinctive Muslim society’ (Naqvi & Qadir, 1997). It is also ‘…a social discipline that cater[s] for the economic problem of the masses in accordance with the Islamic values’ (Mannan, 1986; also Adebayo & Fagge, 2012). Islamic economics refers to the ‘…administration of scarce resources in … human society in the light of an ethical conception of human wellbeing in Islam’ (Adebayo & Fagge, 2012). Further still, it is also ‘a mode of …satisfying the needs of the members of organised society in accordance with … sources of Islamic origin, value and injunctions that [cover] the areas of production, spending, distribution, management and exchange of wealth’ (Musa & Fagge, 2012). These definitions from noted scholars of Islamic economics indicate that the topic concentrates on human well-being, facilitating happiness and well-being (falah) in the hereafter. It also focuses on how to best use the resources gifted to humanity by their Lord, the Master of the sustenance of all dwellers of the earth. These definitions clearly indicate a wider sphere within which is set human limitations. The emphasis of Islamic economics is to value piety, benevolence, brotherhood, cooperation, equality and justice. These are the absolute and eternal ideals

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by which consumers, producers, traders and entrepreneurs must abide. The major objectives of Islamic economics are the elimination of zulm (injustice) and the establishment of justice (adl), the promotion of social well-being and the alleviation of poverty through zakat. It also promotes equity and the elimination of exploitation through the prohibition of riba, with a view to achieving justice and social order in society.

5. The Concepts of ‘Entrepreneur’ and ‘Entrepreneurship’ The English word ‘entrepreneur’ originates from the French word entreprendre, which means ‘to undertake’. Some economists believe that an Irish economist of French origin named Castillon first incorporated the word ‘entrepreneur’ into economic theory in AD 1755. According to his perception, entrepreneurs are ¨ usay, ¨ ‘risk-taking specialists’ (Gum 2015). The popularity of the term has been attributed to Say in 1803. The German economist Schumpeter is considered the first person to link the concept of entrepreneurship with innovation. Schumpeter ¨ usay, ¨ (1911, as cited in Gum 2015) states that entrepreneurship is a ‘…combination and creative destruction.’ The working definition of Drucker has made entrepreneurship a discipline. According to Drucker (1985, as in Nazamul et al., 2014), entrepreneurship is the ‘…pursuance of [a] unique and innovative opportunity for achieving profitable and rapid growth.’ Examples are creating a new enterprise (Low & MacMillan, 1988), creating value through risk-taking (Ronstadt, 1984) and the mental ability to commence an enterprise (Nazamul et al., 2014). Thus, entrepreneurship is a risky procedure that requires sound knowledge, skills, technology and human talent in order to gain anticipated rewards and goals. The entrepreneur is one who has the ownership of a business venture and controls or monitors its processes, without certainty of reward and with a readiness to take risk. Similarly, an entrepreneur is one who owns or possesses an enterprise, partnership or concept that depends on risk and success. Furthermore, an entrepreneur is an individual who establishes and operates a venture, looking for change and responding to it. An entrepreneur is also seen as the initiator of ideas and techniques about marketing and production. He/she is responsible for providing opportunities and resourcing organisations that require his/her care for the effective exploitation of opportunities. Such characteristics and activities of entrepreneurs are recognised as ‘entrepreneurship’, and the result and the determination of these actions are recognised as ‘enterprise’. An enterprise is a business or commercial venture that is framed with a potential to provide job opportunities and effective goods and services and to promote national income, economic growth and development of export possibilities.

6. Realising Sustainable Entrepreneurship Development To achieve sustainable entrepreneurship development in the Muslim world, several issues needed immediate attention. This include international issues (such

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as border guard issues), environmental issues (such as migration and sustainable entrepreneurship development, regional development and sustainable entrepreneurship development, urban planning, advanced construction materials for energy and smart cities in the Muslim world). Criminal activities also affect the sustainability of entrepreneurship development in the Muslim world – these include terrorism, particularly in the Middle East, and international crime, which affects regional sustainable entrepreneurship development. Therefore, security and safety are needed in Muslim nations for sustainable entrepreneurship, businesses and markets. The provision of security should facilitate emerging opportunities, drive business and address constraints that are likely to affect current and future markets. Furthermore, effective accounting, strategic management practices, creative marketing techniques and proficiency in modern economic and Shari’ah economic issues are relevant (economic comfort, security and legislative issues). The use of technologies and energy (such as information and communication technology (ICT) and creative industries) in connection with Islamic microenterprises should yield sustainable entrepreneurship development. A focus on finance and investment, intercultural communication, social cohesion, social innovation, creative business models, and education and knowledge management are all necessary to achieving sustainable entrepreneurship development in the Muslim world. Further areas of emphasis that could solve long overdue sustainable entrepreneurship development are corporate social responsibility, support for women and youth entrepreneurship and small- to medium-sized enterprises (SMEs) in the context of market growth and sustainable entrepreneurship development in the Muslim world. Other factors that will contribute to the realisation of entrepreneurship development include organisation in terms of coordination, networking and sharing of resources; and participation between government, public sector, private sector and enterprise. These factors are now briefly discussed.

6.1. Participation for Islamic Microenterprise Development Islamic financing and organisational instruments generate effective development through the participation of government, public sector, private sector and enterprise. For instance, Amanah Ikhtiyar Malaysia and the Grameen Bank of Bangladesh extended zero interest rates with tolerance of loans capital to clients in Malaysia and have participated with clients in generating their income activities (Gibbons & Kasim, 1990; as cited in Choudhury, 2002, p. 119). In Sudan, Islamic banks projected a remarkable quantity of funds for the development of the agricultural sector and the rural poor with a view to achieving an income generation program (Choudhury, 2002, p. 119). This indicates the significant extent of participation in Islamic microenterprise involving government, public sector, private sector, individuals, stakeholders and enterprise for effective development. Choudhury (2002, p. 120) believes that Islamic financing and organisational instruments have a strong participatory nature. It has the potential for free-interest financing for the poor and viable socioeconomic

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developments such as organisational and empowering programs, education for under-privileged children and agricultural development for the rural poor. Thus, an Islamic economic perspective recognises a philosophy of unity, strong participation by government, the public and private sectors, individual entrepreneurs, stakeholders and enterprises. The aim is holistic microenterprise development programs among Muslim communities. Choudhury (2002, p. 119) further demonstrated that microeconomic policy’s new perspective of development planning can integrate microeconomic and macroeconomic foundations with a grass-roots development focus.

6.2. Entrepreneurship Coordination Entrepreneurship improves the coordination abilities of people, thus increasing the gains from trade in a market. When an entrepreneur’s signal to buyers and sellers is precise, his actions improve coordination. Entrepreneurs should eliminate all coordination failures when the possible gains from trade are substantial (Albrecht, 2016, p. 19). The notion of planning coordination is central to the analysis of institutions and competitive market processes. Institutions and policies vary to the extent in which they promote competition and how quickly and completely they bring individuals’ plans into closer coordination with each other (Harper, 2013).

6.3. Entrepreneurship Networking Networking is established as an important source of the business expansion of SMEs in many developed economies. It often provides the necessary intelligence which can lead to internationalisation (Senik, Scott-Ladd, Entrekin, & Adham, 2011, p. 1). A high proportion of owner-managers use their trading contacts as sources of useful additional information. They use ‘weak ties’ for purposes such as recruitment. They have a sparse use of institutional networks. There is an association between networking activity and business performance, although it seems that this is qualified by sectoral differences. There is an association between the type of the owner-manager’s scale of entrepreneurship and networking activity. Economic development agencies continue to have problems reaching out to microbusiness; such agencies might better differentiate amongst the microbusiness population (Chell & Baines, 2000, p. 1). Relationships and networking have been important in internationalisation studies for some time and are, for small firms in particular, of interest for their role in helping overcome ‘resource poverty.’ Fundamental and secondary networking capabilities enable the identification and exploitation of market opportunities, facilitating the development of knowledge-intensive products and a firm’s international market performance (Sullivan Mort & Weerawardena, 2006, p. 1). Thus, Islamic microenterprises and SMEs should focus on a networking approach to expand commercial activities in developing Muslim nations. This is the case in many developed economies in the West, such as the United Kingdom and the United States.

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Therefore, entrepreneurship networking is pivotal in the development of both local and international enterprises and SMEs. Senik et al. (2011) identified three interconnected sources of networking for SMEs, involving government institutions, business associates and personal relations. He acknowledged that the success of SMEs and enterprises requires cohesion among the myriad of networking sources and operating agencies. A systems approach towards supporting the creation and management of networking linkages for internationalisation combines a systems-thinking perspective with an institutional view. He further emphasises the need for the effective integration of coordination, facilitation and monitoring functions. Consequently, there is a need in the Muslim world for improving the support of entrepreneurship institutions, SMEs, and enterprises systems, and effective thinking that can facilitate local and international entrepreneurship. The policymakers and entrepreneurs of SMEs should intensify the use of social networking systems and satisfy the requirements of Islamic law to ensure effective institutional support mechanisms and to enhance their businesses.

7. Entrepreneurship Development in an Islamic Perspective The concept of entrepreneurship in Islam cannot be overemphasised. In fact, Islam itself can be seen as an ‘entrepreneurial religion’ (Kayed & Hassan, 2010). Entrepreneurship in Islam is also considered an act of ibadah (worship): ‘And I (Allah) created not the jinn and man except that they should worship Me (Alone)’ (Qur’an, 51:56). Almighty Allah mentions entrepreneurship by different names, such as tijarah (business), bay (trade), fadahalullah (bounties of Allah) and aqd (plural uqud), meaning ‘promise’ or ‘contract’. Although Almighty Allah permits business, He prohibits interest (Qur’an, 2:275). Allah (s.w.t.) calls believers to not unjustly consume properties among themselves, except for trade among them (Qur’an, 4:29). He also calls on believers to fulfil all obligations (Qur’an, 5:1). The Glorious Qur’an encourages humans to search for the bounties of Allah in the sea: ‘And you see the ships ploughing through it, that you may seek (thus) of His bounties (by transporting the goods place to place) and that you may be grateful’ (Qur’an, 16:14). This encouragement is not limited to the sea but extends to the land: ‘And when the prayer is ended (jumu’ah) Friday, you may disperse through the land, and search the Bounty of Allah, and remember Allah much: that you may be successful’ (Qur’an, 62:10). This verse comes after the advice to leave off business when the call is proclaimed for prayer (salat). The above verses clearly indicate that entrepreneurship in Islam is not a human philosophy but a revelation from the Lord of humankind. Hence, a Muslim entrepreneur is unlike a Western one, for his/her universal features cut across social, racial, geographical, cultural and spiritual spheres (Hamid & Sa’ari, 2011). In Islam, entrepreneurship is a branch of Islamic economics and trade. Entrepreneurship is regarded as the ‘…search of opportunity away from the resource organised…’ (Faizal et al., 2013). Entrepreneurs are generally accepted as the ‘…main movers of the universal economy…’ (Al-Shaikh, 2013).

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Thus, entrepreneurship development has relied heavily on the government and on individual entrepreneurs in every society (Kayed & Hassan, 2010). Islamic entrepreneurship and business have been remarkable for their social and economic effect in supporting the activities of small business and are pivotal to the international economy. In countries with Islamic affiliations, Islamic entrepreneurship and business development are not only vital for personal trading but also beneficial for establishing commercial relations with other societies.

8. Principles and Features of Islamic Entrepreneurship As entrepreneurship is integral to Islamic economics, it must comply with the sources of Islamic law (shari’ah), the Qur’an and Hadith. These identify entrepreneurial ethics such as sidq (truthfulness), amanah (trustworthiness), ikhlas (sincerity) and akhlaq (morality). In Islam, an entrepreneur is a khalifatullah alal ard (vicegerent of Allah on the earth), as stated in the book of Allah (Qur’an, 2:30). Business acts must be considered by entrepreneur as acts of ibadah (worship), and they are expected to discharge their entrepreneurial activities and responsibilities with good character and virtue. The success of business in Islam is neither a matter of pride nor a sense of one’s commitment but a blessing and favour from Allah. The liquidation of a business that is not due to the selfishness and negligence of the entrepreneur is considered as a trial and examination from Allah, who tests His servants at His own volition. Here, the entrepreneur needs sound tawhid (belief in the Oneness of Allah) to accommodate good and bad happenings with patience and submission to the will of Allah. Thus, the overall characteristic of an entrepreneur is to act within the rules of Islamic economic thought in good faith. Here, the use of tawhid as law in liquidation matters is the disengagement of unifying linkages on which entrepreneurship and business rest. The characteristics that are expected of entrepreneurs involve tawhid (belief in the Oneness of Allah), and, in law, unity of knowledge, complementariness, linkages, and participation which involve the acceptance of the good results of entrepreneurship by the entrepreneur with happiness and thankfulness to Allah and defective results with the highest patience and fidelity. This will save the entrepreneur from hellfire, as Allah (s.w.t.) says: ‘O you who believe! Shall I guide you to a trade that will save you from a painful torment? That you believe in Allah and His messenger…’ (Qur’an, 61:10–11). It is also testing from Allah, who says, ‘And certainly, We shall test with something of fear, hunger, loss of wealth, lives and fruits, but give glad tidings to patient ones (as-sabirun)’ (Qur’an, 2:155). Another important feature of a Muslim entrepreneur is at-taqwa (fear of Allah, and God-consciousness) in his/her transactions. Allah (s.w.t.) said ‘O you who believe! Fear Allah and be among the truthful (as-sadiqin).’ This will certainly make the entrepreneur just and save him from dishonesty, fraudulence and prohibited practices. The fear of Allah is what will make him tajirul amin (trustworthy business man), attaining the company of prophets, honest men and martyrs in the hereafter.

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A Muslim entrepreneur should only embark on halal business and transactions; other businesses that lack legitimacy in Islam should be avoided. An entrepreneur should also ensure that what he/she eats and feeds his/her dependants is from lawful earnings. The Glorious Qur’an commands a Muslim to halal (lawful) food thus: ‘And eat of the things which Allah has offered for you, lawful and respectable, and fear Allah in whom you believe’ (Qur’an, 5:88). A characteristic of Muslim entrepreneurs should be to avoid waste and extravagance: ‘Eat and drink and waste not by extravagance’ (Qur’an, 7:31). Thus, they should possess a full understanding of effective management and utilisation of entrepreneurial resources and facilities. Muslim entrepreneurs should focus on realising their entrepreneurial expectations and inspirations, look to the bounties of Allah (Qur’an, 62:10) and begin to pray (as-salat). Another important factor is that a Muslim entrepreneur must possess a sound and adequate knowledge of marketing and business skills (expertise), and be conversant in all forms of financial and economic transactions. Islam despises ignorance, making it incumbent on every Muslim to search for knowledge. The Apostle of Allah enjoined Muslims to ‘…search for knowledge, even if it is in China.’ This tradition teaches us that geographical distance is not a barrier to seeking knowledge. Another Hadith states that the ‘…search for knowledge is compulsory for every Muslim male and female.’ The Glorious Qur’an teaches that humanity and knowledge are non-separable creations of Allah. This is because, immediately after the creation of Adam (a.s.), Allah (s.w.t.) taught him the names of all things (Qur’an, 2:30–33). It would be no exaggeration to say that the power of man is his knowledge. The first revelation that descended from heaven to the Prophet (s.a.w.) was about knowledge (Qur’an, 96:1–5). Knowledge is an ocean with countless branches. The learned men could not be likened to the ignorant ones. ‘And above every possessor of knowledge, there is one more learned’ (Qur’an, 12:76). Hence, a Muslim entrepreneur should have a sound knowledge and understanding of his/her field. This includes knowledge of entrepreneurial activities, better understanding of the environment of its operation and managerial skills for the enterprise. The enterprise should be capable of facing the entrepreneurial challenges and issues that are likely to arise. It should also be proficient in developing its human resources and be prepared to establish additional branches and agencies. It should also encourage economic well-being through means such as zakat (almsgiving), sadaqah (supererogatory charity), waqaf (endowment), infaq (voluntary charity) (Qur’an, 3:92; 8:3) and a concern for social development. A Muslim entrepreneur should hold to entrepreneurial ethics (Qur’an, 2:275) by avoiding riba (interest) and embodying sidq (truthfulness), amanah (trustworthiness), ikhlas (sincerity) and akhlaq (morality). A Muslim entrepreneur should be conversant with profit and loss-sharing principles, particularly regarding musharakah (joint venture or partnership business).

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9. Challenges Facing Entrepreneurship Development There are educational challenges that involve a lack of entrepreneurial content in the school curricula of some Muslim nations and inadequate entrepreneurial training centres. Societal challenges include a lack of adequate infrastructure for entrepreneurship development – such as steady power supply, safe access to roads and transport, trade equipment and available water supply – social security challenges, information and communication technology, and loose adherence to Islamic sources of law; these are among the problems that face the sector. The principal economic challenges for entrepreneurs are inadequate capital and poor financial support from governments. The instability of exchange rates is also a concern, particularly for foreign investors or entrepreneurs. Frequent reversals of economic policy and a lack of political will by some regimes to continue the good policies of their predecessors do not serve entrepreneurs. There can be negligence, exploitation and a lack of support from vocational and traditional education, which impede the training of skilled workers such as carpenters, bricklayers, electricians, plumbers, mechanics, pharmacy technicians, nurses, laboratory technicians, peasant farmers and fishers.

10. The Way Forward for Entrepreneurship Development in Muslim Countries The way forward for the development of entrepreneurship in Muslim countries is by the development of favourable political, economic and insurance contexts. Entrepreneurship is widely accepted as a field that generates employment (Nkechi, Emeh Ikechukwu, & Okechukwu, 2012), promotes the living standards of people, and impacts on national economic growth (Onwubiko, 2011). However, these outcomes rely heavily on human and natural resources, the effective application and manipulation of these resources, and the talent to do so. The regimes of Muslim states should take positive action and show support through the redevelopment and revitalisation of small and medium-scale enterprises (SMEs), instituting SME development agencies (SMEDAs) and SME schemes if not available. Another vital initiative is the establishment of SME enterprise banks (SMEBs) and banks of industry (BOIs). Although BOIs exist in some Muslim countries, not all have followed the courage of Malaysia in establishing an SMEB and Agro Bank. Malaysia, through its SMEB and Agro Bank, facilitates opportunities, capital and financial support, commitment to business activities, growth in the entrepreneurial and commercial sectors, selfreliance and promotion of the agricultural sector. Malaysia is an exemplar in this respect. Part of Malaysia’s vision is effective support for the agricultural sector through the Agro Bank or Bank of Agriculture (BOA), creating funds for the support of farmers, SMEs and other special schemes that benefit agricultural development. On the other hand, the provision of large training centres offering various programs for youth, women and other members of society will yield positive results.

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11. Conclusion This chapter has discussed Islamic economics and demonstrated that entrepreneurship development is indispensable for boosting economic growth and development, employment, self-reliance and national growth and sustainability. The discussion has been reinforced with frequent verses from the Qur’an and Hadith of the Holy Prophet (s.a.w.), which revealed Islam to be an entrepreneurial religion. Even so, Islam discourages laziness and dependency, and encourages humans to seek the bounties of Allah throughout the earth and sea in accordance with the precepts of the Islamic legal philosophy of business. Entrepreneurship development is likewise understood as a lively and significant discipline for Muslim countries. This chapter has identified the areas of challenge and indicated the way forward and sustainable approaches for effective entrepreneurship development in Muslim societies. The discussion has identified a lack of capital and financial support as the greatest obstacle to entrepreneurship development and to entrepreneurs. Nevertheless, the Malaysian example may guide other countries and convey the prospect of sustainable entrepreneurship development and support. Finally, the chapter has argued that the success of entrepreneurship development and other commercial activities rely heavily on governmental support, whether financial, social or vocational.

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Chapter 2

Application of the Concept of Maslahah in Household Debt Management Nor Aini Ali, Wan Marhaini Wan Ahmad, Suhaili Sarif, Nor ‘Azzah Kamri and Raihanah Azahari Abstract Purpose – This chapter examines the application of the concept of maslahah in household debt management. Methodology/approach – A combination of quantitative and qualitative approaches is employed. Questionnaires were used for data collection. Findings – Malaysian Muslims become indebted for four main purposes: buying their first car, their first home, helping family members, and financing their studies. Thus, Muslims principally borrow funds to fulfil their dharuriyyat (essentials) and hajiyyat (complementary) needs, and in some cases, they borrow for tahsiniyyat (luxury) purposes. Research limitation/implications – The respondents of this research are working Muslims in the Klang Valley, Kuala Lumpur, Malaysia. Practical implication – This study helps Islamic finance institutions to develop better products to offer customers. Its results can also give a real picture about borrowing activities to the Credit Counselling and Debt Management Agency. Originality/value – Prior studies have mainly examined household debt management. This study surveys local Muslims’ household borrowing pattern to understand the nature of personal debt management and then analyses these data against the concept of maslahah. This will enrich the currently available literature. Keywords: Maslahah; household debt; management; application

1. Introduction Not all debt is harmful. Under the right circumstances, loans for mortgages, study and automobiles can help strengthen one’s financial position. However, debt is New Developments in Islamic Economics, 19–33 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181002

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more often an unwelcome guest at the table of many households. Credit card debt and personal loans – sometimes necessary to ease payments and increase standards of living – could become costly and encumbering. Statistics have shown that, without careful management, many households succumb to their debt burden and are declared bankrupt. Cheng, Wei, Rajagopalan, and Abdul Hamid (2014) discovered that, between 2005 and 2012, there were 124,708 personal bankruptcy filings in Malaysia. This was corroborated by Noordin, Zakaria, Mohamed Sawal, Ngah, and Hussin (2012), whose study showed that cases of bankruptcy were more predominant among those below the age of 30 years (particularly executives) who have access to housing loans, but was mainly due to credit card debt. Similar conclusions have also been reached by other international studies (Cocheo, 1997, pp. 31–32; Rinaldi & Sanchis-Arellano, 2006; Schor, 1998). The impact of debt has been found to negatively affect the financial well-being of borrowers. Previous researchers have found that debt levels are strongly associated with health and mortality. Indebtedness has resulted in excessive stress among debtors, eventually leading to deterioration of their health (Elo & Preston, 1996; Feinstein, 1993). Increases in the cost of living that outpace income growth can significantly contribute to increases in household debt. However, increasing and uncontrolled debt is usually a result of irresponsible spending that arises from a low level of financial literacy. Abdul-Muhmin (2008) found that attitudes among consumers in Saudi Arabia towards debt are a possible explanation for the growing levels of consumer indebtedness to Saudi commercial banks. Studies have found that the less educated borrowers are, the more easily they fall into insolvency (Lown, 2008).

2. The Islamic Perspective on Personal or Household Debt Islam permits the acquisition of debt as an unavoidable and necessary undertaking in life. Nevertheless, foreseeing the gravity of debt – especially on debtors – Islam treats debt as a serious commitment, both in its acquisition and settlement. For an individual who wishes to borrow, Allah s.w.t. in the Qur’an reminds us that it is always prudent to document the contract and, if necessary, have it endorsed by third parties: O you who have believed, when you contract a debt for a specified term, write it down. And let a scribe write [it] between you in justice. Let no scribe refuse to write, as Allah has taught him. So let him write and let the one who has the obligation dictate. And let him fear Allah, his Lord, and not leave anything out of it … And bring to witness two witnesses from among your men. And if there are not two men [available], then a man and two women from those whom you accept as witnesses - so that if one of the women errs, then the other can remind her … That is more just in the sight of Allah

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and stronger as evidence and more likely to prevent doubt between you … (Al-Baqarah 2:282). As indicated by the above verse, the presence and documentation of witnesses are to mitigate any future dispute that may arise in relation to the debt contract. It is not uncommon that debt leads to lies and the breaking of promises, as narrated by a Hadith that advises Muslims to frequently seek refuge with Allah from indebtedness: “… O Allah, I seek refuge with You from the sins and from being in debt.” Somebody said to him, “Why do you so frequently seek refuge with Allah from being in debt?” The Prophet replied, “A person in debt tells lies whenever he speaks, and breaks promises whenever he makes (them).” (Al-Bukhari, 2002). The seriousness of committing oneself to debt is more pronounced in the obligation to repay debt. Debtors are obliged to return their borrowings as contracted. The payment must be made in equal measure and quality to the borrowed assets or currencies. In the event that the assets borrowed are no longer available, the replacement must be of at least of equal measure and quality. This was clearly exemplified by a Hadith narrated by Abu Rafi’ about the return of a camel borrowed by the Prophet p.b.u.h.: Abu Rafi’ reported that Allah’s Messenger (may peace be upon him) took from a man as a loan a young camel (below six years). Then several donated camels were brought to him. He ordered Abu Rafi’ to return to that person the young camel (as a return of the loan). Abu Rafi’ returned [it] to him and said: I did not find among them but better camels above the age of six. He (the Prophet Muhammad PBUH) said: Give that to him, for the best men are those who are best in paying off the debt. (Al-Nawawi, 2005). A failure to settle a debt is a grave sin and has repercussions for one’s soul after death. The Prophet has repeatedly reminded Muslims of the gravity of debt that remains unpaid when due. For, as noted above, a debtor tends to become a liar and to break promises to avoid the wrath of the lender and the consequences of low credibility. Hence, to ensure a serious commitment of settlement, a more severe consequence awaits the soul of a deceased debtor. The Prophet says: “The soul of a believer is in limbo with its debt until the debt is fully paid for.” (Ibn Majah, 1997). “O Messenger of Allah, what is this strict issue that has been revealed?” He said, “By the One in Whose hand is my soul, if a man were killed in battle for the sake of Allah, then brought back to

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Nor Aini Ali et al. life, then killed and brought back to life again, then killed, and he owed a debt, he would not enter Paradise until his debt was paid off.” (Al-Sanadi, n.d.).

The above Hadiths indicate that the Prophet did not encourage (while not totally prohibiting) Muslims to borrow, as it could become an unbearable burden to the debtor. Furthermore, such a burden might later affect the heirs of a deceased debtor, as it reduces the quantum of wealth to be inherited by them (Qur’an, 4:11–12). Recognising the importance of settling debts, Muslim scholars have outlined three strict conditions before a Muslim can commit or enter into debt. Firstly, the debt contract must be free of any element prohibited by Shariah. Both debtors and creditors may not promise any increase in payment as this is construed as riba, which is prohibited. Borrowing something that is prohibited and deemed harmful by Shariah is also disallowed. The Prophet said: ‘…do not borrow something which is disliked by Allah.’ Through this Hadith, it is evident that the Prophet prohibits any borrowing activities which involve non-halal or impermissible products or services, such as borrowings for gambling or trading in liquor. The second condition is that, before borrowing, a prospective debtor must first be comfortable with his/her own creditworthiness. Debt is only allowed in instances where the debtor knows that he/she would be able to repay the debt on time. It is important that only those who are capable of repayment should be given the opportunity to borrow by society. Islam allows access to alms and charity for those who are incapable of paying. And, thirdly, the debtor must be determined to repay the debt in full. In this regard, the Prophet says, ‘…whoever owes, and he/she intends to pay the debt, Allah will help him.’ This Hadith shows that Allah will help the debtor who sincerely intends to repay his/her debt. If he/ she is reluctant to make repayment, he/she could be perceived similarly as those who steal the property of others.

3. Malaysian Household Debt Indebtedness is a disturbing problem among Malaysians. Local household borrowings have increased substantially since the year 2000. Malaysia has one of the largest household debt to gross domestic product (GDP) ratios in South-East Asia. According to the 2014 annual report of Bank Negara Malaysia (BNM), Malaysia’s household debt to GDP at the end of 2014 had increased to 87.9% from 86.7% in 2013, 80.5% in 2012 and 76.6% in 2011. Based on the latest figures from the Debt Management Programme (DMP) – a program organised by the Credit Counselling and Debt Management Agency (AKPK) – 303,885 individuals had attended its counselling services up to November 2014. AKPK is a subsidiary of BNM, Malaysia’s central bank, and was instituted to provide advice and assistance for potential and current borrowers in managing their finances and debts. More than a third of those who sought its help were in serious debt and have enrolled in the DMP. Nearly 80% of those enrolled in the program have two or more

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concurrent debts, particularly for credit cards, personal loans, housing loans or hire purchase (car loans). Malaysian household debt is mainly due to higher mortgage financing, especially for residential properties. These represented 44.2% of household debt in 2013, and this increase was reflected by an increase of 5.6% in property financing over the previous year (TheSundaily, 2014). From a more micro-level analysis of household debt, research conducted by the Khazanah Research Institute in 2014 (The Star Online, 2014a, 2014b) concluded that consumerism was an important factor that induced Malaysian households to acquire debt. Many households possess discretionary durable goods such as electrical appliances and vehicles, despite their low income levels. It is of concern that these items were mainly purchased by credit rather than with cash. The main reasons for this were low income or insufficient cash. Household income in 2012 stood at only RM3,626 per month while, at the individual level, median monthly salaries and wages were only RM1,700.00. For the low-income segment, representing the lower 40% of Malaysian society, median household income was only RM1,852 per month, while it was RM4,372 for the middle 40%. These data were supported by 2013 statistics from the Employee Provident Fund (The Star Online, 2014a, 2014b) which indicated that 62% of its active members earned less than RM2,000 per month and 96% earned less than RM6,000 per month. Given their low monthly income, these lower income earners were more likely to consume than to save. Furthermore, it is no anomaly that their consumption was supported by credit, given the prevalence of high-consumption lifestyles. Thus, the debt burden of Malaysians is mainly due to loan commitments ranging from housing to personal borrowings. In many cases, the lack of careful debt planning and the tendency to borrow without any pressing necessity have led to an excessive debt burden. As noted above, even if debt acquisition is allowed for Muslims, borrowing money from others is acceptable only in special circumstances. Islam has always emphasised the priority of borrowing to obtain basic needs, while loans to fulfil unnecessary wants is severely discouraged. J. Ahmad, Ahmad, and Wahid (2011) also suggest that Muslim consumers must always give priority to dharuriyyat and hajiyyat goods when considering borrowing funds. In their opinion, there must be a loan limit for tahsiniyyat purposes. They remind Islamic financial institutions to be reasonable in their profits from debt financing and to not neglect social welfare. This study employs the framework suggested by J. Ahmad et al. (2011) in analysing the application of the concept of maslahah among Malaysian Muslim households in their debt management. This will gauge the effect of this Islamic teaching on Muslims’ decision-making regarding debt. The study employs both quantitative and qualitative research to map the principles for prioritising needs in daily decision-making about the acquisition of debts among working Malaysian Muslims in the Klang Valley. This study differs from J. Ahmad et al. (2011) because needs are appropriately categorised for the purpose of debt acquisition.

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4. Maqasid al-Shariah and the Acquisition of Debt The concept of debt has been gradually changing through time so that its function no longer centres around supporting a government’s fiscal policy or providing funding for business and trade. In the modern world, the acquisition of debt has become a common personal means of supporting increased costs of living and changing lifestyles. Without mortgage facilities, it would take many workers – white- and blue-collar alike – many years to own a house and car. Tertiary education would remain a dream for many without student loans. Households rely more and more on debt to fulfil their daily needs and wants. In Islam, decisions regarding behaviour – including, in this instance, debt acquisition – should rely above all on the guidelines offered by the Qur’an and the sunnah. Some of these guidelines regarding debt management were as outlined above. As borrowing activities have now become more complicated, a more comprehensive understanding of the principles and teachings of the Qur’an and the sunnah may be warranted. Islam affirms that Shariah rulings shall continue to evolve based on custom and ijtihad due to changing times and needs. Any changes in need should be evaluated based on the presence or absence of effective causes and purposes (Abd Aziz, 2000). In the context of household debt, which is deemed part of modern lifestyle, the rulings regarding whether debt acquisition is permitted or disallowed by religion can be determined by the ranking of needs as outlined in the abundant literature on the objectives of Islamic law (maqasid al-Shariah). Al-Ghazali (born in 450 AH/AD 1058), a renowned Muslim scholar, maintained that the objectives of Shariah are to promote human well-being and welfare by safeguarding religion (deen), life (nafs), intellect (naql), lineage (nasl) and property (mal). Thus, Islamic teaching reflects the concepts of compassion and guidance to establish justice, eliminate prejudice and alleviate hardship in society. All of these are manifested in the realisation of maslahah (public interest) which, for many Islamic scholars, is the all-pervasive value and objective of Shariah and is effectively synonymous with compassion. In the context of the rationalisation of Shariah, its objectives are ranked in a hierarchy based on the level of necessity and the extent of its impact on humanity and, in some instances, the rest of creation. Its objectives are ranked in the hierarchical order of the essential (dharuriyyat), the complimentary (hajiyyāt) and the luxurious (tahsiniyyat) (al-Ghazali, n.d.). According to al-Syatibi (1997), dharuriyyat is the highest order of maslahah because it determines the existence and achievement of the five main objectives of Shariah without which life for humans would become unbearable (al-Syatibi, 1997). Hajiyyāt refers to that which is needed by mankind, but whose absence will not cause hardship and ruin. The lowest order of need is tahsiniyyat, which is something that provides comfort and ease of life.

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5. Ranking of Needs in Decisions Regarding Debt Acquisition The writings of many classical Muslim scholars have explicitly or implicitly addressed the issue of debt acquisition. In the wider conception of creation, all assets and properties belong to Allah and no absolute rights of ownership have been granted to any individual. All humanity is accorded responsibility for using the creation of God according to the teaching of Shariah for the ultimate pleasure of Allah s.w.t. In deciding the purpose and extent of the use of his creation, scholars have outlined a ranking of priority in which dharuriyyat must always have priority over hajiyyat and tahsiniyyat (J. Ahmad et al., 2011, p. 66). These rankings of priority should be rules-of-thumb in making decisions about almost all aspects of life. In the context of debt acquisition, classical and contemporary Muslim scholars alike are of the opinion that debt and borrowing activities should only occur for genuine needs which are recognised by Shariah. Al-Qurtubi (2002) maintains that a person may not borrow from anyone without sound reason and necessity. He based his argument on the Hadith which maintains that the Prophet would borrow from someone to cover the needs of the poor (mentioned above). Al-Zuhayli (1991), another modern scholar, also argues that individuals can only enter into debt when they are in absolute and urgent need (emergency). A similar opinion has also been voiced by another scholar, Muhammad Yusuf (1991). He writes: ‘Part of the manners of the borrower [is] that he does not borrow except in desperation, as debt is sadness in the evening and a disgrace during the day.’ Thus, observant Muslims must wisely plan their expenditures so that they can avoid unnecessary loans which may ultimately trap them in a vicious circle of debt. In order to achieve a balanced budget, one should control the unlimited desire to possess luxuries which could eventually lead to prodigality and wasteful and extravagant spending. The rankings of need in the determination of debt acquisition can be assessed from the purpose of the debt since the intention of an action plays a primary role in the determination of the intensity of the need. BNM, the national authority that supervises the state of Malaysia’s household debt, has categorised debt according to the main purposes of acquisition. In 2013, households were found to acquire debt mainly to purchase residential properties and motor vehicles and about 67% of total household loans were with registered financial institutions. Other borrowings were for purchasing non-residential properties, personal consumption, investment in financial securities and payments on credit cards (Bank Negara Malaysia, 2013). From an Islamic perspective, shelter and transportation are both classified as basic needs. Failure to have them disrupts the continuity of life of any individual, as they are considered absolute requirements for human survival (al-Ghazali, n.d.). In the current world, where the cost of living continually increases and sometimes outpaces the growth of earnings, borrowing to own both of these assets has become more crucial (Bank Negara Malaysia, 2013).

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The intensity of the necessity of owning these two assets, however, diminishes in certain circumstances. Borrowing to acquire a second home or means of transport are considered complementary because they are not vital to the five main objectives of Shariah. They may, however, be necessary to relieving or removing the hardship faced in realising these five elements. The necessity to borrow is further reduced when the purpose of debt is to acquire further comforts in life (al-Ghazali, n.d.). Borrowing to invest in financial securities or to pay for credit card expenditure to attain a certain lifestyle exemplifies such comforts. Investment adds value to already existing wealth, and entering into debt to settle a credit card debt signifies irresponsible spending. These refinements are only necessary to adorn life and to provide humans with comfort and perfection. It may be argued that the real purpose behind debt acquisition cannot be easily determined according to the three main rankings of needs. A person’s basic need for a place to live may already been fulfilled by paying rent for it, thus reducing the necessity of borrowing to own a first house. In another instance, one may borrow to help a spouse or a friend. Their level of necessity would be different from borrowing to settle one’s own debts or obligations. Such instances create ambiguity in determining the absolute ranking of the purpose of borrowings. This is in juxtaposition with the limitations of the traditional dimensions of maslahah, which are mostly concerned with an individual’s need rather than the needs of family or society (Abd Aziz, 2000). The ambiguity may, however, be reduced if mapping of needs and purposes is assessed in the context of local customs and demography. Such multidimensionalities, combined with the above considerations, could offer a solution to the dilemma of ranking necessity. Consider, for example, borrowing to settle one’s own debt, to help a spouse or to help a friend. Different assumptions were made about the needs of the respondents; at the same time, their effects are interdependent. The intensity of need may be different or similar for an individual compared with their spouse or friend. From another perspective, one’s individual needs to help a spouse, by virtue of the matrimonial relationship, may be higher than helping a friend in need. Thus, a more multi-dimensional categorisation of needs offers opportunities to reconcile different interpretations of the needs that lead to borrowing. This study attempts to mitigate this dilemma by further breaking down the three rankings into two additional categories, where the purposes of borrowing are most often between the main rankings.

6. Findings The data from this survey were obtained from a questionnaire distributed to 522 working Muslims in the Klang Valley, Kuala Lumpur. Sampling was based on convenience; thus, all questionnaires returned were eligible for analysis. In developing the questionnaire, previous empirical research on household debt and on the Islamic concept of debt was considered. The profile of the respondents is presented in Table 1.

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Table 1: Profiles of Respondents. N (%)

Gender Age

Highest education level

Male Female Below 25 25–30 31–35 36–40 41–45 46–50 51–55 56 and above Secondary Certificate Diploma Bachelor degree Master/PhD degree

200 (38.3) 322 (61.7) 30 (5.7) 190 (36.4) 90 (17.2) 65 (12.5) 58 (11.1) 32 (6.1) 41 (7.9) 16 (3.0) 65 (12.5) 65 (12.5) 123 (23.6) 211 (40.4) 56 (10.8)

Table 1 shows that 61.7% of the respondents were female. While this may not reflect the composition of the actual population, it correlates with the high percentage of workers that attained college and university levels of education. The age of the majority of the respondents was between 25 and 45 years, which represents the age of the developing national workforce. By design, all of the chosen respondents had outstanding debts owed to locally registered financial institutions. Although all are Muslims, more than a third of the debt was acquired from conventional financial institutions. Only loans or financing for cars and property (except residential houses) are favoured from Islamic financial institutions. This indicates that, in their borrowing, Muslims do not really seek Shariah-compliant financing but make their choices based on other factors such as returns and age of borrowings (Table 2). Table 3 shows the percentage of the respondents’ monthly income that must be utilised to settle their monthly loan instalments, according to their age. The majority of them spent between 10% and 50% of their income on monthly dues. It is notable that the main age groups that borrow are those that work and that indebtedness is highest for those who have just entered the workforce. The level of indebtedness becomes lower as age increases. Table 4 depicts the purposes for which respondents acquire debts. These purposes are broken into five categories based on the level of maslahah. The

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Table 2: Types of Debt Based on Financial Institutions. Type of Debt

Housing loan/financing Car loan/financing Personal loan/financing Education loan/financing Credit card(s) Property loan/financing Business loan/financing Other loan/financing (Amanah Saham Bumiputera loan, etc.)

Conventional Financial Institutions

Islamic Financial Institutions

107 (39.9%) 166 81 93 53 6 5 54

161 219 150 61 45 17 12 36

highest-ranking needs are dharuriyyat, followed by hajiyyat and tahsiniyyat. Two further categories are added between these three categories. These additional categories represent the grey area between the levels of maslahah. The maslahah levels for owning first transport or home are very clear where they are considered as principal necessities for people. Similarly, owning second or consecutive homes and vehicles are no longer deemed as necessities but more as easing one’s life; thus, these purposes fulfil that of hajiyyat items. There are, however, some purposes that may not be easily classified as either dharuriyyat or hajiyyat, such as debt for operating a business or for settling existing loans. One may consider such purposes as dharuriyyat while another may perceive them as merely hajiyyat. One may also consider other purposes as hajiyyat, such as owning other homes and vehicles while another may perceive them as merely tahsiniyyat. In this case, a number of purposes should be grouped under special ‘transitional’ categories: one between dharuriyyat and hajiyyat and another between hajiyyat and tahsiniyyat. This reveals that, for Muslims, the five main purposes of debt were to buy first their transport, followed by buying a first house, financing their study, settling their basic needs such as food for their family and paying health costs. Therefore, the majority of respondents borrowed to fulfil their dharuriyyat needs such as cars and houses, as well as for hajiyyat needs and tahsiniyyat purposes such as celebrating special occasions and taking holidays. Table 5 depicts the percentage of debt from household income that is involved in fulfilling the respondents’ highest needs. The majority of the respondents spent almost 60% of their monthly income to pay debts that fulfil impending needs. Given this high level of indebtedness, we may conclude that the respondents depend highly on the continuity and stability of their monthly income to fulfil their basic needs.

Table 3: Comparison of Debt From Household Monthly Income and Age of Respondents (in %).

Percentage of Monthly Income

Less than 10% 10%–20% 21%–30% 31%–40% 41%–50% 51%–60% 61%–70% 71%–80% More than 81% Total N (%)

Below 25

25–30

31–35

36–40

41–45

46–50

51–55

56 and Above

N (%)

1.7 2.1 0.8 0.4 0.6 0 0.2 0 0

5 10.5 7.7 5.4 3.4 2.7 1 0.6 0.2

1 4 1.9 5.2 2.3 1.7 0.2 0.8 0.2

1.7 1.5 2.3 1.9 1.5 2.5 0.4 0.4 0.2

0.6 2.7 2.5 1.9 1.7 1.3 0.4 0 0

0.4 1 1.3 2.3 0.8 0.2 0 0 0.2

1.3 2.1 1.9 1.1 0.8 0.6 0 0 0

1.0 0.4 0 0.2 0.2 0 0 0 0

66 (12.6) 128 (24.5) 99 (19.0) 98 (18.8) 59 (11.3) 47 (9.0) 11 (2.1) 10 (1.9) 4 (0.8)

30 (5.7)

190 (36.4)

90 (17.2)

65 (12.5)

58 (11.1)

32 (6.1)

41 (7.9)

16 (3.0)

522 (100.0)

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Table 4: Purposes of Debt and Categorisation Based on the Level of Maslahah. Dharuriyyat

Owning first vehicle (448) Owning first home (284) Financing study (145) Seling basic needs (72) Health (49)

Total: 998/1,728 (57.75%)

Operating business (31)

Hajiyyat

Helping spouse (96)

Helping friends (10)

Helping family members (145)

Owning other homes (65)

Seling debts (51)

Owning other vehicles (88)

Paying credit cards (84) Total: 407/1,728 (23.55%)

Total: 163/1,728 (9.43%)

Tahsiniyyat Wedding expenses (26) Investment (94) Performing hajj/umrah (10)

Total: 130/1,728 (7.52%)

Vacations (16) Celebrating occasions (10) Luxury items (4)

Total: 30/1,728 (1.74%)

Table 5: Comparison Between Highest Levels of Purposes for Debt and Percentage of Debt From Household Monthly Income. Highest Levels of Purposes of Debt Percentage of Monthly Income

Purchase of First Transport Vehicle

Purchase of First Home

Less than 10% 10%–20% 21%–30% 31%–40% 41%–50% 51%–60% 61%–70% 71%–80% More than 81% Total N

46 97 97 90 58 38 11 8 3 448

33 58 57 45 45 31 6 7 2 284

Finance Basic Health Own Study Needs Treatment

17 39 24 30 16 11 4 3 1 145

5 10 15 17 8 11 3 2 1 72

5 7 11 9 9 6 1 0 1 49

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7. Conclusion Indebtedness is a serious problem for Muslims in Malaysia. The latest statistics show that Malaysian household debt has reached 87.9% of GDP. Without proper management, the problem of over-borrowing will lead some to the brink of bankruptcy. From a religious perspective, Islam suggests that debt may only be granted for urgent situations and real necessities. Borrowing merely to fulfil unnecessary wants is prohibited. Such prioritisation may reflect the hierarchy of necessity derived from maslahah. In this case, any debt may fall under the category of essential (dharuriyyat), complementary (hajiyyat) and luxury (tahsiniyyat). The survey conducted for this research found that the five main drivers of debt are to acquire one’s first transport – normally a car – followed by the purchase of a first house, financing study, settling respondents’ basic needs and paying health costs. It is concluded from the findings that the majority of the respondents are only involved in borrowing for their essential and complementary needs. Such a finding may imply that they try to avoid falling into debt traps caused by unnecessary borrowing. Holistically, maslahah is not merely showing only needs but is also a source of Shariah by recognising human intellectual capability. Maslahah does consider the general purpose of religious legal practice which acknowledges interests of human beings that encompass religion, life, intellect, lineage and property. Based on these principles – derived mainly through human reasoning and intellect since, especially in relation to human affairs, the Qur’an and Sunnah remain silent – debts need to be controlled and structured according to individual needs and abilities. One’s intellectual potential needs to be improved to ensure that decisions are wisely made. This authority can also set a borrowing guideline based on the needs and abilities of a person or society to prevent them from uncontrolled indebtedness. The establishment of bodies such as the AKPK is also a great step to helping those with debt burdens. This is, indirectly, a mechanism to help achieve the divine purpose which is embedded in the spirit of maslahah.

Acknowledgement The authors would like to acknowledge the financial support provided by the University of Malaya under the Equitable Society Research Cluster (ESRC) research grant RP015C-13SBS.

References Abd Aziz, I., Hammad, N. K., & Damiriyyah, U. J. (Eds.). (2000). Qawa‘id al-kubra al-mawsum bi qawa‘id al-‘ahkam fi ’islah al-‘anam. Dimashq: Dar al-Qalam.

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Abdul-Muhmin, A. G. (2008). Consumer attitudes towards debt in an Islamic country: Managing a conflict between religious tradition and modernity. International Journal of Consumer Studies, 32(3), 194–203. Ahmad, J., Ahmad, S., & Wahid, H. (2011). Ekonomi Islam satu pendekatan analisis. Selangor: Universiti Kebangsaan Malaysia. Al-Banna, A. R. (1353H). Al-Fath al-rabbani li tartib musnad al-Imam Ahmad al-Syaibani. Misr: Maktabah al-Ikhwan al-Muslimin. Al-Bukhari, M. I. I. (2002). Sahih al-Bukhari. Damascus: Dar Ibn Kathir. Al-Ghazali, A. H. M. (n.d.). Al-Mustasfa min ilm al-usul. Hamzah bin Zahir al-Hafiz (Ed.). Beirut: Dar Sadir. Al-Nawawi. (2005). Sahih Muslim bi Syarh al-Imam Mahyuddin al-Nawawi. Beirut: Dar Marifah. Al-Qurtubi, A. A. M. (2002). Al-Jami’ li ahkam al-Quran. Qaherah: Dar al-Hadith. Al-Sanadi, M. I. A. H. (n.d.). Sunan al-Nasa’i bi Hashiah al-Sanadi. Beirut: Dar Marifah. Al-Syatibi, A. I. I. (1997). Al-Muwafaqat. Abu Ubaydah Masyhur bin Hasan alSalaman (Ed.). Saudi: Dar Ibn Affan. Al-Zuhayli, W. (1991). Al-tafsir al-munir. Damsyiq: Dar al-Fikr. Bank Negara Malaysia. (2013). Financial stability and payment systems report 2013. Kuala Lumpur: Bank Negara Malaysia. Retrieved from http://www.bnm.gov.my/ files/publication/fsps/en/2014/fs2013_book.pdf. Cheng, E. H., Wei, K. K., Rajagopalan, U., & Abdul Hamid, B. (2014). Causality of personal bankruptcy in Malaysia. In Proceedings Book of ICETSR, Malaysia Handbook on the Emerging Trends in Scientific Research. Singapore: PAK Publishing Group. Cocheo, S. (1997). Statistically speaking, what’s going on in consumer bankruptcy? ABA Banking Journal, 89(8), 31–40. Elo, I. T., & Preston, S. H. (1996). Educational differences in mortality: United States, 1979–1985. Social Science and Medicine, 42(1), 47–57. Feinstein, J. S. (1993). The relationship between socio-economic status and health: A review of the literature. Milbank Memorial Fund Quarterly, 71/2, 279–322. Ibn Majah. (1997). Sahih Ibn Majah. Riyad: Maktabah al-Maarif li Nasy wa Tawzi. Lown, J. M. (2008). Consumer bankruptcy in Utah (USA): Who files and why? International Journal of Consumer Studies, 32(3), 233–240. Muhammad Yusuf. (1991). ‘Uqud al-mu‘awadat al-maliyah fi daw’i ahkam al-Syari‘ah al-Islamiyah. Beirut: Dar al-Thaqafah li al-Nasyr wa al-Tawzi‘. Noordin, N., Zakaria, Z., Mohamed Sawal, M. Z. H., Ngah, K., & Hussin, Z. (2012). Bankruptcy among young executives in Malaysia. Paper presented at International Conference on Economics and Management, Singapore. Rinaldi, L., & Sanchis-Arellano, A. (2006). Household debt sustainability: What explains household non-performing loans? An empirical analysis. Working Paper Series, No. 570. Retrieved from http://ssrn.com/abstract_id5872528. Schor, J. B. (1998). The overspent American: Upscaling, downshifting, and the new consumerism. New York: Basic Books. The Star Online. (2014a). Addicted to debt. Retrieved from https://www. thestar.com.my/business/business-news/2014/11/22/addicted-to-debt-highly-leveragedthe-resilience-of-many-malaysian-households-will-be-tested-as-the/. Accessed on November 22, 2014.

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The Star Online. (2014b). The true cost of living. Retrieved from https://www. thestar.com.my/business/business-news/2014/11/29/the-true-cost-of-living-subsidiesregime-has-distorted-market-pricing/. Accessed on November 29, 2014. TheSundaily. (2014). Household debt: What does it say about the average Malaysian? Retrieved from http://www.thesundaily.my/news/1001887. Accessed on March 31, 2014. Zainal Abidin, A., Sarmidi, T. & Md Noor, A. H. S. (2013). Jurang pendapatan dan hutang isi rumah. Prosiding PERKEM VIII, 1(1), 445–459.

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Chapter 3

Role of Infaq in Financing Students in Malaysian Public Universities Noor Ain Alin @ Nordin and Asmak Ab Rahman Abstract Purpose – The purpose of this chapter is to study the concept of infaq in Islam, investigate its practice in Malaysia, analyse its role in public universities (PUs), investigate the issues and constraints of infaq for financing of higher education in Malaysia and suggest recommendations for improvement. Methodology/approach – This study used a qualitative methodology and was conducted to obtain information on the practice of infaq in financing tertiary-level education in Malaysia, to learn about the recommended practice of infaq in Islam, to analyse its implementation and to explore the constraints faced in the financing of higher education in Malaysia. Findings – This study indicated that the practice of infaq helps to ease the burden of rising fees and the cost of living for university students. Research limitations/implications – The study only focused on the role of infaq in financing higher education in Malaysia. The sample for this study involved four PUs in the Klang Valley. Originality/value – This study provides new contributions to the field of education infaq in Malaysia. Keywords: Infaq; allocation reduction from government; fee rates increment; increase in university students’ cost of living

1. Introduction The contemporary needs of Islamic society can be met by utilizing infaq as an optimal means of increasing wealth (Abdul Hamid & Suhaili, 2014). It is not only able to meet the necessities of life but has also been extended to cover the need for proper education, from preschool right up to the tertiary level. A perfect education is the most important element in ensuring the development and progress of a country because it produces a high quality of human capital. This does, however, New Developments in Islamic Economics, 35–45 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181003

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require a substantial allocation of finance (Garcia Penalosa & Walde, 2000). Education in the early years is important but education at the tertiary level is important too (Banya & Elu, 2001). Educational funding through infaq (spending, normally in the path of Allah) is seen as very important because it has the potential to help the less fortunate and can potentially close the economic gap in the Muslim community. Infaq is the practice of voluntary property transactions made by wealthy people with the aim of seeking the approval of Allah, especially in helping the needy Azha et al. (2013). Infaq is viewed as a crucial alternative for improving the economy of the ummah (society of Muslims) in order to reduce its levels of poverty. Infaq has tremendous scope to benefit ourselves, family members and those in need. It includes nafqah (maintenance), zakat (tithes), sadaqah (charity), nazar (vows) and waqf (an endowment made by a Muslim to a religious, educational or charitable cause). Infaq is not merely limited to providing a piece of land for building a mosque or to serve as a cemetery, or to constructing a building to serve as madrasah (a school for Islamic instruction). It has been adapted over time: using the latest technologies, it can be disseminated to those in need. The benefits are not just short-term but lasting. Through the practice of infaq, many public facilities, educational institutions and social services such as schools, medical colleges and universities can be established, developed and expanded (Baer, 1997). Infaq is essential to education as it produces quality and competent human capital. Therefore, the practice of infaq should be a feature of the culture of Muslims, especially in Malaysia. It helps realise national aspirations for producing quality human capital and nurturing commendable moral values such as ethics, courtesy, integrity and the suppression of individualistic and material pursuing attitudes (Abdullah, 2013; Zaki, Norzaidi, & Zuina, 2008). Infaq is generally divided into three categories. The first is a form of compulsory infaq – a practice that is compulsory for a mukallaf (a person obligated by law to discharge a legal duty) such as maintenance, zakat (payment made annually under Islamic law on certain kinds of property and used for charitable and religious purpose; it is one of the Five Pillars of Islam) and votives (offered or consecrated in fulfilment of a vow). The second category is not obligatory, with practices such as waqf and hibah (gifts). The third category of infaq is fines made up of kaffarah (atonement, to be preceded by remorse or having done wrong or forgotten religious requirements), fidyah (substitution, feeding one poor person one meal for every fast missed) and dam (a religious requirement for adult Muslims, which is the sacrifice of a sheep or goat; specific to people who are performing hajj). Education is essential for enabling an individual to become charismatic human capital in the future. It should also be viewed as the shared responsibility of the whole community: all members of society must work together to ensure that there will no longer be schools dropouts and that all receive a proper education so that the standard of society can be enhanced. Such partnerships are not a new development; in fact, they have long been established in earlier societies where people were willing to contribute some of their property to jointly assist and support educational funding (Marican & Rahman, 2011).

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Tertiary education is very important and receives a special allocation from the government in every annual budget (Bain, 2001; Barr & Turner, 2013; Finney & Kelly, 2004; Kaneko, 2011; Mokgwathi, 1992; Oliveira & Pereira, 1999; Rey, 2009; Shah, 2008). However, the survival of education in Malaysia’s public universities (PUs) is highly dependent on access to the economic resources of the government. The development of infaq can mitigate this situation where the government is spending large amounts of money on tertiary education and where the cost of education is constantly rising (Marican & Rahman, 2011; Marzuki, 2005; Ramli & Hamid, 2014). Education in Malaysia at the tertiary level requires substantial funds and its cost keeps increasing (Finney & Kelly, 2004; M. Mahamood & Rahman, 2014). This has become a constraint because existing financial resources are unable to meet the needs of either universities or students, especially students from middle and lower income families (Marzuki, 2005). This situation could worsen if increasing educational costs prevent students from continuing their studies (Mayor, 2004). This problem is increasingly alarming – an increase in the cost of living occurred with the implementation of the new Goods and Services Tax (GST) from 1 April 2015, especially in big cities. An impact of the implementation of the GST was an increase in the price of goods, which added an additional burden to existing constraints (Palil & Ibrahim, 2011). Household expenditure has also increased due to this rising price of goods each year and a lifestyle where income is spent according to personal wants (Economic Planning Unit, Prime Minister (2015). The need for higher education funding is increasing annually (Marzuki, 2005), but monetary assistance provided by the government in recent years has declined (Fig. 1). 18 16 14 12 10 8 6 4 2 0 2012

2013

2014

2015

2016

Fig. 1: Expenditure Allocation for Public Higher Education Institutions (2012–2016) MYR (Billion). Source: Prepared from Parliament of Malaysia: http://www.parlimen.gov.my/ (2012–2016).

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The Malaysian government has provided educational assistance (fund) to university students, such as the National Higher Education Fund Corporation (PTPTN), Public Service Department (JPA), Majlis Amanah Rakyat or the Bumiputera Council of Trust (MARA), state foundations, and governmentlinked companies (GLCs). These all require university students who are eligible and who receive assistance in the form of loans to be bound by agreement to graduate at a designated time. They are also required to repay their loans at the rate stipulated in the agreement. This may include options such as full payment, half payment or a percentage based on their academic achievement. The repayment of the loan is the responsibility of the student after graduation; however, some borrowers fail to pay their loan as scheduled. Difficulties can be faced not only by graduates in repaying educational loans after their graduation; but also by the al-wakif (the person who spends their money or properties through waqf) because they are no longer able to actively spend their property (Ismon, Ramli, Dahalan, Romli, & Hashim, 2015). Another scenario faced by university students is that they need study loans to finance their studies in places such as Singapore, England and India (Albrecth & Ziderman, 1993; Narayana, 2005; Shantakumar, 1992). The reality in Malaysia is that most students who enrol in institutions of higher education will receive education loans offered by various institutions such as the PTPTN and the MARA. Although students in the PU are offered such loans from the PTPTN, they are bound by agreement to repay the loan after gaining employment at the ujrah (the financial charge for using the service including salary, allowance, commission and fee) rate of 1% (Kamal & Seman, 2014). Further details about the number of borrowers are as follows (Table 1).

Table 1: Loan Statistic/PTPTN Education Funding for Years 1997 to November 2013. Year

1997–2010 2011 2012 2013 TOTAL

Borrower (Number)

Amount (RM Billion)

1,698,845 227,209 209,963 201,958 2,337,975

37.44 5.52 5.13 5.14 53.23

Source: Department of Basic Research and Product Development.

Currently, some PUs have efficiently created and implemented educational funding through infaq (e.g. Universities W, X, Y and Z). Although infaq is a practice that is commonly practised by Muslims in Malaysia, infaq for higher education is yet to become a cultural norm.

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2. Research Methodology This study used a qualitative methodology. It was conducted to obtain information on the practice of infaq in financing tertiary education in Malaysia as well as to study recommended infaq practice in Islam, to analyse its implementation and to explore the constraints faced in financing higher education in Malaysia. The study’s method of data collection involved a planning and implementation process to gather facts, figures and perceptions for analysis (Awang, 2001). The researchers used two methods to obtain data: primary data obtained from field interviews and secondary data from the academic literature. The researchers obtained information from several university libraries, referred to here as Universities W, X, Y and Z. In order to obtain these data, the authors also interviewed the officers associated with the management of infaq in these universities to obtain details and authentic information. The process of collecting interview data spanned four months, from 28 December 2015 to 29 April 2016. The scheduling of the interviews depended on time suitability and arrangements between the researchers and the informants. Most informants cooperated well. The researchers also needed a fairly long period to set a date for an interview, subject to the availability of informants and time constraints. The researchers first identified who administered infaq at PUs and who were suitable respondents for this study’s interviews. The researchers then applied for an official approval letter from the university to conduct field studies. They created interview questions to submit to the researcher’s supervisor so that these could be verified to ensure that the necessary data could fulfil the study’s objectives. The interview questions acted as a guide and facilitated the interview process to prevent the omission of information. The next step was to contact respondents to obtain their consent to conduct the interview sessions. In addition to the interviews, the researchers also used phone calls and emails to obtain additional information or gather further clarification on data collected during the interview. All interviews were conducted at the respective informants’ offices and their duration was between 45 and 90 minutes. A voice recorder was used to facilitate the transcription process so that no information was lost, as well as helping the researcher to correct any perceived errors and record important brief observations (Gorman & Clayton, 2005). All information and data obtained can assist the researchers to perform analysis and conclude the study.

3. Results and Discussion 3.1. Development of Educational Infaq The existence of traditional forms of educational institutions, such as madrasah, pondok schools and people’s religious schools, shows a commitment to the practice of infaq in Malaysia (Mustaffa & Muda, 2014). There are several sources of funding that can be channelled to education, including the government administration, statutory bodies such as MARA, and private donations made directly or entrusted to organisations.

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3.2. Introduction of Infaq into Public Universities At present, infaq is no longer just used for developing pondok educational centres. The term pondok originates from the Arabic word funduq, meaning a place or shelter. Hence, it can be inferred that sekolah pondok consist of small buildings for the temporary shelter of students (Mohd Nor, et al., 2012) and madrasah. Infaq is also used to donate books on behalf of the traditional education system and schools and it now also contributes to public and private higher learning institutions. This is evident in several universities across Malaysia which have established an educational endowment fund to administer funds received and to disburse them to educational purposes, such as scholarships, loans and development funds. There are two funds that assist students in University W; the first is the waqf fund created under the W University Endowment Fund, which was launched in 1999. This fund aims to help students who excel academically but are financially disadvantaged and require assistance to pay tuition fees and cover the cost of living throughout their study. The second is a zakat fund which is supervised by the Centre for Zakat and was placed under the Endowment Fund in 2001. University X has a waqf fund reserve, launched on 21 May 2010. It provides the University X waqf and infaq fund generation program which allows the public to channel their contributions. It also offers several schemes for students: the Education and Student Welfare Scheme, the Student Development Scheme, the Academic and Research Development Scheme and the University X Network Scheme, Industry and Society. There are also schemes for the public to perform waqf and infaq such as the Gifts and Donations Scheme and the Cash Waqf Scheme of University X. In addition, it has been organising the Annual Donation Campaign since 2012. The campaign is organised to generate funds to carry out University X’s academic agenda. For students at University Y, the Knowledge Waqf Fund is a medium to channel contributions through cash. The goal of this fund is to be the main organiser of the giving of alms and knowledge contribution, to provide opportunities to people of all walks of life to carry out charitable activities and practise good deeds, and to act as facilitator and manager for charity and preaching at the university level. These funds are used for activities that may have a permanent impact on the prosperity and advancement of knowledge, special projects and students’ practical facilities, research infrastructure, publications and travellers’ (musafir) accommodation projects. There are four Optional Waqf schemes available: general, book, facilities and special vehicle schemes. University Z has funding to assist students through the Centre of Zakat, Sadaqah and Waqf, which has been operating since 9 May 1998 with consent given by the Selangor Islamic Religious Council (MAIS) to carry out zakat distribution and collection. This centre accepts payment for all types of zakat by utilizing computer systems. Collaboration with MAIS enables the collection and distribution of zakat across University Z’s system. Zakat collection was conducted in two main forms: cash collection (for all types of zakat) and collection by salary deduction (income zakat only).

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3.3. Infaq Instruments in Public Universities Universities W, X, Y and Z were the subject of observations about infaq at institutions of higher education because their infaq mechanisms have become a source of funding for those universities. The researcher also conducted an analysis using data obtained through structured interviews at six organisations that govern infaq at those universities. The interview method was selected to obtain data and information through in-person interviews with informants, in addition to retrieving information from websites and pamphlets. The purpose of the data and information analysis in this study was to analyse the actual status of infaq at institutions of higher education in Malaysia, to understand the governance system of infaq and to determine the constraints faced by infaq management in the relevant institutions of higher education. The Malaysian Ministry of Higher Education has granted autonomy to five PUs with a view to strengthening higher education. Indirectly, these measures will open the opportunity to all relevant universities to build a good reputation and to be competitive in the context of global challenges and developments. Elements of infaq that are found in higher educational institutions are zakat, sadaqah and waqf. The management of infaq in the PUs that participated in this study differed from each other – for example, the three elements of infaq were governed by the same organisation in Universities Z and Y, but by separate units in Universities W and X. Analysis of the information obtained through interviews with informants from all four universities indicated that the infaq available in the universities is in the form of zakat, sadaqah and waqf. The analysis found that the establishment of infaq – as in University X’s Zakat Centre, University Y’s Zakat and Waqf Centre, and the Centre of Zakat, Sadaqah and Waqf of University Z – has great potential to help finance higher education, especially through student financial aid.

3.4. Development and Potential of Infaq in Public Universities The observation and development of infaq has occurred at four PUs because these have the earliest and most complete infaq instruments, including zakat, sadaqah and waqf. However, the researchers only submitted data related to zakat, out of respect for the confidentiality policies of the organisation that governs the instrument of infaq. The zakat collection fund is the highest infaq fund, compared to the sadaqah and waqf collection funds, because the community has realised that zakat is an obligation for every Muslim. The zakat which has been received is the income zakat that is generated through the Salary Deduction Scheme of the university personnel themselves. This continuous flow of funds can assist the respective infaq management parties in applicable PUs to channel financial assistance to students who come from families which cannot afford to support them, as well as lowincome employees. On the other hand, while the sadaqah collection fluctuates, it is highest at University X compared to Universities W, Y and Z because there is a Salary

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Deduction Scheme among the staff of University X. Besides this, the sadaqah collection receives thousands of ringgit each week through the donation and sadaqah boxes placed in the mosque of University X every Friday, and the rental of seminar space, equipment and kiosks as well as through public contributions.

3.5. Issues and Challenges of Infaq in Public Universities The three elements of infaq, sadaqah and waqf are viewed as high-potential media; they are more flexible, so they help PUs to generate income and benefit that can enhance the progress of Malaysian education. Not only do they help students with living expenses but they can also help the university meet its welfare requirements by providing public facilities or financial support to the university community. Although the three elements of infaq play a very important role and have great potential in financing tertiary education, they are also inseparable from the constraints that restrict the provision of assistance, such as the lack of funds that occurred in Universities Z and Y. This issue needs to be addressed so that infaq can continue to assist the welfare of universities and their communities, thus helping to achieve a high-income economy for Malaysia. In addition, equitable management and administration are key pillars for optimal governance and can ensure the success and sustainability of waqf in higher education institutions (Mahamood & Abdul Munim, 2014).

3.6. Implication and Contribution of Infaq in Public Universities To this day, the infaq that is injected from zakat in the respective PUs plays a major role in helping students cover their subsistence, given that the cost of living in the vicinity of Kuala Lumpur and the Klang Valley is the highest in Malaysia. The applications that are received, processed and approved by the unit that manages infaq in PUs are governed by the condition that they meet the criteria of the zakat recipients (asnaf). Students who apply for infaq usually come from underprivileged families with household incomes below RM 3,000, depending on the respective family’s burden. Accordingly, infaq funding is seen as necessary to help fund education in Malaysia: not only to help less fortunate students but also for the continuity of studies in general at PUs. At the same time, infaq appears to be an alternative method of education financing in Malaysia, and all parties in Malaysian society should work together to spread the benefits obtained as a result of the practice of infaq to society. The public will then be able to participate in and contribute to the funding of infaq, and hence increase the amount of infaq fundraising. Indirectly, this can open opportunities for people who can channel assistance and share their wealth with those in need, with full faith and taqwa (the fear of God (Allah), in terms of protecting oneself from displeasing him) in order to bring themselves closer to Allah. This study also found that the benefits derived from waqf are broader than from zakat and sadaqah because the waqf fund is not attributable to only the eight groups of zakat recipients (asnaf). Zakat can be used in an even wider application such as the physical fabric of University Y. Waqf funds may be channelled to

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provide infrastructure that benefits the residents of the university: for example, in the form of a bus service that can be enjoyed by all members of the university community regardless of age, nationality, race or religion.

4. Conclusion A lack of funds, especially sadaqah and waqf funds, is due to a lack of individuals who donate their properties because of little awareness (lack of donors) and insufficient exposure of these possibilities (their applications is not sufficiently known) in the public. Information about infaq, whether the promotion of its organisation, its existence, its methods of collection and distribution and information on infaq funds distribution, should be disseminated using various methods such as mass and printed media, video advertisements or television programs: these are among the best examples for informing and motivating the Muslim community in Malaysia.

Acknowledgement This article is research produced under Grant LRGS entitled ‘Models of waqf financing, investment and development of higher educational institutions: a study in Malaysia and some selected countries (LR001C-2013B)’. We therefore extend our heartfelt appreciation to the Ministry of Higher Education for allocating funds for this research.

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PART II: WAQF

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Chapter 4

Cash Waqf From the Perspective of Majelis Ulama Indonesia (MUI) and the Scholars of Aceh: An Analysis Muhammad Ikhwan Mauluddin and Asmak Ab Rahman Abstract Purpose – Differing opinions about the status of cash waqf are not new among jurists. Several studies have been conducted relating to this issue. This chapter discusses cash waqf from the perspective of certain scholars in Indonesia, the Majelis Ulama Indonesia (MUI, Indonesian Scholars Council) and the scholars of Aceh, and the fatwa (opinion) on cash waqf. Methodology/approach – Data for this study were collected from interviews and academic literature to reach general and specific conclusions. The study was conducted in Aceh, Indonesia. Findings – Different views exist on the validity of cash waqf between the MUI and the scholars of Aceh. The MUI has declared that the practice of cash waqf is allowable and valid, while some scholars of Aceh reject it except when the cash is exchanged (istibdal) for permanent assets. Originality/value – MPU scholars and pondok scholars are not in agreement as to the legality of cash waqf. Pondok scholars reject the practice of cash waqf except if the money is substituted (istibdal) into a fixed asset. This is so even when many other scholars of Aceh ruled that cash waqf is still valid even if it is not converted into a fixed asset. Keywords: Cash waqf; fatwa of scholars; scholars of Indonesia

1. Introduction Waqf, or endowment, is sadaqah jariah (continuous charity) that confers continuing rewards upon the donor and lasting benefits to the public (Mahamood, 2007). A waqf is not merely a form of worship but a distribution of wealth that has an important role in enhancing the economic development and social equity New Developments in Islamic Economics, 49–66 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181004

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of a country. The broadening of the meaning of waqf in the current situation has received attention in some Muslim countries. The practice of waqf is a form of worship encouraged in Islam that was practised by Muslims throughout the religion’s expansion. Through waqf, Muslims can bring themselves closer to Allah. Furthermore, the socio-economic status of Muslims and of Islam itself can be developed and enhanced through the benefits derived from donated assets and funds. Moreover, donors who practise waqf will receive an endless reward from Allah even after death (Mahamood, 2002). From an economic aspect, waqf connotes the transfer of wealth from being exhausted to being profitable, with social equity turning it into a productive asset fruitful for the future of the individual and society (Kahf, 1998). The form of waqf assets is not limited to permanent property but can also be transferable, such as cash waqf (Mahamood, 2007). Cash waqf is often referred to as monetary waqf, which is, in Arabic, waqf al-nuqud. Its profits are used for charitable purposes for the sake of Allah. Cash waqf occurs when capital is maintained with the intention of pleasing Allah alone (Othman, 2015). Çizakça, however, defines cash waqf as a trust fund, established by using money to provide services to people in the name of Allah (Çizakça, 1995). According to the Majelis Ulama Indonesia (Indonesian Scholars Council or MUI), cash waqf is a waqf that is done individually, in a group, or institutionally, in the form of cash (Fatwa Commission of MUI, 2002). Furthermore, cash waqf, according to the MUI, is not only in cash but can also be in share certificates. Its real value should be maintained and it cannot be sold, gifted or inherited. People in Indonesia have been encouraged to practise cash waqf for more than a decade. However, its validity is still debated among Indonesian scholars. Scholars in Aceh are yet to agree on the permissibility of cash waqf. The Majelis Permusyawaratan Ulama (Scholars Consultative Council or MPU) in Aceh has not yet released a fatwa regarding cash waqf. Although the MUI’s fatwa has made it permissible to practise cash waqf, there is still controversy about cash waqf among scholars in Indonesia. Consequently, this chapter will discuss the validity of cash waqf from the perspectives of the MUI and the scholars of Aceh, both the MPU and scholars in pondok pesantren (Islamic boarding schools). This study utilises primary and secondary data. Primary data were obtained from reviewing the academic literature and from verbal interviews. Data were derived from the text of the MUI fatwa on cash waqf, and from interviews about the subject with the scholars of Aceh. The researchers interviewed 13 scholars in Aceh to obtain their opinion regarding the validity of cash waqf. Secondary data were obtained from books, journal articles and working papers related to cash waqf. Analysis was also made of the views of Indonesian scholars with reference to the dalil (evidence from the Qur’an or Sunna) of Islamic law that has been discussed by jurists regarding cash waqf.

2. The Ruling on Cash Waqf There is a difference of opinion among scholars regarding the validity of cash waqf, between the salaf (early) scholars and khalaf (late) scholars. The Imams of the four

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mazahib (schools of thought) have expressed their views on cash waqf. Imam Shafi’i does not allow an object to be donated as waqf if it does not retain its physical shape (‘ain) once it is used, such as dinar or dirham (Al-Kasani, 1997; Qudamah, 1992). Jurists who allow cash waqf require that the object retain its physical shape because donated money could be destroyed and result in the loss of the asset. In the Shafi’i mazhab (school of thought) there are two qawls (opinions), but the most popular is that transferrable assets cannot be donated as waqf. Similarly, the Maliki mazhab disallows the donation of transferrable assets as waqf (Taymiyah, 1987). Abu Hanifah does not clearly explain whether transferrable assets such as weapons and horses could be spent as waqf, even though they are useful. Abu Yusuf, a scholar of the Hanafi mazhab, opined that transferrable assets – such as livestock or weapons for the purpose of jihad – cannot be donated as waqf (Taymiyah, 1987). However, the scholars of the Hanafi mazhab have permitted dinar or dirham to be used as waqf because it has become an ’urf (custom) and has been widely practised in general society. Those scholars have allowed cash waqf on the basis of istihsan bi al-’urf, or acceptance of the customs (Al-Zuhayli, 1995). Scholars of the Hanbali mazhab have ruled that cash waqf is permissible. Ibn Taymiyah said that cash waqf is permissible, although not specifically because, at that time, cash waqf was not yet recognised (Taymiyah, 1987). The Hanbali mazhab insists that funds raised from donated cash waqf must be invested in a mudarabah1 form of investment. The above-mentioned differences of opinion are to be expected because there are no clear dalil texts from the Qur’an and Hadith regarding cash waqf. Nevertheless, contemporary scholars have chosen those opinions permitting cash waqf due to its advantages, plus the sustainability of the money when invested in mudarabah. In Malaysia and Indonesia, for example, scholars have agreed on its permissibility. In Malaysia, cash waqf was permissible in Islam after a fatwa by the 77th National Council of Islamic Religious Affairs Malaysia, Fatwa Council, which met on 10–12 April 2007 in Kuala Terengganu (Perbadanan Wakaf Selangor, 2012). In Indonesia, the MUI has permitted cash waqf following its fatwa, provided that the funds of the cash waqf are put into certain forms of investment (Fatwa Commission of Majelis Ulama Indonesia, 2002). In the 15th session of the International Islamic Fiqh Academy in Oman, which was held between 15 and 20 March 2004 (6–11 Muharram AH 1425), scholars discussed the permissibility of cash waqf. That meeting ruled that cash waqf is jawaz (permissible) (Anon, 2010).

3. Cash Waqf According to the Majelis Ulama Indonesia Ulama are those scholars who have profound knowledge about religion. Not everyone with knowledge is referred to as a scholar, only those who have expert knowledge of Islam have the privilege of being called scholars.

1

Mudarabah is an Islamic contract in which one party supplies the money and the other provides management expertise to undertake a specific trade.

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The MUI is a government association of scholars in Indonesia. The council has given definitions of waqf and cash waqf. According to MUI (Departemen Agama RI, 2003), waqf is: ‫ﺣﺒﺲ ﻣﺎﻝ ﻳﻤﻜﻦ ﺍﻹﻧﺘﻔﺎﻉ ﺑﻪ ﻣﻊ ﺑﻘﺎﺀ ﻋﻴﻨﻪ ﺃﻭ ﺃﺻﻠﻪ ﺑﻘﻄﻊ ﺍﻟﺘﺼﺮﻑ ﻓﻲ ﺭﻗﺒﺘﻪ ﻋﻠﻰ ﻣﺼﺮﻑ‬ ‫ﻣﺒﺎﺡ ﻣﻮﺟﻮﺩ‬ Translation: Withholding an asset that could be used, without spoiling its original physical shape (‘ain) or its origin, by not taking any action against the asset (such as selling, giving, or inheriting), so that it could be spent (its profits) on an existing permissible (not illegal) matter. From this definition, it is understood that waqf is any valuable asset in the eyes of sharia which has two properties: it is beneficial, and it maintains its physical shape after use. The MUI’s definition of waqf is almost identical with that of the Shafi’i mazhab scholars Al-Zuhayli (1995) and Al-Sharbini (1978), which is: ‫ﺣﺒﺲ ﻣﺎﻝ ﻳﻤﻜﻦ ﺍﻹﻧﺘﻔﺎﻉ ﺑﻪ ﻣﻊ ﺑﻘﺎﺀ ﻋﻴﻨﻪ ﺑﻘﻄﻊ ﺍﻟﺘﺼﺮﻑ ﻓﻲ ﺭﻗﺒﺘﻪ ﻋﻠﻰ ﻣﺼﺮﻑ ﻣﺒﺎﺡ ﻣﻮﺟﻮﺩ‬ Translation: Withholding an asset that could be used, without spoiling its original physical shape, by not taking any action against the asset (to sell, give, or inherit), so that it could be spent (its outputs) on an existing permissible (not illegal) matter. There is a difference between the definitions of the scholars of the Shafi’i mazhab and the MUI, which is the addition of a word in the definition of waqf by the MUI. In MUI’s definition, there is an addition to the phrase ‘‫ ’ﻣﻊ ﺑﻘﺎﺀ ﻋﻴﻨﻪ‬which becomes ‘‫’ﺃﺻﻠﻪ ﻣﻊ ﺑﻘﺎﺀ ﻋﻴﻨﻪ ﺃﻭ‬, which means to not change the asset’s ’ain (original physical shape). This means that there are certain criteria for the form of waqf assets, such as its origin or its conservation to waqf. The durability of waqf (ta’bid) concerns the nature of the asset, such as conserving the value of currency. The features of conserving waqf indicated by the MUI are not only the preservation of the original physical shape of the asset after use (baqa ‘ainihi) but also the original characteristics of the asset (baqa aslihi). The MUI’s definition of cash waqf is: Cash waqf (monetary waqf, waqf al-nuqud) is a waqf that could be done individually, in a group of people, institutionally, or by a legal entity in the form of cash (Fatwa of Majelis Ulama Indonesia, 2002). Additionally, according to the MUI, cash waqf also includes share certificates such as securities or Islamic bonds,2 as mentioned in the fatwa: ‘Securities or bonds are included in the definition of money’ (Fatwa of Majelis Ulama Indonesia, 2002). 2

Islamic bonds are certificates of ownership of a pool of underlying assets, in which the certificates are equal of value, issued with the aim of using the mobilised funds for establishing a new project, developing an existing project or financing a business activity according to their respective shares (Suruhanjaya Security Malaysia, 2010).

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The concluding fatwa No. 2 of 2002 by the MUI regarding cash waqf rules it jawaz (permissible). The MUI has provided guidelines for the implementation of cash waqf so that it is done according to sharia. Guidelines for the implementation of cash waqf in Indonesia include the following:

(1) Cash waqf can only be given and used in matters that are permissible by sharia (‫)ﻣﺼﺮﻑ ﻣﺒﺎﺡ‬. (2) The currency value of the cash waqf must be guaranteed to be maintained and cannot be sold, donated or inherited.

4. The Arguments of the MUI Regarding Cash Waqf There is no verse in the Qur’an that specifically rules on cash waqf. However, through some verses from the Qur’an and the Hadith, scholars have produced a ruling that concerns this waqf using their ijtihad (‘independent reasoning’). The majority of scholars understand the requirement of waqf from the text of the Qur’an through the word anfiqu, which means ‘spend’, or from the Hadith text that reads sadaqah al-jariyah, meaning ‘charity of continuous reward.’ Then, through the ijtihad of the scholars, the ruling and discussion concerning waqf has been expanded. With the progress of time, waqf in monetary form, such as dinar and dirham, has appeared in society, to the degree that some scholars of different mazahib have varied in their rulings on cash waqf. This is due to different understandings from the Hadith of what is generally considered waqf. According to the MUI, the general dalil in the Qur’an that is related to the ruling of cash waqf, though indirect, is from Surah al-Baqarah 215, 254 and 267, Surah al-Imran 92 and some Hadiths, as well as the ijtihad of the scholars of the mazahib. The MUI’s understanding of the dalil of cash waqf is based on the meaning of the Hadith text which was narrated by Ibn Umar (Muslim, Hadith No. 1632) which reads: ‫ﺼ ٰﺪ ْﻗ َﺖ ِﺑ َﻬﺎ‬ َ ‫ِﺇ ْﻥ ِﺷ ْﺌ َﺖ َﺣَﺒ ْﺴ َﺖ ﺃَ ْﺻﻠَ َﻬﺎ َﻭَﺗ‬ Translation: If you want to keep its origin and donate its outputs3 According to the MUI, the above Hadith means that the durability of the waqf is in its nature, such as the durability of the currency. Therefore, according to the MUI, the element of durability means not only preserving the original physical shape of the asset after using it (baqa ‘ainihi) but also the characteristics of the waqf (baqa aslihi). To understand this Hadith text, the MUI has extended the existing meaning of waqf by adding aw baqa’ aslihi, which has become an argument for cash waqf in its fatwa. In another argument regarding cash waqf, the MUI has considered the istihsan bi al-’urf. It is understood that the Hanafi mazhab also allowed the practice of dinar and dirham waqf because, at that time, the endowment of dinar and dirham occurred as an Another interpretation of the Hadith is ‘Stop any action against it, and take its benefits.’

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’urf (custom) which was practised in Islamic society. Therefore, the permissibility of cash waqf by the MUI is not new but has been a custom practised in the past. The MUI finalised its ruling on cash waqf in Indonesia by giving the reasons behind its fatwa. First was the opinion of al-Zuhri, who stated that the endowment of dinar is permissible, provided that the dinar is used as a capital and the profits are given to the mauquf ’alaih (the recipients of waqf). Secondly, the mutaqaddimin (contemporary) scholars of the Hanafi mazhab allow the endowment of dinar and dirham as an exemption on the basis of istihsan bi al-’urf, based on the Sunnah (atsar) Abdullah bin Mas’ud (Hanbal, 1998), namely: ‫ﻓﻤﺎ ﺭﺃﻯ ﺍﻟﻤﺴﻠﻤﻮﻥ ﺣﺴﻨﺎ ﻓﻬﻮ ﻋﻨﺪ ﺍﻟﻠﻪ ﺣﺴﻦ ﻭﻣﺎ ﺭﺃﻯ ﺳّﻴﺌﺎ ﻓﻬﻮ ﻋﻨﺪ ﺍﻟﻠﻪ ﺳّﻴﺊ‬ Translation: What is considered good to the Muslims, then it is good in the sight of Allah, and what is considered bad to the Muslims, then it is bad in the eyes of Allah. The meaning of the above statement is that the mutaqaddimin scholars of the Hanafi mazhab have allowed cash waqf due to the practice of the general Muslim community (al-’urf). The third reason is the opinion of some Shafi’i mazhab scholars, which is the opinion of Abu Thawr, who narrated from Imam Shafi’i himself the permissibility of the endowment of dinar or dirham: ‫َﻭ َﺭ َﻭﻯ َﺃُﺑ ْﻮ َﺛ ْﻮ ٍﺭ َﻋ ِﻦ ﺍﻟ ٰﺸﺎ ِﻓ ِﻌﻲ َﺟ َﻮﺍ َﺯ َﻭ ْﻗ ِﻔ َﻬﺎ َﺃ ْﻱ ﺍﻟﺪﻧﺎﻧﻴﺮ ﻭﺍﻟﺪﺭﺍﻫﻴﻢ‬ Translation: Abu Thawr has narrated from Imam Shafi’i the permissibility of the waqf of dinars and dirhams (money). The permissibility of dinar and dirham endowment by the MUI was cited from the writings of Al-Mawardi in his book al-Hawi al-Kabir, from the explanation of Abu Thawr. Nevertheless, Al-Mawardi emphasises that the permissibility of cash waqf does not damage the original shape of the dinar and dirham (Al-Mawardi, 1994). In the opinion of Al-Mawardi, waqf in the form of dinar and dirham (cash waqf) by way of renting it (taking its benefits) without destroying its origins is not valid. This is because, according to some Shafi’i mazhab scholars, the dinar or dirham is not valid, even if their origins are not destroyed. The final reason the MUI gave for its fatwa on cash waqf is that the need to review and refine of the definition of waqf is well known. The Hadith among the other narrations of Ibn Umar was: ‫ﺍﺣﺒﺲ ﺃﺻﻠﻬﺎ ﻭﺳﺒﻞ ﺛﻤﺮﺗﻬﺎ‬ Translation: Keep its origins, and donate its outputs. The waqf that is widely known is prevalent in the fiqh of the Shafi’i mazhab, which is explained as: Keeping a property that could be utilized while its original shape or its substance are preserved from vanishing of the substance by not taking any action against the property (sell, donate, or give), for the distribution of its outcomes on a place (goal) that is permissible (not haram).

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Therefore, by broadening the definition of waqf from that understanding, the durability of the mauquf (endowed object) is permissible. The element of durability from this conception of waqf only considers the waqf’s substance (’ain) and does not include its characteristics. Therefore, broadening the definition of waqf can allow re-interpretation of its meaning to be more relevant to contemporary economic social circumstances. The MUI has added the word ‘‫’ﺃﻭ ﺃﺻﻠﻪ‬, which means that the origin of the property should not be forgotten. This addition was made so that the durability of the asset would also be considered in the nature of the asset. Therefore, endowment of cash without a decrease in its value is permissible (jawaz) and is compatible with the MUI fatwa. The MUI’s consideration of the evidence regarding cash waqf concludes discussion of this fatwa. The MUI decided with haste when ruling on the permissibility of cash waqf before considering the objectives of the dalils. The considerations of the MUI are explained in the following sections.

4.1. Developing or Reviewing of the Definition of Waqf Generally, the MUI considers that Muslim society in Indonesia has only a limited comprehension of waqf. The MUI’s publicised considerations should not have been limited to the perspective of the Shafi’i mazhab alone, in order for a wider comprehension of waqf by Muslims to develop. The MUI summarised the concept of waqf as indicated above. The meaning and characteristics of waqf assets were included as guidelines in the Compilation of Islamic Rulings in Indonesia, which defines waqf as ‘The action of an individual, a group of people, or an institution, of giving a share of property in accordance with the teachings of Islam’ (Basri, 1999). Furthermore, the Compilation also defines assets that can be endowed as ‘Any moveable or immoveable asset that has a durability that is not used only once, and has a value according to Islam’ (Basri, 1999).

4.2. Cash Waqf Is Flexible and Has Great Benefit Cash waqf is flexible and gives the donor greater possibilities than general waqf (Departemen Agama, 2007). This is because the Cash Waqf Certificate can be made into divisions of different values which suit the donor, such as Rp. 20.000, Rp. 50.000 or Rp. 100.000.4 This allows all levels of society, whether of low or high income, to partake in cash waqf. Furthermore, money also has great potential as an instrument for improving a Muslim society’s social and economic development, both from a purely economic standpoint as well as for spiritual and social welfare, such as the construction of mosques, houses and the development of land (Suhaimi, 2012). Therefore, the

The exchange rate of the ringgit to the rupiah is RM 1 5 Rp 3,300.00 ($0.26 USD).

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MUI has considered, in its ruling on cash waqf, the role of maslahah in improving the well-being of the Muslim community.

5. Cash Waqf According to the Scholars of Aceh The scholars of Aceh differ in their judgement regarding the meaning of cash waqf. This arises from a different understanding of waqf itself and whether cash can be donated as waqf. MPU in Aceh has defined waqf as: Endowing a sum of asset in a form of cash, where it is invested and managed as it is and the outputs are given to a specific party without losing its original shape or the capital of the cash that was endowed (Scholar D, 2015). Based on this definition, the MPU understands cash waqf as waqf donated in the form of cash. The collected money serves as capital, while the profits are used for specified charitable purposes. Furthermore, cash waqf retains its original value (asl al-mal), where that cash (which was used as capital) can be maintained. Some scholars in Aceh have agreed that cash waqf is that waqf that is donated in cash or waqf al-nuqud (MPU Scholar, 2015). This definition was offered by many scholars in Aceh. However, they differed in their views on whether it can be acknowledged or not if donated in the form of cash. ‘Cash waqf is the waqf that is given to banks, and its interest that would benefit from’ (Scholar I, 2015). However, the pondok scholars of Aceh understood cash waqf as handing over cash to a bank as capital for the profits of that cash to be a benefit. The understanding of waqf in Aceh is yet to develop because its definition of and the ruling on it has not been further debated among the MPU scholars in Aceh. The majority of Aceh’s community is not aware of the meaning of cash waqf, as stated by Position A of the MPU: …this term has not yet developed in Aceh, such as saving money and that money growing. It has never been further discussed, and it is among the topics to be discussed in the future (Scholar A, 2015). The scholars of Aceh have not agreed on the permissibility of cash waqf. They have two differing opinions regarding this.

5.1. Allowed/Cash Waqf Is Permissible The majority of MPU scholars are of the opinion that cash waqf is valid. This opinion was adopted by members of MPU, Aceh. Seven out of eight MPU scholars who were informants for this study have stated that cash waqf is valid. Table 1 illustrates in detail the validity of cash waqf.

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Table 1: The Views of Aceh Scholars Regarding the Validity of Cash Waqf. Group of Scholars

Name of Scholar

Ruling on Cash Waqf

MPU MPU MPU MPU MPU MPU MPU

Scholar Scholar Scholar Scholar Scholar Scholar Scholar

Permissible/valid Permissible/valid Permissible/valid Permissible/valid Permissible/valid Permissible/valid Permissible/valid

Aceh Aceh Aceh Aceh Aceh Aceh Aceh

A B C D E F G

Position

Position Position Position Position Position Position Position

A B D E E E E

Source: Interviews with the scholars of Aceh.

According to Table 1, MPU Aceh is strongly favourable to allowing cash waqf. The majority of MPU scholars have stated that donating cash for waqf is valid, whether it is in the form of istibdal (exchange) to a durable asset, or it is invested in any mudarabah investment.

5.2. Invalid/Cash Waqf Is Not Permissible The opinion of the majority of MPU scholars contradicts the opinion of some others. Most scholars who are against cash waqf are pondok scholars, with only one MPU scholar not acknowledging the validity of cash waqf. This is detailed in Table 2.

Table 2: The View of Aceh Scholars Regarding the Validity of Cash Waqf. Group of Scholars

MPU Aceh Pondok scholar Pondok scholar Pondok scholar Pondok scholar Pondok scholar

Name of Scholar

The Ruling of Cash Waqf

Scholar H Scholar I

Not permissible/invalid Not permissible/invalid

Scholar J

Not permissible/invalid

Scholar K

Not permissible/invalid

Scholar L

Not permissible/invalid

Scholar M

Not permissible/invalid

Source: Interviews with the scholars of Aceh.

Position

Position C Pondok leader in Pondok A Pondok leader in Pondok B Pondok leader in Pondok C Pondok leader in Pondok D Pondok leader in Pondok E

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This table demonstrates that all pondok scholars in Aceh reject the validity of cash waqf. Besides these, only one MPU scholar does not recognise the validity and permissibility of cash waqf. These scholars do not allow cash waqf, except in the form of istibdal to durable assets such as the purchase of lands or buildings. However, the scholars of Aceh do not consider istibdal a form of cash waqf but a normal type of waqf. We say that giving waqf as cash capital to somebody is not waqf, because waqf is not like that (Scholar L, 2015). That would not be a cash waqf. In my opinion, the inspector of the mosque is a representative for the donator of the waqf for purchasing. In that case, there is no problem because it is not cash waqf. It is a representation (Scholar C, 2015). The dispute in Aceh between the pondok scholars and the MPU scholars has created two parties, one supporting the practice of cash waqf and the other rejecting it. The first group is the majority that agrees with the practice of cash waqf: scholars led by MPU Aceh and its chairman. On the other hand, the second group rejects the practice of cash waqf: all pondok scholars in Aceh and only one from the MPU. They disagree with the practice of cash waqf except for cash that is exchanged for a durable asset (istibdal).

6. The Arguments of Aceh Scholars Against the Dalils of Cash Waqf Pondok scholars in Aceh do not acknowledge the definition of cash waqf or donating cash for waqf. Their argument is that cash money cannot be considered an asset because the currency rate changes from time to time and it is exchangeable – it does not keep its original form. Therefore, the definition of cash waqf is not accepted by the pondok scholars of Aceh. Giving an amount of cash and saving it at an institution in order to obtain a profit for the path of Allah is not considered as waqf, but it is allowable to invest it and spend the profits for the needs of the community. It is recommended, but it is not waqf. It is more suitable for it to be called sadaqah or zakat. Waqf cannot be exchanged or sold (Scholar H, 2015). The argument of the pondok scholars who do not acknowledge cash waqf is based on the fact that cash, as a mauquf (endowed object), is transformed and lost after being spent. They argue that a practice such as cash waqf should not be categorised as waqf but instead should be under other sadaqah practices, such as hibah (gifting) or infaq (disbursement). Moreover, a group of pondok scholars have strongly asserted that money spent as capital cannot be termed waqf.

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The MPU’s definition contradicts that of the pondok scholars because a group of the latter does not acknowledge cash as a waqf asset. They are of the opinion that cash waqf, kept in a waqf fund for spending in the path of Allah, cannot be called waqf. The argument of the pondok scholars revolves around the concept that money donated to a sharia-compliant investment and its profits is not called a waqf but, instead, sadaqah, hibah or zakat (Scholar H, 2015). Scholars in Aceh follow the Shafi’i mazhab in fiqh issues. The pondok scholars – and the MPU scholars – are against the practice of cash waqf for a number of reasons.

6.1. The Cash Will Be Lost After Spending It The pondok scholars argue that the endowment of dinar and dirham (cash waqf) by renting them (taking their benefits) without losing their origins is not valid. They are of the opinion of the Shafi’i mazhab scholars, who state that dinar or dirham is invalid for endowment, even if the ‘ain of its waqf is not destroyed. Because cash cannot be retained after it is spent, its element of durability is lost after exchange or its use for purchase. Money loses its physical shape after expenditure, leading these scholars to question its durability and whether it is retained after use as capital. Because there’s no benefit from cash except for istihlak, when we give it away it is gone and it is transferred into something else (Scholar J, 2015). Declines in currency rates can also cause money to lose value. Nominal money is prone to inflation, and so the pondok scholars claim that it will have no value in the next four years, affecting the true meaning and purpose of waqf. The outcomes of currency inflation do not fit in this case; say we save 4 million rupiah this year: after four years, what could happen the value of the 4 million rupiah? It is definitely going to inflate to 10 million. That is not waqf anymore (Scholar J, 2015). Currency is a measure of value. Therefore, there is no guarantee that 10 million rupiah will retain its value after 4 years; there will, rather, be a continual decline in its value over even shorter periods. Thus, following these arguments regarding inflation, some of Aceh’s pondok scholars claim that inflationary conditions will affect the value of money and cause it to be unstable (Scholar I, 2015).

6.2. Money Is Not an Asset; Rather, It Is the Value of an Object Many scholars in Aceh do not categorise cash waqf under waqf because money is not considered an asset but, rather, a value of something else, or the value of the currency.

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Muhammad Ikhwan Mauluddin and Asmak Ab Rahman Objects that are donated for waqf are permanent objects; however, money is not a permanent object (Scholar I, 2015).

According to these scholars, paper money is a means of payment. Thus, a banknote is just a piece of paper that does not provide any benefit in itself. Therefore, money cannot be used as a mauquf ‘alaih (the recipients of waqf) (Scholar J, 2015). This has led to debate among scholars in Aceh about the matter of movable properties (al-manqul). In this case, money is classified as immovable property – perishable and non-durable – and its physical ‘ain disappears after use. Thus, the scholars argue, money is unable to conform to the criterion of durability, which is the basis of the legality of waqf.

6.3. The ’Ain of the Waqf Has Been Changed or Transferred Money is perishable and non-durable; from the perspective of the physical ‘ain of the cash waqf, it is also easily exchanged with another currency. According to the pondok scholars, the physical ‘ain of waqf properties must be permanent and should not be changed to another physical ‘ain (currency). In reality, the currency can be exchanged with another currency, retaining the value of the money. According to the pondok scholars in Aceh, the value of the endowed money (mauquf) still exists as it was, but originally the mauquf was changed and transferred. In fact, the essence (’ain) of the waqf has not yet been manifested. The argument of pondok scholars is that the ‘ain of the waqf cannot be transferred, replaced or lost (Scholar J, 2015). In other words, the benefit of money cannot be obtained without using it, whether by exchange or replacement.

6.4. Banknotes Did Not Exist During the Time of the Prophet Another issue raised against cash waqf is that this form of waqf did not exist during the time of Prophet Muhammad s.a.w. In his time, dinars and dirhams were present as a medium of exchange, but the Prophet and his companions never endowed dinars or dirhams. Thus, their practice was that they only endowed lands, orchards and other properties, but not cash (Scholar I, 2015). Therefore, the pondok scholars in Aceh have criticised cash waqf in our time because dinars and dirhams were available at the time of the Prophet and his companions, but cash waqf was not known then.

7. The Response of MUI Scholars in Aceh Concerning Cash Waqf The MUI affirmed the validity of cash waqf through its fatwa regarding the matter in 2002. This fatwa was generally accepted by a majority of scholars and amongst societies in Indonesia. Therefore, there has been no issue with the fatwa, and the practice of cash waqf has developed in Indonesia for several decades. However, the fatwa was controversial among the scholars of Aceh. Some agreed with it and others did not. The majority of the pondok scholars in Aceh did

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not. The fatwa contradicted the majority view of those scholars which did not allow the use of money as waqf, unless exchanged (istibdal) with a permanent asset. ‘I do not agree if … the object of concern was just money’ (Scholar K, 2015). The pondok scholars do not agree with the fatwa of the MUI because money is not valid as an ‘ain for waqf. They do agree if the money is replaced or used to buy a durable asset, such as land or a building, and the mauquf in this case is the land or the building and no longer the money. They require the ‘ain of waqf to be a durable asset over a long period of time. The argument put forward by the pondok scholars is that benefit is derived from money over a long period only if it is used once or multiple times. Moreover, waqf should retain its ‘ain until the benefit is had from it multiple times (Scholar K, 2015). Many issues were raised by these scholars in Aceh who disagreed with the fatwa of the MUI. The first issue is that waqf in the form of money does not keep its ‘ain. They claim that the cash waqf only keeps its name, but the ‘ain is no longer exists because the money that was endowed is no longer the same. For instance, a person may pay a capital for an investment worth ten million rupiahs. Although its value permanently exists, the ‘ain of this waqf is lost and replaced by other currency. In short, the understanding of waqf among Pondok scholars is that the physical ‘ain must be permanent for a long term. However, why not use the money to purchase a permanent asset as a waqf, and other people will be given its profits, such as purchasing a store? (Scholar I, 2015). This pondok scholar has criticised the MUI fatwa concerning cash waqf from the perspective of the mechanism applied in cash waqf. He claimed that the ‘ain of cash waqf cannot be retained for it to be a waqf asset; however, he recommended that the money intended for waqf to be changed into a permanent asset, such as a shop building, and then that shop would become the waqf asset (mauquf). On this basis the pondok scholars have rejected the fatwa released by the MUI about the authenticity of cash waqf. If this ruling is based on the value of the ‘ain durability of waqf, then the ruling is not true in the opinion of Aceh’s pondok scholars because waqf should last over a long period of time and in the same form (Scholar K, 2015). The second issue is that the scholars in Aceh strictly hold the views of the Shafi’i mazhab. Therefore, the majority of pondok scholars have rejected the fatwa of the MUI because it does not accord with what they have studied in the books of this mazhab. That’s a matter of ijtihad … We still hold to the ijtihad of the Shafi’i mazhab and the classical books (Scholar I, 2015). Many pondok scholars in Aceh follow the opinions of the Shafi’i mazhab. Arguments which refer to this do not allow the endowment of cash on an ongoing

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basis. Among the Shafi’i scholars, the validity of cash waqf has also been discussed. They have stressed the principle of the durability of the waqf asset, which is an ongoing topic of debate amongst them. The majority of Shafi’i scholars disagree with the use of cash as an endowment because it is not durable and is easily destroyed. The famous opinions of the Shafi’i mazhab do not allow the endowment of an object with a non-durable ‘ain after use, such as dinars and dirhams (Al-Kasani, 1997; Qudamah, 1992). The third issue is the perspective of lawfulness. According to pondok scholars in Aceh, cash waqf is involved with riba (interest) transactions. Money that is invested in any banking sector is exposed to riba. About depositing 10 million rupiahs in a bank and taking riba, we have not reached that level of knowledge yet (Scholar I, 2015). Scholar I, an influential pondok scholar in Aceh, claimed that cash waqf that is invested in any form of specific investment entails riba, which is forbidden in Islam. According to his view, profits gained from cash waqf investments are based on interest, which falls under riba. For this reason, this scholar rejects the fatwa on cash waqf. However, some scholars in Aceh agree with the fatwa of the MUI. They recognise its validity and accept the practice of cash waqf. The majority are scholars of MPU Aceh. They share the same opinion and support the fatwa of the MUI being practised among the people of Aceh. Some scholars from MPU Aceh have provided feedback on the fatwa of MUI. They agree with it and acknowledge the permissibility (mubah) of cash waqf and that its practice is allowable in Islam. In addition, the fatwa of the MUI was derived from the opinions of Shafi’i mazhab scholars. The majority of MPU scholars strongly agree with the MUI fatwa because the ruling of cash waqf was already given a fatwa by some classical scholars and also by some scholars of the four mazahib. When the MUI released its fatwa on validating cash waqf, it considered the opinions of the scholars and imams of the Shafi’i mazhab who allowed the endowment of cash for the Muslim public. Scholar D, a scholar from the MPU in Aceh in the field of fatwa, explained the importance of practising cash waqf at present by Muslims in Aceh. Nowadays, it is difficult for many Muslims to donate durable assets for waqf, such as lands and buildings, because it is hard to obtain them in comparison to money. Muslims in Aceh tend to save their wealth in the form of money to the degree where they feel more inclined to donate it as waqf (Scholar D, 2015). The fatwa of the MUI was studied thoroughly by MPU scholars in Aceh, who found it very acceptable. Both the MPU and MUI are monitored by the Indonesian government. Thus, although the MPU has not specifically yet ruled on cash waqf, the fatwa of the MUI can be applied in Aceh (Scholar A, 2015). Debate between the scholars of Aceh regarding the fatwa on cash waqf derives from their understanding of the preservation of the physical ‘ain of the money. According to these scholars, money could be preserved by investing it in mudarabah investments or sharia deposits (Scholar C, 2015).

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The differences of opinion regarding the MUI fatwa centre on the basic substance of cash waqf, with concerns about preserving its physical ‘ain, must be durable and long-lasting. In this particular case, the physical ‘ain of money is said by the majority of dissenting scholars to be non-durable, which makes the MUI fatwa about cash waqf unacceptable to them. On the other hand, the scholars who accept this fatwa justify it by arguing that the ‘ain of money could be everlasting and durable by investing it and using the profits as waqf benefits. This view was put forward by the majority of MPU scholars. If differences of opinion are inescapable in implementing rulings in Islam, they are even more intense in khilafiyah issues, such as cash waqf. In this instance, there is more than one opinion regarding the ruling about cash waqf. The fatwa of MUI concerning cash waqf should be studied comprehensively by scholars in Aceh because the fatwa cannot be seen from the perspective of the Shafi’i mazhab alone but must also consider the opinions of scholars from other mazahib. There is no current debate or scholarly discussion between the scholars of Aceh regarding cash waqf. Therefore, the dispute has not achieved a conclusive ruling in Aceh, and opinions are divided for and against it. According to the current researchers, the MUI fatwa on cash waqf could be taken as a basis for Muslim society in Aceh to practise cash waqf since the scholars of Aceh – whether among the MPU scholars or pondok scholars – have not yet sufficiently studied the issue. The majority of pondok scholars do not oppose the fatwa of the MUI but, rather, do not acknowledge the validity of cash waqf and are in disagreement with the MUI regarding its permissibility. In order to establish a final ruling on cash waqf and whether it is acceptable to the majority of Aceh’s scholars, further debate on the issue is required among them.

8. Conclusion The debates about the fatwa or the opinions of the scholars in Indonesia, and especially in Aceh, are of great interest. The fatwa on cash waqf was released by the MUI in 2002, and there have since not been any problems concerning the validity of cash waqf. However, this is different in Aceh, where the majority of scholars have been in dispute about the validity of cash waqf. The opinions of Indonesian scholars about cash waqf are illustrated in Table 3.

Table 3: The Validity of Cash Waqf According to MUI and Scholars in Aceh. The Definition of Cash Waqf Ulama

MUI MPU Aceh Pondok scholars

The Ruling on Cash Waqf

Istibdal

Investment

Istibdal

Investment

√ √ √

√ √ –

√ √ √

√ √ –

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Muhammad Ikhwan Mauluddin and Asmak Ab Rahman

For the scholars of MUI and MPU Aceh, endowing cash is permissible because its physical ‘ain is permanent, even if the waqf asset is damaged or changed: the cash is durable because it retains its value. Scholars from the Shafi’i mazhab and Maliki mazhab and some correct opinions from the Hanbali mazhab allow the endowment of movable assets, with the condition that they provide continual benefit (Al-Sharbini, 1978). The scholars of MPU Aceh are of the opinion that cash waqf could be invested in mudarabah investments, such as investing in any Islamic bank. The returns of the investment are then donated to parties that are specified by the endower, or exchanged (istibdal) with a permanent asset, such as buildings or lands. Pondok scholars reject the practice of cash waqf by arguing that endowing rupiahs will only be beneficial until their physical ‘ain expires or dissipates once used. The physical ‘ain of money will be lost once it is changed into the physical ‘ain of another currency. However, pondok scholars allow cash waqf in the form of istibdal, on condition that the money be used to purchase a durable asset, such as a land to build a mosque. Therefore, such an opinion fulfils the standards set by a number of mazahib, such as the Shafi’i, Maliki and Hanbali, which is that the benefit of the money should be continuous after it is changed into a permanent asset (Ibn Abidin, 1994).

Table 4: Summary of the Views of Scholars in Indonesia About the Validity of Cash Waqf. The Opinions of MUI and Scholars of Aceh

Principle

Mechanism

Implications

Accepting

Rejecting

In accordance with the prophetic tradition

The physical ‘ain of the waqf asset must be durable and permanent Cash is not an asset

In accordance with the fatwa of the mazahib scholars regarding cash waqf Preserving the ‘ain of money by preserving its value Through mudarabah or istibdal to a permanent asset Facilitates the welfare of the community

The istibdal to a permanent asset is permissible Cash waqf by way of investment is prone to riba Cash waqf is not the solution to improving the economy of a Muslim society

Source: Modified from the fatwa of MUI and interviews with scholars in Aceh.

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The dispute among the scholars of Aceh is not too drastic because MPU Aceh has not yet released a fatwa on the validity of practising cash waqf, which has not been formally discussed by the MPU. The dispute about the validity of cash waqf among the MPU Aceh and pondok scholars in Aceh has not involved a fatwa that forbids the practice of cash waqf (see Table 4). A khilafiyah matter like the practice of cash waqf has not become a major issue for scholars in Aceh because it falls under the ruling of khilafiyah in Islam. What can be observed from this dispute is that both groups do not share the same view about the nature of cash waqf, preventing a solution to this dispute. Regardless of the arguments that would be raised, it is undeniable that the difference of opinion among the scholars is not wrong.

References Al-Kasani, A. B. (1997). Bada’i al-Sana’i fi Tartib al-Shara’i (Vol. 6). (‘Adil Ahmad Abd al-Maujud & ‘Ali Muhammad Muawwad, tahqiq). Beirut: Dar al-Kutub al-‘Ilmiyyah. Al-Sharbini, M. K. (1978). Mughni al-Muhtaj ila Ma’rifah Ma’ani Alfaz al-Minhaj al-Talibin (Vol. 2). Beirut: Dar al-Fikr. Anon. (2010). Al-Tanawwu’ al-Islami: Qararat al-Dawrah al-Khamisah ‘Ashrah li Majlis Majma’ al-Fiqh al-Islami. Retrieved from http://www.muslimdiverty.net/ news/fatwas/2010-04-26-794.html. Accessed on 9 September 2015. Basri, C. H. (1999). Kompilasi Hukum Islam dalam Sistem Hukum Nasional (1st ed.). Jakarta: Logos Wacana Ilmu. Çizakça, M. (1995). Cash waqfs of Bursa, 1555–1823. Journal of the Economic and Social History of the Orient, 38(3), 313–354. Direktorat Pemberdayaan Wakaf. (2007). Pedoman Pengelolaan Wakaf Tunai (4th ed.). Jakarta: Departemen Agama RI. Hanbal, A. (1998). Musnad al-Imam Ahmad Ibn Hanbal (Vol. 1). Beirut: Dar Sadir. Ibn Abidin, M. A. (1994). Radd al-Mukhtar ‘ala al-Durr al-Mukhtar Sharh Tanwir al-Absar (Vol. 6). Beirut: Dar al-Kutub al-‘Ilmiyyah. Kahf, M. (1998). al-Waqf fi al-Mujtama’ al-Islami al-Mu’asir. Qatar: Markaz al-Buhuz wa al-Dirasat. Mahamood, S. M. (2002). Bagaimana Membuat Wakaf. Kuala Lumpur: Jabatan Syariah dan Undang-Undang, Universiti Malaya. Mahamood, S. M. (2007). Pembentukan dana wakaf menurut perspektif syariah dan undang-undang serta aplikasinya di Malaysia. Jurnal Syariah, 15(2), 61–83. Majelis Ulama Indonesia. (2002). Wakaf Uang. Retrieved from http://mui.or.id/mui/ produk-mui/fatwa-mui/fatwa-komisi-fatwa-mui/wakaf-uang.html. Accessed on January 28, 2015. Majelis Ulama Indonesia. (2003). Himpunan Fatwa Majelis Ulama Indonesia. Jakarta: Direktorat Jenderal Bimbingan Masyarakat Islam dan Penyelenggaraan Haji, Departemen Agama RI. Mawardi. (1994). Al-Hawi al-Kabir (Vol. 9). (Mahmud Martaji, tahqiq). Beirut: Dar al-Fikr.

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Othman, R. (2015). Wakaf Tunai: Sejarah, Amalan dan Cabaran Masa Kini. Kuala Lumpur: Dewan Bahasa dan Pustaka. Perbadanan Wakaf Selangor. (2012). Keputusan fatwa. Retrieved from http:// www.wakafselangor.gov.my/index.php/2012-04-27-03-02-07/keputusan-fatwa. Accessed on April 8, 2015. Qudamah, I. (1992). Al-Mughni (2nd ed., Vol. 8). (‘Abd Allah ‘Abd al-Muhsin dan ‘Abd al-Fath Muhammad, tahqiq). Qaherah: Hijr. Suhaimi, F. M. (2012). Peranan Dana Wakaf dalam Pembangunan Ekonomi Masyarakat Islam Di Pulau Pinang. Master thesis, Akademi Pengajian Islam, Universiti Malaya, Kuala Lumpur. Suruhanjaya Security Malaysia. (2010). Sukuk: Islamic Capital Market Series. Selangor: Sweet & Maxwell Asia. Taymiyah, I. (1987). al-Ikhtiyarat al-Fiqhiyyah. Beirut: Dar al-Ma’rifah. Zuhayli, W. (1995). Fiqh al-Islami wa Adillatuhu (Vol. 8). Beirut: Dar al-Fikr.

Interview Scholar A (2015). Position A of Institution A, Aceh, Indonesia. An interview, 7 May. Scholar B (2015). Position B of Institution A, Aceh, Indonesia. An interview, 27 May. Scholar C (2015). Position D of Institution A, Aceh, Indonesia. An interview, 21 May. Scholar D (2015). Position E of Institution A, Aceh, Indonesia. An interview, 12 May. Scholar E (2015). Position E of Institution A, Aceh, Indonesia. An interview, 29 May. Scholar F (2015). Position E of Institution A, Aceh, Indonesia. An interview, 12 May. Scholar G (2015). Position E of Institution A, Aceh, Indonesia. An interview, 27 May. Scholar H (2015). Position C of Institution A, Aceh, Indonesia. An interview, 7 May. Scholar I (2015). Pondok scholar, a leader in Pondok A, Aceh, Indonesia. An interview, 27 May. Scholar J (2015). Pondok scholar, a leader in Pondok B, Aceh, Indonesia. An interview, 27 May. Scholar K (2015). Pondok scholar, a leader in Pondok C, Aceh, Indonesia. An interview, 22 May. Scholar L (2015). Pondok scholar, a leader in Pondok D, Aceh, Indonesia. An interview, 27 May. Scholar M (2015). Pondok scholar, a leader in Pondok E, Aceh, Indonesia. An interview, 27 May.

Chapter 5

The Potential of Cash Waqf in the Socio-economic Development of Society in Kelantan: A Stakeholder’s Perspective Siti Nur Asmad Che Hassan and Asmak Ab Rahman Abstract Purpose – This study analyses the potential of cash waqf for the socioeconomic development of Kelantan state. A cash waqf scheme was established by the Kelantan Islamic Religious Council (Majlis Agama Islam Kelantan or MAIK) in an effort to contribute to the socio-economic development of the Muslim community in that state. Methodology/approach – A qualitative method of data acquisition through interviews. Among the informants interviewed were persons well versed with waqf and Islamic affairs, and several relevant public persons in Kelantan. Findings – The results indicate that the people of Kelantan are optimistic about the success of cash waqf, although the implementation of this instrument is still in its infancy there. The socio-economic development factors of the economy, education, well-being, agriculture, health and religious affairs can be improved with the implementation of cash waqf. Originality/value – This chapter is the first attempt to discuss the potential of cash waqf in Kelantan. Keywords: Cash waqf; potential; society; Kelantan; Waqf; Islamic economic development

1. Introduction Waqf practices can distribute wealth and generally aid the socio-economic development of the Muslim community. Waqf is an important institution in an Islamic social framework. It can effectively harness the potential of selfless New Developments in Islamic Economics, 67–82 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181005

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charitable giving for a better economic impact in targeted social segments of society. The Ottoman Empire achieved its glory long ago with the support of cash waqf funds. Such funds were managed to accommodate government expenditure and to provide facilities to Ottoman subjects. Cash waqf is usually formed where collective donations are used to build institutions such as school, hospital and orphanages. Waqf is also regarded as a source of capital for socio-economic development, one of the factors of production (Mahamood, 2007). Through economic activities such as business and investment, this capital source can generate a profit more than double its original value if managed well. Waqf also promotes responsible development, developing the kind of caring society which is promoted by Islam (Borham, 2003). The waqf property must be developed to meet the goal of its implementation in Islam. Waqf property development can be implemented either by an individual, by a community or through waqf institutions. Donors contribute not only to the socio-economic development of the Muslim community but also gain an everlasting and continuous reward from Allah s.w.t. Therefore, Muslims are able to share their wealth with others through the practice of waqf. Waqf also provides flexibility in fund utilisation as compared to zakat. Zakat funds must be utilised for specific categories of recipients. On the other hand, waqf can be used to provide a wide range of well-being services to Muslims, as well as to non-Muslims, and the beneficiaries could also be other living beings.

2. Waqf and Cash Waqf Waqf is something that is given for public use (such as alms) or for purposes related to Islam, such as digging wells for public use or constructing a mosque (Dewan, 2007). The word waqf is a transliteration of the Arabic word ‫ﻭﻗﻒ‬, which is a derivative of ‫ﻣﺼﺪﺭ‬, originating from the root verb meaning ‘stopping at a place or time’. Funds collected for the purpose of waqf are known as cash or money waqf, for which the Arabic term is ‫ﺍﻟﻨﻘﻮﺩ ﻭﻗﻒ‬. Linguistically, ‘money’ here means a conversion tool with a specific price or value recognised legally. According to Kamus Dewan, ‘cash’ means money that can be used immediately (Dewan, 2007). Cash waqf, also known as al-nuqud, occurs when its capital is maintained with the aim of obtaining the blessing of Allah s.w.t. (Akgunduz, 2013; Nazir & Hasanuddin, 2014). In the discussion on cash waqf, jurists from the Shafii, Hanbali, Maliki and Hanafi mazhabs are of the opinion that waqf is only permissible for moveable or ‘liquid’ assets that are inherently perpetual in nature (Al-Kasani, 1997; Ibn Qudamah, 1999). In Malaysia, cash or cash waqf funds collected in a trust fund are managed by an inspector appointed by the State Islamic Council (MAIN) in the respective state. Waqf contributions from individuals, groups and particular organisations are collected into a waqf fund and converted into permanent assets, the benefits of which are used for public well-being as general waqf (MAIK, 2016). Cash

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waqf managed by the Kelantan Islamic Religious Council (MAIK) is termed money waqf and is converted to a form of permanent asset rather than waqf al-nuqud.

3. Contribution of Cash Waqf to the Socio-economic Development of Society Cash waqf is an important alternative within the waqf system. It is not only applied in Malaysia but also is practised all over the world, especially in Muslimmajority countries. This is because cash waqf can generate income to support shortages of waqf funds in order to enhance the development of the community. In Malaysia, the 77th National Fatwa Council Committee Meeting, on 10–12 April 2007, resolved that waqf in the form of cash is permitted in Islam. The Waqf Foundation of Malaysia (YWM) is a government body which launched the Cash Waqf Malaysia Scheme to raise funds to finance the construction of waqf properties and the acquisition of new strategic and viable waqf assets. YWM projects in Malaysia include the construction of schools, the New Brother Complex, Waqaf Mart, and the People’s Bazaar of the State Islamic Council (MAIN) (Waqaf Foundation of Malaysia, 2016). In Terengganu, the Islamic Religious Council and Malay Custom of Terengganu (MAIDAM) officially launched the Cash Waqf Scheme on 27 December 2007 and collected RM 540,477.74 by 2014 (Zulkiflee, Hairunnizam, & Ahmad, 2015). In addition, five projects developed through a share of waqf in Malacca are the construction of a religious school (maahad tahfiz) in Jasin, an apartment in the southeast, orphanages in Jasin district, the Melaka Islamic Religious Council complex and projects enlarging mosques across the state of Malacca, and the construction of retail outlets (Jaafar, 1998). The Share Waqf Scheme organised by the Penang Islamic Religious Council (MAINPP) was established to raise funds to resolve disputes about abandoned waqf lands (Firafizal, 2002). In addition, Negeri Sembilan followed the same steps when offering units of shares to the public where the share certificates are made waqf to the Islamic Religious Council. The Cash Waqf Fund is used to purchase permanent properties and redeem Muslim-owned lands and properties which have been pawned in Negeri Sembilan. The Johore Islamic Religious Council (MAIJ) launched the Johore Share Waqf Scheme to develop existing waqf properties and for social well-being purposes. A statutory body, Johor Corporation (JCorp), has made waqf of its shares, worth RM 200 million (MAIJ, 2015). The Selangor State Share Waqf Scheme and the Selangor Waqf Corporation (PWS) also held a very successful collection, and the funds were then distributed for economic, educational, social and general relief (JAWHAR, 2015). On the top of that, the most important factor ensuring the sustainability of the cash waqf fund is its structure. Cash funds collected are not to be spent simply directly as is zakat. The fund, however, will be allocated towards the necessary purpose. Several Malaysian Institutes of Higher Learning (IPTA) have created cash waqf in their respective institutions. Among them are the International Islamic

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University Malaysia (IIUM), the National University of Malaysia (UKM) and Universiti Putra Malaysia (UPM). These funds will finance tuition fees and living costs and were obtained from individuals, organisations, companies, kafalah programs and an RM 1 campaign among students and local communities. This approach will assist families with low income and those experiencing difficulty in financing their studies (Othman, 2015). The contribution and implementation of cash waqf in other Muslim countries is also growing rapidly. In Egypt, Al-Azhar University is a symbol of pride for waqf education in Egypt. This university was established with the contribution of waqf which built an educational centre and a hospital on the waqf land, and its financing was due to economic waqf investments (Ibrahim, 2009). In Cairo, a waqf hospital was built by Al-Mansoor Saif al-Din Qalawoon, called Qalawoon Hospital, in 1284 AH (Islamic Relief Malaysia, 2015). In this hospital there is a school, a library, and a mosque which are funded by public collection of cash waqf. The Kuwait Awqaf Public Foundation (KAPF) was established to serve as a fund for waqf land development projects. KAPF has taken the initiative to establish waqf funds for a Qur’an waqf fund, the management of mosques, the well-being of persons with disabilities, the environment, scientific development, culture and thought, health development and family and community development. In addition, KAPF also provides drinks, free food and clothing to the needy (Abdul Latiff, Mohd Daud, & Ismail, 2008). In Syria, waqf property management is under the Ministry of Awqaf, Syria. Funds in this trust are distributed to teachers in religious schools, orphanages and charitable foundations (Ministry of Awqaf Syria, 2015). The Awqaf and Minor Affairs Foundation (AMAF) in Dubai has been established for the socioeconomic development of the community. These funds are channelled towards the management of mosques, disseminating knowledge of the Qur’an, the sunna and Islam, research in science and culture, social care and the provision of health facilities. Cash waqf is not only beneficial for Muslims but also for every religion. However, there are strengths and weaknesses in planned projects based on waqf which organisers need to know. In Sudan, the Awqaf Corporation also generates cash waqf to fund and implement the country’s waqf projects. Cash waqf contributions provide accommodation for university students, scholarships, a health centre and pharmacy, Qur’an printing and accommodation for hajj and umrah pilgrims in sea ports and airports. In Bangladesh, the Social Investment Bank Ltd (SIBL) and the Islamic Bank Bangladesh Ltd (IBBL) offer a Cash Waqf Certificate for charitable purposes such as religion, education, family development, culture, health and social well-being (Wan Yon, Abdul Latif, & Bahrom, 2008). Cash waqf can play an important role in the socio-economic development of society: if applied properly in every sector of the economy it will contribute to alleviating poverty, generating employment and ensuring the development of society. The Indonesian Waqf Fund (TWI) was created to help the community through an animal husbandry waqf program, agricultural waqf, farming waqf, trade venture waqf and business facility waqf. In addition, TWI has also developed

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Building for Converts, libraries, schools and health centres (Agustianto, 2006). The UK-based Islamic Relief Organization also collects nearly 30 million pounds sterling per year. Its Cash Waqf Fund is distributed to various charitable activities for education, health, water, income generation activities, qurbani, emergencies and anxiety relief. This waqf fund distributes aid to 25 countries (Islamic Relief Malaysia, 2015). Cash waqf in the Ottoman Empire provided substantial contributions to socio-economic development in many sectors, such as education, health, religion, the economy, well-being, municipalities, society and political activity. The first cash waqf success was in the educational sector, with a cash waqf fund being used to build primary and secondary schools as well as institutions of higher education (Mat Hassan, 2015). This can be seen in the construction of the Suleymaniya complex equipped with primary schools, five colleges and a medical centre. In Anatolia, cash waqf established several leading institutions of higher learning. Through cash waqf funds, a large mosque was built in Amsya, to which was attached a soup kitchen (dapur sup), a higher education centre and an elementary school. Other amenities such as finance, daily necessities and the payment of teachers’ salaries also came from the waqf fund. According to Kayhan Orbay, its benefits in the health sector are also evident, with a hospital built to serve the public and provide free screenings. An example is the construction of a hospital in Edirne. In addition, a medical school was also built to produce medical experts to serve the public (Orbay, 2012). Cash waqf also contributed to social well-being, especially through the construction of a public kitchen (dapur awam) that was held as imaret in Bursa and Edirne. These facilities are available to provide food to waqf workers, the poor and the needy. In Bursa and Edirne, a cash waqf fund has been used to provide financial assistance to single mothers, to Sufis who have no residence and for payment of pensions to former waqf employees (Cizakca, 1995). In addition, cash waqf also contributed to the development of urbanisation in Ottoman territory. For example, when Sultan Mehmed conquered Istanbul in 1453, he continued to build residential houses, a bath house (hammam), the warehouse market, workshops and places of worship using the waqf fund. The constructed market was leased to dealers and rental payments were used for improvements to the market and for the well-being of others (Van Leeuwen, 2009). Overall, almost all countries applying cash waqf contribute to the socioeconomic development of the Muslim community.

4. Kelantan Society Kelantan is one of the Malaysia’s 14 states, located on the nation’s east coast. Kelantan has 10 districts: Kota Bharu, Pasir Mas, Tumpat, Pasir Puteh, Bachok, Kuala Krai, Machang, Tanah Merah, Jeli and Gua Musang. Its overall area is 15,104.62 square kilometres. The total population of Kelantan in 2014 was 1,849,700, predominantly Malays. The state’s population density is expected to

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increase at an average rate of 2% per year (Department of Statistics Kelantan, 2015) (Table 1). Based on these projections, 80% of the population in Kelantan live in six northern districts – Kota Bharu, Bachok, Pasir Mas, Pasir Puteh, Machang and Tumpat – comprising only 20% of the state’s area. The three districts in the south – Tanah Merah, Kuala Krai and Gua Musang – with 80% of the Kelantan’s area only contain 20% of its population. Meanwhile, the total composition of Kelantan’s population in 2015 is shown in Table 2. The population of Kelantan comprises Bumiputera (Malays), Chinese, Indians and others. In 2015, the majority of its population were 93.5% Bumiputera and 3.2% Chinese, followed by 0.28% Indian and 0.7% other ethnicities, as well as non-citizens at 2.37%. Commonly, Bumiputera are Muslims, as are a small proportion of other ethnic groups. The Muslim community in Kelantan as a whole exceeds 93% of the total population.

Table 1: Projection of Population in Kelantan State From Years 2010 to 2014.

Bachok Kota Bharu Machang Pasir Mas Pasir Puteh Tanah Merah Tumpat Gua Musang Kuala Krai Jeli Kelantan

2010

2011

2012

2013

2014

142,100 509,600 101,300 212,000 134,200 133,400 137,200 103,300 120,800 48,000 1,641,900

146,000 522,000 103,900 217,300 137,700 136,700 177,700 106,000 123,700 19,300 1,690,300

149,900 534,500 106,400 222,800 141,100 140,000 182,200 108,800 136,500 50,600 1,772,800

153,800 547,200 109,000 228,300 144,600 143,300 186,800 111,700 129,500 51,900 1,806,100

157,700 560,100 111,700 233,800 148,200 146,700 191,400 114,500 132,400 53,200 1,849,700

Source: Department of Statistics Kelantan, 30 December 2015.

Table 2: Distribution of Population by Ethnic Group (in Thousands) in Malaysia and Kelantan in 2015. Distribution

Malaysia Kelantan

Total

Bumiputera

Chinese

30,485.20 1,718.20

19,152.00 1,606.8

6,642.00 2,012.60 267.40 54.4 4.8 11.5

Source: Department of Statistics Malaysia, 11 May 2015.

Indian

Others Non-Citizen

2,411.40 40.7

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5. The Socio-economic Condition of Kelantan Kelantan is a state that is developing socio-economically. It has experienced steady economic growth from 2010 to 2014. This is based on the continual increase of the total gross domestic product (revenue) (GDP) per capita: RM 9.806 million for 2010, RM 10.894 million in 2011, RM 11.217 million in 2012, RM 11.265 million in 2013 and RM 11.815 million in 2015. Table 3 below shows GDP per capita among the states of Malaysia, at current prices, from 2010 to 2014. It records Kelantan’s GDP per capita as the lowest of all Malaysia’s states. However, a study (Adib, 2013) found that the GDP per capita of this state is not so different to that of some regions of southern Thailand. This shows common growth features between Kelantan and these regions in Thailand. The people of Kelantan must make greater efforts to put the state on par with other states in the eastern region – Terengganu and Pahang – which already far exceed it in GDP per capita. Overall, Kelantan has increased its GDP per year but is still not up to the economic growth levels of other states. Therefore, in order to achieve

Table 3: GDP per Capita by State in Malaysia From 2010 to 2014. GDP per Capita at Current Prices Malaysian Ringgit (MYR) State

Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Pulau Pinang Perak Perlis Selangor Terengganu Sabah Sarawak WP Kuala Lumpur WP Labuan Malaysia

2010

2011

2012

2013

2014

22,035 14,034 9,806 29,366 29,363 23,883 33,597 18,207 17,410 32,300 21,573 17,831 35,034 64,693 38,445 28,773

24,350 15,563 10,894 32,421 32,136 27,069 35,527 20,370 18,299 34,478 23,282 19,648 40,632 70,675 44,044 31,372

25,442 16,088 11,217 34,965 33,761 27,413 37,053 21,711 19,537 36,799 23,935 19,487 41,493 77,073 49,157 32,913

26,317 16,629 11,265 35,727 34,092 27,912 38,472 22,438 20,136 38,082 24,488 18,647 41,792 82,262 53,610 33,721

28,466 17,321 11,815 38,766 35,969 29,575 42,186 24,207 21,084 40,701 26,573 19,672 44,437 91,097 56,062 36,155

Source: Department of Statistics Malaysia, 02 July 2015.

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balanced economic development, other social factors such as reducing inequality and eradicating poverty should also be considered (Todaro and Smith, 2006). Social development is also important because it affects the state’s level of economic development. Kelantan has taken the initiative in providing a wide range of amenities in education, health and social needs to meet the basic needs of its population. The prosperity and well-being of the public can influence longterm economic growth and development. Factors such as education, health and poverty reduction can improve quality of life and, at the same time, contribute to social and economic development. The Kelantan State Government has provided facilities for education, among which are three higher learning institutions (IPTA), ten private higher learning institutions (IPTS), two polytechnics, two matriculation centres and three community colleges. In addition, there are a total of 14 traditional Islamic schools (pondok), or madrasas, under the auspices of the Pondok Development Center Berhad (PPB) for those who wish to further deepen their religious studies (Pondok Development Center, 2015). In Malaysia, waqf in educational institution began with the establishment of pondok institutions. In 2000, some pondok institutions were replaced with Arabic schools to standardise the curriculum according to the teaching in the Middle East (Abdul Latiff et al., 2008). Because of that, waqf in education received attention from the public. Library facilities are also available in Kelantan to enhance public education. Under the auspices of the Kelantan Public Library Corporation, seven branch libraries and three rural libraries were established around 2007. Rural libraries have been increased to 37 and located in every parliamentary constituency in Kelantan (Kelantan Public Library, 2016). As many as 271 health facilities have been provided by the government, such as hospitals, health clinics, rural clinics, maternal and child health clinics, and dental clinics (Kelantan State Health Department, 2016). Kelantan has recorded a decreasing poverty rate from year to year. Poverty levels are measured using Poverty Line Income (PGM), taking into account minimum requirements for food, clothing, shelter and other basic household expenses, to ensure an adequate standard of living. However, poverty is a universal problem and occurs everywhere, including in developed countries like the United States. Table 4 shows data on poverty rates, including Kelantan’s, which have decreased from 7.2% in 2007 to 4.8% in 2004, and further to 2.7% in 2012, declining again to reach 0.9% in 2014. In 2014, Kelantan had the second highest incidence of poverty of Malaysia’s states. However, the poverty rate in Kelantan is still at a manageable level, at less than 5% for 3 years in a row. To eradicate poverty, Kelantan’s Government has implemented several programs to assist people, such as the Veranda of Mecca Fund Programme, the Poor People Advocacy Programme, the People’s Farm Programme, the Dhua’fat House Aid Programme and the Free Rice Aid Programme (Al-It’am Scheme). Other initiatives are also being taken to reduce Kelantan’s poverty,

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Table 4: Incidence of Poverty by State in 2007, 2009, 2012 and 2014 (%).

Malaysia Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Pulau Pinang Perak Perlis Selangor Terengganu Sabah and WP Labuan Sarawak WP Kuala Lumpur WP Putrajaya

2007

2009

2012

2014

3.6 1.5 3.1 7.2 1.8 1.3 1.7 1.4 3.4 7.0 0.7 6.5 16.0 4.2 1.5 0.0

3.8 1.3 5.3 4.8 0.5 0.7 2.1 1.2 3.5 6.0 0.7 4.0 19.2 5.3 0.7 0.0

1.7 0.9 1.7 2.7 0.1 0.5 1.3 0.6 1.5 1.9 0.4 1.7 7.8 2.4 0.8 0.0

0.6 0.0 0.3 0.9 0.1 0.4 0.7 0.3 0.7 0.2 0.2 0.6 3.9 0.9 0.1 0.0

Source: Official website of the Economic Planning Unit, 1 January 2016.

such as potable water and electricity aid, medical aid and special aid for the poor.

6. Data Collection The current research utilised two methods of data collection: primary data was collected through interviews and secondary data through literature review and documentary research. The research featured semi-structured (semi-standard) interview questions, which used structured interview questions prepared before the interviews, but also left questions open for people to complete required information. The researchers obtained information from multiple informants, namely persons well versed with waqf and Islamic affairs and members of society in Kelantan (selected according to the socio-economic profile fitting this study) referred to here as informants X, Y, Z, K, L, C and G. Interviews with informants were conducted face-to-face and remotely by email and telephone. Arrangements setting the date, time and place were made in advance for face-to-face interviews. The informants’ answers were audio recorded so that all data and information could be analysed and stored for future reference.

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7. Implementation of Cash Waqf in Kelantan State In Kelantan, the waqf unit is under the Baitulmal division. Informant X, mentioned that it was established in 2013 to specifically perform tasks related to waqf – including cash waqf – in Kelantan. But the implementation of cash waqf in Kelantan was approved by the Board of Scholars on 9 June 2013, which decided: Contributing waqf in cash form is permissible in Islam. In managing this cash waqf, the MAIK management and administration shall ensure that the cash dedicated for waqf is used for the purchase of permanent assets. This is because the cash physically cannot be retained in its original form, but the retention can still be realized by turning it into other property of a permanent nature. Thus, it meets the waqf concept of holding an asset that can be used without its physical depreciation. (MAIK Board of Scholars Council1) On 22 December 2015, cash waqf in Kelantan was successfully launched on behalf of the Muslim Religious Council and Malay Custom, Kelantan. The ceremony was officiated by His Royal Highness (HRH) Sultan Muhammad V at Hotel Perdana Kota Bharu, Kelantan. His Majesty the Sultan of Kelantan officiated cash waqf and launched a website, a cash waqf system and the Bunut Payong pondok project. This first cash waqf project in Kelantan is the Development of Bukit Payong Pondok. The development’s objective is to redevelop the largest and oldest pondok education centre in Kelantan by building a dormitory for students of Sullamiah Religious Secondary School, Sullamiah. The project is located at Lot 3388 Mukim Kampung Bunut Payong Gang Kota Bharu, with 0.7624 hectares of land. According to the informant X, this land belongs to the family (grandmother) of Sultan Muhammad V and is waqf for the construction of this pondok. This project involved the construction of two four-storey dormitory buildings which can accommodate 500 male and female students, two units for hostel guardians/ wardens, multipurpose halls, a hostel office, and seven units, worship pondok and a recreation space, that is, a badminton court.

8. The Potential of Cash Waqf in the Socio-economic Development of Kelantan State Cash waqf has the potential to achieve the balanced socio-economic development of the Muslim community in Kelantan. Among the products of MAIK cash waqf are General Waqf, Special Education Waqf and Project Waqf (Share Waqf). Informant X expressed that all these products are aimed at developing the community of Kelantan.

1

Source: https://waqaf.e-maik.my/v1/index.php/pengenalan.html.

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Waqf is important for the socio-economic development of society. Based on interviews conducted with all informants, cash waqf has the potential to enhance the socio-economic condition of the community in Kelantan. All parties were positive about the implementation of cash waqf in Kelantan. However, a detailed study is required in order to realise it, especially in terms of management, understanding and marketing. Six important aspects have been considered in the analysis of the potential of cash waqf for socio-economic development in Kelantan: the economy, religion, education, health, agriculture and social well-being. The analysis indicates a tendency for people to choose education, followed by social well-being, the economy, agriculture, health and religion. However, all of these aspects are mutually interconnected in having a positive impact on socio-economic development. There are six potential benefits of cash waqf in the socio-economic development of Kelantan.

8.1. Potential of Cash Waqf in Education Education is an important aspect of life that can be considered a long-term investment. It can produce a generation that is educated and highly moral who are preachers, scholars and leaders. In Kelantan, waqf applied to education is needed by the community. Most informants agreed that the education system in Kelantan can be further developed using the cash waqf fund. Informant X stated that this is because many people drop out of education due to financial constraints. Kelantan society requires an educational institution that benefits from waqf. Three informants – K, C and G – agreed that these requirements can help less fortunate people (asnaf) who receive zakat aid. Al-Azhar Educational Waqf can be used as a model of a well-funded, successful university that meets all of its expenses from the waqf fund (Abdul Latiff et al., 2008). The existence of the Special Education Waqf Scheme in Kelantan has further enhanced the education sector. Education is foundational to the social and economic well-being of the community. Islamic educational institutions and Islamic traditional schools (pondok) can help people gain knowledge of Islam (informant Y). In Malaysia, the educational institutions built by waqf funds capital include the Islamic University of Malaysia, madrasas and pondok in Terengganu. The amenities they provide help students complete their work properly and maintain Islamic knowledge (Mat Hassan, 2015). The Johore Islamic Religious Council (MAIJ) has successfully introduced the Share Waqf Scheme to improve the cash waqf fund collection. One project of Johore’s share waqf is the Islamic School Share project. Its purpose is the construction of 121 schools under the supervision of Johor’s state government to accommodate increasing numbers of students each year. In addition, MAIJ also successfully established the Waqf Dormitory Building in Egypt, which provides accommodation to Johore students in the Middle East (Atan, Wahab, & Mohd Salleh, 2014).

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Syed Adwam Wafa (2010) suggested some methods for raising funds for education, such as monthly infaq, takaful, and raising educational funding from individuals or corporations. This educational waqf method can create a country that produces more intellectuals as the catalyst for community development.

8.2. Potential of Cash Waqf in Social Well-being Social well-being is intended to help the less fortunate. The history of Ibn Batthuta shows how cash waqf has been channelled to the needy and less fortunate (Ibn Baṭūṭ;ah, 1960). He himself observed one event when a servant accidentally broke a porcelain bowl from China. The fearful slave was approached by another person and told to collect the shattered fragments of the bowl, which were brought to the waqf trustee. The slave was finally paid a price similar to the bowl’s (Mohamad Suhaimi & Rahman, 2012). The Cash Waqf Fund also reduces taxation from a source of national income to a level that is less burdensome to the community. Therefore, the cash waqf instrument may also be used to help the less fortunate, such as assisting the disabled and orphans, for the food needs of the poor and for equipment for their burial. In Singapore, the Islamic Religious Council of Singapore (MUIS) allocates 8% of its waqf property to help other countries in need such as Saudi Arabia, India and Indonesia (Mohamad Suhaimi & Rahman, 2012). However, the contributions channelled must conform to Islamic rules. Interview informants also thought that cash waqf could be applied to social well-being in Kelantan. The state’s per capita income is relatively low and poverty levels remain stubbornly high. Informant K said that the Cash Waqf Fund can be used for general public well-being to provide more waqf buildings for public use, thus helping poor communities in need. This aligns with the principles of the Kelantan state government that put the well-being of its people first.

8.3. Potential of Cash Waqf in Economic Development Most respondents also nominated the economy as an important factor that should be developed for the socio-economic benefit of Kelantan. According to informant Z, cash waqf may improve the economy of society by providing loans for business start-up capital to undertake various economic activities. The potential of cash waqf as capital investment was discussed in the works of Monzer Kahf in which cash waqf can be used as capital investment based on the principle of al-mudharabah. This helps the Muslim community with small- and medium-scale business. After a promised period, the borrower must repay the business capital along with an agreed proportion of profits from the business. The funds are then granted as a capital loan to others who wish to run a business (Kahf, 1998). This reduces the community’s dependence on loans from conventional banks. Cash waqf funds may also be permanent capital generated from the real estate sector with the purchase of premises or office buildings which are rented to Muslims at a reasonable price (Masyita, 2001). For example, waqf applied to a bazaar provides opportunities for recipients to generate their own income. Revenue from

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the rental can be used to manage waqf properties or other investments. Kelantan recipients (asnaf) would benefit from cash waqf because the rental rates of waqf premises are cheaper than other premises. This helps the asnaf group and the poor to earn income. This observation was supported by informant C.

8.4. Potential of Cash Waqf for Health Excellent health can improve quality of life. A healthy body makes everyday activities run smoothly. In Kelantan, there is a Health Waqf Scheme that can receive contributions in cash. The Health Waqf Fund aims to provide health facilities such as hospitals and clinics, and to purchase relevant equipment. The establishment of waqf hospitals provides services for free or at a low cost. An example is centres for kidney dialysis patients (Wan Yon et al., 2008). An example of success of cash waqf in health is JCorp’s building and management of 16 An-Nur waqf clinics and one An-Nur waqf hospital in Pasir Gudang (HWAN). According to the 2011 JCorp annual report, the number of patients seeking treatment to the end of 2011 was 765,611, 6% of whom were non-Muslims. An-Nur waqf clinic provides basic treatment services to the public for a fee of RM 5 for its medical and treatment costs. An An-Nur waqf clinic has also been built in Kelantan at the mosque of al-Ismaili Pasir Pekan in Tumpat (Wan Yon et al., 2008). In Kelantan, health waqf must be developed: statistics indicates that patient density is too high at the Kota Bharu General Hospital. Its space is very limited, and other basic facilities such as its parking lot had to be reduced to accommodate the construction of the hospital building. This is a problem for people who want to access health services there. According to informant G, waqf land for the construction of hospitals is urgently needed, while cash waqf funds can also be applied to aspects of the construction of patients’ medical facilities. The success of cash waqf in the health sector can be observed from the establishment of waqf hospitals or clinics, such as a maternity hospital in the city of Rayy in Iran, al-Muqtadiri Hospital in Baghdad and al-Mansuri Hospital in Cairo, all of which aim to provide health facilities and services to the public (Sulaiman & Abdul Manaf, 2009).

8.5. Potential of Cash Waqf in Agriculture Cash waqf fund can also be applied to agriculture because the predominant occupation of the people of Kelantan is farming. This application was popular in the sixteenth and seventeenth centuries in the Ottoman Empire where cash waqf was an important resource. Cash waqf funds are lent to farmers and urban residents (Mandaville, 1979). This is quite compatible with the socio-economic characteristics of Kelantan’s population who are actively involved in agriculture. Cash waqf funds are channelled to farmers help the community while improving the socio-economic development of Kelantan. Farmers there face the problem of often being forced to seek land to rent for farming. The rental rate is prescribed by the tenant. Informant Y argues that some of them fix an expensive rent, whereas the returns may not be as high as anticipated.

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Cash waqf can be used to develop waqf land. Abandoned waqf lands cannot be developed for infrastructure development, and buildings and business premises can be modified and used as a place for the community to farm. The lands are utilised by renting the property to the community for agricultural and livestock production. People can then rent agricultural land cheaply. This could assist the socio-economic development of society. Income from these profits can also be included in the cash waqf fund if mutually agreed.

8.6. Potential of Cash Waqf for Religious Purposes People are more inclined to give permanent properties as waqf if they are used for religious purposes. They make waqf of land for mosques, religious schools, tahfiz schools and so on. According to informant X, on average the application for waqf of property received is more often given as waqf for religious purposes in Kelantan. Mosques and surau (a small prayer building or place) are closely related to the spiritual development of the Muslim community. A faithful Muslim devoted to Islam and with good morals certainly tends to live a better life. In addition, the spiritual activity of mosques brings the community closer to religion. The improvement of religious aspects will become more stable through the cash waqf fund. There is, as in Singapore, a total of 70 mosques that serve as the place of worship for Muslims but are also centres for social activities and a focus for nonMuslims to learn more about Islam (Mohamad Suhaimi & Rahman, 2012).

9. Conclusion In conclusion, cash waqf has become very important in the everyday muamalah of the Muslim community. Waqf practices were once considered purely religious but have grown rapidly worldwide. This study discussed in some details the potential of cash waqf in the socio-economic development of the Muslim community. It is a potential fund for the development of existing waqf lands or for funding the social and economic activities of the Muslim community.

Acknowledgement The authors would like to express their gratitude to the University of Malaya for granting the precious opportunity to engage in this research and particularly in providing a specific grant (PO068-2015A) as financial support throughout the research period.

References Abdul Latiff, A. Z., Mohd Daud, N., & Ismail, C. Z. (2008). Pengurusan Harta Wakaf dan Potensinya ke Arah Kemajuan Pendidikan Umat Islam di Malaysia. Jurnal Pengurusan Jawhar. Adib, M., & Syahirah, N. (2013). Pengamalan Ekonomi Islam di Negeri Kelantan. PERKEM VIII. Selangor.

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Mat Hassan, S. H. (2015). Potensi Dinar Emas dalam Wakaf Tunai. Kuala Lumpur: Dewan Bahasa dan Pustaka. Ministry of Awqaf Syria (2015). Retrieved from http://www.syrianawkaf.org. Accessed on November 10, 2015. Mohamad Suhaimi, F., & Rahman, A. A. (2012). Perkembangan wakaf Tunai dan Potensi Sumbangannya dalam pembangunan Sosioekonomi Masyarakat Islam. In Transformasi Penyelidikan dalam Bidang Pengajian Islam. Kuala Lumpur: Bahagian Ijazah Tinggi Akademi Pengajian Islam Universiti Malaya. Nazir, H., & Hasanuddin, M. (2014). Ensiklopedia Ekonomi dan Perbankan Syariah. Indonesia: Kaki Langit. Orbay, K. (2012). Financial development of the waqfs in Konya and the agricultural economy in the central Anatolia (late sixteenth-early seventeenth centuries). Journal of the Economic and Social History of the Orient, 55(1), 74–116. Othman, R. (2015). Wakaf Tunai: Sejarah, Amalan dan Cabaran Masa Kini. Kuala Lumpur: Dewan Bahasa dan Pustaka. Pondok Development Center. (2015). Retrieved from https://epondok.wordpress.com. Accessed on July 02, 2015. Sulaiman, N., & Abdul Manaf, F. (2009). Peranan Harta wakaf dalam Bidang pembangunan dan Pendidikan Ummah: Fokus dalam Bidang Perubatan. Jurnal Pengurusan JAWHAR, 3(1), 1–30. Syed Adwam Wafa, S. M. G. W. (2010). Pembangunan Wakaf Pendidikan di Malaysia. Working paper at 7th international conference- the Tawhidi Espitemology: Zakat and waqf economy, Bangi, Selangor. Todaro, M. P., & Smith, S. C. (2006). Economic development (9th ed.). England: Pearson Limited. Van Leeuwen, R. (2009). Waqfs and urban structures: The case of Ottoman Damascus (Vol. 11). Leiden, Boston: Brill. Wan Yon, W. A., Abdul Latif, M. S., & Bahrom, H. (2008). Mekanisme wakaf: Gagasan awal terhadap pembangunan dan pembiayaan pusat penyelidikan dan perkembangan Islam Borneo. Jurnal Pengurusan JAWHAR, 2(2), 63–86. Waqaf Foundation of Malaysia. (2016). Retrieved from http://www.ywm.gov.my. Accessed on January 02, 2016. Zulkiflee, N., Wahid, H., & Ahmad, S. (2015). Kesedaran Terhadap Wakaf Tunai: Kajian Di Besut, Terengganu. In Proceeding Seminar Fiqh Semasa (SeFis). Negeri Sembilan: Universiti Sains Islam Malaysia.

Interviews Informant Informant Informant Informant Informant Informant Informant

C. (2015). An interview, 24 December. G. (2016). An interview, 7 January. K. (2015). An interview, 28 December. L. (2015). An interview, 26 December. X. (2015). An interview, 5 October. Y. (2016). An interview, 30 December. Z. (2016). An interview, 7 January.

Chapter 6

Empowering Society Through Waqf Bazars: A Case Study in Kelantan, Malaysia Nur Aliza Binti Ahmad and Asmak Ab Rahman Abstract Purpose – This chapter analyses the socio-economic development of the Muslim community in Kelantan through the establishment of the Bazar Wakaf Rakyat (People’s Waqf Bazar). Methodology/approach – A qualitative method of data acquisition through interviews. Among the informants interviewed were the authority of waqf matter, the tenants of Bazar Wakaf Rakyat X, the tenants of Bazar Wakaf Y, the committee members of mosque X and local people in Kelantan. Findings – The research indicates that the Bazar Wakaf Rakyat plays a role in enhancing the economic and spiritual development of the Kelantanese people. Economic development occurs through affordable rental rates, job opportunities, the construction of Bazar Wakaf Rakyat in strategic locations and the types of products being sold. The Bazar Wakaf Rakyat built inside the mosque compound also plays a part in spiritual development. Originality/value – This chapter is the first to discuss issues relating to Bazar Wakaf Rakyat in Kelantan. Keywords: Bazar Wakaf Rakyat; community; Kelantan; waqf; economic development

1. Introduction The waqf instrument in Malaysia is developing into a positive tool for the nation’s economic development. Waqf can contribute towards education, healthcare, economic, religious, charitable and other facilities for the Muslim community. Most contemporary Malaysians are aware of the importance of waqf in increasing national revenue and economic development. New Developments in Islamic Economics, 83–97 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181006

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Malaysia experienced rapid economic development in the 1950s and 1960s, with the emergence of the new nation from former colonies. ‘Economic development’ refers to the process whereby the people of a country make use of available resources to create the sustainable production of goods and services per capita. According to Todaro (1994), as well as improving production and income, development also involves radical changes in institutional, social and administrative structures, and in attitudes, customs and beliefs. A nation’s development focuses not only on economic and social development but also includes factors such as physical development, political stability, environmental quality and economic strength that improve the standard of living and the quality of society. Development therefore implies growing self-reliance, both individual and collective. The base for a nation’s development must be its own resources, both human and material, fully used to meet its own needs (The Report of The South Commission, 1990). This is termed sustainable development and refers to comprehensive and integrated development undertaken to fulfil current needs, without compromising the ability to meet future needs of future generations (Moran et al., 2008). Sustainable development generates economic and social capacities which can preserve development in any kind situation, in order to improve the basic needs of the population (Goodland & Ledec, 1987). Therefore, sustainable development not only emphasises standard of living but also maintains balance with the environment and development such as economics development, social development and then environment development. Thus, the mere presence of economic development in a country without social and environment development cannot yet be considered sustainable development (Mamat, 2009).

2. Waqf Waqf is an Arabic word, a noun derived from the verb waqafa, which has various meanings depending on the purpose and usage of the sentence. Linguistically, the word can mean ‘to stop’ (‫)ﺍﻟﺴﻜﻦ‬, ‘to prohibit’ (‫ )ﺍﻟﻤﻨﻊ‬and ‘to hold’ (‫( )ﺍﻟﺤﺴﻦ‬Manzūr & Mukarram, 1990). In current usage, waqf means keeping or retaining a person’s property for the benefit of others. God has ordained waqf, upholding and establishing it as one of the ways for his servants to spiritually attach themselves to Him and bestowing great reward on anyone who donates their property for Allah’s purposes. The Qur’an has no specific mention of waqf, but there are several pieces of evidence of the ahkam for waqf from the Al-Qur’an, the Hadith and the consensus of Muslim scholars. Allah s.w.t. commanded in Surah Al-Baqarah, 26 in relation to the rewards earned by those who made waqf of their property in the path of Allah s.w.t.: Translation: To compare (donation) those who spent their wealth in the way of Allah, is like a seed that grows seven branches; each branch has a hundred grains and (remember), Allah gives manifold increase to whom He pleases, and Allah is the ever Embracing, the All Knowing.

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Four elements are necessary to give effect to and validate waqf. The first requirement is the waqf payer or waqif, who must be among people who are mukallaf, those who have reached puberty and are sound of mind, independent and able to make their own choices without coercion. Therefore, a child who has not reached the age of puberty or one who is mentally ill would not be allowed to give waqf because they are not qualified to be responsible under Islamic law (Al-Khatīb, 1940). In addition, waqf by one who has been forced to dedicate his/ her property to this end is not a valid waqf, as is pronouncement of waqf from waqf donor has not come from the free and voluntary heart of the waqf donor. A servant would also not be able to dedicate property for waqf because all property obtained by a servant would become the property of his/her master; the servant has no rights of ownership over that property. If the waqf donor is declared an apostate and is sentenced to death for it, the waqf is still valid. However, the waqf becomes void if waqf donor dies not because of the punishment for apostasy but because of other reason (Al-Humam, Ibn, & Al-Sirasi, 1970). The second requirement is the recipient who is given the waqf property, whether a person or any party or legal representative who is assigned the waqf property. Some examples of valid waqf recipients would be a family member of the waqf donor or a family consisting of children, wife, husband, parents and relatives or those who are not relatives of the waqf donor such as individuals, a cluster of families or groups who are not family members. In addition, the waqf recipient can also be certain bodies or trustees such as baitulmal, mosques or small prayer buildings (surau); schools or higher learning institutions; missionary centres; libraries; charitable organisations that care for orphans, the disabled, the blind, the elderly; rehabilitation centres including for drugs; hospitals and clinics, and organisations that do not conflict with Islamic teachings (Sabran, 2002). The third requirement is a specified property declared for waqf (mawqūf) (Al-Ramlī & al-Abbās, 1967). In addition, the property must be personally, legally and permanently owned by the waqf donor. It would be invalid to declare as waqf an asset that is incapable of being legally owned under Islamic law; for example, giving one’s dog as a waqf property where it is not allowed (illegal) under Islamic law (Al-Ramlī & al-Abbās, 1967). The waqf created must be beneficial to the recipient of the waqf and can be put to good use in accordance with the Islamic law (Al-Baijūrī & Qāsim, n.d.). The waqf property must be a tangible item which is permanent and durable, nonperishable and not easily damaged or destroyed, such as land and houses. Finally, the property to be declared for waqf must be halāl and must not have been obtained illegally such as through theft, fraud, gambling or prostitution. Now, cash also can be property declared for waqf (cash waqf). In addition, it is a medium of exchange for our country. The last pillar of waqf is sighah. The sighah pronouncement by the waqf payer must reflect the meaning of waqf itself and not another meaning. There are two types of sighah utterance. The first is sighah sorīh (clear), a pronouncement that has no other meaning other than waqf, being words that can be understood by listeners as having the intention of waqf, without any other meaning. The fiqh scholars are in agreement that there are three clear sighah pronouncements, which are ‘I waqf’,

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‘I withhold’ and ‘I give in the path of Allah (sabilullah)’ (Al-Ghamrāwi, 1933). The second type of sighah utterance is the kinayah pronouncement (indirectly/ metaphorically), which does not directly signify the meaning of waqf. It is only valid if accompanied by other words that directly refer to waqf gift by waqf donor. Among the examples of kinayah pronouncement are ‘I give as sadaqah (charity)’, ‘I maintain’ and ‘I forbid’. These three examples are utterances called kinayah, which are applicable to waqf pronouncements, where the meaning does not clearly and directly indicate waqf (Al-Baijūrī & Qāsim, n.d.).

3. The Role of Waqf in Society Waqf plays its own unique role in economic development. It has become a means of redistributing wealth in order to achieve economic development in a whole context. Waqf has contributed to the provision of education, health centres, places of worship, roads, bridges and other needs. It contributes to the nation’s development of education. It is an instrument which is not dependent on the government’s financial resources. The success of the Egyptian educational system has demonstrated the success of Islamic educational institutions with the establishment of Al-Azhar University, which was fully funded through waqf (Azha, Baharuddin, Salahuddin, & Afandi, 2013). In Malaysia, there are several educational institutions which have been built by means of waqf: Universiti Islam Malaysia, University College Bestari, University College Islam Perlis and University College Islam Selangor (Abdul Rashid & Hussin, n.d.). Furthermore, educational waqf funds were established at several local universities to strengthen education in Malaysia (Ali & Wahid, 2014). Waqf plays a significant role in education by providing educational opportunities to underprivileged children, indirectly paving the way to improve their families’ low standards of living. Waqf also plays a role in healthcare, especially with the high cost of medical services which prevents many from receiving adequate medical treatment. This affects economic development because people are less able to work if they do not have access to good healthcare. A model of healthcare waqf which has been implemented in Malaysia is Klinik Waqf An-Nur Johor. Johor Corporation in co-operation with the Johor Islamic Religious Council (MAIJ) has established clinics such as Waqf An-Nur (KWAN) and Hospital Waqf An-Nur Pasir Gudang, which aim to help low-income earners on less than RM800 a month (Karim, Rosman, & Rahman, 2014). The role of waqf in the conduct of religious activities for Muslims is no less important. The construction of mosques, small prayer buildings (surau), or any religious premises fulfil needs for Muslims. It is because the formation of spiritual good and calm when Muslims are able to worship in comfortable mosques and suraus; it is really good for their spiritual development. Economic development should not only emphasise the material aspect but must also complement spirituality. There are many mosques and religious sites which have been given for waqf, such as in Negeri Sembilan, Johor and Selangor. Almost 70% of waqf land in Malaysia has been declared waqf for the construction of mosques rather than for other uses such as schools and cemeteries. Construction of mosques can improve

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socio-economic conditions which not only focus on the economy but also on the promotion of religious knowledge (Harun, Possumah, Shafiai, & Noor, 2014). The role of waqf in economic activity can be observed through the building of business premises and waqf hotels. The construction of business complexes and buildings on waqf land, or purchased with funds from waqf shares, has been implemented in several states such as Kedah, Johor, Selangor, the Federal Territory and Penang (Rahman, 2009). Travel is another economic activity where waqf plays a role. Malaysian Muslims have benefitted from the construction of several waqf hotels such as those in Terengganu, Perak, Negeri Sembilan and Melaka. The construction of waqf hotels enhances the Muslim community economically because they attract foreign Muslim tourists to stay in the hotels. The instrument of waqf has been proven to play a positive role in the socioeconomic conditions of the local community.

4. The Muslim Community in Kelantan Kelantan is situated in the north-east part of the Malay Peninsula, facing the South China Sea and sharing a common border with Thailand. In 2012, Kelantan’s land area was 15,105 square kilometres, 4.6% of Malaysia’s total land area. Kelantan is separated from the other Malaysian states by the Titiwangsa Mountains, which run from north to south across its state borders. Kelantan Darul Naim comprises 11 districts: Kota Bharu, Pasir Mas, Tumpat, Pasir Puteh, Bachok, Kuala Krai, Machang, Tanah Merah, Jeli, Gua Musang and the sub-district of Lojing. Among the major cities in the state are Kota Bharu (the state capital), Gua Musang, Pasir Mas, Tanah Merah and Kuala Krai, as well new centres such as Kubang Kerian, Pasir Tumboh, Pengkalan Chepa, Bandar Baru Tunjong and Tok Bali (The Official Portal of the Kelantan State Government, 2015). Table 1 shows that the estimated population in Kelantan, from mid-2008 to 2013, was continuously increasing to 1,675,100 (in 2014) with a population growth rate of 1.6% for 2012/2013.

Table 1: Estimated Population in Kelantan mid-2008 to 2013. Year

Estimated Population

2008 2009 2010 2011 2012 2013

1,549,800 1,570,000 1,589,900 1,618,800 1,648,400 1,675,100

Source: Official Portal of the Kelantan State Government (2015).

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Nur Aliza Binti Ahmad and Asmak Ab Rahman Table 2: Population Density for the State of Kelantan for 2000 and 2009–2012. Year

Population Density (Persons/km2)

2000 2009 2010 2011 2012

90 104 105 107 109

Source: Official Portal of the Kelantan State Government (2015).

Table 2 shows Kelantan’s population density for 2002 and from 2009 to 2012. Population density is the average number of people for every square kilometre. In 2000, the population density was 50/km2, 2009, 2010, 2011 and 2012 had a consistent increase every year, with the population density reaching 109/km2 people in 2012.

5. The Socio-economic Condition of the Community in Kelantan According to Roslan and Ismail (2013), Kelantan is a state currently undergoing development. The economic development in Kelantan is Islamic in concept with an emphasis on human capital, social development and culture, in order to realise both worldly objectives and those of the hereafter. However, the problem commonly associated with Kelantan is poverty, which is the main factor hindering development in the state. Table 3 sets out the distribution of poverty in Malaysia in 2009, 2012 and 2014. Kelantan recorded a distribution of poverty of 4.8% in 2009, 2.7% in 2012 and 0.9% in 2014, the second-highest after Sabah and the Federal Territory of Labuan. The economic condition of a state is measured by its real annual gross domestic product (RGDP), which determines whether it has experienced economic progress or decline. Kelantan’s economic position represented by GDP per capita is stable from 2009 to 2012. This indicates positive growth, although Kelantan recorded the lowest rate of GDP among Malaysia’s states, as shown in Table 4. Based on this table, Kelantan recorded the second-highest level of poverty and the lowest GDP per capita compared to other states in Malaysia. Kelantan clearly faces problems with the amount of income it generates. The establishment of the Bazar Wakaf Rakyat in every Malaysian state except for Sarawak can enhance the economic development of the Muslim community, helping those who have

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Table 3: Distribution of Poverty in Malaysian States in 2009, 2012 and 2014. Percentage (%) State

2009

2012

2014

Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Penang Perak Perlis Selangor Terengganu Sabah and Federal Territory of Labuan Sarawak Federal Territory of Kuala Lumpur Federal Territory of Putrajaya

1.3 5.3 4.8 0.5 0.7 2.1 1.2 3.5 6.0 0.7 4.0 19.2

0.9 1.7 2.7 0.1 0.5 1.3 0.6 1.5 1.9 0.4 1.7 7.8

0.0 0.3 0.9 0.1 0.4 0.7 0.3 0.7 0.2 0.2 0.6 3.9

5.3 0.7

2.4 0.8

0.9 0.1

0.0

0.0

0.0

Source: Economic Planning Unit, Prime Minister’s Office (2016).

been unable to carry out business activities due to the high rental rates of shops and co-operatives. The Bazar Wakaf Rakyat can play a significant role in economic activity through the construction of business premises.

6. Bazar Wakaf Rakyat in Kelantan The aim of Bazar Wakaf Rakyat is to provide business premises for the conduct of various types of business by Muslims entrepreneurs, including the long-term poor and the asnaf group (those entitled to receive zakat), which can increase their income. The establishment of the Bazar Wakaf Rakyat also aligns with one of the objectives of Yayasan Waqaf Malaysia which is to bring down the level of poverty. Table 5 shows the total number of projects implemented, 64 units of Bazar Wakaf Rakyat and three units of Wakaf Mart in chosen locations throughout Malaysia (excepting Sarawak).

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Table 4: Gross Domestic Product According to State at Current Prices in 2009–2012. GDP per Capita at Current Price (Millions) State

Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Pulau Pinang Perak Perlis Selangor Terengganu Sabah Sarawak Federal Territory of Kuala Lumpur Federal Territory of Labuan GDP per capita at current price

2009

2010

2011

2012

18,878 12,481 8,421 25,397 25,595 20,548 30,098 15,809 15,186 28,468 19,102 15,515 31,286 57,040

21,329 13,744 9,322 28,328 28,586 23,008 33,601 17,341 16,175 31,457 20,581 17,118 34,136 62,075

23,533 15,398 10,342 31,086 31,159 26,033 35,027 19,321 17,007 33,589 22,116 18,873 39,143 68,089

24,452 15,832 10,566 33,543 32,258 26,159 36,669 20,485 18,150 35,832 22,518 18,758 40,075 73,970

31,200 25,385

32,387 27,890

37,091 30,433

40,136 31,887

Source: Economic Planning Unit, Prime Minister’s Office (2016).

There are four Bazars Wakaf Rakyat in Kelantan at four different locations, each bazar having five or ten units in total. The locations at which Bazar Wakaf Rakyat has been set up in Kelantan include the following:

• Five units of Bazars Wakaf Rakyat at Masjid Felda Ciku 1, Gua Musang, Kelantan. • Five units of Bazars Wakaf Rakyat at Masjid Felda Ciku 7, Gua Musang, Kelantan. • Five units of Bazars Wakaf Rakyat at Masjid Felda Kemahang 2, Tanah Merah, Kelantan. • Ten units of Bazars Wakaf Rakyat MAIN 2 Tingkat at Kg Geting, Tumpat, Kelantan.

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Table 5: Number of Bazar Wakaf Rakyat and Wakaf Mart by State in Malaysia. Zone

State

Sabah zone Eastern zone

Sabah Pahang Terengganu Kelantan Selangor Federal Territory Negeri Sembilan Melaka Johor Perlis Kedah Penang Perak Total

Central zone

Southern zone Northern zone

Bazar Wakaf Rakyat

5 8 2 4 5 5 3 2 7 6 8 4 5 64

Wakaf Mart

2 (Kiosk) 3 1 (Kiosk)

6

Source: Department of Waqf, Zakat and Hajj (2015).

7. Research Methodology This research utilised two methods of data collection: primary data were collected through interviews and secondary data through literature review and documentary research/library research. Library research obtained information from books, journals and theses from several local libraries. The research featured semistructured (semi-standard) interview questions, which used structured interview questions prepared before the interviews, but also left questions open for people to complete required information. The researchers obtained information from multiple informants, namely the authority of waqf in Kelantan and the tenants at two Bazar Wakaf Rakyat in Kelantan, Bazar Wakaf Rakyat X and Bazar Wakaf Rakyat Y. The researcher also interviewed third parties such as congregation members and committee members of the mosque and the qariah team drawn from the community of Kelantan, referred to here as informants A, B, C, D, E and F. Interviews were conducted face-to-face and remotely by email and telephone. Arrangements setting the date, time and place were made in advance for face-to-face interviews. The informants’ answers were audio recorded so that all data are stored for future reference.

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8. The Role of Bazar Wakaf Rakyat in Improving the Economy of Kelantan Waqf has the potential to enhance the economy of the Muslim community by establishing premises or centres for business, such as Bazar Wakaf Rakyat in Kelantan. Bazar Wakaf Rakyat provides those who are less fortunate, especially the asnaf with the opportunity of conducting business. Therefore, it can indirectly improve the asnaf group’s economic prospects. The researcher has separated the role of Bazar Wakaf Rakyat into two, economic and spiritual development, as shown in Fig. 1.

8.1. Role of Bazar Wakaf Rakyat in Economic Development Integrated development approaches simultaneously advance multiple benefits across the three dimensions of sustainable development (social, environmental and economic) to ensure that poverty eradication and environmental sustainability go hand in hand. ‘Integrated development’ could be a term that combines economic development, social development and environmental protection. Integrated development maybe achieved only when human societies decide to create necessary presuppositions at the education, research, economic, social, political, technological and environmental levels for the better world, based on the human value of peace, justice, solidarity; political, economic and social democracy; and ethnic respect for nature and for variety of culture of all human beings (Fig. 2). 8.1.1. Reasonable Rental Rate Different rental rates are imposed by the two bazars. The rental rate imposed by Bazar Wakaf Rakyat varies depending on the type of premises, whether rental accommodation, eateries, grocery stores and normal stores (Informant A, 2015). For rental accommodation, the rent is RM 245 a unit and the total amount of rental accommodation is five units, totalling to RM 1245 a month (Informant B, 2015). For eateries, the rent is RM 265 a month (Informant C, 2015).

ROLE OF BAZAR WAKAF RAKYAT IN KELANTAN

Role of Bazar Wakaf Rakyat in economic development

Fig. 1:

Role of Bazar Wakaf Rakyat in spiritual development

Role of Bazar Wakaf Rakyat in Kelantan.

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The Role of Bazar Wakaf Rakyat In Economic Development

Bazar Wakaf Rakyat X

Reasonable rental rate

Job opportunities

Construction of Bazar Wakaf Rakyat in mosque compound Bazar Wakaf Rakyat located in strategic area

Bazar Wakaf Rakyat Y

Reasonable rental rate

Job opportunities

Bazar Wakaf Rakyat located in strategic area

Type of goods sold

Type of goods sold

Fig. 2:

The Role of Bazar Wakaf Rakyat in Enhancing the Economy of the Muslim Community.

Bazar Wakaf Rakyat X is built in the mosque compound, and its rent is approximately RM100–120 a month. Although this rent is significantly different, its rate is still reasonable because it is lower than the market rate of around RM350 a month. This reasonably low rent makes it possible for the less fortunate to rent premises at both bazars. According to Mohamad Suhaimi (2011), rental rates which are lower than market rates can help tenants reduce the cost of their business operations. It also indirectly contributes towards meeting the main objective of Yayasan Waqaf Malaysia in establishing the Bazar Wakaf Rakyat, to help ease the burden on the asnaf group and to improve their economic condition. 8.1.2. Job Opportunities Bazar Wakaf Rakyat has opened up job opportunities for the local community, who are able to rent premises in the bazar at a low rate to start a business. Others are employed as workers at the bazar. According to Aris and Musa (2014), the opening of small-scale shops such as eateries, car washes, bakeries and noodle production can provide jobs for the local community and help the government reduce poverty. Islam, based on Surah Al-Maidah, 2, encourages mutual assistance in order to reduce the burden of others.

94

Nur Aliza Binti Ahmad and Asmak Ab Rahman Translation: ‘And help each other in righteousness and piety, and help not one another in sin and transgression and remain fearing Allah, for undoubtedly the torment of Allah is severe (for those who disobey His commands).’

8.1.3. The Setting Up of Bazar Wakaf Rakyat at Strategic Locations Establishing a business at a strategic location can positively influence its efficiency and profitability (Mohd Sapie et al., 2017). Bazar Wakaf Rakyat X was set up at a strategic location near a school, as well as being close to the village’s houses. There are many shops in the Bazar Wakaf Rakyat X selling light snacks such as beverages, crackers (keropok), ice cream, wafers and fried food. These are very popular among the school children. According to Salleh (2013), groups of school children are very fond of eating snacks and will typically flock to the snack stalls in the bazar once school ends for the day. Bazar Wakaf Rakyat Y is also strategically located near roads, village residences, educational centres such as boarding school and youth training skills as well as within the vicinity of well-known resorts in Kelantan. The Bazar Wakaf Rakyat Y is between Pantai Geting and Pantai Sri Tujuh, areas frequented by local and overseas tourists. Many activities are held at these tourist spots, including the Wau Festival, which is held at these beach locations annually. 8.1.4. Type of Goods The type of goods being sold at both these Bazar Wakaf Rakyat varies according to area, environment and customer demand. The choice of goods sold by their tenants is important as these attract the locals. Refer Table 6. Given that the location of Bazar Wakaf Rakyat X is within the vicinity of a secondary school, its target customers are school children. This influences the type of goods sold, which are those which attract the students’ interest and entice them to stop by the bazar. Most of the students enjoy snacks such as crackers, wafers, ice-cream.

Table 6: Types of Goods Sold at the Two Bazar Wakaf Rakyat in Kelantan. Bazar Wakaf Rakyat

Type of Goods Sold

Bazar Wakaf Rakyat X

1 1 1 1 1 5 2

Bazar Wakaf Rakyat Y Source: Modified based on interview.

unit eatery (noodles) unit fast-food outlet unit shop selling wafers unit tailor’s workshop unit bridal shop units accommodation (chalet) unit eateries

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The tenants must also be creative in choosing which goods to sell; for example, eateries must find new items for their menu in order to attract customers (Informant D, 2015) and sell items which are not yet for sale in the area or are hard for others to copy such as selling wafers (Informant E, 2015). Meanwhile, tenants at Bazar Wakaf Rakyat Y find it more suitable to operate rental accommodations and eateries given that the bazar is located in a tourist and resort area. The area is frequently visited by tourists, so the demand for rental accommodations and eateries is high.

9. The Construction of Bazar Wakaf Rakyat in the Mosque Compound Only Bazar Wakaf Rakyat X is built in a mosque compound. This enables the congregation of the mosque to stop by the bazar before or after prayer times. Those who come to the mosque for funerals and repair works can also stop by the bazar. This helps to stimulate the local economy. According to Hussin et al. (2012), the mosque serves not only as a place of worship but also a centre of economic activity for the Muslim community. There should be more Bazar Wakaf Rakyat in urban areas so that the number of businesses can increase, especially on Fridays when the mosque becomes the focus of the male worshippers who attend the mosque for Friday prayers, also stimulating the economy of the Muslim community (Informant E, 2015).

10. The Role of Bazar Wakaf Rakyat in Spiritual Development Apart from improving the economic welfare of the local community, the location of Bazar Wakaf Rakyat in a mosque compound also plays a part in spiritual development. The tenants at Bazar Wakaf Rakyat X enjoy the benefits of spiritual and religious development as well as making a profit. For example, the bazar tenants can pray five times daily in congregation, and they can also listen to religious sermons or lectures for free while they carry out their business activities (Informant F, 2015). The fee for the rental of these premises is collected by the treasurer of the mosque and is given to the mosque by the tenants as sadaqah or donation, to be used for the development and upkeep of the mosque. For example, it contributes to the cost of repairs, the purchase of equipment and religious activities (Informant E, 2015). The collection of the tenants’ monthly rent contributes to the development of the mosque, enabling the local community to worship in more comfort. This is important because spiritual harmony and peace of mind can only be achieved through a close relationship between man and his Creator (Rahman, 2009).

11. Conclusion Various steps are being taken by the government and Yayasan Wakaf Malaysia (YWM) in co-operation with Majlis Agama Islam Negeri (MAIN) to assist the

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needy. This contributes to the development of waqf property which had been abandoned due to several problems faced by MAIN and YWM. Historically, Waqf is an instrument which can greatly benefit a nation in many different ways, such as economic, education, charity, worship, health and the economy. If used properly, this instrument has the potential to reduce levels of poverty and unemployment. Bazar Wakaf Rakyat in Kelantan is one of the projects implemented to stimulate the economic activity of the local community in Kelantan. Indirectly, it serves to improve Kelantan’s economic conditions, especially in rural areas.

Acknowledgement The authors would like to express their gratitude to the University of Malaya for granting the precious opportunity to engage in this very interesting research, particularly in providing a specific grant (PO072-2015A) as financial support throughout the research period.

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Karim, A. K., Rosman, A. S., & Rahman, A. A. (2014). Konsep Wakaf Kesihatan & Perkembangannya di Malaysia. In Proceedings of the Asean Islamic Endownment Seminar 2014 (IQLIMI 2014). Mamat, M. (2009). Prinsip Pembangunan Mampan Dalam Novel ‘Desir Angin di Pergunungan. Jurnal Pengajian Umum Asia Tenggara MALIM, 10. Manzūr, I., & Mukarram, M. I. (1990). Lisan al-‘Arab (Vol. 9). Beirut: Dār Sadr. Mohamad Suhaimi, F. (2011). Peranan dana wakaf dalam pembangunan ekonomi masyarakat Islam di Pulau Pinang. Ph.D. thesis, University of Malaya. Mohd Sapie, N., Hussain, M. Y., Ishak, S., Awang, A. H., & Lyndon, N. (2017). Motif dan daya tarikan pusat membeli-belah dalam kalangan pengunjung metropolitan Kuala Lumpur, Malaysia (Patron motives and perspectives of shopping malls’ attraction in Metropolitan Kuala Lumpur). Geografia-Malaysian Journal of Society and Space, 10(1). Moran, D. D., Wackernagel, M., Kitzes, J. A., Goldfinger, S. H., & Boutaud, A. (2008). Measuring sustainable development—nation by nation. Ecological Economics, 64(3), 470–474. Rahman, A. A. (2009). Peranan wakaf dalam pembangunan ekonomi umat Islam dan aplikasinya di Malaysia. Jurnal Syariah, 17(1), 113–152. Roslan, N. S., & Ismail, M. A. (2013). Pengamalan Ekonomi Islam di Negeri Kelantan. Prosiding PERKEM VIII (1). Sabran, O. (2002). Pengurusan Harta Wakaf. Johor: Universiti Teknologi Mara. Salleh, N. (2013). Kesedaran terhadap amalan pemakanan seimbang dalam kalangan pelajar Politeknik Merlimau, Melaka: satu tinjauan. Ph.D. thesis, Universiti Tun Hussein Onn Malaysi. The Official Portal of the Kelantan State Goverment. (2015). http://www.kelantan.gov.my/index.php/ms/kelantan/geografi. The Report Of The South Commission. (1990). The Challenge To The South. New York: Oxford University Press. Todaro, M. P. (1994). Economic development in the third world (5th ed.). White Plains, NY: Longman.

Interviews Informant Informant Informant Informant Informant Informant

A (2015). An Interview, 28 October. B (2015). An Interview, 29 December. C (2015). An Interview, 29 December. D (2015). An Interview, 8 October. E (2015). An Interview, 21 October. F (2016). An Interview, 28 January.

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PART III: TAKAFUL

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Chapter 7

Micro-Takaful in Aceh: Does Society Need It? Rafiza Zuliani and Asmak Ab Rahman Abstract Purpose – The purpose of this study is to review the responses of low-income earners to micro-takaful and its implementation in Banda Aceh. Methodology/approach – The data for the study were obtained by interviewing three parties. These parties were practitioners, academic experts and low-income earners selected by purposive sampling in each zone of Banda Aceh. Findings – The study found that there is a potential for micro-takaful to be offered in Banda Aceh due to the needs of low-income groups for it; however, there are many challenges which need to be overcome for successful implementation. Research limitations – The study is limited to the potential implementation of micro-takaful in Banda Aceh. Therefore, the study involves only its residents. Originality/value – This study makes a positive contribution to stakeholders by ensuring that they can provide micro-takaful schemes for the benefit of low-income earners. The study also adds to the literature on the concept of micro-takaful. Keywords: Banda Aceh; micro-takaful; poverty reduction; low-income earners

1. Introduction Poverty reduction cannot be ignored by any developing country. One of the goals of the World Bank is to reduce the world’s population who live in poverty to 3% by 2030 (World Bank, 2015). According to Hasim (2014a), over 1 billion people in the world live in extreme poverty – on less than $1.25 USD/day – and 2.2 billion live in moderate poverty, on less than $2 USD/day. The world’s poor are New Developments in Islamic Economics, 101–115 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181007

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mostly found in developing countries. Hence, assisting developing countries to reduce their poverty levels is a major global development challenge. The World Bank has made efforts towards achieving this goal, for example, by implementing a social safety net and providing social insurance, including initiatives to protect people from the effects of natural disasters and epidemics (World Bank, 2015). By cooperating with the Global Facility for Disaster Reduction and Recovery, the World Bank is advancing the recognition of risk, risk reduction, resilient recovery and protection against financial distress through insurance and disaster risk financing (World Bank, 2015). By 2030, the United Nations Development Programme (UNDP) also has goals to reduce poverty; one goal is to ensure that all men and women, particularly the poor and the vulnerable, have equal rights to economic resources as well as access to basic services, ownership and control over land, and other forms of property, inheritance and natural resources, and to appropriate new technology and financial services, including micro-finance (UNDP, 2017). A lack of access to financial services and management of the risk of natural disasters are factors that perpetuate poverty. Poor households with no financial resources and assets are likely to fall into extreme poverty if they are trapped by multiple risks. The poor need to be protected from such a possibility, but they lack access to appropriate protection. This problem is faced nowadays by most developing countries. Cohen and Sebstad (2006) list developing countries and the main risks faced by the majority of their populations (Table 1).

Table 1: List of Developing Countries and Main Risks Faced by the Majority of Their Populations. Country

Uganda Malawi Philippines Vietnam Indonesia Lao People’s Democratic Republic Georgia Ukraine Bolivia

Main Risks

Illness, death, disability, property loss, loan risk Death, food security, disease, education Death, old age, disease Disease, natural disasters, accidents, livestock disease Illness, children’s education, poor harvest Illness, livestock disease, death Illness, business loss, theft, death, retirement income Disease, disability, theft Disease, death, property loss (including loss of crops in rural areas)

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Indonesia, based on this table, is a developing country that is prone to multiple risks such as disease, low quality of children’s education and bad crops (Churchill, 2006; Tomchinsky, 2008). Indonesia has an extensive territory and a large population, and its government has not been able to ensure protection against risk for every individual citizen. Therefore, takaful protection is a form of financial protection that could be acquired by Indonesians to guarantee their future (Bardai & Salleh, 1996). However, participation in takaful is still poor. The reason given for this is that premiums are too costly for low-income earners in Indonesia. In response, the Financial Services Authority (or OJK – Otoritas Jasa Keuangan), which is responsible for managing and controlling financial institutions in Indonesia, has given its full support to insurance schemes which favour low-income earners. These are schemes with premium payments that do not exceed Rp 50,000 ($4 USD) per annum – known as micro-takaful. However, the marketing of this product is limited to certain areas of Indonesia and only a small number of insurance companies offer micro-insurance products to the public. Until now, the offering of micro-takaful schemes has been uneven across Indonesia. Even in Aceh, micro-takaful is still foreign to most people, even though it is one of the provinces in Indonesia that has recurring natural disasters – particularly earthquakes – and is inhabited by a large proportion of poor people. In March 2015, the number of low-income earners (with a per capita income per month below the poverty line) in Aceh was 851,000 (17.8%), an increase of 14,000 from September 2014, when its poor numbered 837,000 (16.98%) (Aceh Central Bureau of Statistics, 2015). Aceh has a majority Muslim population and is the only province in Indonesia that practises Islamic shariah law. There is thus a favourable opportunity to market micro-takaful in Aceh: a study conducted by Sherif and Azlina Shaairi (2013) found that, even though takaful is a product which can be subscribed by Muslims and nonMuslims, a Muslim population is a factor which positively correlates to its demand. The demand for Muslims is to use takaful rather than conventional insurance because of religious obligations. There are several countries where micro-takaful schemes have had a positive response from the public. In Ghana, a study has indicated that there is a very high potential demand among informal sector employees for micro-insurance products. This is influenced by several factors: the premium rate, income level and the insurance agency. Even the trust of the participants has become a determinant of the demand for micro-insurance. The researchers proposed that the Ghana National Insurance Commission should consider appropriate legislation that will encourage insurance companies to venture into the micro-insurance business. Such legislation may provide subsidies or tax relief to insurance companies that provide micro-insurance services (Akotey, Osei, & Gemegah, 2011). Another country that has offered micro-insurance to the public is India. Micro-insurance in India was commenced with the delivery of micro-finance services to the poor by micro-finance institutions and NGOs. Micro-insurance is a component of micro-finance. Although the coverage of the scheme is still very limited (between 5 and 10 million people), it has huge potential. The overall market is estimated to have reached a value of Rs. 250 billion (Pinto, 2015).

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These two countries have reported positive effects from the offer of microtakaful schemes to the public. A similar situation has also been anticipated in Indonesia, particularly in Aceh. However, even though micro-takaful appears to have a great potential market, it must be in accordance with the desires of the people, particularly those in Banda Aceh. Low-income earners must receive benefits in their situations of need from such schemes. A study is needed to address these issues.

2. Concept of Micro-Takaful Micro-takaful, or micro-insurance, is a two-word term consisting of ‘micro’ and ‘insurance’. ‘Micro’ refers to the target population of the insurance: low-income earners living below the poverty line (Pfister, Klein, & Denker, 2009; T.O. Yusuf & Mobolaji, 2012). They are not part of the social security system and are unable to secure insurance from market-based insurance companies (Churchill, 2006). ‘Insurance’ or takaful, on the other hand, means financial services which aim to compensate customers against risks that lead to loss (T.O. Yusuf & Mobolaji, 2012). Khan (2006) posited that micro-takaful is a mechanism that provides protection, based on shariah, to blue-collar workers – those with low incomes. Microtakaful is a simplified form of takaful for the poor. It is considered simplified because the scheme’s premium is low, the policy document is concise and easy to understand, and the assets involved are smaller than usual for takaful. Table 2 shows the clear difference between the two in terms of their target groups. In a micro-takaful scheme, the targeted micro-group is low-income earners. Hence, all its procedures are based on the means and abilities of lowincome earners: low premium rates, a simple policy and a fast process.

Table 2: The Difference Between Takaful and Micro-Takaful.

Market Level of awareness Policy

Sums insured Premium (contribution)

Takaful

Micro-Takaful

Customers have high and medium incomes The market is largely familiar with insurance Policy document is difficult to understand and there are many exceptions Large sums insured Large contribution based on age or other characteristics of specific risk

Customers are poor; have low incomes The market is largely unfamiliar with insurance Policy document is simple and easy to understand with little or no exceptions Small sums insured Low and affordable contribution

Micro-Takaful in Aceh Consideration

Contributions paid by customers

Claims

Claims process is somewhat cumbersome

105

Contributions can be paid in part or entirely subsidised by zakat fund, waqf fund or government fund Claims process is fast and easy

Source: Modified from Hasim (2014b).

Micro-takaful makes a significant contribution to the economic development of developing countries, including Muslim countries where a majority of the population is poor. Social welfare ranking is an indication of the development of a country. If poverty in a country is high, it can be said that its social welfare is at a low level and, consequently, its growth and economic development are also low. According to Goulet, one of the components to be considered in determining whether a country is experiencing progress in its development is to ascertain whether basic needs, such as food, health, protection and shelter, can be met by society. If these basic needs cannot be met, then that is an indicator of absolute poverty (Idris & Dan, 2004). In contrast to those who are economically and socially privileged, the poor face a greater risk of failing to meet their basic needs because they have a limited capacity to manage these risks. If an accident occurs which causes loss of property, or the death of the breadwinner, then the poor will face an acute crisis. In facing these kinds of risk, they usually resort to the following strategies:

• An informal risk-sharing arrangement; • Being conservative (i.e. avoiding risky activities); • Self-insurance through savings, reduced expenditure (including withdrawing children from school) and taking a second job; • Emergency loans from family or from money lenders; • Liquidation of assets; • In some countries, children are sold into bonded labour (Lloyd, 2014). The above strategies are similar to those described by McCord (2009). Due to a lack of information and access to financial services, the poor in developing countries will withdraw their children from school because of a lack of cash to pay fees, or they will sell their goods, household items and even properties that are still productive – rice fields in Cambodia, cattle in Kenya or gold in Ghana (McCord, 2009). These actions are taken by low-income communities to solve problems when faced with risk or an accident. However, the methods that they employ in facing risk leave them in poverty. Therefore, development is the main purpose of microtakaful (McCord, 2009). Micro-takaful is important because the poor can

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participate, preventing their fall into absolute poverty which, in turn, affects the growth and development of the country. The micro-takaful distribution system, involving agents who may not necessarily have a licence, may also be able to reach low-income earners in rural areas who lack access to and information about financial services and have a generally limited understanding of insurance (Asuransi Mikro Indonesia, 2014). The role of such agents is, therefore, indispensable in disseminating information on microtakaful to those who have not joined or who have not come to the attention of financial services. These agents can also help to ease the burden on governments of reducing poverty.

3. Research Methodology A qualitative approach was employed to obtain in-depth information about the needs of low-income communities in Banda Aceh for micro-takaful schemes. The study involved interviewing three groups: low-income earners, takaful practitioners and academic experts. Low-income earners were interviewed because they are the main target of micro-takaful and, hence, the most important respondents for this study. Those selected for interview had various types of employment and their income did not exceed IDR 2,500,000 ($190 USD) per month, that level being the target of micro-takaful (Asuransi Mikro Indonesia, 2014). Moreover, these respondents had not previously participated in any insurance scheme. The academic experts who provided data from their responses to this study were from the Banda Aceh community and, because of their close understanding of the community’s needs and the expectations of the insurance industry in Banda Aceh, it was anticipated that they would be a more objective interview group. Takaful practitioners from takaful and insurance companies in Banda Aceh were also interviewed. They were included as a respondent group because of their involvement in the bidding process of insurance or takaful schemes. Takaful practitioners are more aware of the product criteria and requirements expected by the public. With their inclusion, the data acquired can support this research to determine if there is potential for offering micro-takaful in Banda Aceh. All informants are referred to as Informant X, K, L, C, Y, Z, G, M and P.

4. Opinions on the Potential of Micro-Takaful Implementation in Banda Aceh 4.1 Opinions of Low-Income Earners

Based on interviews conducted with respondents, we can conclude that those on low incomes only understood insurance as a protection against mortality, ill health and vehicle problems. They did not know that insurance also provides for education, savings and other purposes. This demonstrates the limited knowledge

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about insurance among the residents of Banda Aceh, and that most of them do not view insurance as one of their needs. There are several factors that affect why insurance has gained less ground among these people. One reason is high insurance payments. This factor is particularly noticeable among those who are less fortunate, especially those who do not understand the concept of insurance. This is supported by the results of our interviews with these people. Based on the results of all interviews, 75% of respondents gave the reason for not participating in insurance as their inability to meet payments. The remaining respondents gave reasons such as a lack of knowledge and understanding of insurance. One of the respondents stated: ‘How can we join insurance? We experience difficulties in everyday life, in paying electricity bills, paying school fees; we have a lot of needs’ (Informant Z). We can conclude that most respondents considered the cost of insurance expensive and, hence, they could not afford to purchase a policy. However, after we explained the micro-takaful scheme, the majority of low-income respondents had a more positive attitude to it. They also stated that, if micro-takaful was offered in Aceh, they would want it because it is affordable. The following are some of their responses when interviewed: If it only costs Rp 50,000 ($4 USD) per year, it is cheap and we are able to pay for it. After all, if disaster struck, we’d need more money than that (Informant M). It is not expensive if it costs Rp 50,000 per year. I am interested in purchasing it (Informant P). Cheap, but it would be better if it could be below Rp 50,000 because vehicle insurance is only Rp 20,000 ($1.5 USD) per year (Informant G). Therefore, we conclude that most of them desire protection for their property and life but financial constraints dampen their desire and they therefore ignore the guarantee for the future that micro-takaful offers.

4.2 Opinions of Academic Experts The purchase of insurance is still considered a luxury by most people in Banda Aceh. This is confirmed by Informant X when asked about the development of micro-takaful and its potential: We were provided feedback that insurance is considered a secondary requirement (hajjiyyat), even tertiary (tahsiniyyat), by society. So, if there is a micro [micro-takaful scheme], these people will not feel the need. Informant X stated that the people of Banda Aceh perceive no need for insurance because it is considered expensive. Nevertheless, if micro-takaful was

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offered, it is probable that their perception of their need may change because a low premium price will not deter them. Based on his experience working at an insurance institution, he stated that: The growth of the micro can only come from marketing since it is not attractive in terms of fees. For example, Rp 50,000 sales with a commission of 20%, means that the agent can only get Rp 10,000 ($0.75 USD), which is too small and is not attractive enough. This may cause marketing to be sluggish, unless it is in a corporate form, such as for groups of students on campus where it is considered a form of micro as well, but in the form of micro-groups. Thus, micro-takaful has great opportunity for growth but is not comparable with commissions earned by agents who sell mainstream takaful products. This is because the level of commission depends on the value of sales: the higher the price of the products sold, the greater the value of the commissions that are earned. The role of agents is very important in the development of micro-takaful. There should be reasonable incentives to encourage them to sell micro-takaful. Micro-takaful product sales to groups can provide better returns and higher commissions for agents than sales to individuals. The perception of poor interest from agencies in offering this product is shared by Informant K who was once an employee of Takaful Company Q, one of the takaful providers in Indonesia: Micro-takaful is less in demand because, by the time I had quit from Takaful Company Q in 2001, the micro-takaful product named QQ Takaful was already unpopular. Micro-takaful is less attractive to agents since they are the ones who sell the product. It is difficult to understand the middle and lower classes. Those who are interested in the QQ takaful product are those who join Majelis Ta’lim (an Islamic learning community). Hence, education to the public on insurance needs a lot of improvement. This opinion of Informant K is similar to that of Informant X. He also believes that the micro-takaful offered by Takaful Company Q is less well received among agents, who are more interested in promoting other products that give them better profit than micro-products. He also added that marketing takaful products to low-income groups is not that easy because they need a better understanding of the purpose of insurance. This calls for a program that informs the public about the takaful scheme to ensure that they are aware of its importance and the benefits to be gained from joining it. Informant X is of a similar opinion as Informant K about micro-takaful. He stated that, for people to understand the functions and benefits of micro-takaful, there is a need for an advertising, or ‘socialisation’, process: Yes, it actually depends on socialisation … If it [socialisation] is good, then it is pretty potent too. So, if it is done and there is awareness from the companies, the government and the educators,

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or the campus, that is very good. Because, eventually, everyone will have protection. For people who die, if there is a microinsurance scheme with a premium of Rp 50,000 ($4 USD), it is a great opportunity because funeral expenses and other costs are quite high, as much as Rp 2,000,000 ($150 USD) in one day (Informant X). According to him, the successful implementation of micro-takaful depends on cooperation between the government, companies and educators. The parties concerned should continue to educate the public so that they are aware of the benefits of takaful in protecting them from future misfortunes. The example given by him is the event of death in Aceh, during which a family usually needs a large sum of money to bear the costs of the funeral and the tahlil event. With the availability of micro-takaful, the family would have no financial problem in managing their family member’s death.

4.3 Opinions of Takaful Practitioners Practitioners’ opinions regarding micro-takaful schemes differ to the public and academic experts. According to Informant L, micro-takaful has great opportunity for marketing in Aceh, but the micro-hazard risk of micro-takaful can become a major obstacle to the offer of such products: Micro-takaful is a great opportunity because of the low premium cost, only Rp 50,000 ($4 USD) per year, which means that the monthly contribution does not even reach Rp 5,000 ($0.37 USD). That is good if it can be maintained. But there is a high moral hazard since customers would cheat us. He explained that, prior to the official introduction of the micro-takaful concept by OJK, Takaful Company Q has offered takaful products that had this concept of micro, the QQ takaful product. He said that, when Takaful Company Q was offering the product, many customers who participated in the scheme during the early bid were from among the less fortunate. In addition to low premium rates, the QQ takaful products were also easily obtained by completing a form available at nearby post offices. The subscription of the product could also be delegated to others without requiring an underwriter. Because of this, Informant L said that the QQ takaful product’s offer to the public had a high moral hazard. They stopped offering the product because most of the customers were not being honest to the takaful party during the claims process. Informant L mentioned that the product received an encouraging response from the public, even though the benefits were limited to death coverage only. He felt that, if this product were to be offered again in the future, the response would be more favourable if other benefits for protection were offered.

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However, we found that the opinion of Informant L as a takaful practitioner differed from those expressed by Informant K, as an academic expert, on the lacklustre response towards the QQ micro-takaful products. The academics were of the view that most agents are not interested in selling micro-takaful due to the small incentives that they would earn. However, Informant L, as a takaful officer, believes that such matters depend on the intent and purpose of the agencies. If they sell the products with the intention of simply earning commissions, then they would be less interested because the commission that they can earn is negligible. In contrast, if the agents sell the products with the intention of spreading knowledge and understanding about takaful benefits, then they would be motivated to sell products, even if they expected only a small commission. A similar opinion is shared by Informant C regarding the interest of agents in offering micro-takaful schemes: The successful sales of products depend on the agents and not necessarily only on the size of the commission. If we really want, we can sell any product. It would be fortunate if we have the desire to sell. If we do not sell, there is no profit. Based on Informant C’s view, the agents act as intermediaries to sell whatever takaful products are offered to the public, including micro-takaful. According to him, not all agents work solely on the basis of commission. Since the amount of commission earned is based on the revenue of takaful policies sold, when agents sell in large quantities then their commission also increases. When discussing the potential of micro-takaful, Informant Y provided a different perspective about micro-takaful: That would be nice, because BPJS1 is actually formulated for the poor, especially for those who are unable to make an expensive purchase (insurance). But it also depends on public awareness; sometimes we are tired of explaining, but if they are not aware, they will not purchase it. She thus states that the potential of micro-takaful depends on the public’s awareness of its importance and benefits. According to her, even though the government has provided the infrastructure to help the poor by providing insurance at a small premium, it will have minimal impact if people do not take the initiative to participate in it.

1 BPJS stands for Social Security Agency (Badan Penyelenggara Jaminan Sosial). BPJS is an insurance company that runs the National Health Insurance program (JKN) of the Indonesian Health Department which ensures the health of all Indonesian citizens. This program is very helpful, especially to the poor, because costs for individuals are borne by the government without them having to pay any fee; however, it is limited to health protection.

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From the opinions and insights of the takaful officials that were interviewed, we found that all provided different answers concerning the viability of a microtakaful scheme in Banda Aceh. However, we can conclude that the success of a micro-takaful scheme in Banda Aceh is influenced by several factors: moral hazard, the role of agents and public awareness.

5. Discussion About the Three Parties The three parties that we interviewed – low-income earners, academic experts and takaful practitioners – provided different views on the potential of micro-takaful in Banda Aceh. All low-income respondents to the interviews reacted positively to microtakaful. Some of these positive responses referred to the reasonable and appropriate premiums that are based on the capability of those with low-incomes – such as those offered by the OJK as the regulator. These respondents claimed that, if there was a takaful scheme that offered a premium rate of 50,000 IDR ($4 USD)/ year, then they would be willing to participate in micro-takaful. Most respondents perceived a major obstacle to be financial problems or a lack of cash for takaful contributions. The following are some micro-takaful products that have been offered in some parts of Indonesia (Table 3):

Table 3: Micro-Takaful Products. Organisation a

AAUI

Product

Description

Warisanku Provides protection against the risk of death due to an accident, with a compensation of Rp 10,000,000 ($744 USD) plus funeral costs of Rp 500,000 ($37 USD) for beneficiaries. Rumahku Provides protection to residential buildings and micro-enterprise buildings against risks such as fire and flood. Stop saha Provides protection to enterprise workplaces such Erupsi as shops, stalls, stands, carts, bicycles, motorcycles and boats, as well as protection to the venture capital/business, from the risk of damage caused by a volcanic eruption. Stop saha Provides protection to enterprise workplaces such Gempa as shops, stalls, stands, carts, bicycles, motorcycles, Bumi boats, etc., as well as protection to the venture capital/business, from the risk of damage caused by earthquake.

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Table 3: (Continued) Organisation

AAJI

b

AASIc

Product

Si Peci

Si Bijak

Description

Life insurance that guarantees against the risk of mortality. Compensation is given at Rp 5,000,000 ($372 USD) if the client dies due to illness and Rp 25,000,000 ($1,863 USD) in the case of accidental death. A shariah micro-insurance product that offers life insurance and/or general insurance. For the protection of life, this product provides compensation due to death and for funerals. For loss coverage, this product offers a guarantee against the risk of accidents and the disruption of buildings where the enterprise or residence is located.

a

AAUI: Asosiasi Asuransi Umum Indonesia (Indonesia General Insurance Group). AAJI: Asosiasi Asuransi Jiwa Indonesia (Indonesia Life Insurance Group). c AASI: Asosiasi Asuransi Syariah Indonesia (Indonesia Shariah Insurance Group). Source: http://asuransimikroindonesia.org, conversion rate as at 18 December 2016, www.xe.com. b

The second reason why most of the other respondents do not participate in takaful is poor understanding of the functions and benefits of takaful. The solution to this is for the public to be educated to understand the benefits of insurance or takaful through advertising or campaigns. The village head or similar parties should also be involved in providing education about the benefits of insurance to the rural poor, who are usually far from access to the financial industry. Cole (2015) argues that the government is responsible for providing financial education to the public, rather than financial service firms. This is because the government has a role in incorporating financial education into the school curriculum. He observes that such a program is effective in high schools in Brazil, which has led not only to a significant increase in students’ financial knowledge but also to an improvement in their financial behaviour, such as saving for future purchases. Another approach that he believes can improve financial education is the use of mass media. According to him, financial education can change the community’s behaviour regarding finance. If some of these solutions can be implemented, in light of the responses from the community, then there are great opportunities for demand for micro-takaful. There is thus the potential for the implementation of a micro-takaful scheme in Banda Aceh. The academic experts argue that agents play an important role in the marketing of a product and ensuring its success. This view is also supported by T.O. Yusuf (2011), who argues that an insurance agent is an intermediary who provides

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a useful link between the insurer and the insured in the commercial insurance market. Similarly, in the micro-market of takaful products, the role of agents (intermediaries) is necessary for providing information to the public. Granting commissions or incentives is a good way of encouraging agents (brokers) to provide a good service and for insurers to successfully sell their product (T.O. Yusuf, 2011). According to the academic experts interviewed, agents are less interested in marketing micro-takaful products due to their perception that the commission they obtain from selling this product is insignificant. Hence, there is a reluctance to offer micro-takaful schemes to the public. The academic experts argue that micro-takaful could be marketed in Banda Aceh if agents were given reasonable incentives to encourage them to market it. A solution is that the takaful party, as an insurer, requires the service of intermediaries or agents who disseminate micro-takaful schemes and estimate compensation that will encourage them to provide good services. Takaful practitioners argue that micro-takaful has great potential to be marketed to the public of Banda Aceh since the services are offered at a low premium rate. This is because traditional takaful schemes are offered at premium rates which inspire only lukewarm responses. However, they also stated that the risk of fraud or moral hazard is high when offering micro-takaful. This is because microproducts had been offered to the public and the biggest challenge that faced was moral hazard or dishonest customers. Cole (2015) stated that moral hazard is an issue that often challenges the standard insurance market. He suggested that if micro-takaful products are to be properly developed, the government must boost the systems for digital financial services. For example, in offering and accepting micro-takaful, customers could conduct transactions through mobile phone payments to reduce transaction costs. The government can also establish a national identification system to reduce the danger of fraud or other moral issues.

6. Conclusion Based on the views of the three parties interviewed, we conclude that there is potential for micro-takaful to be offered in Banda Aceh, given the needs of its poor and low-income earners. As mentioned previously, its main problem is the perception of expensive premium payments by low-income communities. However, given that the micro-takaful premium rate offered by OJK through AAUI, AAJI and AASI is only Rp 50,000 per year, the value seems reasonable, and lowincome earners could participate in micro-takaful. However, there are many challenges that will need to be faced by the insurance industry and the government to ensure its successful implementation.

References Aceh Central Bureau of Statistics. (2015, September). No. 46/09/TH.XVIII. Retrieved from http://aceh.bps.go.id/asem/brs_ind/brsInd-20151021083740.pdf. Accessed on May 16, 2016.

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Akotey, O. J., Osei, K. A., & Gemegah, A. (2011). The demand for micro insurance in Ghana. The Journal of Risk Finance, 12(3), 182–194. Asuransi Mikro Indonesia. (2014). Grand design OJK. Retrieved from www. asuransimikroindonesia.org. Accessed on May 19, 2016. Bardai, B., & Salleh, M. F. M. (1996). Pengurusan kewangan keluarga (p. 196). Kuala Lumpur: Utusan Publications and Distributors Sdn. Bhd. Churchill, C. F. (2006). What is insurance for the poor? In C. F. Churchill (Ed.), Protecting the poor: A microinsurance compendium (Vol. 1, pp. 12–24). International Labour Organization. Cohen, M., & Sebstad, J. (2006). The demand for microinsurance. In C. F. Churchill (Ed.), Protecting the poor: A microinsurance compendium (Vol. 1, pp. 25–44). International Labour Organization. Cole, S. (2015). Overcoming barriers to microinsurance adoption: Evidence from the field. The Geneva Papers on Risk and Insurance - Issues and Practice, 40(4), 720–740. Hasim, H. (2014a). Developing a conceptual framework of microtakaful as a strategy towards poverty alleviation. Journal of Economics and Sustainable Development, 5(28), 1–8. Retrieved from http://repository.essex.ac.uk/13181/1/18665-21118-1PB.pdf. Accessed on June 20, 2016. Hasim, H. (2014b). Microtakaful as an Islamic Financial Instrument, for poverty alleviation in Iraq. Middle-East Journal of Scientific Research, 21(12), 2315–2325. Idris, N. A. H., & Dan, A. R. (2004). Teori Pertumbuhan dan Pembangunan Ekonomi (pp. 23–24). Bangi: Penerbit Universiti Kebangsaan Malaysia. Khan, M. J. A. (2006). Micro-takaful, the way forward. Academy for International Modern Studies. Retrieved from www.LearnIslamicFinance.com. Accessed on May 12, 2016. Lloyd’s 360° Risk Insight. (2014, November). Insurance in developing countries: Exploring opportunities in microinsurances. London, UK: Lloyd’s. Retrieved from https://www.lloyds.com/;/media/lloyds/reports/360/360%20other/ insuranceindevelopingcountries.pdf. Accessed November 4, 2014. McCord, M. J. (2009). Microinsurance: Providing profitable risk management possibilities for the low-income market. In I. Matth¨aus-Maier & J. D. Von Pischke (Eds.), New partnerships for innovation in microfinance (pp. 281–282). Berlin, Heidelberg: Springer. Pfister, W., Klein, B., & Denker, H. (2009). Security at little cost microinsurance in financial systems development. BMZ position paper: Microinsurance – A field of activity for German development policy. Federal Ministry for economic cooperation and development, Bonn, Germany, 2009 – Strategies 179. 23p. Retrieved from https://www.bmz.de/en/publications/archiv/type_of_publication/strategies/ konzept179.pdf. Accessed on May 2016. Pinto, V. (2015). Role of NGOs in promoting micro health insurance: A study with reference to ‘Sampoorna Suraksha’ Health insurance scheme by SKDRDP, Mangalore (India). South Asian Journal of Business and Management Cases, 4(2), 251–261. Sherif, M., & Azlina Shaairi, N. (2013). Determinants of demand on family Takaful in Malaysia. Journal of Islamic Accounting and Business Research, 4(1), 26–50. Retrieved from www.emeraldinsight.com/1759-0817.htm.

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Tomchinsky, G. (2008, November 5). Introduction to micro-insurance historical perspective. Fourth international microinsurance conference, Cartagena, Colombia. Retrieved from http://www.ilo.org/public/english/employment/mifacility/download/ presentations/mconf2008_tomchinsky.pdf. Accessed on September 30, 2014. UNDP. (2017, October 25). Sustainable development goals. Retrieved from http:// www.undp.org/content/undp/en/home/sustainable-development-goals/goal-1-nopoverty/targets/. World Bank. (2015). Working to end extreme poverty and promote shared prosperity. Retrieved from http://www.worldbank.org/en/about/annual-report/overview. Accessed on Jun 17, 2016. Yusuf, T. O. (2011). Brokers’ incentives and conflicts of interest in the control of opportunism. The Journal of Risk Finance, 12(3), 168–181. Yusuf, T. O., & Mobolaji, A. H. (2012). The role of Islamic micro insurance in economic growth and development: The Nigerian experience: A case study of Al-Barakah microfinance bank, Lagos. International Journal of Business and Commerce, 1(10), 106–122.

Interviews Informant Informant Informant Informant Informant Informant Informant Informant Informant

C. (2015). An Interview, 29 June. G. (2015). An Interview, 13 June. K. (2015). An Interview, 9 June. L. (2015). An Interview, 11 June. M. (2015). An Interview, 2 August. P. (2015). An Interview, 2 August. X. (2015). An Interview, 9 June. Y. (2015). An Interview, 29 June. Z. (2015). An Interview, 26 May.

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Chapter 8

Women and Risk: Does Takaful Have the Solution? Nuurshiraathal Firdaws Abd Rani and Asmak Ab Rahman Abstract Purpose – Women are more susceptible to specific health risks such as breast cancer, cervical cancer, and risk during pregnancy and childbirth. These can affect women’s well-being and also need to be managed to avoid financial loss. Takaful operators in Malaysia have been offering special takaful products for women. Women can mitigate exposure to these risks through insurance. This study examines the risks faced by Malaysian women and the coverage they are offered by Islamic insurance. Methodology/approach – The study used a qualitative methodology involving documentary evidence and interviews with four Islamic insurance agents and four product development officers from four Islamic insurance providers in Malaysia. Findings – Among the risks faced by women are female-specific illnesses, the cost of expensive treatments, crime-related accidents or loss, social or career risks and privatisation policy. Due to these risks, women are in need of female-specific takaful products to reduce risk and protect themselves. Originality/value – Specific takaful products for women are crucial to protect them from risks, improving their well-being and increasing their participation in the nation’s economic and social development. Keywords: Women; risk; women’s takaful products

1. Introduction No one, male or female, can escape risk. Women face different risks from men. Thus, women need takaful products to protect themselves. Razif and Mohamad (2011) discuss various risk management tools, such as Islamic insurance and derivatives, which aim to keep risk to a minimum. However, Muslims cannot use conventional insurance due to prohibitive elements in the way it is managed. Therefore, in many New Developments in Islamic Economics, 117–134 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181008

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Muslim countries – such as Saudi Arabia, Indonesia, the UAE and Malaysia – an Islamic form of insurance has been introduced to enable Muslims to gain the benefit of insurance protection. A criticism has been that Islamic insurance mimics conventional products. Insurance companies have recently offered insurance protection to specifically protect against risks faced by women. Islamic insurance operators also offer the same protection. This study investigates why Islamic insurance operators offer such products specifically for women. We assume that Islamic insurance operators offer these products due to market demand. Islamic insurance functions as a risk management hedge against unexpected loss and can reduce loss to small rather than devastating impact (Abdou, Ali, & Lister, 2014). Dusuki and Bouheraoua (2011) note that Islamic insurance is based on the Islamic principles of protection of religion, protection of life, protection of intellect, protection of lineage and protection of property. In terms of the general function of insurance, Islamic insurance plays a similar role as non-Islamic insurance, which is to provide financial assistance in the event of an unfortunate event occurring to the insured. However, there is no direct guidance about takaful in the Qur’an to inform the maqasid rules. We may examine exegesis of Surah Yusuf, verses 47–49: Prophet Yusuf said: “You will plant for seven years consecutively; and what you harvest leave in its spikes, except a little from which you will eat. Then will come after that seven difficult [years] which will consume what you saved for them, except a little from which you will store. Then will come after that a year in which the people will be given rain and in which they will press [olives and grapes].” Based on the Qur’anic verses above, Ibn Kathir (1988) explained the interpretation of the dreams and solutions given by the Prophet Yusuf to the Egyptian king. The Prophet Yusuf interpreted the Egyptian king’s dreams to mean that Egypt would experience drought for seven years after prosperity. He suggested that the king plant crops for the first seven years and store these crops as preparation for the next seven years of drought. This shows that people require knowledge of risk management in managing financial affairs and wealth assets. From an Islamic perspective, Abdullah (2012a, 2012b, 2012c) states that risk management is vital and that we are encouraged to improve our lives and social well-being. These Qur’anic verses clearly explain the importance of strategic planning in controlling and managing risks to protect ourselves. A lack of effective risk management is likely to endanger certain individuals to the extent of risking their lives (Yazid et al., 2017). Islam recognises the existence of risk and even motivates individuals to control and mitigate it, consistent with the maqasid shariah, in the protection of life (Aris et al., 2012) and property (Razif and Mohamad, 2011).

2. Health Risks The World Health Organization (WHO) has noted that women’s health has become an urgent priority. Asaria et al. (2009) have reported that chronic diseases

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have a great impact on women’s health in both developed and developing countries. The statistics for mortality and disability for women of all ages are highest in Africa. In Malaysia, in 2016, DOS (2017) has reported the crude death rate for women at 4.5 per 1,000 population. Hatta, Pandian, Fazwan, and Farouk (2008) observe that life expectancy for women is higher than men. By 2017, the life expectancy of women had increased to 77.4 years (DOS, 2017). In Malaysia, the three most common cancers suffered by women are breast cancer (32%), colorectal cancer (11.1%) and cervical cancer (8.3%). However, the statistics by MOH (2012) on female cancer after the age of 60 years show a decline in comparison to men. Breast cancer is a global cause of death among women, at 522,000 deaths per annum. Ovarian cancer is also a major cause of death, especially when the cancer spreads from the ovary. In India, statistics from NCDIR (2013) on breast cancer have surpassed those of cervical cancer. Gangane et al. (2016) conducted a study between 2010 and 2012 on 212 women in rural India who had been diagnosed with breast cancer. They identified risk factors associated with delays experienced by these patients in seeking treatment. A total of 381 breast cancer cases involving women were diagnosed from 2010 to 2012 at Kasturba Hospital: 73 of them died in 2013 who had no previous examination and were diagnosed with breast cancer only after self-examination at the health centre. Gangane et al. (2016) found that 103 women (48.5%) experienced a delay of more than three months between the first appearance of symptoms and the first treatment at a health centre. Age is associated with patients’ delays, with women aged 60 and older being five times more likely to defer medical consultation than younger women. The majority of patients (73.1%) sought private medical advice rather than government health services (11.8%). The clinical symptom most often experienced is a painless mass in the breast (92.4%). Patients tend to take these for granted and regard these symptoms as non-life-threatening. The study also found that nearly 60% of patients who are late in seeking medical treatment are at severe clinical stages. This leads to a low survival rate due to limited capacity for diagnosis and therapy. Gangane et al. (2016) concluded that a multivariate statistical analysis found that patients’ ages positively correlated with a delay in seeking medical treatment in rural India. Meanwhile, bivariate statistical analysis was conducted into the final stage of the disease. Thus, health education is very important for reducing patient delays and assisting in the early detection of breast cancer. Jewkes, Dunkle, Nduna, and Shai (2010) have found that women are also vulnerable to diseases such as HIV/AIDS and malaria, particularly due to sexual practices, rape and patterns of work. Therefore, it is very important to study women’s exposure and the prevalence of HIV/AIDS in relation to work risks, socio-cultural behaviour and gender-specific roles and practices. Another disease affecting women is human papilloma virus (HPV), the leading cause of death due to cancer in developing countries. Internationally, almost all cervical cancer cases are linked to HPV genital infection. According to WHO (2009), the highest statistic for HPV prevalence is in Africa, with one in five women being infected with HPV. Efforts should be made to raise awareness among women about the early

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symptoms and risk exposure factors of these chronic diseases. Health improvements will reduce their risk. Davidson et al. (2011) suggest that basic healthcare and intervention must be implemented to meet the needs of the contemporary society. Mutalib (2011) found that another factor which affects women’s health is stress. Malaysia ranked 16th in terms of women feeling under pressure. Among such pressures are suspicions about husbands, worry over children not excelling academically and taking on high workloads in order to be recognised by senior management. However, these conditions do not apply to all women because there are some who can control this pressure due to their personality and maturity, or do not work in the labour force. Pregnancy and childbirth also pose risks. Complications from pregnancy include disseminated intravascular coagulation, ectopic pregnancy, hydatidiform mole, miscarriage and stillbirth. Another risk is the psychological health of the mother. Social support for the psychological health of the primiparous (first child) mother is very important for containing depression, anxiety and low selfesteem. A study conducted by Razurel and Kaiser (2015) in Geneva on 235 mothers who were in the last month of pregnancy to six weeks after birth noted that the emotional support, respect, material support and knowledge of the women’s partners, mothers, family and friends, and of professionals, are all important. More than half a million women continue to die each year during pregnancy and childbirth, and 99% of these live in developing countries. In developed countries, there are an average of 9 maternal deaths per 100,000 live births, while for developing countries, the figure stands at 1,000 or more maternal deaths per 100,000 live births (WHO, 2009). The highest maternal mortality rates are in subSaharan Africa and South Asia. In some areas in Asia and Africa, less than half of women giving birth were attended by health professionals (Department of Public Information, 2010). In Malaysia, the maternal mortality rate in 2016 was 29.1 maternal deaths per 100,000 live births. Obstetric embolism is the main cause of maternal mortality in 2016 (23.0%) (DOS, 2017). The three main maternal risks during pregnancy are diabetes, anaemia and high blood pressure (MOH, 2012). Therefore, Davidson et al. (2011) have suggested improvement in the universal implementation of education and health strategies to increase the proportion of births attended by skilled health personnel, particularly for women in rural and remote areas.

3. Social Risk According to Karim (1990), after the independence of Malaysia, the changing pattern of female participation in employment has become more clearly visible. Additionally, the implementation of the New Economic Policy (NEP) and changes in economic strategy have opened up job opportunities for women, enabling the elimination of poverty and the restructuring of society. The UN’s 2010 Asia-Pacific Human Development Report (AHDR) estimated that Malaysia’s gross domestic product (GDP) would benefit by 2.9% per annum

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if the labour force participation rate (LFPR)1 of women increased by 70% (UNDP, 2010). In a study conducted by Myrdal and Klein in Britain, Beechey (1983) stated that among the factors leading more women to join the labour force are the change in the size and structure of the family, uncertainty about life after marriage and longer life expectancy. In addition, women work because they do not want to be completely dependent on their husbands. If they are working, their future is more secure in the event of any marital disruption such as divorce or the death of their husband. This observation is supported by Bakar (2012), who argues that, from an economic perspective, a factor leading women to work is the higher cost of living which requires both spouses to work in order to meet the family’s expenses. In addition, the growing processes of industrialisation and urbanisation have led to higher demand for labour. WHO (2009) estimated that 50% of the formal labour force in most countries are women. According to DOS (2017), the participation rate of women in Malaysia’s labour force in 2016 was 54.3%. In 2017, women comprised 15.5 million of a population of 32 million; the influx of female graduates is 61%. The number of women in post-secondary education is higher than men: 63,107 compared to 34,699. Malaysia estimates an increase in the female labour participation rate of 59% by 2020 (EPU, 2015).

4. Crime Risk Domestic violence involving physical, sexual or psychological attacks; forced isolation; economic deprivation and disorders can leave women living in fear. Rosenfield, Min, and Bardfield (2010) posited that at least one in three women will be a victim of physical, sexual or psychological abuse. Most forms of such violence continue for several years. Violence against women and girls is very dangerous because it can lead to psychological damage, loss of personal freedom and loss of confidence to participate in society. In Malaysia, the issue of violence against women – domestic violence, rape and sexual harassment – is widely recognised. In 2014, the statistics on domestic violence released by the DSW (2014) documented 696 cases involving females compared to 35 for males. Crime against women is rampant but few cases are reported. Consequently, violence against women is a concealed problem that affects human and healthcare costs (WHO, 2009). Thus, Davidson et al. (2011) argued that education about legal recourses and courage to speak up for high-risk victims of crime should be a priority; it would improve the lives of individuals but also of society as a whole.

‘LFPR’ is the percentage of working-age persons in an economy that are either employed, or not employed but looking for a job; website About Education. Retrieved from http://economics.about.com/od/unemploymentrate/f/labor_force.htm. Accessed 30 March 2015.

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Davidson et al. (2011) stated that the Code of Practice on the Prevention and Eradication of Sexual Harassment in the Workplace is enforced by the Ministry of Human Resources (MHR) to address the problem of sexual harassment in the workplace, whereas sexual harassment outside the workplace is governed by Sections 375–377 of the Penal Code. In 2006, several important amendments were made to the law to recognise marital rape under Section 375A.

5. Takaful and Women Thus, considering these types of risk faced by women, researchers can investigate the prospects of takaful companies. Takaful companies have been chosen because their modus operandi is free from the elements riba, gharar and maysir (Ali, Odierno, & Ismail, 2008). These three elements are a complex element of shariah non-compliance. Establishment of the takaful industry in Malaysia is a result of the National Fatwa Committee, which in 1984 issued a fatwa that conventional insurance practices in Malaysia are unlawful for Muslims. Frenz and Soualhi (2010) have stated that shariah non-compliance risk is the operational risk incurred by an Islamic financial institution due to elements of shariah noncompliance or other relevant elements. This risk will cause takaful operators’ earnings or profits to be unrecognised by shariah and cause takaful operators to incur losses. It is important to ensure that all takaful activities conform to the maqasid of shariah. It differs from conventional insurance that uses voidable (fasid) contracts where policyholders pay a premium to protect themselves or their interest against risks. For insurance, each policyholder’s risk is managed by insurance companies through a form of risk intermediation. Patel (2004) observed that takaful is an element of Islamic finance that is regarded as the second-most important social institution for eradicating poverty and need in Islamic societies. In Southeast Asia, Malaysia is a leader in the takaful sector and has performed strongly, especially in the family takaful market. Ernst and Young (2014) stated that, in the ASEAN region in 2014, estimated gross takaful contributions reached approximately US$4.2 billion, compared to US$3.5 billion in 2013. Gross takaful contributions in Malaysia were almost three-quarters (71%) of this. According to Abdullah (2012a, 2012b, 2012c), participants pay contributions for two main purposes: as tabarru’ in takaful funds to assist other participants, and as savings and investments for the benefit of participants and their family members in the event of any disaster or death to the participant. Takaful plays a role in protecting participants against contingencies that differ from regular insurance protection through takaful funds. Takaful funds cover contingencies for participants by provide financial assistance in their eventuality when the participants suffer a defined loss. Such a fund is managed by takaful operators as trustees. According to Siti Khadijah, Saleh, Kamarudin and Haryadi (2013), participants contribute a certain amount of money as collective coverage in order to assist each other in the event of a mishap. This approach allows the participants to have a contingency for any subsequent undesirable event. It also provides them with greater accessibility to takaful and higher creditworthiness.

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Ezamshah (2011) mentioned that, from the participants’ perspective, the objectives of takaful recruitment include the accumulation of education savings, retirement funds, hospital bill payments and other requirements. They also have the opportunity for high investment returns from takaful plans while managing adverse risks such as early death or expenses involving hospital and other bills. Therefore, risk is managed by sharing it with all participants in the takaful fund. Consequently, an individual will also incur some of the risks faced by other participants. In addition, takaful funds should interact with other forms of Islamic finance to ensure that takaful institutions are sufficiently managed to address contingencies. Therefore, takaful is social insurance with its premiums and funding both low-cost and accessible. For example, MAA Takaful – also known as Zurich Takaful – introduced Takafulink Wanita as a protection for women. It is a unique product that offers both protection and investment benefits. Its participants have the flexibility to pay contributions monthly, quarterly, semi-annually or annually. Their contributions are as little as RM50 a month. Etiqa Takaful also introduced a takaful product specifically for women: Femina Special. The contribution for the age band of 18–40 years is RM22 per month, and for age 41–70 years is RM41 per month. Chia (2010) observed that treatment at public hospitals in Malaysia is still affordable (outpatient clinic: RM1; specialist clinic: RM5; and a maximum of RM50 for third-class ward hospitalisation) due to subsidies from the government. Ren (2006) reported that only one-third of surgeons and physicians work in public hospitals, although public hospitals have 41,429 beds and private hospitals only 11,689 beds (Abdul-Hamid, 2010). This results in excess workload which affects the services given to low-income groups. During emergencies, people in lowincome groups have no option but to go to the nearest private hospital to receive prompt treatment. Such factors also motivated the researcher to investigate the viability of women’s takaful in Malaysia. Micro-takaful is among the social and ethical results of takaful in society beyond it being merely an insurance scheme. According to Htay, Sadzali, and Amin (2015), takaful operators are concentrating more on takaful products for middle- and highincome groups. Micro-takaful is an alternative that can serve as a protection scheme for low-income earners to assist them with financial protection in the case of accidents. It also helps the industry to be more competitive. Ahmad (2007) argued that offering micro-takaful to lower-income groups would expand the takaful product range, introduce true tabarru’, and offer competitive products. Currently, only a few micro-takaful products are available on the market. Siti Khadijah, Saleh, Kamarudin and Haryadi (2013) also advocated the importance of participation in takaful for lower income groups to obtain funds from the International Monetary Fund (IMF), as was done by Micro-Takaful Sakinah in Indonesia. This practice enables micro-takaful institutions to reach low-income earners who have not previously been reached by them. Microfinance institutions (MFIs) could also offer micro-finance products at low risk. Thus, those on lower incomes could enjoy the benefits of takaful protection which they previously found difficult to afford. This demonstrates that micro-takaful is

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important in ensuring the sustainability of MFIs by offering protection against unexpected events such as theft, illness and death on the answers given by the informants. All the information that was gained assisted researchers to analyse the data and summarise the research.

6. Results and Data Analysis Qualitative data analysis began with the transcription of all audio-recorded interviews from the informants. The researchers compiled the data by assigning an index code to each of the informants. For example, for the transcription index code TA3(E)-27/8/15(6), TA3 referred to the third informant, 27/8/15 to the date of the interview (i.e. 27 August 2015) and (6) to the row number from which the passage was taken. These codes facilitated the researchers to retrieve and crossreference original data. The researchers extracted every sentence or paragraph related to the research questions and coded them. Based on the coding combination results for informants 1–8, the researchers deduced a number of themes that were considered appropriate for the scope of the investigation. The coding was performed at the data construction level to consolidate all similar data. Common motifs were identified before they were segregated into several main themes. The coding categories were women’s risks, age of eligibility and the product benefit packages. Furthermore, a documentation content analysis was performed on items such as brochures to ascertain whether they were relevant to the research questions. Suitable content was also incorporated into certain themes as the interview’s support material. Table 1 lists the answers from the informants that were identified by the researcher as relevant to the question of the major risks to women’s health.

Table 1: Women’s Risks. What Are the Risks Faced by Women Which Stimulate the Offering of Women’s Takaful Products? Informants

Informants TA1, TA2, TA4, PO5, PO6, PO7 and PO8 Informants TA1, PO6 and PO8 Informant TA3 Informants TA2, PO6 and PO7 Informants TA1 and TA4

Answers

Female-specific illnesses High cost of treatment Career risk Crime-related accidents or losses to women Risk of privatisation policy/reduction in government hospital subsidy

Source: Analysis of interviews with informants.

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6.1 Female-Specific Illnesses The offering of takaful products specifically for women is very important because the incidence of specific illnesses, particularly cancer in women, is high. According to Siegel, Miller, and Jemal (2017), statistics from the National Cancer Institute (NCI) confirm that the cancers most prevalent in the United States are those of the breasts, lungs and prostate. In 2017, there were an estimated 252,710 new cases of breast cancer for women and 2,470 cases for men, while the estimated deaths due to breast cancer were 40,610 for women and 460 for men. However, deaths by breast cancer ranked second to lung cancer among women, with 71,280 cases of the latter. According to the informants, insurance companies are aware that women are exposed to a few female critical illnesses such as cancer, either of the breast or cervix. These statistics were reflected when informants TA1, TA2, TA4, PO5, PO6, PO7 and PO8 were asked, ‘What types of risks faced by women stimulate the offering of women’s takaful products?’ The answers are grouped into five. Firstly, TA2 and PO5 only mentioned generally that women are more at risk of disease because there are some diseases that are specific to women. However, TA1, TA4, PO6 and PO7 further clarified the benefits of women’s takaful products offered by their own takaful operators to the main critical illnesses affecting women. According to them, there are multiple female illnesses which include cervical cancer, breast cancer, ovarian cancer and complications from pregnancy. In addition, the existence of international women’s cancer month shows that women are more often diagnosed with cancer. Takaful Puteri is specific to female illnesses. Femina designs its various products differently: it is the best for covering women from any type of cancer. The rate of breast cancer among women is very high. Thus, takaful operators can assist by providing monetary compensation. Thirdly, PO5 stated that, when they formulated the product, they did not adequately consider whether it was effective because they created it as a general fit for illnesses. In addition, PO5 thought that women’s awareness of illnesses is higher than men and that they are more concerned about health. PO6 stated that people asked about women’s takaful because cancer is considered a normal illness nowadays. Finally, PO8 said that his company paid tribute to the increasingly high status of women in society with their tagline ‘Ultimate to women’. Thus, female-specific illnesses such as cervical and breast cancers are now perceived as normal phenomena for takaful. Protection from specific female illnesses is emphasised by several takaful operators because exposure to specific disease risks is higher among women. Although men are also vulnerable to illnesses such as heart diseases (Utusan Online, 2016), these can be covered by basic takaful plans. Ischemic heart disease is the main cause of death for males 15.3% in 2016.

6.2 High Cost of Treatment Risk When dealing with specific diseases, one cannot escape the high cost of treatment. Most patients only realise they have cancer such as ovary cancer when they are in Stages 3 or 4 of the disease; the high cost of treatments such as chemotherapy or

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removal of cancerous lumps are then unavoidable. In addition, women’s role in reproduction means that they have to deal with the risks such as complications during childbirth where the cost of treatment is also high. Thus, the protection of women offered by takaful products is important because the tabarru’ fund can provide financial relief to cover the costs of treatment. The rising cost of living can mean that emergency savings are used to assist with everyday expenses. Informants TA1, PO6 and PO8 expressed their opinions regarding the high cost of treatment risk when asked ‘What types of risks faced by women stimulate the offering of women’s takaful products?’ Their response was twofold. On the one hand, TA1 did not provide clear views and only mentioned the costs of treatments. This informant said that perhaps our spending can be controlled but there are other things that we cannot control, such as the cost of treating serious illnesses such as cardiovascular disease and the many procedures relating to the treatment of cancer. Thus, these expenses can be quite alarming. On the other hand, PO6 and PO8 discussed how we could manage if disease is suddenly detected or if we fall sick and need to be hospitalised. An example is being diagnosed with Stage 4 ovarian cancer which would involve many costs. Someone might need to undergo chemotherapy or have a lump removed but they might have no savings or coverage because they had been feeling healthy. If there are a lot of money or savings, it would not matter. This is a benefit of takaful coverage. We also asked a question about how takaful premiums and takaful can be made viable and sustainable as well as accessible: ‘Does the contribution rate imposed in women’s takaful products take into account the participants’ ability?’ Six informants – TA1, TA3, PO5, PO6, PO7 and PO8 – agreed that the rate of contribution for women’s takaful products takes into account participants’ ability to pay. For their annual contribution rates, takaful operators consider all aspects relevant to the population of Malaysia. They have conducted research or pilot studies to ensure that annual contribution rates are in line with the target market. They also facilitate agents to draft plans that are appropriate to the level of the participants’ financial ability. Informants TA2 and PO8 also stated that the annual takaful contribution rate is also included within the wakalah fee charge for managing the business. This is because each participant’s contribution rate will be channelled to the participants’ own fund and a certain percentage taken for the wakalah fees as well as the participants’ tabarru’ funds. Thus, the rate of takaful contribution imposed by takaful operators has tabarru’ elements, wakalah, and savings and investments to safeguard the benefits of the participants as well as the welfare of takaful operators. Compensation money withdrawn from the takaful fund can also help participants and their family members because those with critical illnesses are not able to earn income and support their family. Yusof (1996) observed that takaful has an element of investment through a mudarabah contract (element of profit-sharing among participants with takaful operators). Abdul Aziz and Mohamad (2013) argued that takaful can also be used to plan retirement with structured savings for the future which can act as replacement income or savings in the event of death or permanent disability – especially the death of a single breadwinner in a family.

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Takaful claims could then support surviving family members. Therefore, every family requires the protection of takaful according to the needs of its dependents. Abdul Aziz and Mohamad (2013) also mentioned that the cost of healthcare is one of the factors that make insurance necessary. Although some countries, such as Malaysia, provide free treatment in government hospitals, this is still insufficient and patients must wait a long time for treatment. Most who can afford it prefer medical services at private hospitals that offer more comfort and faster treatment than government hospitals. Thus, through takaful, the financial burden of expensive healthcare can be mitigated. Healthcare costs are rising because of higher service charges which reflect developments in medicine and technology, the increasing demand for services, and increased awareness of health. Among the factors that are leading to increased demand for services are lifestyle, nutrition and the environment, which are considered both communal and individual responsibilities (MOH, 2011). These are stated in KRAs (key result areas) 2 and 3 regarding health awareness and healthy lifestyle. Individuals and communities are empowered to focus on their own health when they acquire knowledge and skills, thereby achieving optimal outcomes in decision-making about health. In addition, preventive care programs and disease management should be a priority for improving health and reducing costs (MOH, 2010). However, the current awareness about protections against future risk is still poor, especially for those in rural areas. They assume a takaful plan wasteful, especially if they are still healthy. This is because their disposable income would be reduced if they paid the management expenses of takaful operators; no misfortune may occur during the takaful coverage period.

6.3 Career Risk Career risk is another factor that necessitates takaful products for women. Most women nowadays have completed higher education and have their own source of income. In Malaysia, the percentage of women graduates is 61% and the number of women in post-secondary education is more than men: 63,107 versus 34,699 (DOS, 2015). It is estimated by the Economic Planning Unit (2015) that female participation in the Malaysian labour force will increase to 59% by 2020. Sairally (2012) argued that demographics has triggered institutional interest in women. They comprise more than 40% of the global workforce, and more than half are university-educated. Therefore, their role in the development of the economy and society is indispensable. Hence, their potential to be exposed to any form of risk and accident is at high levels, such as by car accident whilst headed to work. According to statistics on transport accidents in 2016, showed a high percentage of men at 7.5% compared to women 2.2%. However, women are more vulnerable, quick to panic, emotional and traumatic compared to men in situations of disaster or unforeseen situations. These findings were confirmed by excerpts from interviews with informant TA3, who said that women are at more risk from going out to work than from pregnancy. They do have workplace compensation but

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women’s takaful products provide broader protection for women. Nevertheless, benefits for death and permanent disability are also offered in other family takaful products that cover both men and women.

6.4 Crime-Related Accidents or Losses to Women Women’s takaful products also offer protective benefits from crimes such as kidnapping, rape and ATM cash withdrawal losses. Takaful operators will pay a sum of money as a courtesy to their participants if they are a victim of any criminal incidents. For instance ETB (2015), compassionate cash totalling RM500 is offered for domestic violence, RM1000 for snatch thefts, and RM1000 for ATM cash withdrawal losses. According to Hanna (1969), takaful is a social protective agency when it covers all aspects of material needs such as food and shelter; there are also moral aspects such as compensation purposes for certain accidents such as those related to crime. Takaful allows improved accommodation for the needs of its participants by monitoring demand. Compassionate cash also comes from such funds. According to Htay et al. (2015), takaful is all about social benefits. It is important to understand social issues to mitigate risks because there should be an internal mechanism for the protection of the takaful fund and its participants to assist in cases of mishap or crime-related incidents. Although misfortunes suffered by women cannot totally be measured and compared in monetary terms, such compensation payments can meet legal and other costs incurred by women while they lodge a complaint to ensure that those involved in crime are punished; this contributes to the maslahah (well-being) of women. On the other hand, if a woman does not have a takaful plan and the cost of making a complaint is high, it is possible that the crime will not be reported to the authorities. Thus, the criminals might go unpunished and continue to oppress women. This observation was supported by informants TA2, PO6 and PO7. They mentioned only two takaful operators which offer benefits for women affected by crime. TA2 explained that among the benefits of women’s takaful products are when women became the victim of a crime such as snatch theft, such as when a woman has her bag snatched, and she then falls and is hit by a car. According to PO6, some takaful operators may not compensate for incidents such as rape. PO7 remarked that protection against crime is needed because it may occur during the policy period of takaful besides takaful coverage for death, disability and women’s cancer. Aishah, Nong, and Hamid (2010) argue that most cases of violence against women are due to their gender because women are assumed to be more emotional, easily deterred and do not like violence compared to men. Furthermore, fear of resisting violence is a major barrier to progress in their life. Another misfortune that may occur to women is divorce. In this case, a takaful operator will make some payment through goodwill to cover the legal costs of the woman, especially if she was divorced by her husband without her consent. In 2016, Royal Malaysia Police have issued statistics on domestic violence: 5,796 cases (60.4%) were reported, 1,951 (20.3%) in rape cases and 1,526 in molest cases (15.9%). This is reflected by excerpts from interviews conducted with informants TA3 and PO6. TA3 mentioned that crime-related accidents benefit, such as for

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theft and even for ATM theft, was not provided under family takaful but was offered under Femina with PesonaLady. PP6 explained that they also offered divorce benefit. Thus, the benefits offered by takaful operator regarding crime-related incidents or losses to women can protect their lives, lineage and property maslahah because most of them are vulnerable to rape, ATM cash withdrawal losses and other risks.

6.5 Privatisation Policy/Subsidy Reduction at Government Hospitals By the year 2020, healthcare spending is expected to increase threefold in terms of dollars compared to 2007 (4.7% of GDP) (MOH, 2010). The public health sector is very important to the community, especially to those who cannot afford treatment at private hospitals. The private health sector plays a role in improving Malaysia’s provision of healthcare. In 2016, there were 216 private hospitals with 14,619 beds which refers to private maternity home, private nursing home, private hospital and hospice (DOS, 2017). However, this sector is more concentrated in urban areas and where people can afford cover or have their own health financing or insurance from employers. The congestion and workload in public health facilities are due to financial constraints and result in assistance being sought from the private sector (MOH, 2011). This is reflected by the information provided by informants TA1 and TA4. According to them, subsidies from government on government hospitals have continued to decline. TA1 mentioned that many treatments that were once free now require payment or are moving in that direction. Previously, treatment for all diseases, even heart attacks, was paid by the government if sought at government hospitals. Now, however, there are financial constraints on the government and, hence, subsidies. The government is already subsidising less and passing on subsequent effects to people, such as fewer facilities for free treatment. The current trend is towards privatisation. TA4 said that many people are willing to start a plan because of their dependents. In government hospitals, subsidies have generally continued to decline. Mohamad and Tumin (2014) argued that one factor relating to health privatisation policy is changing demographics, especially regarding senior citizens who urge the government to increase health spending. In addition, there is an increased demand, particularly from the middle class, for better quality and faster health services. However, according to Rustgi, Doty, and Collins (2009), the result of health privatisation is users paying a higher cost for treatment in private than in government hospitals, as happens in the United States. Accordingly, with the existence of a dual public–private system, there is a need to integrate these sectors’ delivery systems in health financing to ensure the optimum use of resources, particularly as the competitive private sector is an engine of growth – outlined by the National Strategic Directions in achieving Vision 2020 (MOH, 2010). On the other hand, the government still must improve the policy and regulation of the entire dual health system. Thus, takaful contributions for health coverage are indispensable for covering medical costs in private hospitals, especially takaful products which are specifically for women.

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7. Conclusion Specific takaful products for women are important in reducing the potential risks they face. The results of this analysis demonstrate that the risks faced by women are female-specific illnesses, the high cost of treatment, career risks, crime-related accidents or losses and privatisation policies or the reduction of subsidies in government hospitals. Therefore, the takaful products offered by takaful operators can provide protection, especially in health protection, pregnancy complications, crime-related incidents or losses to women. However, takaful coverage for men is also important. Based on the findings, there are also takaful operators offering takaful products for men and most of the risks they face are covered through various existing takaful plans.

Acknowledgement The authors would like to express their gratitude to the University of Malaya for granting the precious opportunity to engage in this very interesting research, particularly in providing specific grants (RP021A-15HNE) and (PO073-2015A) for financial support throughout the research period.

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Jewkes, R. K., Dunkle, K., Nduna, M., & Shai, N. (2010). Intimate partner violence, relationship power inequity, and incidence of HIV infection in Young women in South Africa: A cohort study. The Lancet, 376(9734), 41–48. Karim, S. (1990). Wanita Malaysia: Harapan dan Cabaran. Kuala Lumpur: ‘K’Pub. & Distributors: Pengedar Tunggal, Mahir Marketing Services. Ministry of Health Malaysia (MOH). (2010). Country Health Plan: 10th Malaysia Plan 2011 -2015 [Online]. Retrieved from http://www.moh.gov.my/images/gallery/ Report/Country_health.pdf. Accessed on March 3, 2016. Ministry of Health Malaysia. (2011). Pelan Strategik 2011–2015. Putrajaya: Planning and Development Division. Ministry of Health Malaysia (MOH). (2012). Annual Report MOH 2012 [Online]. Retrieved from Official Portal Ministry of Health Malaysia http://www.moh. gov.my/english.php/pages/view/56. Accessed on March 3, 2016. Mohamad, N. B., & Tumin, M. (2014). Civil society organization and privatization of health services in Malaysia. Journal of Business and Social Development, 2(1). Mutalib, Z. A. (2011, July 20). Syak Suami Curang Punca Stress: Kajian Menunjukkan Wanita Malaysia di Tanggake-16 Paling Tertekan. Berita Harian. National Centre for Disease Informatics and Research (NCDIR). (2013). National cancer registry programme: Time trends in cancer incidence rates 1982–2010. Bengaluru, India: Indian Council of Medical Research. Patel, S. (2004). Takaful and poverty alleviation. Bowdon: The International Cooperative and Mutual. Razif, N. F. M., & Mohamad, M. D. S. (2011). Risiko-risiko dalam kewangan semasa: Penilaian daripada perspektif Islam. In Proceeding international conference on management. Razurel, C., & Kaiser, B. (2015). The role of satisfaction with social support on the psychological health of primiparous mothers in the perinatal period. Women & Health, 55(2), 167–186. Ren, H. D. (2006). Malaysian healthcare where are we heading? A critical look at the proposed national health financial scheme 2006. Rosenfield, A., Min, C., & Bardfield, J. (2010). Global women’s health and human rights. Women’s Global Health and Human Rights, 3–7. Rustgi, S. D., Doty, M. M., & Collins, S. R. (2009). Women at risk: Why many women are forgoing needed health care. Commonwealth Fund. Sairally, B. S. (2012). Tailoring Islamic banking products for women. ISRA Bulletin, 11(April). Siegel, R. L., Miller, K. D., & Jemal, A. (2017). Cancer statistics, 2017. CA: A Cancer Journal for Clinicians, 67(1), 7–30. Siti Khadijah, A. M., Saleh, N. E. P., Kamarudin, M. F., & Haryadi, A. (2013). Sustainability of Islamic micro finance institutions (IMFIs). Universal Journal of Accounting and Finance, 1(2), 70–77. United Nations Development Programme (UNDP). (2010, February). Asia-Pacific human development report: Power, voice and rights, a turning point for gender equality in Asia and the Pacific. New Delhi, Macmillan Publishers India Ltd. Retrieved from http://www.undp.org/content/undp/en/home/librarypage/hdr/asia_ and_the_pacifichumandevelopmentreport2010.html. Accessed on March 3, 2016.

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United Nations. Department of Economic, & United Nations. Department of Public Information. (2010). The millennium development goals report 2010. Herndon, VA: United Nations Publications. Utusan Online. (2016). Penyakit Jantung Punca Lelaki Pendek Umur. Retrieved from http://m.utusan.com.my/berita/luar-negara/penyakit-jantung-punca-lelaki-pendekumur-1.111675. Accessed January 12, 2016. World Health Organization. (2009). Women and health: Today’s evidence tomorrow’s agenda. World Health Organization. Yazid, A. S., Jais, W. M., Jusoh, M. S., Daud, W. N. W., Salleh, F., Ali, E. A. T. E., & Hamid, N. A. (2017). Islamic personal risk management from Islamic perspective. World Applied Sciences Journal, 35(9), 1885–1892 Yusof, M. F. (1996). Takaful–concept and operational system: From the practitioner’s perspectives.

Appendix Table A1: Background of Interviewee. Interviewee Institution

Department

Position

TA1 TA2 TA3

TO A TO B TO C

Not stated Not stated Not stated

Takaful Agent Assistant Vice President Shariah Agency Sales Manager Takaful Agent

TA4

TO D

PO5 PO6

TO A TO B

PO7

TO C

PO8

TO D

People and Culture Department Marketing Unit Assistant Manager Product Management Unit Officer Product Management General Operations, Retail Product Officer Non-Motor Underwriting, Non Banca Product Development Unit Executive Officer

Table A2: Questionnaire. Questionnaire

1. 2. 3.

When were the women’s takaful products offered? What factors triggered the implementation of women’s takaful products? Has the existence of conventional women’s insurance products also affected the supply of women’s takaful products?

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Table A2: (Continued) Questionnaire

4. 5.

6. 7.

8. 9. 10. 11.

Who are the target groups in promoting women’s takaful products? Are there women who do not work who have this product? • If so, what are the factors that cause them to take it and how is payment made? How do women or customers respond to women’s takaful products? According to your opinion, what are the diseases that most commonly occur to women in Malaysia? • Which women’s age group most often experiences illness? • Thus far, which diseases do women most demand protection from? How is the contribution rate in women’s takaful products set? Does the contribution rate imposed in women’s takaful products take into account participants’ ability to pay? Can the benefits offered in women’s takaful products safeguard women’s welfare? In your opinion, what are the advantages of women’s takaful products compared to other family takaful products, especially for women?

Chapter 9

The Islamic Perspective on the Underwriting of Health Takaful Products: A Study of Selected Takaful Operators in Malaysia Aisyah Mustafa and Asmak Ab Rahman Abstract Purpose – This chapter examines whether the underwriting processes of takaful operators for health takaful products conform to shariah. Methodology/approach – A qualitative research method has been used for this study. Data have been collected from primary sources through interviews and from secondary sources by examining relevant documentation. Interviews were conducted with underwriters from takaful operators A, B, C and D. Interviews were also conducted with the shariah executives of these takaful operators and with shariah experts from two institutions – University A and Research Institute B – for their opinions on the underwriting process. This selection of respondents from those responsible for the underwriting process and from experts in shariah has assisted us in locating data for our research, based on their experience and the practices in which they are involved. Findings – The study found that the underwriting process used by takaful operators was in accordance with Islamic principles. Research limitations/implications – The study is limited to four takaful operators in Malaysia who have received awards for best operators; this study focuses on health takaful products. Originality/value – This study provides a view about the process of risk selection which determines the contribution rate and whether a risk will be acceptable or not to the company. Keywords: Underwriting; risk classification; shariah; takaful; Malaysia

1. Introduction Insurance is a financial instrument that manages the risks of certain exigencies that people face. Risk is defined as the possibility that something unexpected, New Developments in Islamic Economics, 135–150 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181009

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representing a peril, may occur. Accidents, death and natural disasters are a few of the types of risk that people experience daily. Each individual should seek to protect themselves against such risks. Even though insurance is recognised as one of the best instruments for managing risk, the way that insurance is contracted does not comply with Islamic law. Islam encourages its followers to always be prepared to face any possible negative occurrence. If people are not prepared, the risks they face are greater. In al-Qur’an, Allah says: ‘Our Lord! Lay not on us a burden greater than we have strength to bear. Blot out our sins, and grant us Forgiveness. Have Mercy on us’ (Surah al-Baqarah (2):286). Muslims believe that Allah will never test humans beyond their limits. Humans also cannot predict their future correctly. Therefore, all human plans and efforts will be achieved if God wills. However, this does not mean that we cannot plan for our activities. Accordingly, in this life, every human should always be prepared to face future risks. Risk, therefore, should be managed wisely so that its impact can be minimised, thus mitigating its negative impact on individuals. Islam does not ignore this fact and does not prohibit people from preparing for the risks and uncertainties that life represents. The takaful system is not intended to fight fate or challenge the provision of Allah or encourage disbelief in qada’ and qadar, one of the pillars of faith. However, the act of entirely surrendering to Allah without any effort is contrary to Islamic teaching. Takaful and insurance are institutions involved in risk management which aim to reduce the suffering experienced by individuals. Takaful also has an element of mutual help which distinguishes it from conventional insurance. Takaful is a system whereby participants regularly contribute a certain amount to a common fund with the intent of jointly guaranteeing each other. The importance of help is at the core of takaful operations and is in conformity with the word of God: ‘Help you one another in AlBirr and AtTaqwa (virtue, righteousness and piety); but do not help one another in sin and transgression. And fear Allˆah. Verily, Allˆah is Severe in punishment’ (Surah al-Maidah (5):2). When participants join in a takaful scheme, they not only seek protection for themselves but also cooperate with other participants to mutually contribute to one another in case of need. The takaful system as an instrument of protection is the best alternative for Muslims to avoid the prohibited elements of conventional insurance. Conventional insurance is prohibited by Muslim scholars, based on their research, due to the existence of riba (usury), gharar (uncertainty) and maysir (gambling). Riba (usury) is totally prohibited under the shariah law and within a takaful arrangement. In order to avoid riba, takaful treats participants’ contributions to a risk-sharing scheme not as premiums as conventional insurance does. In takaful, they are treated as contributions. Furthermore, the pool of funds secured from those participants’ contributions or donations must be managed and invested in accordance with shariah. Gharar is uncertainty. In order to avoid gharar, there must be complete clarity or full disclosure in any takaful. It is not permissible to enter into a takaful contract if there is any unknown element on the subject. Maysir (gambling) is regarded as the excessive side of gharar. While the participant (insured) may have

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an insurable interest in the subject matter, if the risk transfer (risk-sharing in takaful) contains any speculative element, then it is prohibited under takaful (Iqbal, 2005). Takaful was introduced to enable Muslims to obtain financial protection that is in accordance with shariah. It can be defined as the act of a group of people who desire to reciprocally guarantee each other against certain losses or damage that any of them may experience. In the takaful business, tabarru’ (takaful donation) is a contract wherein a participant agrees to donate contributions (to a takaful fund) to assist fellow participants. It thus fulfills the obligation of joint guarantee and mutual help should another participant suffer loss. The whole business of takaful must follow the principles of shariah in either a product’s development or in their operations. In order to ensure that a takaful company adheres to Islamic law, a shariah officer and committee must be appointed by the company. Each operation must obtain the approval of the shariah supervisory board. This board is an independent committee appointed by the takaful company with the agreement of the Central Bank of Malaysia (BNM). There are currently 11 takaful companies operating in Malaysia (Central Bank of Malaysia, 2014). The Shariah Advisory Council of Bank Negara Malaysia (SAC), supervised by BNM, has the authority to ascertain the compliance of takaful businesses to Islamic law and shariah principles. SAC is also responsible for validating all takaful products to ensure their compatibility with shariah principles. Takaful encourages people to cooperate to assist those who suffer misfortune, in line with the industry’s concept of ta’awun. In the takaful context, ta’awun refers to mutual assistance where the participants commit to making donations with the intention of helping each other. Although people are encouraged to participate in takaful or insurance, they must undergo a selection process. Individual selection is based on the information provided in the entry form and aims to identify those who are genuinely entitled to participate in takaful. There has been a debate about the underwriting process, and there are studies which argue that it contains an element of unfairness because factors such as age, gender, occupation and family background are used to determine the class of risk. Wils (1994) argues that it is unfair to charge higher premiums to a driver merely because, on average, young men have bad driving habits. He argues that the premiums charged should be based on the individual’s history and driving habits and not just on averages. Heath (2007) also argues that it is unfair to punish individuals for circumstances beyond their control; for example, a premium charged differently according to gender. He believes that this is inappropriate because gender determination is something that is beyond human control. He also argues that it is unfair to consider family background when evaluating an applicant’s risk. Insurance companies should only evaluate the applicants themselves without considering the circumstances of the applicant’s parents because they are not the subject of the insurance cover. Moreover, Palmer (2007) states that insurance is a social benefit and that it is unfair to reject an application from an individual based on their occupation.

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Takaful also adopts an underwriting process before insuring participant or customer can be insured. As a result of the underwriting process, a takaful operator may reject applicants who do not meet criteria set by the takaful company. This practice has been seen as contrasting with the takaful system itself, which is based on the concept of mutual help among participants. It seems contrary to the concept of takaful to adopt such underwriting practices. This issue, therefore, deserves greater examination so that Muslims can participate confidently and securely in takaful.

2. Underwriting Process Underwriting is the process of identifying and classifying risk incurred by an insurance company on insurance applications made by individuals in order to protect the company’s assets and liabilities (Redzuan, Yakob, & Hamid, 2006). Htay, Jawahir, and Salman (2013) add that it is also used to determine the contribution rate of an individual. This process involves assessing an individual in order to fix a rate and class of risk. In summary, it is a process of risk selection which determines whether a risk will be acceptable to the company (Zulkifli et al., 2012). An insurance company’s main objective for underwriting is to build a business portfolio that has low risk and is profitable for the company. An insurance company must decide whether to acquire a large volume of business at a low rate of profit per unit or a small volume of business at a high rate of profit per unit (Lim, 2003). Another objective of underwriting is to avoid ‘adverse selection’, where highrisk, rather than low-risk, individuals buy insurance (Vaughan & Vaughan, 1995). High-risk individuals who obtain insurance cover by paying a lower or regular contribution rate can affect the finances of the company (Lim, 2009). If the insurer is unable to fully and accurately assess risks, then the price of coverage for healthy people would likely increase – perhaps uncontrollably – to compensate for claims made by unhealthy people (Rothstein & Caplan, 2004). Each application submitted by an individual wishing to buy insurance has its risk assessed in advance. The company needs to investigate the individual’s circumstances and determine whether the applicant is in good health. An insurance company usually has three basic options if it offers a sub-standard policy to an applicant: it may issue a policy with a higher premium than its standard policy; it may issue a policy with limited benefits; or it may issue policies with certain exceptions (Affordable Educators, 2001). Takaful offers mutual help to participants for specific eventualities as agreed by participants. Although takaful acts as a guarantee and a mechanism to help participants, takaful operators will only choose certain individuals as participants (customers). In conventional insurance, the company will choose customers who meet the requirements set by the insurance company through the underwriting process. The underwriting process will apply certain criteria to determine the eligibility of applicants to be insured. An underwriting process is also conducted when selecting takaful participants.

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It must, at this point, be stressed that the underwriting process for takaful has not been well explained or explored. Although takaful is developing across the world – especially in Malaysia – little is known about the underwriting process that takaful operators use to select participants. This is a significant gap in knowledge which the present study seeks to fill.

3. Factors Used in Underwriting in Health Takaful Products This research found eight significant factors for takaful companies in the underwriting process: age, gender, physical condition, medical history, personal life, family background, occupation and hobbies.

3.1. Age Age is one of the factors assessed in the underwriting process. Age is an important factor, so that’s why people always say, ‘Join takaful while you are young.’ When you are young, it is easy to be accepted because, in youth, there are not many diseases. So, when he/she joins takaful a bit later, it can become increasingly expensive (Company A, 2013).1 The statement above is also supported by the underwriter of Company B: When you are young you should join takaful since, at this time, you are still healthy. There is no disease. If you’re old, many diseases will come and the charges will also be high. That’s why we encourage people to join takaful while still young (Company B, 2014).2

3.2. Gender Gender is also an important factor in assessing an individual who wishes to participate in takaful. According to the following statements, men and women should be treated differently. The life expectancy of men is shorter but their charges are cheap; for women, their life expectancy is longer but there are many types of diseases and cancers of women. That’s why women should pay more for this takaful product because they are a higher risk (Company B, 2014).

1

Shariah Review, Governance & Shariah Department, Company A, interview with the researcher, 28 August 2013. 2 Underwriter, Operation & IT, Company B, interview with the researcher, 13 February 2014.

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Aisyah Mustafa and Asmak Ab Rahman Women live longer than men but, in the medical card product, women have more diseases than men. If men are very old, they should pay more because of heart attacks, prostate cancer and so on (Company A, 2013). There is a difference between the contributions of men and women. Why? Because women live longer than men (Company B, 2014).

3.3. Physical Condition Each application must include details of the physical condition of the applicant in order to determine their health. Physical condition refers to the applicant’s weight and height. Underwriters will evaluate the physical condition of the applicant to determine the risk that will be incurred. Physical condition can also determine the health of the applicant. This was stated in the interview conducted with the underwriter of Company A: We need to know whether they are fat or not, overweight or underweight. When they are underweight, they have their own risks; this is the same with overweight people. We know what diseases people who are obese will get. One of these diseases will come, right? So, being overweight is a higher risk. That’s one of the risk factors we look for (Company A, 2013).

3.4. Medical History Applicants must disclose their medical history to prove their current health and to show if they have suffered a disease and if they have received treatment before applying for a takaful. Healthy individuals would have different contribution payments than diseased individuals. If the underwriter finds that the applicant had a disease, then the underwriters will request medical reports from a doctor to determine the applicant’s health status. This was confirmed by an underwriter: If people have hypertension, we need to get a report from the doctor. As underwriters, we need to know how to read the report for things such as the blood-test result, ECG, etc. So, after we read the report, we feel that this person has hypertension, but he/she controls their eating, takes the medicine, and always consults his/her doctor, and we will add a little contribution. But if he/she does not exercise control, if their doctor said he/she rarely comes to follow-up, so his/ her risks is higher, then the ‘loading’ is high. But if the doctor said that he/she has many diseases, and then we will reject the application (Company A, 2013). Most takaful operators adopt a similar underwriting process. However, the underwriting practice at Company C, which specialises in government employees,

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is slightly different from other takaful operators. This is evident from the statement of that company’s underwriter: Our Group Hospital & Surgical (GHS) is very unique compared to other takaful operators because we insure government employees and our underwriting requirement is very simple. We term it a simplified underwriting: simplified in the way that we consider auto-acceptance. Our medical and health product, as long as he/ she is a government employee, their age does not exceed 65 years and they have good health—if they answered ‘no’ for questions (a) to (j) in the proposal form describing diseases, then we will automatically accept them (Company C, 2014).3 According to this statement, the application is only assessed in the health section of the proposal form. If the applicant answered ‘no’ to each of the diseases specified in the form, then they will be accepted on standard terms. The applicant will thus be charged the standard contribution. However, if the applicant has a disease, then the company will not provide any protection against that disease. The underwriter for Company C stated that, ‘If he has hypertension, cardiovascular disease, diabetes mellitus or other diseases, then we, as underwriters, have to accept the application, but with exclusions’ (Company C, 2014).

3.5. Personal Life Details about the personal life of the applicant are required in order to determine the applicant’s lifestyle; for example, whether they smoke, take drugs or drink alcohol. As stated by the underwriter of Company A, the takaful operator may charge a higher contribution due to a smoking habit – 36 cigarettes or more per day is high risk. But if the applicant smokes 10 cigarettes per day and has other diseases which will worsen his condition, then higher charges will also be imposed (Company C, 2014). Those with drug or alcohol habits also have their risk assessed, according to the underwriter of Company A: ‘We are not able to offer health coverage to applicants who have a drug habit. For alcohol, the offer depends on the frequency of alcohol consumption and special blood test results that examine the liver.’ The underwriter for Company B also made the same point: Yes, we do offer a medical card to a client who consumes alcohol but it is subject to the level of…consumption. Normally, if it is social alcohol drinking then it should not be an issue. If alcohol is abused, this means that there is an over-consumption of alcohol, so the case will be rejected (Company B, 2014).

3

Assistant Manager, New Business & Underwriting & Policy Servicing, Company C, interview with the researcher, 30 January 2014.

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3.6. Family Background The family’s health history is a good indicator of the health of the applicant. This is because there are several diseases, such as hypertension, diabetes mellitus and cancer, which are hereditary (Nik Husain, 2005). Applicants must disclose details of their families’ health to facilitate the process of risk assessment. If a family member has a dangerous disease then there is a probability that the applicant will inherit it. This was acknowledged by the underwriter of Company A: If parents have diabetes at the age of 35, then, most likely, genetically their son will have diabetes as well. If the parents have diabetes at the age of 50, that is not a genetic problem. Maybe it’s because of their parents’ lifestyle. If both parents have diabetes or hypertension before the age of 40, we will charge more (Company A, 2013). Even if the applicant does not have a disease but their family’s health history shows the presence of a dangerous disease, then exclusion will be made for that particular disease. This was stated by the underwriter of Company D: ‘For example, he has no dangerous disease, but the family history shows cancer, so, if he took a takaful plan, maybe we will exclude the cancer benefit or, if he has an eye problem, we will exclude blindness (Company D, 2014).4

3.7. Occupation The occupation of the applicant is one of the factors that should be evaluated when assessing individual applications. This is because the risk incurred by each individual is not identical and is dependent on the work place and type of employment. This was stated as follows: If a person is working as a photographer, we need to know where he/ she worked. Working in the studio is a risk in itself. The risk is not the same for a CNN photographer who lives in Iraq, or someone working in a volcano for a television show for National Geographic, or any other dangerous place (Company D, 2014).

3.8. Hobbies The hobbies of applicants will be evaluated because some hobbies can be dangerous and increase the risk of death. This was stated by two interviewees: Examples: he/she goes to scuba diving, or car racing, mountain climbing, diving, hiking every week; all that is a high risk, right? (Company D, 2014). 4

Assistant Vice-President-Head, Medical/Health Operations, Company D, interview with researcher 8 January 2013.

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Let us say your hobbies are extreme sports like racing and scuba diving. For scuba diving, if you dive to a maximum depth, we will charge more contributions because the deeper you dive the more oxygen will be reduced, so the risk of death is higher (Company B, 2014). Engaging in dangerous hobbies, such as the examples above, would be charged at a higher rate. Thus, the takaful company will use the information obtained from the questionnaire to assess the risk. This was explained in the following way: Let’s say they love climbing or hiking. We will ask how many times they go. To get more information, they should fill in the application form. We have a special set questionnaire to be answered by each applicant: which mountain were you climbing, Kinabalu or another? How many times a year? We will ask them to get more info (Company A, 2013). Even if an applicant’s hobby was classified as dangerous, the applicant would still be allowed to participate in a takaful plan but extra charges or exclusions would apply. In general, a takaful operator will assess applications based on the above factors from those seeking protection to evaluate the risk which can be borne by the company. The underwriting practice is equally concerned with all factors which would result in a rejection of the application for individuals wishing to participate in takaful. The takaful system tries to differ from standard insurance because it aims to help applicants. Thus, the rejection of applicants is contrary to the spirit of takaful, which stresses mutual help.

Table 1. Summary of Factors Used in Underwriting Health Takaful Products by Selected Takaful Operators. Underwriting Factors

Company A

Company B

Company C

Company D

Age Gender Physical condition Medical history Personal life Family background Occupation Hobby

U U U U U U U U

U U U U U U U U

U   U  U  

U U U U U U U U

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4. Shariah View of Factors Used in Underwriting Underwriting is one of the most important aspects of both conventional insurance and takaful. The growth and success of insurance companies and takaful operators largely depend on underwriting activities (Alhabshi, Sharif, Abdul Razak, & Ismail, 2012). Underwriting includes gathering information and evaluating medical reports to determine whether an application made should be classified as ‘standard’, ‘sub-standard’ or ‘declined’. The underwriters will then determine the tabarru’ rate that the applicant must contribute. The tabarru’ rate is determined according to the assessed individual risk made for the applicant. All of the factors discussed above – age, gender, personal life, physical condition, occupation, family background, hobbies and health status – are considered during the underwriting process, especially for the medical card products in a family takaful. The insurer must estimate the cost based on the cost of providing similar policies in the past. The premium is the price the insured pays for the insurance product. The rate-setting process requires an estimation of the premium for a future policy period. This process generally begins with historical premiums and applies a series of adjustments. The first adjustment is to relate the historical premium to the rate level currently in effect. Insurance premiums can vary significantly for risks with different characteristics. The rating manual is the document that contains the information necessary to appropriately classify each risk and calculate the premium associated with that risk. The fundamental insurance equation is: Premium ¼ Losses 1 LAE 1 UW Expenses 1 UW Profit:

The role of a pricing actuary is to estimate each of these components for the period during which the proposed rates will apply. Amounts paid or owed to claimants under the provisions of an insurance contract are known as losses. A claimant can be the insured or a third party seeking damages covered under the terms of the insurance contract. Amounts paid by the insurance company to investigate and settle claims are called loss adjustment expenses (LAEs). Losses and LAEs usually represent the largest component of insurance costs and hence the largest portion of insurance premiums (Werner & Modlin, 2016). Since personal circumstances differ between individuals, contributions also differ: those imposed on the young are much lower than on older individuals. Regarding the concept of tabarru’ in takaful, the difference in contribution fees is not a problem as far as jurisprudence is concerned. This is because the determination of the level of individual mortality is based on historical experience. This is described by the shariah expert in Company E5: In terms of age, we need to look at the age based on mortality statistics or tables, statistics that have been researched and studies 5

Internal Research Fellow, Company E, interview with the researcher 21 February 2014.

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Underwriting of Health Takaful Products that have been done long ago. Usually, people at a young age do not have a lot of diseases compared to older people. This has been used to maintain fairness in the operation (Company E, 2014).

Older participants should pay more because their average life expectancy is shorter. If older women were not charged more, then the rates for younger women would have to be increased, and that would discriminate unfairly against younger women. While, mortality tables were initially based on general population statistics extracted from birth and death records but, with the advent of insurance companies and the growing volume of empirical data available from the insurance industry, mortality tables with particular relevance to insurance or takaful are now primarily based upon observing people insured or covered by insurance or takaful schemes (Alhabshi et al., 2012).

Table 2. Life Expectancy in Malaysia. 2016

2015

2014

2013

Age (Year)

Male

Female

Male

Female

Male

Female

Male

Female

,1 1–4 5–9 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–79 80–84 .85

73.2 72.7 68.8 63.9 59 54.3 49.6 44.8 40.1 35.5 31 26.7 22.6 18.9 15.3 12.1 9.4 6.9 4.8

77.6 77.1 73.2 68.3 63.4 58.4 53.5 48.7 43.8 39 34.3 29.7 25.3 21.1 17.1 13.3 10.1 7.2 5.1

73 72.5 68.6 63.7 58.8 54.1 49.4 44.6 40 35.4 30.9 26.6 22.5 18.8 15.3 12.1 9.4 6.9 4.8

77.5 77 73.1 68.1 63.2 58.3 53.4 48.5 43.7 38.9 34.2 29.6 25.2 21 17 13.2 10 7.2 5

72.8 72.3 68.4 63.5 58.6 53.9 49.2 44.4 39.8 35.2 30.8 26.5 22.4 18.7 15.2 12 9.3 6.8 4.8

77.3 76.8 72.9 68 63 58.1 53.2 48.4 43.5 38.7 34 29.4 25 20.8 16.9 13.1 9.9 7.1 5

72.7 72.2 68.3 63.3 58.4 53.7 49 44.3 39.7 35.1 30.7 26.4 22.3 18.6 15.1 11.9 9.3 6.8 4.7

77.2 76.7 72.8 67.8 62.9 58 53.1 48.2 43.4 38.6 33.9 29.3 24.9 20.7 16.7 13 9.8 7 4.9

Source: World Health Organization.

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The use of the life expectancy table is also a way of managing the takaful company’s risk. As a trustee, a takaful company has to manage the company’s funds and also the tabarru’ funds so that these remain in a good condition. This was stated by the Head of Shariah for Company D: The takaful operator is a trustee and, in Malaysia, the takaful operators are involved in the business sector. So, they might have considerations of profit and loss. This is closely related to underwriting (Company D, 2014). Takaful must operate according to business principles and consider profit and loss factors. Therefore, operators need to ensure that the company’s funds are in a strong position. Otherwise, participants will have a problem making claims if there is a lack of funds. Gender is also considered when underwriting. This is because there is a difference in risk faced by each participant and, as such, a difference in the contributions which are charged to a participant. This has been acknowledged by the shariah expert: ‘The gender factor must depend on the circumstances… If they have a lot of problems/diseases, they should pay a bit more’ (Company E, 2014). The difference in contributions depends on the applicant’s gender. Women have a higher risk because they have a higher level of morbidity than men (Zulkifli et al., 2012). Thus, there is no problem in fiqh if underwriting factors are used by takaful operators. This was stated by the shariah expert from Company A: Imagine if there is no underwriting concept in takaful. This means that anyone will be accepted in takaful. But that does not make sense. That is an ideal thing, but we are faced with reality. In reality, business decisions are allowed by Islam. So, from the perspective of Islamic jurisprudence, there is no problem (Company A, 2013). All decisions which were determined according to takaful are based on previous studies that have been reviewed by the actuary before a product is approved. The statistics used are based on studies and past experience. According to the shariah expert at University A, the company bears all the risk. Therefore, the factors used in underwriting follow business decisions which have, as their aim, the avoidance of greater risk. As such, there is no problem if gender is used in the underwriting process. Gender is evaluated to ensure that tabarru’ funds are always healthy. To ensure that these funds are in a good condition, the company needs to perform risk selection for each application. Although the concept of takaful is tabarru’, underwriting should be practised to avoid a lack of funds which could arise if participants in takaful were not evaluated and carefully selected. Any harm that could affect the risk fund and the fund’s shareholders should be avoided. The Prophet (PBUH) says (Al-Baihaqi, 1991): lā ḍarar walā ḍirār, which means ‘no

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harm not harming’, and the Qur’an also says about harm: ‘You should not kill yourselves’ (Surah al-Nisa (4):29) and ‘Do not expose yourselves to ruin’ (Surah al-Baqarah (2):195). As stated earlier, high-risk applicants incur additional charges. Takaful operators will accept applications from individuals who already have a disease but will insist on certain conditions, which either increase charges or exclude pre-existing illnesses. This is because a company needs to maintain financial stability so that it can continue to provide services to the participants. This was stated by the Head of Shariah in Company D: Medical history is very important because our method in takaful is that prevention is better than cure. So, actually, you should join takaful before you get a worse condition. If you join after you are in trouble, it is a bit difficult. We must take care of our funds (risk fund and shareholder fund). If we add a sick person, we are being unfair to healthy people (Company D, 2014). These factors aim to protect the company’s funds from harm. Participants’ medical history must be considered in order to avoid anti-selection, where individuals who are in a high-risk category give tabarru’ contributions at a normal rate. The stability of the company is very important for ensuring that it remains in the industry. Harm to the funds should be eliminated by making an assessment of the applicant based on their health status. Harm incurred by takaful operators should be reduced by differentiating the contributions of each individual. Among the features of takaful, according to Wahbah Zuhaili, are that the values or the rates charged to each individual vary according to participants and events (Al-Zuhaili, 2002). To justify their high risk, participants are charged a higher contribution, compared to those who present a lower risk. This avoids destabilising the tabarru’ fund. Such reasoning is strengthened by the Islamic legal maxim dar’u al-mafasid muqaddam ‘ala jalbi al-masaleh: ‘Averting harm takes precedence over achieving benefit.’ If the harm outweighs the benefit, preventing harm takes precedence. When the benefit and the harm are of the same magnitude, shariah gives precedence to preventing harm (Shubayr, 2007). Additionally, those who already have a disease will often claim for its treatment. This indicates that, when the level of an individual’s health is not good, it affects the tabarru’ funds. Thus, a reason for rejecting an application is to ensure that the tabarru’ fund is stable. This rejection is seen as a measure that protects the tabarru’ and shareholder funds. This was stated by the Head of Shariah Compliance in Company D: If you ask whether takaful conforms to the concept of helping, then yes, it does. The concept is to help participants and also to help shareholders. This is because the shareholder has managed the fund. This is one perspective. The second perspective is from the participants. The concept is based on mutual help. For example, in

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Aisyah Mustafa and Asmak Ab Rahman terms of underwriting criteria used, if he is a high risk, then we will impose higher tabarru’. People at higher risk will be assisted by those at lower risk. This happens in takaful. These groups have different risk exposures. If we only accept a high-risk person, what will happen to the person who is lower risk? And what will happen to the shareholder? If a high-risk person already has an existing disease such as blood pressure, we can accept him but we exclude protection for the disease. We need to be fair to the people who don’t have a risk (Company D, 2014).

According to the Head of Shariah in Company D, the concept of mutual help practised by the takaful operator is mutual help between the shareholder and the participants, and mutual help among participants. If the underwriting process is not performed carefully and there is a subsequent shortage of funds, then the shareholders will help by giving qard (a loan without interest) to the takaful fund. The Malaysian Islamic Financial Services Act 2013, Section 95, makes qard or a loan provision compulsory for every takaful operator in the event of a deficit in the risk fund. The concept of mutual help among participants can be seen when each participant contributes to a specific fund. This fund is used to help participants who suffer misfortune. If the participant is at high risk, the rate of tabarru’ that needs to be contributed must be commensurate with the risks. Rejection of an application does not mean that takaful does not conform to the concept of mutual help. Takaful is an institution that should be concerned with business profits and losses. Therefore, companies must be proficient at managing risk. The factors used in underwriting assess individual risks and avoid harm to the tabarru’ fund. The shariah expert at Institution B also stated that participants in takaful should help each other. This concept of helping is exclusive to takaful participants. Therefore, each application must be assessed and selected to ensure that the risks taken by the applicant can be borne by the company. He said: Of course we gather together for the purpose of helping each other! But the takaful company does not have the same function as the welfare state. The government will cover their citizens but not in takaful. Takaful covers only those who become members. That cannot be said to be unfair. In that manner, takaful still accepts the participation of individuals with high-risk by imposing a ‘loading’. In certain cases, there can be exclusion, where there are exceptions against certain diseases (Company E, 2014). This element of help is applied in takaful to protect members. Anyone who joins takaful will receive protection as required. Therefore, takaful still allows entry to high-risk individuals by making additional charges or exclusions. However, if the individual wishing to participate in takaful is very unwell, his/her application will be rejected. The rejection of an application is made by assessing

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the risk that the applicant represents. If the risk is very high and is likely to damage the company’s funds, then it will be rejected. Maslahah as public interest should be given priority when accepting takaful participants as this will protect the takaful fund. This fund is very important and needs to be protected because it is the main source for paying claims when participants suffer misfortune. The underwriting process is also important for maintaining maslahah in takaful operations and for avoiding any harm to the takaful fund.

5. Conclusion The underwriting process in health insurance that is practised by the insurance and takaful industries is the same. Both takaful and insurance will consider eight factors when assessing the risk of an applicant before granting protection. Based on this research, we conclude that there is no issue of injustice or unfairness when these factors are taken into account because there is no specific provision in Islam that bans the use of underwriting factors to assess the risk of applicants who wish to participate in takaful. Takaful companies in acting as trustees will always protect the tabarru’ funds from any shortfall. This is done by using these underwriting factors to assess the risk of applicants. Moreover, the underwriting process is there to avoid any harm. The company will ensure that participants and shareholders are not exposed to harm according to the Islamic legal maxim al-ḍarar yuzāl, which means that the harm is eliminated (Zarqa’, 1989), and lā ḍarar walā ḍirār, which means ‘no harm not harming’ (Al-Baihaqi, 1991). The Qur’an also encourages no harm and not exposing yourself to ruin (Surah al-Baqarah (2):195). Islam recognises that risk is part of the nature of business. It also recognises that business risk can be minimised if managed properly. The underwriting process is seen as a way of managing risk in the industry. To avoid taking on excessive risks, takaful operators choose applications that do not cause harm to the tabarru’ funds. This is because, if the risk causes harm or loss, it will affect the company and have an effect on the risk fund that protects participants in the event of misfortune. In summary, the underwriting process that is practised does not contradict Islamic principles. This is because a takaful company must ensure that the company’s fund and tabarru’ fund are always healthy. This risk can be minimised if strategic steps are taken. Among the steps of reducing the risk of a shortage of funds is for the company to evaluating every applicant through the underwriting process.

References Affordable Educators. (2001). Underwriting insurance (p. 7). Temecula: Cape Education. Al-Baihaqi, Abu Bakar, Ahmad Ibn Husayn (1991). Ma‘rifah al-Sunan wa Athar. Bab Ma‘rifah al-Sunan, no. Hadith 11979 (p. 305). Qahirah: Dar al-Wa‘i.

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Alhabshi, S. O., Sharif, K., Abdul Razak, S. H., & Ismail, E. (2012). Takaful: Reality and challenges (p. 291). Petaling Jaya: Pearson Malaysia Sdn. Bhd. Al-Zuhaili, W. (2002). Al-Muaʻmalat al-Maliyyah al-Muaʻsarah (p. 373). Damsyik: Dar al-Fikr. Central Bank of Malaysia. (2014). Takaful operators. Retrieved from http:// www.bnm.gov.my/index.php?ch5li&cat5insurance&type5TKF&fund50&cu50. Accessed August 16, 2014. Chee, L. C. (2009). Pengurusan Risiko & Insurans (p. 117). Sintok: Universiti Utara Malaysia. Heath, J. (2007). Reasonable restrictions on underwriting. In P. Flanagan, P. D. Primeaux & W. L. Ferguson (Eds.), Insurance ethics for a more ethical world (research in ethical issues in organizations) (Vol. 7, pp. 127–159). Htay, S. N. N., Jawahir, M. K., & Salman, S. A. (2013). Shariah scholars’ view point on the practice of underwriting and risk rating for family takaful model. Asian Social Science, 9(9), 280–286. Iqbal, M. (2005). General takaful practice: Technical approach to eliminate Gharar (uncertainty), Maisir (gambling), and Riba’(usury) (pp. 2–3). Jakarta: Gema Insani Press. Lim, C. C. (2003). Pengurusan Risiko & Insurans. Sintok: UUM Press. Nik Husain, N. R. (2005). Penyakit Keturunan (p. 54). Kuala Lumpur: Dewan Bahasa dan Pustaka. Palmer, D. E. (2007). Insurance, risk assessment and fairness: An ethical analysis. In P. Flanagan, P. D. Primeaux & W. L. Ferguson (Eds.), Insurance ethics for a more ethical world (research in ethical issues in organizations (Vol. 7, pp. 113–126). Redzuan, H., Yakob, R., & Hamid, M. A. (2006). Prinsip Pengurusan Risiko dan Insurans (p. 180). Petaling Jaya: Prentice Hall, Pearson Malaysia Sdn. Bhd. Rothstein, M. A., & Caplan, A. L. (Eds.). (2004). Genetics and life insurance: Medical underwriting and social policy. MIT Press. Shubayr, Muhammad Uthman. (2007). al-Qawa‘id al-Kulliyahwa al-Dawabit alFiqhiyyah fi al-Shari‘ah al-Islamiyyah (p. 182). Jordan: Dar al-Nafa’is. Vaughan, E. J., & Vaughan, T. M. (1995). Essentials of insurance: A risk management perspective (p. 112). New York, NY: John Wiley & Sons. Werner, G., & Modlin, C. (2016). Basic ratemaking (p. 90). Arlington County, VA: Casualty Actuarial Society. Wils, W. P. (1994). Insurance risk classifications in the EC: Regulatory outlook. Oxford Journal of Legal Studies, 14, 449–467. World Health Organization. (2018). Life table by country. Retrieved from http:// apps.who.int/gho/data/?theme5main&vid560990. Accessed June 5, 2018. Zarqa’, M. (1989). Syarh al-Qawaʻid al-Fiqhiyyah (p. 179). Damsyik: Dar al-Qalam. Zulkifli, A. M., Hisham, B., Yassin, N., & Ramly, J. (2012). Amalan Asas Takaful Tahap Permulaan untuk Pengamal. Kuala Lumpur: IBFIM.

Chapter 10

Society’s Understanding of Family Takaful: A Study in Southern Thailand Mirwanee Ha, Asmak Ab Rahman and Azizi Che Seman Abstract Purpose – The objective of this study is to assess the level of understanding of family takaful among the Muslim community of southern Thailand. Methodology/approach – This study used a questionnaire as the data collection tool. It sampled 400 respondents who were selected in a simple way, regardless of whether they owned protection policies or not. The methods used to analyse the data are descriptive statistics and means, and independent samples T-testing. Findings – The study found that the Muslim community in southern Thailand had a generally low level of understanding of family takaful. However, the differences in the level of understanding between those who participated in family takaful and those who did not were examined. The research findings were then found to indicate that there was a distinction between the two groups: those who participated in family takaful had a clear and positive understanding of it, while those who did not had no clear understanding of it. These are significant differences which signify that participation in family takaful by Muslims in southern Thailand was influenced by their understanding of it. Research limitations/implications – This study was conducted in the Muslim community in and around Muang District, Narathiwat Province, in southern Thailand. Practical implications – This study clearly indicates, especially to those involved directly or indirectly in the takaful industry, that there are still many in the community who do not participate in family takaful because they lack understanding and have negative perceptions of it. Those who are involved must make the effort to communicate more in-depth insights to target communities, which could effectively enhance the uptake of family takaful. Originality/value – This is the first empirical study of takaful in Thailand. It was conducted to determine the level of understanding of family takaful in New Developments in Islamic Economics, 151–166 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181010

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the Muslim communities of southern Thailand and to compare the levels of understanding of family takaful between those who have participated in it and those who have not. Keywords: Islamic insurance; takaful; understanding of takaful; demand for takaful; south Thailand

1. Introduction Humans are exposed to various risks that may lead to unexpected danger to property or life. Risk is an unforeseen and undesirable reality that can also be understood as the possibility of incurring loss. In other words, it is the possibility that something will not go the way we had hoped when, instead, something unfortunate occurs which brings about loss (Athearn, 1977). In social sciences, there are two prevailing definitions of risk: (1) risk is a situation or event where something of human value (including humans themselves) is at stake and where the outcome is uncertain; (2) risk is an uncertain consequence of an event or an activity with respect to something that humans value. According to these definitions, risk expresses an ontology (a theory of being) independent of our knowledge and perceptions. A rephrasing of the two definitions is that risk refers to uncertainty about, and the severity of, the consequences (or outcomes) of an activity with respect to something that humans value (Aven & Renn, 2009). Examples of risk include road accidents, calamities such as fires at residential homes and factories, theft and chronic diseases, causing suffering and distress to victims and their families. There are three systems that can present us with risk: society, nature and technology. Every individual must be prepared to face the possibility of any risks to mitigate the impact on themselves and their family. Examples of dangerous risk in the social system are robbery, riots and kidnapping. Meanwhile, risk in the natural world comes from acts of nature such as earthquakes, floods, storms and natural fires. Technological systems create risks for humans such as explosions, pollution and radiation (Arthur, 1996). Therefore, people must aspire to build stability into their lives so that they can alleviate financial difficulties when risk arises. The insurance system has been introduced to provide such stability when misfortune occurs. Insurance is a personal risk management mechanism that plays an important role in the lives of people from all walks of life. Insurance is preparation in advance to reduce financial burden and offer protection when calamity or risk occurs. Islamic insurance, or takaful, was formulated as an alternative for Muslims which enables them to obtain protection against risk in compliance with Islamic law. In general, takaful is similar to conventional insurance, where the goal is to provide a service to the policyholders or participants (Ahmad, 2005). Both types of insurance are instruments that assist participants should any hardship befall them. What differentiates the two is how they achieve this goal. Takaful practices are managed in accordance with Islamic law and are based on the concepts of mutual co-operation and assistance (Mohd Noor & Zakaria, 2010).

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According to Malaysia’s Islamic Financial Services Act (IFSA) 2013, takaful is an arrangement based on mutual assistance, where participants agree to contribute to a common fund that provides mutual financial benefits, which can be paid to participants or their beneficiaries in the event of the risks that have been explicitly included in the agreement. Through takaful, closer relations can be established, by Islamic rules and practices, among participants who have collectively agreed to bear any losses together. Basically, the concept of takaful envisages an insurance plan based on Islamic fraternity, mutual co-operation, responsibility and assistance (Ismail & Abdullah, 2000). Accordingly, takaful products were introduced as an alternative to allow individuals, especially Muslims, to manage risks with protection products which are Shariahcompliant. In the management of takaful contributions, takaful operators divide the premium into two separate accounts: the participant’s account and the tabarru’ account. The participant’s account belongs solely to the participant, and the funds in this account will be invested by the takaful operator to generate profits. Funds from this account are used if any misfortune befalls any of the participants within the duration of the contract period. For example, if a participant becomes permanently invalid, he or she will receive financial assistance sourced from the tabarru’ account. Or should the participant pass away, his or her family will receive financial compensation sourced from the tabarru’ account. Hence, the issue of riba does not arise because the money given to the family is based upon the principle of tabarru’, or donation (Ab Rahman & Mohamad, 2010). Malaysia was the first country in Asia to pioneer Islamic insurance businesses (Ismail & Abdullah, 2000). The existence of the takaful industry was largely influenced by the National Fatwa Council’s ruling that life insurance in its then form was an invalid contract due to its elements of gharar, maysir and riba (Industry Takaful Malaysia, 1984–2004). In August 1985, Syarikat Takaful Malaysia Sendirian Berhad (STM) was established as the first takaful operator in Malaysia (Yusof, 1996). Since the establishment of this first takaful company, the industry has grown so rapidly that there are now various takaful companies in Malaysia. One is Syarikat EtiQa Takaful Berhad (ETB), formerly known as Takaful Nasional Sdn. Bhd. Another is Syarikat Takaful Ikhlas Sdn. Bhd., which offers a variety of family takaful products with many advantages and privileges that can confer benefit to society, as required by Islam, and meets market demand (Che Othaman, 2010; Mohd Safar, 2011). In Thailand, takaful plans constitute a new market and were introduced in 2006, when Philip Life Assurance Company (formerly known as Finansa Life Assurance Company) established an Islamic insurance scheme, or takaful. Takaful in Thailand is currently offered by a number of conventional insurance companies and Islamic cooperatives (Islam Santichon Coop., 2015). Out of the 25 conventional insurance companies in Thailand (OIC Thailand, 2015), only 4 offer Islamic insurance or takaful schemes to the public. They are the Thai Takaful Scheme under the Thai Life Insurance Co., Ltd (Thai Life Insurance, 2015), the Arkhaney Takaful scheme under the South-East Life Insurance Co., Ltd (Arkhaney Takaful, 2012), the Phillip Takaful scheme under Phillip Life

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Assurance Co., Ltd (Phillip Life Assurance, 2015) and Muang Thai Takaful scheme under the United Muang Thai Life Assurance Co., Ltd (Muang Thai Takaful, 2015). In Thailand, takaful has not developed as widely as conventional insurance. The Muslim community itself is still influenced by conventional insurance, which has long existed in Thailand. According to Mahmood Sabri and Redzuan (2015), takaful services are generally less well received, even by the Muslim community. This poor reception can be attributed to poor understanding of the role of takaful in lives and in the economy, despite these services being in line with Islamic law. However, the development of takaful companies can be regarded as very important to the Muslim community of Thailand, the majority of whom are found in the south. This is because takaful serves are an alternative that enables them to participate in a halal protection plan. The success of a takaful company is invariably linked to the community’s positive understanding of Islamic insurance (Mahamad, 2015). Better understanding among Muslims will increase awareness of the importance of Islamic takaful institutions. This study seeks to determine the level of understanding of family takaful among the Muslim community in southern Thailand. It also aims to assess the differences in understanding about family takaful between those who have participated in it and those who have not.

2. Literature Review Yusof (1996) explained that mutual responsibility, co-operation, assistance and protection from hardship and destruction are cornerstones of the concept of takaful. Similarly, studies conducted by Hashim, Shahidan, and Fadzim (2005) and Thanasegaran (2008) have stated that takaful operations are not the same as conventional insurance because takaful is based on mutual co-operation and assistance rather than buying and selling. Research conducted by Mohd Safar (2011) indicates that, although takaful and conventional insurance are similar – both being concerned with the assumption of risk – the covenant behind their operations are very different. The contractual agreement applied in conventional insurance is the contract mu’awadah (exchange through buying and selling) between the insurance company and the policyholder. Meanwhile, takaful adopts the tabarru’ (donation and contribution) contract, based on the concept of mutual responsibility, co-operation and assistance, to protect and shield one another from suffering. This is reinforced by Mohd Noor and Zakaria (2010), who argue that, although tabarru’ and mu’awadah appear to be similar, they actually differ significantly. Tabarru’ is a practice that involves the transfer of ownership to a new owner without any payment or compensation: for example, hibah, charitable contributions, donations, wills and waqf/waqaf. Meanwhile, mu’awadah involves the conversion of two values or compensation. Mohamad et al. (2008) observed that participants each sign a declaration in the takaful contract to agree to mutually help each other through the payment of

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takaful contribution, based on the concept of tabarru’ or donation. Yusof (1996) also stated that, through the concept of tabarru’ or donation, takaful can operate within a system which truly accords with the practices of Islamic financial institutions. Meanwhile, research conducted by Mohamed Mazahir (2013) also asserts that tabarru’ is a fundamental concept of takaful that distinguishes it from conventional insurance. The operation of conventional insurance is incompatible with the laws and needs of Shariah as the former involves the element of gharar (uncertainty) in the insurance contract, maysir (gambling) due to the element of uncertainty and riba (interest) in the investment activities. However, these elements – which contradict Shariah – have been eliminated by the concept of tabarru’ in the takaful contract. Hussain and Pasha (2011) argued that the tabarru’ and its paradigm in takaful operations are sufficient to distinguish between takaful and conventional insurance. A tabarru’ contract is one made voluntarily whereby only one party delivers a good or service without due consideration from the other party. When participants join a takaful scheme, they essentially agree to donate part of their funds to the tabarru’ account whereby funds collected in this account will be used to help the takaful participants and their families. There are a number of field studies examining society’s understanding and reception of takaful that can be compared with this study. One was conducted by Zakaria (2004) that examined society’s understanding and reception of a takaful scheme in Bagan Serai, Perak. The results of this research show that 40% of the respondents had a high level of understanding of takaful schemes, while the remaining 60% had a moderate level of understanding. None of the respondents were found to have a poor understanding of takaful. This suggested that society’s level of understanding of takaful was moderate. Badri (2008) researched the level of understanding and the perception of family takaful among the Malay community of the Federal Territory of Kuala Lumpur. Each of the three groups of respondents in his study produced different results. The group of respondents who had participated in family takaful had a clear understanding and positive perception of it, while respondents who had subscribed to a conventional life insurance policy had a higher level of confidence in, and a better perception of, that in comparison to takaful. Meanwhile, respondents who did not have any insurance did not to have a clear understanding of family takaful. Similarly, Yunus and Abdul Rahim (2010) found that respondents with family takaful policies had much knowledge and a more positive perception of family takaful than respondents who did not have family takaful plans. A study by Matsawali et al. (2012) also assessed the understanding of takaful and conventional insurance as well as identifying the reasons or factors that make conventional insurance contradictory to Shariah principles. The respondents were residents of Brunei Darussalam. The study found that a majority of the respondents did not understand the concept of takaful, even though they preferred to undertake takaful rather than conventional insurance. This study thus suggests that takaful companies need to educate the public and enhance understanding of takaful.

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3. Methodology This research was conducted by survey. Its objective was to obtain an accurate picture of society’s understanding of family takaful in southern Thailand. Questionnaires were used to gather information from a total of 400 respondents from the Muslim community in and around Muang District, Narathiwat Province in southern Thailand. They were selected using the Convenience Sampling method (Marican, 2005) and are Muslim adults of all ages, gender, marital status, education levels, occupations, monthly incomes and number of dependents, regardless of whether they have an insurance protection policy. The questionnaire forms were distributed and collected between 15 March and 28 April 2016. This study used 10 items to assess the level of understanding of three aspects which are closely linked to family takaful: their understanding of the concept of family takaful, the implementation of family takaful and the compatibility of family takaful with the principles of Islam. The items in the questionnaire were based on research conducted by Zakaria (2004), Che Seman et al. (2008), Badri (2008) and Matsawali et al. (2012). The data measurement used the five-point Likert scale, where 1 5 strongly disagree, 2 5 disagree, 3 5 uncertain, 4 5 agree and 5 5 strongly agree. The research findings were analysed using mean score levels as shown in Table 1.

3.1. Pilot Test Before the research proper commenced, the author performed a pilot test to assess the reliability of the research items (Reliability Test) using the Cronbach Alpha programme. According to Churchill (1999), the Cronbach Alpha programme is a technique to estimate whether the internal consistency observed in the pilot test would be suitable for field research because it requires an administration of measurement for a particular instrument. Chua (2006) stated that a value of the Cronbach Alpha between 0.60 and 0.90 was acceptable. Table 2 demonstrates

Table 1: Interpretation of Mean Score. Mean Score

Level of Understanding

4.50–5.00 3.50–4.49 2.50–3.49 1.50–2.49 1.00–1.49

Very high High Medium Low Very low

Source: Tanin Silcaru, Karn Vicai laek Vikhrok Khomun Thang Sthiti duai SPSS (Research and Statistical Analysis by SPSS), 2009.

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Table 2: Reliability of the Questionnaire Instrument. Items on Understanding of Family Takaful

An understanding of the concept of family takaful (3 items) An understanding of the implementation of family takaful (4 items) An understanding of the compatibility between family takaful and the principles of Islam (3 items)

Cronbach Alpha

0.948 0.953 0.933

Source: Pilot Test Questionnaire (n 5 30).

that the value of the Cronbach Alpha for all questionnaire items indicated a high level of reliability.

4. Data Analysis and Results The data were analysed using Statistical Package for Social Sciences (SPSS) software version 20. Frequency and percentage were the statistical methods that were used to describe the profile of respondents, mean score to gauge the level of understanding of family takaful, and independent sample t-testing to determine whether there were different levels of understanding of family takaful between those who had participated in family takaful and those who had not. The results of the study now follow.

4.1. Background of Respondents Table 3 summarises background information of 400 respondents from the Muslim community of Muang District, Narathiwat Province in southern Thailand. There were more female (54.8%) than male (45.3%) respondents in this study. A majority (61.3%) of respondents were aged between 25 and 45 years. Most (88%) were married. In terms of their educational background, a large proportion held a bachelor’s degree (49%), while each of the other levels of education had less than 25%. The respondents came from a variety of occupations. A majority (33%) worked in the agricultural sector, while the percentage from other occupational sectors such as government offices, private sector clerical, business owners, homemakers and labourers did not exceed 20% each. Some respondents were not employed (2.8%) and others were studying (3%). It is clear that agriculture is the main occupational activity of the residents of the Muang District, Narathiwat Province (Amphoe Information Services, 2015). A large majority (51.8%) of respondents earned income ranging from 5,001 to 15,000 Baht, followed by respondents with an income of 5,000 Baht and lower (28.8%), while those who earned an income of 15,001 Baht and over comprised less

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Table 3: Background Characteristics of Respondents. Gender

Number

Percentage

Male Female Total

181 219 400

45.3 54.8 100.0

Number

Percentage

59 143 102 71 25 400

14.8 35.8 25.5 17.8 6.3 100.0

Number

Percentage

70 323 7 400

17.5 80.8 1.8 100.0

Number

Percentage

13 83 98 196 8 2 400

3.3 20.8 24.5 49.0 2.0 0.5 100.0

Number

Percentage

55 77 56 132 11 48 5 16 400

13.8 19.3 14.0 33.0 2.8 12.0 1.3 4.0 100.0

Age

Ages 18–24 years Ages 25–35 years Ages 36–45 years Ages 46–55 years Ages 56 years and above Total Marital Status

Single Married Divorced Total Education Level

No education Primary Secondary Bachelor’s degree Master’s degree Doctor of philosophy (PhD) Total Employment Sector

Government officials Private sector officials Business Agriculture Unemployed Homemaker Labourer Student Total

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Table 3: (Continued) Monthly Income

Number

Percentage

115 207 66 12 400

28.8 51.8 16.5 3.0 100.0

Number

Percentage

No dependents 1–3 dependants 4–6 dependants 7 dependants and more Total

48 205 128 19 400

12.0 51.3 32.0 4.8 100.0

Status of Participation in Family Takaful

Number

Percentage

78

19.5

322

80.5

400

100.0

5,000 Baht* and below 5,001–15,000 Baht** 15,001–30,000 Baht*** 30,001 Baht**** and above Total Number of Dependents (Not Including Themselves)

Participating in family takaful Not participating in family takaful Total

Note: *5,000 Baht 5 RM596.60. **5,001 Baht 5 RM596.72, 15,000 Baht 5 RM1789.80. ***15,001 Baht 5 RM1789.92, 30,000 Baht 5 RM3579.59. ****30,001 Baht 5 RM3579.71 (Fx-Rate Fine the Best Currency Exchange, 2016). Source: Questionnaire, 15 March–28 April 2016.

than 20% of respondents. A majority of respondents had between one and three dependants (51.3%), followed by 32% who had four to six. Other respondents had a large number of dependants – seven or more – as well as some who did not have any dependants at all; these last two categories were only a small percentage.

4.2. Understanding of Family Takaful Table 4 shows the respondents’ overall levels of understanding of various aspects of family takaful, including its concept, implementation and compatibility with the principles of Islam. The mean score readings are mostly less than 2.5. These findings indicate that the respondents’ level of understanding of the concept of family takaful (mean 5 2.46), the implementation of family takaful (mean 5 2.48) and understanding of the compatibility of family takaful with the

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Table 4: Respondents’ Level of Understanding on Family Takaful. Per Item

Overall

Mean (SP)

Mean (SP)

Takaful is an Islamic insurance system Family takaful is based on the practice of mutual assistance and co-operation Takaful practice is built on the principle of tabarru’

2.51 (1.226)

2.46 (1.143)

Implementation Of Family Takaful

Mean (SP)

Mean (SP)

People from all walks of life subscribe to takaful products Family takaful is based on a combination of mudarabah and wakalah models The contribution made by the takaful participants is based on the donation rules The determination of profitsharing between the participants and the takaful operator is based on the mudarabah contract (sharing of profit)

2.75 (1.223)

2.49 (1.101)

Understanding of the Compatibility of Family Takaful With the Principles of Islam

Mean (SP)

Mean (SP)

2.43 (1.307)

2.41 (1.209)

The Concept of Family Takaful

Family takaful as an alternative halal insurance for Muslims No elements of gharar, maysir and riba (elements that are not permitted by Islam) in family takaful Family takaful is a product which is based on shariah principles Overall understanding of family takaful Source: Questionnaire, 15 March–28 April 2016.

2.47 (1.250)

2.41 (1.185)

2.50 (1.122)

2.44 (1.131)

2.27 (1.264)

2.42 (1.280)

2.40 (1.254) 2.46 (1.110)

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principles of Islam (mean 5 2.41) were still at a low level. In summary, the respondents’ level of understanding overall is still at a low level (mean 5 2.46).

4.3. The Difference in the Level of Understanding of Family Takaful Between the Groups Participating and Not Participating in Family Takaful Table 5 shows the difference between the groups of respondents who participated in family takaful and the group of respondents who did not, reporting their understanding of family takaful. Based on these research findings, the total mean scores for the group who participated in family takaful exceed 3.50 while the total mean score for the group who did not was less than 2.5. This indicates that, overall, respondents who participated in family takaful had a higher level of understanding of it, and that the group of respondents who did not had a lower level of understanding of it.

4.4. T-Test on the Difference of Levels of Understanding Between the Group Participating in Family Takaful and the Group Not Participating in It Table 6 shows the different levels of understanding between the respondent group participating in family takaful and the one not participating in it. It indicates that there were significant differences in the level of understanding of family takaful between the two groups (p 5 0.000). This demonstrates that the level of understanding of family takaful varies between these two groups, with the respondents who participated in family takaful found to have a clear understanding and a positive perception of family takaful, while respondents

Table 5: The Difference Between the Groups Who Participated and Did Not Participate in Family Takaful According to Their Level of Understanding of It.

Respondents’ Understanding of Family Takaful

Concept of family takaful Implementation of family takaful Compatibility of family takaful with the principles of Islam Overall

Respondents Who Participated in Family Takaful

Respondents Who did Not Participate in Family Takaful

Mean (SP)

Mean (SP)

3.67 (0.680) 3.65 (0.496)

2.17 (1.037) 2.21 (1.021)

3.82 (0.570)

2.07 (1.068)

3.71 (0.487)

2.16 (1.002)

Source: Questionnaire, 15 March–28 April 2016.

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Tests for Equal Variance F

Level of Understanding of Family Takaful

Equal Variant Assumed Equal Variant Not Assumed

Source: Questionnaire, 15 March–28 April 2016.

Sig.

T-Test for Equality Mean

t

66.681 0.000 13.263

df

398

19.739 252.609

Sig. Mean (2-Tailed) Difference

Std Error Difference

95% Confidence Interval Lower Limit

Upper Limit

0.000

1.549

0.117

1.319

1.779

0.000

1.549

0.078

1.394

1.703

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Table 6: T-Test on the Difference of the Levels of Understanding Between the Group Participating in Family Takaful and the Group Not Participating in Family Takaful.

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who did not participate in family takaful were found to have lower level of understanding of it. Table 6 establishes a significant difference in the understanding of family takaful between the two groups and, thus, that an individual’s participation in family takaful is influenced by his or her understanding of it; in other words, they joined takaful because they understood what it was. Therefore, if more people can be assisted to understand the concept of takaful, the number of people participating in it will correspondingly increase. On the other hand, if many do not understand takaful, its penetration of the market will be slow. Consequently, it is imperative that efforts be made to improve understanding of family takaful to enable the takaful industry to grow. The parties involved, whether senior managers or takaful agents, need to give clearer and more in-depth explanations to the public by any appropriate means. For example, they could hold programs that increase understanding of takaful, whether seminars or talks, in mosques, community halls, government venues and elsewhere, without waiting for an invitation from the relevant parties. Encouraging individual takaful agents to visit potential clients or conduct visits from house to house could also be a way to introduce takaful products and to properly educate communities about them. In addition, takaful companies also need to enhance the promotion of takaful by intensifying the dissemination of information on its benefits and advantages through the mass media, whether by print media such as magazines, newspapers and flyers, or through the electronic media. These steps can be very effective in promoting family takaful to every segment of society.

5. Conclusion This study reveals that the understanding of family takaful among the Muslim community of southern Thailand is low. An examination of its findings also reveals different levels of understanding in the community of family takaful according to the two groups. Those who have participated in family takaful were found to have a clearer understanding and more positive perception of family takaful, while those who have not participated were found not to have a clear understanding of it. In addition, the study also revealed a significant gap in understanding between the two groups, which demonstrates that people’s participation in family takaful is mostly influenced by their understanding of the product. The implications of this study are that takaful companies should intensify promotion in order to increase the knowledge and understanding of the community about takaful. In addition, the Shariah advisory members should also play a more active role in ensuring an understanding in the community of the compliance of takaful with Islamic law. Shariah advisory members also need to have expertise in fiqh Islamic muamalat related to contemporary issues in takaful in order to give answers to a confused society and provide a clearer understanding of takaful to society.

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Acknowledgement The authors would like to express their gratitude to the University of Malaya for granting the precious opportunity to engage in this research, and particularly for providing a specific grant (PO071-2015A) as financial support throughout the research period.

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Industry Takaful Malaysia (1984–2004). Retrieved at http://www.bnm.gov.my/files/ publication/tkf/bm/2004/booklet.bm.pdf. Accessed on August 18, 2016. Islam Santichon Coop. (2015). Khau san takaful (takaful news). Retrieved at http:// www.islamsantichoncoop.com/main/content.php?page5sub&category59&id517. Accessed on June 30, 2016. Ismail, A., & Abdullah, K. (2000). Teori dan Praktis. Kuala Lumpur: The Malaysian Insurance Institute & Takaful Nasional Sendirian Berhad. Mahamad, M. A. (2015). Islamic insurance. Retrieved at https://islamicfinancethai. com. Accessed June 29, 2015. Mahmood Sabri, M. S. F., & Redzuan, H. (2015). Analisis Permintaan Takaful Keluarga di Malaysia. In eProsiding seminar fiqh Semasa (SeFis). Retrieved at http://usulifaqihrc.com/eprosiding/wp-content/uploads/2015/05/Prosiding-MuhammadShukri-Faidz-Bin-Mahmood-Sabri-1.pdf. Accessed on August 16, 2015. Marican, S. (2005). Kaedah Penyelidikan Sains Sosial. Selangor: Prentice Hall Pearson Malaysia Sdn. Bhd. Matsawali, M. S., Abdullah, M. F., Ping, Y. C., Abidin, S. Y., Zaini, M. M., Ali, H. M. (2012). A study on takaful and conventional insurance preferences: The case of Brunei. International Journal of Business and Social Science, 3(22), 163–176. Mohamad, M. H. (2008). Perbandingan Kontrak takaful dan Insurans. In A. A. Rahman, et al. (Eds.), Sistem Takaful di Malaysia: Isu-Isu Kontemporari (pp. 19–36). Kuala Lumpur: University of Malaya. Mohamed Mazahir, S. M. (2013). Conventional insurance and takaful: Konseptual and operational differences. Paper Proceeding of the 5th Islamic Economics system conference (iECONS 2013), Faculty Economics and muamalat, Universiti Sains Islam Malaysia, Berjaya Times Square Hotel, Kuala Lumpur, 4–5th September, 271–281. Mohd Noor, A., & Zakaria, M. S. (2010). Takaful: Analisis Terhadap Konsep dan Akad. Journal Muamalat, 3, 1–28. Mohd Safar, A. F. (2011). Analisis terhadap elemen maqasid al-syariah dalam produk Takaful Ikhlas di Malaysia. Master thesis. Department of Fiqh and Usul, Academy of Islamic Studies, University of Malaya, Kuala Lumpur. Muang Thai Takaful. (2015). Retrieved at http://www.muangthai.co.th/ webmtl/Default.aspx?tabid5773&language5th-TH. Accessed on November 17, 2015. OIC Thailand. (2015). Chamnuan Borisad Prakan Shiwit Nai Thai (total of insurance companies in Thailand). Retrieved at http://www.oic.or.th/th/search/companies.php? Accessed on December 3, 2015. Phillip Life Assurance. (2015). Phillip takaful. Retrieved at http://www.philliplife.com/ about/philliplife/. Accessed on November 17, 2015. Silcaru, T. (2009). Karn Vicai laek Vikhrok Khomun Thang Sthiti duai SPSS (research and statistical Analysis by SPSS). Nonthaburi: S.R. Printing Massproduct Sdn. Bhd. Thai Life Insurance. (2015). Thai takaful. Retrieved at http://www.thailife.com/. Accessed on November 17, 2015. Thanasegaran, H. (2008). Growth of Islamic insurance (takaful) in Malaysia: A Model for the region? Singapore Journal of Legal Studies, 143–164.

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Yunus, Y., & Abdul Rahim, H. (2010). Pengtauan dan Persepsi Terhadap Perlindungan takaful Keluarga. Journal Pengguna Malaysia, 15, 65–76. Yusof, M. F. (1996), Takaful: Sistem Insurans Islam. Kuala Lumpur: Utusan Publications & Distributors Sdn. Bhd. Zakaria, S. (2004). Pemahaman dan Sambutan Masyarakat Terhadap Skim Takaful: Kajian di Bagan Serai, Perak. Master thesis, Department of Fiqh and Usul, Academy of Islamic Studies, University of Malaya, Kuala Lumpur.

PART IV: BANKING INSTITUTIONS

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Chapter 11

The Application of Bay’ Al-Tawarruq in Islamic Banking Institutions in Malaysia: A Study of Bank Muamalat Malaysia Berhad Mohd Izuwan Mahyudin and Azizi Che Seman Abstract Purpose – A study of Islamic banking products, especially bay’ al-tawarruq transactions, demonstrates that the purpose of these transactions is to provide liquidity to the customer, such as personal financing, working capital expenditure, cash lines and credit cards. However, as the industry expands, the industry is innovating to extend products to include an investment and deposit instrument that provides a fixed return to the customer. As the second fully-fledged Islamic bank in Malaysia, Bank Muamalat Malaysia Berhad (BMMB) offers products based on the bay’ al-tawarruq concept. Methodology/approach – This study investigates the original principles of the bay’ al-tawarruq contract and its current applications in BMMB. Findings – The study found that the bay’ al-tawarruq contract is being adopted as an alternative to the bay’ al-‘inah contract, especially for financing-based products offered by BMMB. Originality/value – This is an attempt to study the application of Tawarruq contract in Bank Muamalat’s product offerings based on the process and mechanism of Bursa Suq al-Sila’ (BSAS). Keywords: Bay’ al-tawarruq; Bank Muamalat Malaysia Berhad; financing products; Islamic banking

1. Introduction After the 1983 Islamic Bank Act (IBA) came into effect, the first Islamic bank in Malaysia was founded, Bank Islam Malaysia Berhad (BIMB). After this first Islamic bank was established, an initiative was introduced to encourage conventional banks in Malaysia to offer Islamic banking products through a ‘No-Interest New Developments in Islamic Economics, 169–179 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181011

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Banking Scheme’. Subsequently, in 1999, the second Islamic bank was founded and was named Bank Muamalat Malaysia Berhad (BMMB) (Haron, 2008). The Islamic financial industry in Malaysia has experienced exponential growth. It has significantly contributed to the growth and advancement of the national economy. The Islamic financial system in Malaysia has grown to become a competitive component of the financial system, competing with the conventional financial system as a driver of growth and progress for the nation’s economy. It encompasses all aspects of the banking system: Islamic banking, takaful, the money market and Islamic equity (Official Portal of the Bank Negara Malaysia, 2014). The Islamic financial system has experienced very encouraging development, domestically and globally. Malaysia is currently redoubling its effort to improve its position as International Islamic Finance Hub (Official Portal of the Bank Negara Malaysia, 2014). This positive development can stimulate a variety of initiatives in the Islamic financial industry. This has positive impacts on the industry and on the country as a whole. Among the most significant impacts is that more foreigners can become involved in the Islamic financial system in Malaysia. It also enhances and broadens various concepts of Shariah in Islamic financial products. Upon closer examination, previous concepts that have been used widely in Islamic banking products are wadi’ah, bay’ al-‘inah, murabahah and bay’ bithaman ajil. However, many other Shariah concepts have been introduced, among which are mudarabah, ijarah mausufah fi al-zimmah, musharakah mutanaqisah and tawarruq (Official Portal of the Bank Negara Malaysia, 2014). Such diversity can lead to the investigation of many new Islamic financial products which are more innovative and interesting. Many studies have been done in this field, either at the individual or industry level. Tawarruq is one of the Shariah contracts that are widely used by today’s Islamic banking institutions, especially in facilitating customers’ access to cash. Previous Islamic scholars did not discuss bay’ al-tawarruq in itself but while discussing other contracts. For instance, although imam al-Nawawi (2003) did not discuss the concept of bay’ al-tawarruq directly in his book Rawdah al-Talibin, he did mention this principle in his discussion about bay’ al-‘inah and bay’ bithaman mu’ajjal (Rahman, Mohammad and Mohd Salleh, 2010). The discussion among the majority of fuqaha’ on bay’ al-‘inah has occurred when they also discussed tawarruq. They did not separate them, except for one that did discuss them separately, a faqih from the Ḥanbali school of thought who argued that bay’ al-‘inah and tawarruq are two types of transactions that are always linked to deferred selling transactions which might end as riba (Sheikh Ahmad, 2006). The term al-tawarruq was only pioneered by fuqaha’ from the Hanbali school of thought (Al-Bahuti, 1986).

2. Definition of Tawarruq The etymology of bay’ al-tawarruq is from the Arabic term ‫‘( ﻃﻠﺐ ﺍﻟﻮﺭﻕ‬asked for wariq’) (Ibn Manzur, 1990). Wariq is money made of silver. The meaning bay’ al-tawarruq subsequently changed to become more general (al-Mani’, 1425H): ‘Asked for money: either silver, gold or paper.’

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As a financial term, bay’ al-tawarruq refers to muamalah business transactions which involve two stages of business. In its first stage, business is conducted where a purchase on credit is made between the buyer and the original seller of an asset. In the second stage, the buyer will sell the asset to a third buyer in cash (Ministry of Waqf and Islamic Affairs Kuwait, 1993). Majma’ al-Fiqh al-Islami, Rabitah al-‘Alam al-Islami defined bay’ al-tawarruq as the purchase of an item owned by the seller at a deferred price, with the buyer selling it to a third party to obtain cash (al-Mani‘, 1425H). It is named bay’ al-tawarruq because, when the asset is bought on credit, the buyer will not be interested in using and benefitting from it but will resell the asset to obtain cash (Qal‘ahji, 2002). It is also known as a murabahah commodity and is used widely in deposits, financing, asset and liability management, and risk management products (Central Bank of Malaysia, 2011).

3. The Tawarruq Application at the Bank Muamalat Malaysia Berhad BMMB introduced tawarruq contract products in 2006. The tawarruq-based products were approved by the bank’s Shariah Committee at its 11th meeting on 6 December 2006. Before this contract was introduced and applied at BMMB, most of its products were based on bay’ al-‘inah. The introduction of the tawarruq contract initiates moves by BMMB away from bay’ al-‘inah because this contract is quite controversial (Mohd Salim, 2014). This change is consistent with the current development of Islamic financial system in Malaysia which requires a transition towards less controversial contracts. The history of the implementation of bay’ al-‘inah in the Islamic financial system in Malaysia features many discussions and decisions made by authoritative bodies to ensure that the implementation of bay’ al-‘inah strictly follows Shariah requirements. Because it has strict terms and conditions, the bay’ al-‘inah contract cannot be implemented carelessly: the violation of one stipulated term will render the contract invalid in Shara’. The strict terms and conditions outlined in the contract implementation of bay’ al-‘inah are due to decisions made by the Shariah Advisory Council (SAC) BNM as an authoritative body that monitors the Islamic financial system in Malaysia, especially Shariah compliance. MPS, both at its 16th meeting of 11 November 2000 and its 82nd meeting of 17 February 2009, decided that the aqad bay’ al-‘inah must adhere to the following valid terms and conditions (Central Bank of Malaysia, 2011):

(1) Have two clear and separate buy and sell agreements, which are the purchase agreement and the sale agreement. (2) There are no conditions for asset re-purchasing in the agreement. (3) The time for the execution of every agreement is different. (4) The sequence for the execution of every agreement is accurate, whereby the first buy-and-sell agreement must be completed before the second agreement is sealed.

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(5) There is a transfer of asset ownership, and the valid possessions on asset (qabd) based on Shara’ and current business practice (‘urf tijari). Furthermore, a circular was issued by BNM at the end of 2012 to specifically detail and maintain the validity of the terms and conditions of the bay’ al-‘inah contract. Islamic financial institutions must comply with this circular, which requires them to attest that all transactions based on bay’ al-‘inah comply with the Shara’. On 1 January 2013, BMMB decided to no longer offer products based on bay’ al-‘inah to its customers. BMMB had, from 2006, begun replacing the bay’ al-‘inah contract in some of its products with bay’ al-tawarruq. The decision in January 2013 caused all products based on bay’ al-‘inah to be terminated and replaced with the alternative tawarruq contract (Mohd Salim, 2014). BMMB products using the bay’ al-tawarruq are detailed in Table 1.

Table 1: Products at BMMB Based on Bay’ Al-tawarruq. No.

Category

Name of Product

1.

Personal Financing

2. 3.

Deposit Product Asset Financing

4. 5.

Cash Line Facility Revolving Credit

6.

Term Financing

7.

Restructuring

Muamalat Personal Financing-i (bay’ al-tawarruq) Fixed Term Account-i (bay’ al-tawarruq) Muamalat Asset Financing-i (bay’ al-tawarruq) Cash Line Facility-i (bay’ al-tawarruq) Muamalat Revolving Credit-i (bay’ al-tawarruq) Muamalat Term Financing-i (bay’ al-tawarruq) Restructuring Financing-i (bay’ al-tawarruq)

Source: Interview with BMMB Shariah officers.

4. Commodity Market Share Platform (Bursa Suq Al-Sila’) Bay’ al-tawarruq is a form of financial transaction. In any trade agreement, the subject of exchange is one of the things that must be adhered to. Any asset declared by Shara’ can become the subject of bay’ al-tawarruq agreements. However, in current practice, bay’ al-tawarruq normally uses a certain commodity as the basic asset that is obtained from the third party. This differs from the bay’ al-‘inah contract, where the normal basic asset used in the trading transaction is the asset owned by the seller or by the buyer, not normally in the form of commodity. Thus, serious consideration must be given in every dealing to the commodity that will be used in the bay’ al-tawarruq transaction.

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Bursa Suq al-Sila’ (BSAS) arose from a collaboration between BNM, the Securities Commission, the Malaysian Exchange and parties in the Islamic financial industry. It is a trading platform of the Shariah Commodity and is electronically hosted. BSAS is an international commodity platform that facilitates Islamic investment and financing based on commodities and using the principles of bay’ al-tawarruq, musawamah and/or musawamah (Central Bank of Malaysia, 2011). In the BSAS structure, the buyer must own the commodity before transacting any business. BSAS allows the buyer to receive the commodity if he is in a position that surpasses the commodity’s sale and if the trading account is not closed (‘squared-off’) on the same day. To take delivery, the buyer is charged with the delivery fees based on the total amount that has been decided by BSAS, as well as other costs related to delivery and storage (Dusuki, 2010). SAC, at its 78th meeting on 30 July 2008, decided that the proposal for a BSAS operational structure was allowable, subject to the ability of the commodity being traded be identified and determined accurately (mu‘ayyan bi al-dhat) regarding its location, quantity and quality. Also, it was suggested that the business be done at random so that the BSAS operations can better fulfil the original characteristics of bay’ al-tawarruq (Central Bank of Malaysia, 2011).

5. The Process and Mechanism of Suq Al-Sila’ (Bursa Suq Al-Sila’) The process and mechanism used in BSAS are illustrated in Fig. 1.

Fig. 1:

The Modus Operandi of the Bay’ Al-tawarruq Transaction on the Bursa Suq al-Sila’ Platform. Source: Dusuki, 2010.

(1) During the opening of pre-market: • The purchase offer (bid) from the financial institution and the offer to sell from the commodity seller included in the system.

174

(2)

(3)

(4)

(5)

Mohd Izuwan Mahyudin and Azizi Che Seman • When the market opens at 10.00 a.m., the transaction will commence by making the match with the order through the BSAS system. • The commodity issuer will sell directly to Islamic Bank A. The commodity ownership will transfer to Islamic Bank A. Bursa Malaysia Islamic Services (BMIS) will ensure that the commodity will be delivered should there be any demand for it. • At this stage, the confirmation of business will be sent to all parties involved. • Islamic Bank A will make payment by crediting the BMIS account. • An e-certificate will be issued giving complete information about the business and confirming that the transaction has been effected. Islamic Bank A sells the commodity to its customer or to other Islamic banks by means of murabahah (cost price plus profit), paid in instalments. • Ownership will transfer to customer/Islamic Bank B. Customer or Islamic Bank B sells the commodity to BMIS through Islamic Bank A, or directly. • BMIS pays the customer/Islamic Bank B by instructing Islamic Bank A to debit its account. • Commodity ownership will transfer to BMIS. Commodity sales by BMIS to the issuer of the commodity are performed at random and follow the matching offer as in the actual market. • Ownership will transfer to the other commodity issuers. • As soon as the commodity’s ownership is transferred to the issuer of the commodity, it is free to be re-sold or otherwise in BSAS.

The use of the BSAS platform greatly facilitates the implementation of the tawarruq transaction at BMMB, especially in ensuring that the transaction fully complies with Shariah. This is because BSAS has stipulated several rules that must be followed to ensure that the transaction fulfils the requirements of syara’ (Brochure of Bursa Suq Al-Sila’, Bursa Malaysia):

(1) Must be in existence – physical commodity must exist. (2) Unencumbered commodity – not tagged to any sale at the point of offer. (3) Commodity must be located in a specific and accurate location. Complete information of this must be provided when the offer is made. (4) Commodity must be owned by the issuer who makes the offer. (5) Commodity must be given when there is a demand for its delivery. (6) Commodity must be described clearly – size, quantity and quality. (7) Commodity ownership will be identified through a system – every time a transaction occurs, only the owner will be qualified to own it.

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Briefly speaking, there are three separate business transactions in a tawarruq structure which use the BSAS platform:

(1) First transaction: the bank buys the commodity from Trader A with cash. (2) Second transaction: the bank sells the commodity to a customer by instalment. (3) Third transaction: customer sells the commodity to Trader B for cash. The above transaction sequence is for financing products. Meanwhile, for deposit products:

(1) First transaction: The customer buys the commodity from Trader A with cash. (2) Second transaction: Customer sells the commodity to the bank using instalments. (3) Third transaction: The bank sells the commodity to Trader B for cash.

6. Tawarruq Application at BMMB The funding application based on the concept of bay’ al-tawarruq at BMMB involves or integrates several other contracts: bay’ al-murabahah, wa’d mulzim, wakalah and bay’wadi’ah. Bay’ al-murabahah (selling with profit) is selling an item for the same price as the first price but with added profit (Al-Zuhayli, 2007). It is a form of trading that sells a commodity or asset for a price (capital) to the buyer, together with the profit that was acknowledged and agreed upon by the seller and buyer (AAOIFI, 2010). Bay’ al-tawarruq transactions at BMMB currently occur when the bank sells a commodity purchased from a commodity trader to a customer. BMMB will sell at a higher price than the price paid to the commodity seller (Abdullah, 2014). Wakalah is a replacement (‘taking over a place’) of another person during the latter’s life that is endorsed by Shara’ (Al-Zuhayliw, 2007). Wakalah can be understood as an agency contract that involves a party granting agency to another party as their representative to perform a certain task. In the Islamic finance context, the customer will normally appoint a financial institution as their representative to carry out a muamalah transaction and, in return, the financial institution will receive some payment for the service (Bank Negara Malaysia, 2011). In BMMB’s current practice of bay’ al-tawarruq, this happens when a customer appoints the bank to sell a commodity bought from other commodity sellers. Bay’wadi’ah is when an item is sold at the same price at which it was bought, other than a slight reduction in price (Al-Zuhayliw, 2007). It can be understood as a transaction that takes place where the selling price is less than the purchase, or

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cost price (Muhammad, 2008). In the practice of financing bay’ al-tawarruq transactions at BMMB, bay’wadi’ah applies when a customer sells the commodity to other commodity sellers at a lower price than the price for which he or she purchased it from the bank (Abdullah, 2014). Wa‘d mulzim means a binding promise (Central Bank of Malaysia, 2011). It is a form of commitment by a customer to the bank to buy a commodity that has been purchased by the bank. If he violates the promise and does not buy the commodity, then the bank has every right to take action against the customer.

7. The Modus Operandi of Products Based on Tawarruq at Bank Muamalat Malaysia Berhad (Fig. 2) (1) The customer approaches the bank and applies for funding by issuing a purchase requisition to the bank and completing the required documentation. (2) Based on this requisition, the bank buys a commodity from the first commodity seller. (3) The bank sells the commodity bought from the first commodity seller to the customer based on the murabahah contract (cost price plus the profit). (4) The customer appoints the bank as representative (based on the wakalah concept) to sell that commodity to other commodity sellers. (5) Based on its appointment as the representative, the bank will sell the commodity to other commodity sellers. (6) The bank then deposits the money from the sale (Step 5 above) into the customer’s account. Thus, customers who require liquidity (cash) can come to the bank and make a purchase request, together with a binding promise, to buy a certain asset from the bank. At the same time, the customer appoints the bank as his/her restricted representative to accept the asset transaction for himself or herself. The customer

Fig. 2: Modus Operandi of Financing (tawarruq) at Bank Muamalat Malaysia Berhad. Source: Interview with BMMB research officers.

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issues a purchase requisition to the bank, which cannot be revoked after it is issued. The following documentation is involved:

(1) The purchase request, on which is stated the customer’s intention to buy a commodity and their request to the bank to buy that commodity. (2) An undertaking to purchase (wa’d mulzim), which is an agreement to buy the commodity bought by the bank at a stipulated price as soon as the bank buys that commodity from the first commodity trader. (3) Appointment of a representative to execute the purchase deal (wakalah khaṣṣah), wherein the customer appoints the bank as his/her representative, restricted specifically to executing the commodity purchase agreement from the bank; the bank will act as recipient on behalf of the customer and complete the buy-and-sell agreement via murabahah with the bank. At this stage, the customer will issue a letter of agency to the bank, appointing the bank as his/her agent to sell the commodity to other commodity sellers subsequent to the murabahah agreement. Based on the purchase request from the customer, the bank will buy the commodity from the commodity seller (the first trader) at the same cost with the total amount of financing applied. Commodity traders will provide the holding certificates, together with the delivery order, as proof of transfer of ownership to the bank. Following the undertaking to purchase (wa‘d mulzim) commitment by the customer, the bank will sell the commodity to the customer at a selling price based on the murabahah (cost price plus profit) that will be paid by the customer to the bank in instalments (delayed). The bank as a restricted agent for the customer acts as recipient on behalf of the customer and executes the commodity purchase through the murabahah sale contract. The customer also appoints the bank as his/her representative (wakil), then sells the commodity that was bought to other commodity traders. Based on the letter of agency, the bank as the customer’s representative will sell the commodity on behalf of that customer to other commodity traders (Trader 2). Having sold the commodity to the commodity trader, the bank deposits some money from the sale – equalling the total amount of the funding – into the customer’s account. Thus, all BMMB financing products based on bay’ al-tawarruq will be executed according to the procedure stated above. There is, however, a different procedure relating to the deposit product.

8. Conclusion There is a difference in opinion among contemporary scholars regarding bay’ al-tawarruq transactions currently performed in Islamic banking institutions.

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A way forward is for transactions to be continued with more systematic terms and conditions, and practices and procedures that fulfil the validity requirement of a buy-and-sell contract. This is because, in contemporary financial practice, everything must be explicit and systematic to safeguard the interest of the parties involved in the contract. A series of resolutions issued by the Bank Negara Malaysia regarding the implementation of the bay’ al-‘inah contract has outlined several stringent criteria that must be adhered to by Islamic banking institutions in Malaysia to ensure that their transactions truly fulfil the requirements of Shariah. In practice, it is a daunting task for Islamic banking institutions to fulfil these terms and conditions. Thus, an already-existing alternative that can replace the bay’ al-‘inah contract is bay’ al-tawarruq. BMMB, as a fully Islamic banking institution, has decided to terminate its product offerings based on bay’ al ‘inah and replace it with bay’ al-tawarru contracts.

References AAOIFI. (2010). Accounting and Auditing Organization for Islamic financial institution Shariah standard. Bahrain: AAOIFI. Al-Bahuti, M. I. Y. (1986). Kashshaf al-Qina‘ ‘an Matan al-Iqna’. Beirut: Dar al-Fikr. Bank Negara Malaysia. (2011). Resolusi Syariah dalam Kewangan Islam (2nd ed.). Kuala Lumpur: Bank Negara Malaysia. Central Bank of Malaysia, (2011). www.bnm.gov.my/index.php?ch=en_speech &pg=en_speech&ac=267&lang=en. Dusuki, A. W. (2010). Can Bursa Malaysia’s Suq al-Sila’ (commodity murabahah house) resolve the controversy over tawarruq. Paper work for international Shariah research academy for Islamic finance (ISRA), No. 10. Haron, S. (2008). Sistem kewangan Islam dan perbankan Islam. Kuala Lumpur: Kuala Lumpur Business School Sdn. Bhd. Ibn al-Humam, M. I. A. W. (1995). Sharḥ Fatḥ al-Qadir. Lebanon: Dar al-Kutub al-Ilmiyyah. Ibn Abi Shayba. (n.d.).Muṣannaf Ibn Abi Shayba. India: Dar Al-Salafiyyah. Ibn Manzur, J. M. I. M. (1990). Lisan al-‘Arab. Beirut: Dar al-Fikr. Ministry of Waqf and Islamic Affairs Kuwait. (1993). Al-Mawsu‘ah al-Fiqhiyyah. Kuwait: Ministry of Waqf and Islamic Affairs Kuwait. Official Portal of the Bank Negara Malaysia, (2014). www.bnm.gov.my/index.php? ch=en_speech&pg=en_speech&ac=267&lang=en. Qal‘ahji, M. R. (2002). Al-Mu‘amalat al-Maliyyah al-Mu‘aṣirah fi Ḍaw’ al-Fiqh wa al-Shari‘ah. Beirut: Dar al-Nafa’is. Rahman, A. A., Mohammad, S., & Mohd Salleh, I. (2010). Bay’ al-tawarruq dan Aplikasinya dalam Pembiayaan Peribadi di Bank Islam Malaysia Berhad. Jurnal Syariah, 18(2). Sheikh Ahmad, M. P. (2006). Bai Al-lnah dan Tawarruq: Kaedah dan Pendekatan Penyelesaian. Paper work for Muzakarah Cendekiawan Syariah Nusantara, Langkawi, 28–29 June 2006.

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Interviews Abdullah, M. F. (2014). Head of the Research and Publication Unit, Shariah Department, Bank Muamalat Malaysia Berhad. An interview, 12 March. Mohd Salim, N. A. (2014). Head of the Advisory and Secretariat Unit, Shariah Department, Bank Muamalat Malaysia Berhad. An interview, 12 March.

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Chapter 12

Determinants of the Asset Structure of Malaysian Islamic Banks: A Panel Study Ahmad Azam Sulaiman @ Mohamad, Mohammad Taqiuddin Mohamad and Siti Saidatul Akmal Arishin Abstract Purpose – This study investigates the management of asset structures in Malaysia’s commercial banking sector. Methodology/approach – The study uses unbalanced panel data from 17 Islamic banks in Malaysia, covering the period 1997 to 2012. All significant data have been taken into account in analysing whether there is a relationship between asset structure management and certain factors involving bank-specific financial conditions and macroeconomic features. These include financing, deposits, profits, money supply, gross domestic product (GDP) and composite indices. Findings – The results reveal that asset management structure is significant for total financing, total deposits, money supply, GDP and composite indices. In conclusion, the management of asset structures acts to efficiently prevent any unexpected crises that may affect banking operations. Originality/value – The structure of asset management in Islamic banking is influenced by internal and external factors which have the most impact on asset management by Islamic banks. Islamic banking also provides more financing to reduce their risk and at the same time they attempt to increase deposits and investment in due to interest rate volatility in conventional banking. Keywords: Asset structure management; Islamic banking; Malaysia

1. Introduction The management of banking assets refers to how banking or financial institutions handle their balance sheet. Such institutions provide services that expose them to a variety of risks – relating to credit, interest rates, liquidity, markets and capital. New Developments in Islamic Economics, 181–195 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181012

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Asset structure management is an approach that protects banks so that the risk level is acceptable (Chareonsuk & Chansa-Ngavej, 2008). The main objective of asset management is to maximise returns through efficient allocation. Asset management can be deterministic or stochastic. Asset structure management models allow institutions to measure and monitor risk and provide appropriate strategies for their management. Therefore, banking institutions, finance companies, leasing, insurance companies and other entities need to focus on asset management when they face various financial risks. Asset management structure is an intermediate step in a long-term strategic planning process (DeYoung & Yom, 2008). Therefore, insuring assets in response to changes in banks’ internal policy, financial conditions and the economic environment remains important because such factors can change rapidly for commercial banks, as illustrated by the 2008 financial crisis and, more recently, the European debt crisis. This chapter considers the key problems in asset structure management using the example of Malaysia’s Islamic banks and proposes several techniques to address these problems. The key problems of Islamic banks are the need to dynamically optimise asset structure to ensure the profitability of bank operations and to minimise risks (Tiby, 2011). These can be addressed by jointly structuring asset portfolios using the gap method for interest rate risk and expanding the range of profitable operations. The management of asset structure outlined in this chapter includes a proposal for the successful operation of Malaysia’s Islamic banks. Underlying these management strategies must be high-quality analysis of a bank’s internal policy involving bank specification, financial conditions and the macroeconomic indicators of Malaysia. The main objective of this chapter is to conduct an empirical investigation of the determinants that drive the asset structure management of Islamic banks. This chapter contributes to the literature on the asset structure management of banks by incorporating the role of bank-specific financial conditions and macroeconomic policy factors in explaining the management of the asset structure of Malaysia’s Islamic banks. Little is known about asset structure management in Islamic banks, and the empirical evidence is limited. The analysis of different factors that affect asset structure management is important for the progress and sustainability of the Islamic banking industry, especially in Malaysia. Section 2 of this chapter reviews the literature on the asset structures of commercial banks. Section 3 describes the empirical methodology which is consistent with model specification, empirical variables and data. Section 4 presents the empirical findings and discusses the results. Finally, Section 5 concludes and discusses policy implications.

2. Literature Review Blaˇskoa and Sinkey (2006) studied the structure of bank assets, attitude of risktaking and risk management among financial institutions in United States. They used data from 1989 to 1996 and focused on commercial banks that hold more than 40% of their assets in real estate loans. Studies have revealed that real estate loans in commercial banks have increased from 1724 loans in 1989 to 2835 in 1996, corresponding to the increase in real estate loans to macro-industry. In a

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real estate-lending bank, the study found that banks have a high likelihood of not resolving less-specific debt. The study also noted that bank properties (Real Estate Banks, REBs) have a lower ratio than basic capital risk (Risk Capital Bank, RBC) and that RBC standards allow banks to move their portfolio to safer assets as collateral (mortgages), with lower capital requirements, without the risk of interest. Walker (1997) discusses the behaviour of banks in managing assets to maximise profits using data from 1989 to 1993 as the analysis period. The model is the differential equation that keeps the current loan and investment bank from the current and previous resource levels while also using a balance sheet. The models estimated use ordinary least squares regression for the data for each commercial bank with total assets of at least $1 billion in 1993. This is designed to examine whether the bank could increase short-term profits on different asset allocation. 1992 data are taken as the initial value of t-1. Data for t-1 for the transaction are savings deposits, foreign deposits in other liabilities and federal funds purchased to determine the variables associated and total liabilities for the period of t. The initial value of t-1 is for fixed assets and total assets, capital, profits, loans, investments and capital. Only banks that operated between 1989 and 1993 are considered. Heteroscedasticity has been removed from each equation by using the heteroscedasticity consistent covariance matrix. The study found that a bank can earn high profit rates through its assets; however, the reaction to the credit crisis, as well as the regulators, should not be underestimated. Optimal allocation requires a bank representative to increase the proportion of assets that have been sold in the federal funds market and reduce the proportion of assets held in loans and investments. Tektas, Nur Ozkan-Gunay, and Gunay (2005) have studied stochastic models in various periods for asset and liability management in Turkey’s banking sector between 1987 and 1990. Their use of stochastic models is divided into eight approaches. The variables they used are cash, profit, reserve, incomes of funds, expenses of funds, interest income of short term, interest income of securities, instalment payments of medium-term loans, total reserve requirement, deposit inflow of Category 1, new public deposits institution, outstanding capital and outstanding short-term loans. The aim is to develop optimisation tools that ensure sustained profitability, risk management, and meet legal requirements and policies and the demands of depositors at a predetermined time. The effects of changes in policy and bank regulation, environmental factors, potential risk, the addition of alternative decisions and obstacles can be handled and evaluated by the model. In the end, the study found that the rate of the loan becomes irregular and increased in 1987 and 1990. The profit is also close to the actual figures, especially for the first two years. Kosmidou and Zopounidis (2002) review the methodology of asset and liability management in a stochastic interest rate environment for Greek banks around 1999. This study’s purpose was to develop an optimisation tool and interest rate scenarios to determine the optimal balance of profitability, risk, liquidity and other uncertainties for purposes such as maximising returns, reducing risk, maintaining liquidity and solvency, and expanding deposits and

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loans. The study found a total of 2,500 different solutions, and all were evaluated to determine the present value and risk commensurate with the expected returns. These results clearly demonstrate the performance of the solution obtained by the proposed programming model to overcome the actual strategy for managing the assets of the bank in which both were measured for the presence of risk. The relationship between assets and liabilities has also been studied by DeYoung and Yom (2008) using annual data of commercial banks in the United States from 1990 to 2005. The studies used correlation analysis and analysed data from four years: 1990, 1995, 2000 and 2005. The bank’s assets were divided into six accounts: cash, short-term securities, long-term securities, long-term loans, short-term loans, and other assets. Liabilities were divided into five accounts: demand deposits, purchased funds, core deposits, equities and other liabilities. Each account represents a percentage of the bank’s assets. This study shows that large banks in the United States are free, from time to time, from the use of intensive reductions such as swaps, interest rates and adjustable loans. Investigators found the asset–liability relationships more likely to gather from time to time for all sizes of banks. Small banks grew strongly and rapidly and this increased the management of ALM (asset liability management) efficiency. A further study by Ferstl and Weissensteiner (2011) proposed stochastic linear programs for various levels of management in investment opportunities for different times. Stochastic linear programs were used because they are more efficient and more flexible. In the model calculations, the studies combined the log of equity returns and the log of the dividend-price ratio with the Nelson parameter but did not enter transaction expenses and taxes, coherent risk measures and cash flow. The objective of this study was to minimise the conditional value at risk of shareholder value as the difference between the mark-to-market (financial) assets and the present value of future liabilities. The results revealed that there was a high demand for hedging to reduce the risk of market interest rates. Tektas, Nur Ozkan-Gunay, and Gunay (2005) have examined how different management strategies affect the financial stability of banks during crises. Asset–liability management requires banks to efficiently maximise profits in order to control and reduce risks. This enables the maximising of liquidity, revenue, capital adequacy and the stock market, subject to financial and legal requirements, and institutional policies. A programming model is used which has been applied to two commercial banks in Turkey with different levels of risk-taking. Models can also predict the component assets, liabilities and financial position of different risk-taking strategies. This chapter provides new evidence about the performance of banks with different management philosophies by comparing asset–liability management during crises. The study also reveals how changes in market perceptions can create difficulties during a crisis, even if objectives have not changed. Vaidyanathan (1999) discusses these issues of asset–liability management and describes the various categories of risk that must be managed. That paper also examines strategies for asset–liability management in terms of assets and liabilities, particularly in the context of India. It also discusses new information technology initiatives that impact asset–liability management by financial

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institutions in India. Financial risks include credit risk, capital risk, market risk, interest rate risk and liquidity risk. Vaidyanathan also discusses several techniques such as the risk measuring gap analysis model (GAP), the duration model, value at risk and the simulation model. This study demonstrates that the joint venture company (conglomerate approach) is very important to financial institutions; its increasing popularity in market development is also applicable in the Indian context. The difference between commercial banks and lending institutions will not be clear: the two types of institution are involved in borrowing and lending in the short and long term, and in activities such as pension funds and insurance.

3. Methodology 3.1. Model Specification This study’s empirical model is based on the asset structure management model, where the assets on the bank’s balance sheet consist of financing and profitability. The liability side consists of total deposits and composite. Demand for loans made by lenders is a function of declining interest rates. Total deposits are also a function of the increase in interest rates. All the assets and deposits mature the same, for example, during a period of one year. At this stage, all the parameters are known with certainty. All that is left are operational expenses associated with deposits and loans. This chapter also follows the augmented dealership model used by Poghosyan (2013), which includes cross-country macro-economic and institutional differences to examine the determinants of asset structure management by Islamic banks. Max EP ¼ ðp 3 L 1 b 3 B 2 d 3 DÞ 2 b 3 E subject to R 1 L 1 B ¼ D 1 E

(a)

Max EP ¼ ½ðp 2 b 3 L 1 ½ðb 3 ð1 2 rÞ 2 d 3 D

(b)

The baseline model is specified as follows: ASSETit ¼ TFit 1 TDit 1 ROAit 1 M3t 1 GDPt 1 COMPOSITt 1 «it

(c)

where ASSET is the bank asset, TFit is the total financing variable, TDit is total deposit determinants, ROAit is profit, M3t is money supply, GDPt is gross domestic product and COMPOSITt is FTSE Bursa Malaysia. An addition – «it – is the residual term. i and t refer to bank and time, respectively.

3.2. Empirical Variables The dependent variable used in this research is asset structure management. The explanatory variables are divided into bank-specific determinants, financial condition determinants and macroeconomic determinants. The explanatory variables are selected as suggested by the literature. The descriptions of the variables, the data sources and the expected signs are presented in Table 1.

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Variables

Bank asset (ASSETit)

Bank-Specific Determinants Total financing (TFit)

Total deposit (TDit)

Profit (ROAit)

Definition

Source

Expected Sign

This ratio represents the ownership of assets by banks. High asset ownership enables banks to offer more financial services at low cost.

Bank Annual Report

This ratio shows the behaviour of banks in the pursuit of profit and risk-taking. This behaviour is consistent with a profit-sharing paradigm that allows Islamic banking to offer long-term financing to the project-risk profile with high returns. A liquidity ratio of deposit-based Islamic banking institutions. Refers to the liquidity needed by the banking institutions to meet public demand deposits. Measurement of profit before tax divided by total assets. This variable indicates the proportion of bank profits to total assets.

Bank Annual Report

1

Bank Annual Report

1/2

Bank Annual Report

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Table 1: Description of Variables.

Macroeconomic determinants Gross domestic product (GDPt)

Composite index (COMPOSITt)

Growth in money supply indicators shows real growth potential, especially future growth.

Economic Report

1/2

In this study, a key indicator of demand for banking services, including extensions of loans and money supply. Variables are an indication of the economic cycle where banks provide liquidity for expected costs relating to the economic cycle. The performance of the stock market at a point in time. Consists of all counters listed on the main board. It is one index that reflects the performance of the overall market price.

Economic Report

1/2

Economic Report

1/2

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Financial Condition Determinants Money supply (m3t)

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3.3. Data and Methodology Cross-sectional and time-series (panel-data analysis) data relating to fully fledged Islamic banks in Malaysia were employed in this study that were derived from bank annual reports for the period 1997–2012. The bank-level data were obtained from Malaysia’s Central Bank (BNM), which has comprehensive information on Malaysian Islamic banks across ownership (BNM, 1997–2012). The financial statement items and ratios in the BNM database were harmonised within a universal format. The financial conditions and macroeconomic data were obtained from Annual Economic Reports of Malaysia, published by Malaysia’s Ministry of Finance (MOF, 1997–2012). The sample comprised an unbalanced panel of fully fledged Islamic banks with a minimum of three years’ operation and a maximum of 15 years’ operation. The number of Islamic banks by country is presented in Table 2.

Table 2: Number of Banks by Country. No.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Banks

Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad Maybank Islamic Berhad RHB Islamic Bank Berhad EONCAP Islamic Bank Berhad Hong Leong Islamic Bank Berhad CIMB Islamic Bank Berhad AmIslamic Bank Berhad Affin Islamic Bank Berhad Alliance Islamic Bank Berhad Public Islamic Bank Berhad Al Rajhi Banking & Investment Corporation (Malaysia) Asian Finance Bank Berhad HSBC Amanah Malaysia Berhad Kuwait Finance House (Malaysia) Berhad OCBC Al-Amin Bank Berhad Standard Chartered Saadiq Berhad

Source: Modified from Bank Negara Malaysia (1997–2012).

Ownership

Period

Local Local Local Local Local Local

1997–2012 1997–2012 1997–2012 1997–2012 1997–2012 1997–2012

Local Local Local Local Local Foreign

1997–2012 1997–2012 1997–2012 1997–2012 1997–2012 1997–2012

Foreign Foreign Foreign

1997–2012 1997–2012 1997–2012

Foreign Foreign

1997–2012 1997–2012

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4. Empirical Findings 4.1. Descriptive Analysis Table 3 reports the descriptive statistics for the variables used in the current analysis of the asset structure management of Islamic banks in Malaysia. The data reveal that COMPOSITt recorded the highest mean value of 196.1300. The second-highest mean value is ASSETit with a value of 14.9280. ROAit recorded the lowest average value of 0.0076, and GDPt had the second-lowest mean value of 4.6009. Standard deviation was used to reveal the variations in the data. Table 1 shows that COMPOSITt recorded the highest value of 295.8028, with the second-highest being GDPt with a value of 13.5436. ROAit had the lowest value of 0.0256, while TDit had the second-lowest value of 1.48E 108. Based on Table 3, the variables TDit, M3t and COMPOSITt have a positive value of skewness and skew to the right with values of 6.5963, 0.2543 and 0.8398 respectively. The variables of ASSETit, TFit, ROAit and GDPt have negative values of skewness and skew to the left. The variables GDPt and COMPOSITt have a relatively flat distribution relative to a normal distribution. The variables of ASSETit, TFit, TDit, ROAit and M3t have peaked distribution relative to a normal distribution. Thus, the data are not normally distributed. In addition, the value of Jarque-Berra for all variables supports the hypothesis of normal distribution with probability values significant at 1%.

4.2. Analysis of Correlation Coefficients Table 4 provides the correlations among these variables for Malaysian Islamic banks. As suggested by Anderson and Hsiao (1982), any correlation coefficient exceeding (0.7) indicates a potential problem in choosing between variables. However, the results show that there is no multicolinearity problem among the independent variables used in the analysis in both samples. Therefore, all variables were used in the analysis.

4.3. Model Selections Chow testing compares the no-effects model with the fixed-effects model. Table 5 shows that the F-ratio used is 7.3429, where the value is greater than a critical value. It can be concluded that it is not suitable for use in this study without the impact model; rather, the fixed-effects model is appropriate. The same method was also used to compare the fixed-effects model with randomeffects model using the Hausman test. The hypothesis of this study is that the random effects-model is better than the fixed-effects model and vice versa with the alternative hypothesis. The Wald statistical value obtained by the x2 value is not significant. It indicates that the null hypothesis – which states that the random effects model estimation is better than the fixed-effects model – is rejected. This is because,

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Variables

Mean Median Standard deviation Skewness Kurtosis Jarque-Bera *Significant at 1% ( ) t value. **Significant at 5%. ***Significant at 10%.

ASSET

TF

TD

ROA

M3

GDP

COMPOSIT

14.9280 15.2733 2.1061 20.3794 5.1314 40.9519*

13.9092 14.4928 2.6106 21.9047 10.6704 565.3915*

26576424 2448583 1.48E108 6.5963 45.1098 14,604.61*

0.0076 0.0084 0.0256 28.1912 95.8189 72,550.55*

7.0017 8.1961 10.8817 0.2543 4.3275 18.6118*

4.6009 7.2236 13.5436 21.2553 3.9066 65.6115*

916.1300 844.5400 295.8028 0.8398 2.4573 30.9010*

Ahmad Azam Sulaiman @ Mohamad et al.

Table 3: Descriptive Statistics.

Probability

ASSET TF TD ROA M3 GDP COMPOSIT

ASSET

TF

TD

ROA

M3

KDNK

COMPOSIT

1.0000 0.6626* 0.5126* 20.0929 0.1866** 20.0010 0.4483*

1.0000 0.3412* 20.0053 0.1136 20.0054 0.3879*

1.0000 20.0751 0.0283 20.002472 0.1607**

1.0000 20.1134 20.0757 20.1485***

1.0000 0.1257 0.2727

1.0000 0.5186*

1.0000

*Significant at 1% ( ) t value. **Significant at 5%. ***Significant at 10%.

Determinants of the Asset Structure of Malaysian Islamic Banks

Table 4: The Correlation Coefficients Between Independent Variables for Islamic Banks.

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Table 5: Diagnostic Tests for Model Selection. Type of Test

Chow test for pooled VS fixedeffect model Hausman test for random VS fixed-effect model

Statistical

Stat

p-Value

F

7.3429

0.0000

x2

18.5283

0.0050

based on the adjusted R2 and MSE for the three models above, it was found that the value of adjusted R2 of 0.9107 is the highest among the three models. Conversely, its MSE with the value of 0.6102 is the smallest compared to the value of other models. Thus, the fixed-effects model is better than randomeffects model.

4.4. Model Estimation Results This section discusses the important findings from the estimation results. For clarity, explanations are provided for each result (Table 6). SIZEit ¼ 8:1837 1 0:3594 TFit 1 2:28E 2 09 TDit 1 1:2146 ROAit 1 0:0125 M3t 2 0:0244 KDNKt 1 0:0020 COMPOSITt

Table 6: Result Estimations. Variable

Constant TFit TDit ROAit M3t GDPi COMPOSITt R2 Adj R2 F 2 test MSE DW-test *Significant at 1% ( ) t value. **Significant at 5%. ***Significant at 10%.

Fixed Effects

8.1837 (22.6204) 0.3594 (11.3273)*** 2.28E-09 (0.672901)*** 1.2146 (0.5441) 0.0125 (2.4018)*** 20.0244 (24.0846)*** 0.0020 (6.6485)*** 0.9107 0.8943 55.6277 0.610204 1.2158

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4.4.1. Bank-Specific Determinants Beginning with the bank’s specific variables, there are only two which are total financing (TFit), where total deposits (TDit) are positive, and which have a significant relationship with the variables of assets structure (ASSETit) with respective coefficients of 0.3594 and 2.28E-09. Both significant levels are 10%. The result also demonstrates that the profit variable is positively related to the assets structure but not significantly (Bashir, 2003). Financing growth (TFit) has consistently exerted a positive and significant impact on the assets structure (ASSETit) of Islamic banks. These results are in line with previous studies. Zakaria and Ismail (2006) indicated a high degree of persistence in bank asset structure. The larger the amount of assets, the less liquidity is provided. Islamic banks have the ability to reduce risk-taking and hold more financing. The financing that is issued should be evaluated and meet set conditions and standards in order to avoid detrimental financial problems for the bank. Generally, Islamic banking is involved in various forms of financing, such as real estate, consumer, commercial finance and industry (Ismail, 2009; Ismal, 2010). The impact of total deposits (TDit) on asset structure for Islamic banks is positive and statistically significant. This result demonstrates that deposit interest rates in conventional banks influence Islamic banking deposits, even though, in principle, riba is forbidden in Islamic banking. In this context, higher interest rates in conventional banks will lead their customers to switch their deposits to Islamic banking (Abedifar, Molyneux and Tarazi, 2013). This may be because the rate-of-return benchmark in Islamic banking is based on the overnight inter-bank rate of return. Increased demand enables banks to have a large source of funds to invest, thus contributing to national income (Kit and Rahman, 2011). 4.4.2. Financial Condition Determinants This study found that money supply (M3t) has a positive relationship with a significant coefficient of 0.0125 and a significant level of 10%. This indicates that, when economic growth becomes rapid and sustainable, financial growth also will accelerate. Financing allocations to the private sector also provide a high return to the bank, succeeded by expansion of the bank’s assets structure. Thus, the economy will grow and improve. Excessive money growth indicates an excessive risk to the economy and will lead a rise in inflation (Joya, 1994). The effects of money supply are also control variables in this study. For example, in 2009, money supply in Malaysia increased due to the increase in government spending and a higher level of financing of the private sector through the banking system (Kosmidou & Zopounidis, 2002). 4.4.3. Macroeconomic Determinants Macroeconomic indicators play a significant role in the asset structure of Islamic banks. There is one positive variable, the composite index (COMPOSITi), and the gross domestic product (GDPt) variable is negatively related. Coefficient values

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are, respectively, 0.0020 and 20.0244, and these two variables are significant at 10%. The composite index variable (COMPOSITi) is significant for the variable of assets structure (ASSETit). The results accord with Maysami and Sim (2001): when a return on investment in stock increased, the assets owned by the bank also increased. Furthermore, the stable economic growth of a country can ensure that stock returns are better because the increase of investors from within and without the country increases the demand for stock. Thus, investments in banks that are capable of generating revenue are then channelled into building the bank’s capital and reserves. Moreover, these findings show that, during this period, the government actively pursued an expansionary monetary policy to revive the economy (Loo, 1998). A significant relationship in gross domestic product (GDPi) indicates that economic conditions are stable and that the country is driven by strong domestic and external demand responding to external risks. Thus, there is interest in taking financing which is offered by the bank; the bank can directly expand the existing asset. Growth in these indicators has a positive impact on the profitability of banks and, presently, only a small percentage of financing is in default (Mohd, 2006).

5. Conclusion This study’s aim is to investigate the management of Islamic banking assets in Malaysia with regard to the external factors that influence its development. Based on panel data analysis that was conducted, the structure of asset management in Islamic banking is influenced by both internal and external factors which have the most impact on asset management by Islamic banks. In this study, Islamic banking is found to provide more financing to reduce risk to the bank. The growth of total deposits in Islamic banking is due to interest rate volatility in conventional banking, allowing banks to increase investment and thus promote economic growth. Regulatory standards and high caution regarding changes in macroeconomic variables will also positively affect the management of the bank’s assets structure and generate more national income.

Acknowledgment This article is funded by University Malaya Research Grant (UMRG): RP034C17HNE Penetapan Piawai Pengambilan Risiko Pembiayaan Bagi Perbankan Islam Malaysia: Dasar Pengurusan Strategik, Kehematan Makro dan Kestabilan.

References Abedifar, P., Molyneux, P., & Tarazi, A. (2013). Risk in Islamic banking. Review of Finance, 17(6), 2035–2096. Anderson, T. W., & Hsiao, C. (1982). Formulation and estimation of dynamic models using panel data. Journal of Econometrics, 18(1), 47–82.

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Bashir, A. H. M. (2003). Determinants of profitability in Islamic banks: Some evidence from the Middle East. Islamic Economic Studies, 11(1), 31–57. Blaˇsko, M., & Sinkey, J. F., Jr. (2006). Bank asset structure, real-estate lending, and risk-taking. The Quarterly Review of Economics and Finance, 46(1), 53–81. BNM (1997–2012). Economic report. Kuala Lumpur: Islamic Interbank Money Market. Chareonsuk, C., & Chansa-Ngavej, C. (2008). Intangible asset management framework for long-term financial performance. Industrial Management & Data Systems, 108(6), 812–828. DeYoung, R., & Yom, C. (2008). On the independence of assets and liabilities: Evidence from US commercial banks, 1990–2005. Journal of Financial Stability, 4(3), 275–303. Ferstl, R., & Weissensteiner, A. (2011). Asset-liability management under timevarying investment opportunities. Journal of Banking & Finance, 35(1), 182–192. Ministry of Finance (MOF) (1997–2012). Annual report. Putrajaya: Ministry of Finance. Ismail, S. (2009). Pengurusan Bank Perdagangan di Malaysia. Kuala Lumpur: Dewan Bahasa dan Pustaka. Ismal, R. (2010). Volatility of the returns and expected losses of Islamic bank financing. International Journal of Islamic and Middle Eastern Finance and Management, 3(3), 267–279. Joya, J. (1994). Dasar kewangan dan inflasi: Satu kajian empirikal di Malaysia. Ph.D. thesis, Bahagian Ekonomi Gunaan, Fakulti Ekonomi dan Pentadbiran, Universiti Malaya. Kit, S. M., & Rahman, A. A. (2011). Pembiayaan Perbankan Islam dan Kadar Pengeluaran Negara: Kes Malaysia (Islamic financing and the growth of national products: The Malaysian Case). Akademika, 81(3). Kosmidou, K., & Zopounidis, C. (2002). An optimization scenario methodology for bank asset liability management. Operational Research, 2(2), 279. Loo, H. B. (1998). The effects of economic factors on Kuala Lumpur stock Exchange composite Index. Ph.D. thesis, Universiti Utara Malaysia. Maysami, R. C., & Sim, H. H. (2001). An empirical investigation of the dynamic relations between macroeconomic factors and the stock markets of Malaysia and Thailand. The Management Journal, 20, 1–20. Mohd, Z. (2006). Pemodelan data indeks komposit Kuala Lumpur menggunakan neurofuzz. Ph.D. thesis, Universiti Teknologi Malaysia. Poghosyan, T. (2013). Financial intermediation costs in low income countries: The role of regulatory, institutional, and macroeconomic factors. Economic Systems, 37(1), 92–110. Tektas, A., Nur Ozkan-Gunay, E., & Gunay, G. (2005). Asset and liability management in financial crisis. The Journal of Risk Finance, 6(2), 135–149. Tiby, A. M. (2011). Islamic banking. Hoboken, NJ: John Wiley & Sons. Vaidyanathan, R. (1999). Asset-liability management: Issues and trends in Indian context. ASCI Journal of Management, 29(1), 39–48. Walker, D. A. (1997). A behavioral model of bank asset management. Journal of Economic Behavior & Organization, 32(3), 413–431. Zakaria, R. H., & Ismail, A. G. (2008). Does Islamic banks’ securitization involvement restrain their financing activity? Humanomics, 24(2), 95–109.

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Chapter 13

Islamic Versus Conventional Banking: Characteristics and Stability Analysis of the Malaysian Banking Sector Ahmad Azam Sulaiman @ Mohamad, Mohammad Taqiuddin Mohamad and Siti Aisyah Hashim Abstract Purpose – This research analyses the stability of a number of banks operating in Malaysia by using descriptive statistical analysis based on internal variables. These include the characteristics of the bank, capital adequacy ratio, ratio of profitability, liquidity ratio and the ratio of bank operations. Methodology/approach – Each bank’s stability is studied using z-score analysis. Data are sourced from the balance sheets and income statements of the banks from 2000 to 2011. Findings – The results indicate that characteristics of a bank do influence a bank’s performance. There are significant differences in financial ratios between Islamic and conventional banking. Islamic banks provide a lower loan loss of capital to cover impaired loans than conventional banks. This provides high capital based on the mean value obtained. The capital ratio allows both sets of banks to meet the capital adequacy ratio set by the Central Bank of Malaysia. Meanwhile, in profitability ratios, conventional banks have higher returns on higher assets, whereas Islamic Banking has higher returns on higher equity. Only 8 Islamic banks and 11 conventional banks are highly stable banking institutions in Malaysia. Originality/value – Islamic and conventional banking systems in Malaysia need further improvement to deal with unexpected economics crises and increased competition between the two. Hence, Islamic banking must be refined, especially for improving their stability to attract more investments for further development and performance. Keywords: Bank’s characteristics; stability; Islamic; conventional banking

New Developments in Islamic Economics, 197–214 Copyright © 2019 by Emerald Publishing Limited All rights of reproduction in any form reserved doi:10.1108/978-1-78756-283-720181013

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1. Introduction Banking is a service industry that mediates between the community and the corporate world where the community uses the financial services offered by the banks. Banks also offer loans and investment services for those who have financial deficits and surpluses. In Malaysia, conventional banking is long established, whereas Islamic banking only began in 1983. Islamic banking is rapidly expanding at present in nations such as Russia, France, Germany and Turkey, meeting the needs of Muslims in those countries. A factor contributing to this expansion is economic uncertainty in Europe, which has led them to look to Malaysia as a reference for understanding an Islamic banking system. Such recognition by outsiders is evidence that the Islamic banking system in Malaysia is a successful application of Islam to banking. The establishment of Islamic banking institutions in Malaysia also arises from the needs of the Muslims who are the majority of Malaysia’s population. Bank Islam Malaysia Berhad became the first Islamic bank in 1983. The second Islamic bank was established around 1999, Bank Muamalat Malaysia Berhad, in order to improve and enhance Malaysia’s Islamic banking. After witnessing the encouraging response that the Islamic banking system has received from the public, conventional banks are also keen to offer Islamic banking scheme products. The Central Bank of Malaysia (Bank Negara Malaysia, BNM) launched the InterestFree Banking System, which was adapted for Islamic banking and is still in use. BNM has also approved seven domestic banking groups for structural transformation under the Islamic Banking Scheme to Islamic subsidiaries. With this transformation, the potential of the universal Islamic banking licenses under the Islamic Banking Act 1983 can be fully realised. In addition, foreign Islamic banking is interested in operating in Malaysia: there are currently eight foreign Islamic banks operating in Malaysia. With the launch of the Islamic Banking Scheme and the entry of foreign Islamic banks, Islamic banking is reaching an international level. Assets and equity in Malaysian Islamic banking are on the increase and are expected to be stronger in the future. The growth of Islamic banking is experiencing an encouraging performance, comparable to conventional banking, and is competitive in the global arena. Greater competition will stimulate global banking.

2. Literature Review The characteristics of Islamic and conventional banking have been the subject of multiple studies by previous researchers, along with the growth of world banking institutions based on banking performance which make comparisons between the two forms of banking. The research by Hassan and Bashir (2003) has analysed how their characteristics and overall finance have affected Islamic banking’s performance. Bank data have been used to review the performance of Islamic banking from 1994 to 2001. These researchers used various internal and external characteristics to assess the profitability and efficiency of banks. Several banking ratios were also used to assess the relationship between the performance and the internal characteristics of the banks, such as the management of financial resources,

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management of funds and the ratio between strength and liquidity. The study found that the macroeconomic environment, financial structure and taxation will increase the capital- and loans-to-asset ratio, which in return will lead to higher profits. Bashir (2006) used the same methodology as Hassan and Bashir (2003) when examining Islamic banking in the Middle East. In this study, covering the period 1993–1998, this research utilised the fund resources management, the use of funds and the ratio of strength to liquidity. Another indicator was dummy variables for ownership. The results also demonstrated that control of the macroeconomic environment, financial structure and taxation will increase the capital ratio and loan ratio, increasing the bank’s profits. Thus, the total of the equity and big loan ratios, reacting with growth of domestic products (GDPs), will produce a high profit margin (Hassan & Bashir, 2003). The findings also indicated that foreign ownership is likely to be profitable, and that stock markets and banks are complementary. The research conducted by Haron (2004) was on profits by Islamic banks in general. Its aim was to examine the factors that contribute to the profitability of Islamic banks. The financial ratio that was used in the research as a proxy for profit comprises the percentage of total assets, bank profit on the total asset, net profit before tax to total assets, net profit before tax to capital and reserves and net profit after tax to capital and reserves. This research determined that internal and external factors are strongly related to the level of the total income of Islamic banks. Additionally, the funds deposited in the current account, the total of capital and reserves, the percentage of shared profit between banks and depositors, and money supply have a large influence on the profitability of Islamic banks. A study of conventional banks that examined internal and external factors was also conducted by Kosmidou, Tanna, and Pasiouras (2005). They studied the specific effect of banks’ characteristics, macroeconomic context and financial structures on the profits of UK commercial banks from 1995 to 2002. There are five internal indicators for assessing a bank’s performance: the ratio of cost to income, ratio of liquidity, ratio of asset quality, equity ratio and total of assets. Four measurements of external factors were used: GDPs, inflation, concentration of the banking industry and stock market capital. Naceur (2003) also conducted research on the benefits of conventional banks by using four characteristics – administrative expenses ratio, capital ratio, loan ratio and bank’s size – as the internal indications of bank performance. Naceur (2003) found that a bank’s capital strength has a positive effect, more dominant than its profits and expenditure management. The size of banks had also become more efficient. A bank’s specific factors appear stronger with the inclusion of macroeconomic measures and the financial market in determining its performance. This also has a positive influence on a bank’s profits. Widagdo and Ika (2008) compared the performance of Islamic and conventional banks in Indonesia. By using various financial ratios – revenue, liquidity risk and solvency, and efficiency – as well as a t-test, the study found no major differences in performance between Islamic and conventional banking in the periods of research. Sarker’s (1999) study of the performance of Islamic banking in Bangladesh indicated that an Islamic bank cannot operate with high efficiency if it operates under a conventional framework. This is not a deficiency in the

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mechanics of Islamic banking but is due to the lack of efficiency in conventional banking, and it impedes effective Islamic banking. Nonetheless, Islamic banks in Bangladesh can operate under the conventional framework by using the financing of loss and profit partnerships.

3. Research Methodology This study used the research approach adopted by Hassan and Bashir (2003) and Bashir (2006) by using banks’ characteristics and financial ratios to assess the performance and competitiveness of Islamic banking as represented by profit indicators, capital, operations and the liquidity of Islamic banking in the period 2000–2011. Income statements and balance data sourced from 19 Islamic banks and 23 conventional banks in Malaysia were analysed. This research used descriptive statistical analysis to study the differences in performance between Islamic and conventional banking. The Islamic and conventional banks are listed in Table 1. Normally, a bank faces risks present inside or outside its operation. These various risks can be categorized under the CAMEL framework—Capital adequacy, Asset quality, Management quality, Earning, and Liquidity (Errico and Farahbaksh, 1998). Nowadays, the tendency is to research the stability of banking and finance in the period in which it operates. The International Monetary Fund (IMF) has introduced Financial Soundness Indicators to more precisely study the stability of a bank’s finances by the addition of financial indicators (Sundararajan et al., 2002). Table 3 shows the variables used in this study in its comparison of performance between Islamic and conventional banking. The development of both forms of banking is similar and both operate in the same market. Financial indicators, such as those in Table 2, were used because they help regulators evaluate the performance of banks. Table 2 also shows the definition of each ratio used in previous studies. Table 1 lists Islamic and conventional banks operating in Malaysia. The list was sourced from BNM’s website. Bank Islam Malaysia Berhad and Bank Muamalat Berhad are fully Islamic banks, while Citibank Malaysia and Deutsch Bank run Islamic banking schemes. The other Islamic banks are subsidiaries of Islamic banks that have gained approval from BNM to operate separately alongside conventional banks. Financial indicators were identified to analyse the performance of the banks. The characteristics of a bank usually have a significant relationship with its performance: a bank’s characteristics that function well will improve its performance. There are several bank characteristic variables that have been used by past researchers. However, this research only uses two from previous research: the ratios of loans to total assets and equity to total assets. According to Hassan and Bashir (2003), these are the leverage ratio and the liquidity ratio of the bank. The second indicator for studying a bank’s profile is the quality of its assets. The control of the indicator of asset quality is important because insolvency risks for a financial institution will become apparent from asset losses. Low quality of assets can cause a shortage of capital and increase risk to credit and capital. The

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Table 1: Islamic and Conventional Banks in Malaysia. Islamic Banks

1 2 3 4 5 6 7

Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad Affin Islamic Bank Berhad Alliance Islamic Bank Berhad Amislamic Bank Berhad CIMB Islamic Bank Berhad Hong Leong Islamic Bank Berhad 8 Maybank Islamic Berhad 9 Public Islamic Bank Berhad 10 RHB Islamic Bank Berhad 11 12 13 14 15 16 17 18

Conventional Banks

1 2 3 4 5 6 7

Affin Bank Berhad Alliance Bank Malaysia Berhad AmBank (M) Berhad Cimb Bank Berhad Hong Leong Bank Berhad Malayan Banking Berhad Public Bank Berhad

8 RHB Bank Berhad 9 Bangkok Bank Berhad 10 Bank of America Malaysia Berhad Al-Rajhi Banking and Investment 11 Bank of China (Malaysia) Berhad Corporation (Malaysia) Berhad Asian Finance Bank Berhad 12 Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad Kuwait Finance House 13 Citibank Berhad (Malaysia) Berhad OCBC Al-Amin Bank Berhad 14 Deutsche Bank (Malaysia) Berhad HSBC Amanah Malaysia Berhad 15 HSBC Bank Malaysia Berhad Standard Chartered Saadiq 16 Industrial and Commercial Bank Berhad of China (Malaysia) Berhad Citibank Berhad 17 J.P. Morgan Chase Bank Berhad Deutsche Bank 18 OCBC Bank (Malaysia) Berhad 19 Standard Chartered Bank Malaysia Berhad 20 Sumitomo Mitsui Banking Corporation Malaysia Berhad 21 Bank of Nova Scotia Berhad 22 Royal Bank of Scotland Berhad 23 United Overseas Bank (Malaysia) Berhad

Source: Central Bank of Malaysia (2000–2011).

Bank Characteristics Loan/total asset

Equity/total asset Asset quality Reserves for loan loss/affected loan Affected loan/gross loans Capital Adequacy Tier 1/TRWA

Definition

Loan ratio to total asset is used to calculate the total of the outstanding loan as a percentage of total assets. A high ratio indicates that the bank gives high loans and that liquidity is low. A high ratio shows that the bank is in risk of breach. The equity ratio to total asset is a measure of the bank’s ability to refrain loss. A descending trend in the ratio signals a probable issue with capital adequacy. The ratio of loan loss to affected loan is interrelated where it measures how far reserves can compensate for an affected loan. A high ratio value indicates that the bank is providing adequate reserves for the affected borrower. The ratio of affected loan to gross loans is the measure of the total amount of doubtful loans. The lower the value of the ratio, the better the asset quality. Tier 1 is bank capital comprising paid share capital, retained earnings and statutory reserves, as well as deferred tax assets. TRWA is the total of risk-weighted assets, including credit risk, market risk and operational risk. It measures the standard adequacy capital for the deposit user towards risk assets. The measure of standard capital adequacy for the bank is 4%. If the amount received is lower than that, it indicates that the bank does not have sufficient standard capital adequacy. A bank’s capital comprises Tiers 1 and 2. Tier 1 consists of paid stock capital, retained earnings, statutory reserves and deferred tax assets.

Ahmad Azam Sulaiman @ Mohamad et al.

Indicators of Financial Ratios

202

Table 2: Financial Ratios.

There are general provisions in Tier 2 for the collective diminution in value of bad and doubtful financing and the rejection of investments in instruments from other banks. For TRWA, this consists of reasonable risk assets, market risk and operational risk. It measures capital adequacy for deposit users. Capital adequacy and its readiness will determine the strength of the financial institution in facing shocks to the balance sheet. Total Capital/TRWA Profitability Ratio Return on Asset (ROA)

Operation Return on average asset (ROAA) Return on average equity (ROAE) Liquidity Cash/deposit Net borrowing/customer fund and Short-Term Fund

Ratio obtained by dividing revenue after tax by the total average asset. Determines the bank’s efficiency in using the asset. Ratio obtained by dividing the tax return with average equity. Gives a better picture of a bank’s revenue. A liquidity measurement where a high ratio indicates high liquidity in a bank. Depositors’ trust will increase when the bank maintains this ratio. Ratio of net borrowing to deposit fund measures the bank’s liquidity where a high value indicates lower bank liquidity.

Islamic Versus Conventional Banking

Return on Equity (ROE)

Measures the efficiency of the management of the bank, being the net profit for each specified unit. A high ratio reflects a high ability resulting in positive performance. Measures the bank’s efficiency. ROE is also considered the net profit for each capital equity. A higher ratio reflects a high performance of bank management.

203

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quality of assets depends on the collection, monitoring and evaluation of the bank’s credit; it can be increased by raising loans, making adequate allocation to face loss or preventing asset concentration in a geographical or economic sector. Loan probability indicators in repaying loans must be considered because they are necessary for any asset quality analysis. The aim is to monitor the fluctuations of indebtedness in economic sectors that are exposed to changes in economy activity (Hassan & Bashir, 2003). The third financial indicator is the capital adequacy ratio, which shows the strength of a financial institution towards shocks to the balance sheet (Hassan & Bashir, 2003). As stipulated by Basel III,1 Islamic and conventional banks must maintain their capital adequacy around 8%. Every bank must ensure that their capital core is Tier 1 to meet the requirement of 6% (BNM, 2011). The management of the bank could manipulate the internal capital risk if the bank suffers a lack of capital adequacy to reduce the effect of the capital adequacy rule (Sulaiman & Mohamad, 2010). This also illustrates the strength of banks in facing the risk of non-performing loans. This is because high capital can accommodate capital credit risks that exist in the bank (Hassan & Bashir, 2003; Bashir, 2006; Kosmidou, Tanna, & Pasiouras, 2005). Table 2 shows the definitions of the financial ratio that have been used in this research. These financial ratios used are derived from the past research of Hassan and Bashir (2003) and Bashir (2006). The profitability ratio, return on assets (ROA) and return on equity (ROE) are used to measure the bank’s efficiency in managing specific assets and capital equity it holds. The two ratios are always used in research on the financial performance of banking institutions (such as Bashir, 2006; Haron, 2004; Hassan & Bashir, 2003; Naceur, 2003; Widagdo & Ika, 2008). This is because these finance indicators are important profitability ratios for assessing a bank’s performance as well as its value to investors seeking greater profit. On the other hand, the operating ratio assesses the differences between the performance of Islamic and conventional banking. This ratio determines the market risk of a financial institution. Other financial indicators are net interest income, revenue per total average assets, other operating income by total assets, non-operating items, taxes per total assets and other operating items as net income. Since Islamic banking does not charge interest, its income is taken into account. A large operating ratio indicates that the bank is operating well (Hassan & Bashir, 2003). The last ratio to be examined is the liquidity ratio. A bank’s liquidity is an important criterion for the bank’s ability to transform liabilities into assets. Liquidity is not usually much of a problem for strong banks in competitive banking systems. However, liquidity problems that occurred in the 1997 financial crisis had been the main cause of solvency issues (Hassan & Bashir, 2003). There 1 ‘Basel III’ is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to improve the banking sector’s ability to absorb shocks arising from financial and economic stress – whatever the source – improve risk management and governance and strengthen banks’ transparency and disclosure.

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are various indicators that measure a bank’s liquidity ratio. In this research, the indicators of liquidity ratio are net loans to total assets, and deposits and cash to total assets and total liabilities. The ratio of net loans to customer deposits and short-term funds are a measure of a bank’s liquidity, with high ratios reflecting low bank liquidity. The ratio of cash to bank deposits indicates the highest liquidity. Thus, the level of the indicator indicates that banks have highly liquid assets and vice versa. Depositors’ trust in the bank increases when the bank maintains the ratio of deposits (Hassan & Bashir, 2003).

4. Results The profile comparison between Islamic and conventional banking in Malaysia may be seen in Table 3. It is apparent, based on the mean value of a bank’s characteristics, that Islamic banking is riskier than conventional banking. This is because Islamic banks offer more loans and are exposed to breaches if customers do not repay loans. From the perspective of asset quality, the high mean value for conventional banking reflects the fact that those banks possess significantly higher loan loss reserves than Islamic banks. On the other hand, Islamic banks provide a low reserve because impaired loans in Islamic banks have a lower rate of 0.0289, compared to a mean value for conventional banking of 0.0981. Therefore, the asset quality of Islamic banking is superior to conventional banking. The ratio of capital adequacy, the mean value of Tier 1 to the total of riskweighted assets (TRWA), and total capital to TRWA for the two banking systems demonstrate that both meet the adequacy of their core capital by 6%, and a total capital of 8%. This indicates that Islamic and conventional banking are in strong positions to meet any financial shocks. In terms of profitability ratios, conventional banks have a higher ROA than Islamic banking. On the other hand, Islamic banking has a higher ROE than conventional banking. This reflects the fact that Islamic banks have better equity management than conventional banks, yet lack the ability to manage bank assets. In conventional banking, the opposite is true. Additionally, the ratio of bank operations indicates that Islamic banking has a lower mean value in return on average asset (ROAA) than conventional banking, whilst the latter has a lower mean value in return on average equity (ROAE) than Islamic banking. The mean value indicates that operations related to the assets of conventional bank are better but, for equity-related operations, Islamic banking is superior. Analysis of bank liquidity, the mean value of net loans to customer deposits and short-term funds, and cash value to Islamic banking deposits demonstrates that Islamic banking in Malaysia has higher liquidity in assets compared to conventional banking. If this value is maintained in Islamic banking, the trust of depositors in the bank increases. Table 3 below records the results of the descriptive analysis for 18 Islamic and 23 conventional banks, and an overall analysis of the banking system. The EViews 7 program was used to analyse the data. All variables are internal bank variables. The bank data were analysed based on six key points: mean value,

Maximum value

Bank Characteristics

Islamic Banking

Conventional Banking

All Banks

Loans/total assets Equity/total assets Loan loss reserves/impaired loans Impaired loans/gross loans Tier 1/TRWA Total Capital/TRWA Return on Assets (ROA) Return on Equity (ROE) Return on Average Assets (ROAA) Return on Average Equity (ROAE) Cash/Deposits Net Loans/customer funds and short-term funds Loans/total assets Equity/total assets Loan Loss Reserves/Impaired Loans Impaired Loans/Gross Loans Tier 1/TRWA Total Capital/TRWA Return on Assets (ROA) Return on Equity (ROE)

0.3901 0.1577 21.9759 0.0298 3.9981 4.1095 0.0062 0.1224 0.01193 0.1564 0.2726 33.8060 0.9805 0.9995 1.2779 0.3479 451.7663 466.2887 0.0507 4.5967

0.1044 0.4544 113.3735 0.0981 0.0890 15.2088 0.1388 0.0133 0.0144 0.1544 26.4657 3.7378 1.1481 0.7769 12,282.76 17.8846 0.9817 161.7487 1.6637 0.2122

0.1275 0.4058 62.9965 0.0682 0.0851 10.3359 0.0102 0.1316 0.0133 0.1553 14.9429 0.0158 1.1481 0.9994 12,282.76 17.8846 451.7663 466.2887 1.6637 4.5967

Ahmad Azam Sulaiman @ Mohamad et al.

Mean value

206

Table 3: Analysis of Characteristics of Islamic and Conventional Banking.

Minimum value

0.1387 1.3719 4.821088 2464.388 0 20.019 2415.5 20.0080 20.0185 20.0185 20.2910 20.6571 20.1002 21.2932 0 0 233.8734 0.2662 0.2539 28.4029 0.0527 39.5991

0.09 1.03 1802.511 70.924 0 0 2500.0143 20.0043 0 0 20.0369 20.7211 20.0335 20.3999 0 0 5.4817 0.1352 0.2417 788.5191 1.0763 0.1019

0.1387 1.3719 1802.511 2464.388 0 20.019 2500.0143 20.00795 20.0186 20.0185 20.2910 20.7211 20.1002 21.2932 0 0 0.0188 0.1976 0.2643 594.3846 0.8077 0.1043

Islamic Versus Conventional Banking

Standard deviation

Return on Average Assets (ROAA) Return on Average Equity (ROAE) Cash/deposits Net Loans/customer funds and short-term funds Loans/total assets Equity/total assets Loan Loss Reserves/impaired loans Impaired Loans/gross loans Tier 1/TRWA Total Capital/TRWA Return on Assets (ROA) Return on Equity (ROE) Return on Average Assets (ROAA) Return on Average Equity (ROAE) Cash/deposits Net Loans/customer funds and short-term funds Loans/total assets Equity/total assets Loan Loss Reserves/impaired loans Impaired Loans/gross loans Tier 1/TRWA Total Capital/TRWA

207

208

Bank Characteristics

Skewness value

Return on Assets (ROA) Return on Equity (ROE) Return on Average Assets (ROAA) Return on Average Equity (ROAE) Cash/Deposits Net Loans/Customer Funds and Short-term Funds Loans/Total Assets Equity/Total Assets Loan Loss Reserves/impaired loans Impaired Loans: Gross Loans Tier 1/TRWA Total Capital/TRWA Return on Assets (ROA)

Islamic Banking

Conventional Banking

All Banks

40.6883 0.0244 0.3351 0.0232 0.2701 0.4809

21.7107 0.1544 0.0173 0.0129 0.1581 148.011

31.9269 0.0210 0.2502 0.0182 0.2143 111.4436

20.0982 2.4190 214.5224 2.9848 10.3644 10.4042 28.8396

5.0122 20.8586 13.6497 16.4441 4.7208 3.6695 2.9651

3.3681 20.3831 18.1583 21.9245 4.3709 9.7642 24.1407

Ahmad Azam Sulaiman @ Mohamad et al.

Table 3: (Continued)

Kurtosis

10.9929 0.7574 0.86325 5.9224 9.1610 1.9462 7.4411 211.936 13.7479 109.6467 110.5567 105.0249 148.7496 11.7921 10.7398 48.6703 88.5968

6.7682 0.8289 1.2081 9.1485 7.1976 34.5025 2.2594 207.7801 272.2427 37.2614 20.0596 39.0669 73.1780 7.0117 7.8068 95.2561 83.8639

11.8742 0.7470 1.0339 12.2808 0.3778 14.1010 1.7971 367.462 484.0525 30.8354 123.0068 108.8063 210.6303 14.5132 13.1308 170.4863 11.9456

Islamic Versus Conventional Banking

Return on Equity (ROE) Return on Average Assets (ROAA) Return on Average Equity (ROAE) Cash/Deposits Net Loans/customer funds and short-term funds Loans/total assets Equity/total assets Loan Loss Reserves/impaired loans Impaired Loans/gross loans Tier 1/TRWA Total Capital/TRWA Return on Assets (ROA) Return on Equity (ROE) Return on Average Assets (ROAA) Return on Average Equity (ROAE) Cash/Deposits Net Loans/customer funds and short-term funds

209

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maximum value, minimum value, standard deviation, and skewness and kurtosis values. The next analysis is related to the maximum and minimum values in each bank variable. The ratio of loans to total assets has a maximum value of 1.1481 for conventional banking; the minimum value is zero for both types of banking. The ratio of equity to total assets has a maximum value of 0.9995 and a minimum value of 20019, both being available in Islamic banking. Both maximum and minimum value for the ratio of loan loss reserves to impaired loans are available in conventional banking, where the maximum value is 12,282.76 and the minimum value is 2500.0143. Conventional banking also has the highest value for the ratio of impaired loans to gross loans (17.8846) while the lowest value was for Islamic banking at 20.0080. Both the maximum and minimum values of the core capital and total capital ratios are found in Islamic banking. This indicates that Islamic banks have greater capital than conventional banks, totalling 451.7663 and 466.2887 for core capital to total capital, respectively. Islamic banking also has the lowest capital value of 20.0185 for both ratios. Whereas ROA ratio shows conventional banking at the highest value of 1.6637, the lowest value is held by Islamic banking, as low as 20.2910. In contrast, with ROE, the highest ratio was for Islamic banking at 4.5967, while the lowest value was for the conventional banking at 20.7211. For ROAA and ROAE, the maximum and minimum values of both ratios are for Islamic banking: its maximum value of ROAA is 0.1387, and its minimum value is 20.1002. The maximum and minimum values for ROAE were 1.3719 and 21.2932, respectively. This indicates that conventional banking has a medium value for ROAA and ROAE. The maximum value of the ratio of cash to deposits for conventional banking is higher than for Islamic banking at 1802.511, while the minimum value of this ratio for both is zero. Thus, the liquidity of both Islamic and conventional banking is positive. This is similar to the ratio of net loans to customer deposits and short-term funds, in which both conventional and Islamic banking have a minimum value of zero. The maximum value of this ratio, 2464.388 for Islamic banking, is much higher than the maximum value for conventional banking. The standard deviation indicates whether the size of the dispersed data is smaller or larger. Table 3 records the greatest standard deviation at 788.5191, which is for the ratio of loan loss reserves to impaired loans for conventional banking; the second-largest standard deviation is 233.8734 for Islamic banking for the ratio of net loans to customer funds and short-term funds. This means that the dispersion of both data is great. The smallest dispersions of data are for ROAA in conventional banking, with a standard deviation of 0.0129. In addition, the ROAE ratio for conventional banking also has the smallest data dispersion, with a standard deviation of 0.0173. Skewness value describes the skew of data either to the left (negative value data) or right (positive value data), indicating an imbalance. Table 3 contains six ratios with negative value of skewness: the ratio of loans to total assets for Islamic banking (20.0982); the ratio of equity to total assets for conventional banking (20.8586) and for all banks (0.3831); the ratio of loan loss reserves to

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Islamic banking impaired loans (214.5224); and the ROA for Islamic banking (28.8396) and for all banks (24141). The skewness of other ratios is positive and the biggest skewness value is in the ratio of loan loss reserves to impaired loans, and impaired loans to gross loans for all banks, at 18.1583 and 21.9245, respectively. The height or peak of data is called kurtosis. Kurtosis is used to assess whether the data are peaked or flat. Table 3 shows the ratio of impaired loans to gross loans for conventional banks having the highest kurtosis value against all ratios in Islamic and conventional banking, with a value of 272.2427; this ratio has a higher maximum value than others. Meanwhile, the ratio of loans to total assets for Islamic banking has the lowest kurtosis value of 1.9462, influenced by the minimum value of this ratio. Table 4 shows the analysis of z-scores for Islamic and conventional banking. Z-score is used to analyse the stability of a bank, with a value derived through the z-score formula that was introduced by Altman (1968). Bank stability in this table depends on the average value of all banks. A bank is considered stable when the z-score value is higher than the average value; if the z-score is lower than the

Table 4: Z-Score Analysis No.

1 2 3 4 5 6 7 8 9 10

Islamic Banking

Z-score Average

No. Conventional Banking

Bank Islam Malaysia Berhad Bank Muamalat Malaysia Berhad Affin Islamic Bank Berhad Alliance Islamic Bank Berhad AmIslamic Bank Berhad CIMB Islamic Bank Berhad Hong Leong Islamic Bank Berhad Maybank Islamic Berhad Public Islamic Bank Berhad RHB Islamic Bank Berhad

35.6061

1

Affin Bank Berhad

215.3143

2

199.8826

3

Alliance Bank 181.5609 Malaysia Berhad AmBank (M) Berhad 71.0707

182.4283

4

CIMB Bank Berhad

165.1601

228.9128

5

143.9002

56.5221

6

52.8399

7

Hong Leong Bank Berhad Malayan Banking Berhad Public Bank Berhad

162.9160

171.3182

8

RHB Bank Berhad

184.4501

213.1939

9

Bangkok Bank Berhad Bank of America Malaysia Berhad

167.8250

175.7431 10

Z-score Average

65.3165

68.0758

272.3719

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Table 4: (Continued) No.

Islamic Banking

Z-score Average

No. Conventional Banking

Z-score Average

11

Al-Rajhi Banking & Investment Corporation (Malaysia) Berhad Asian Finance Bank Berhad

4.0794

11

Bank of China (Malaysia) Berhad

299.7237

164.7306 12

Bank of TokyoMitsubishi UFJ (Malaysia) Berhad Citibank Berhad

281.9951

12

13

14 15 16

Kuwait Finance House (Malaysia) Berhad OCBC Al-Amin Bank Berhad HSBC Amanah Malaysia Berhad Standard Chartered Saadiq Berhad

75.8488

13

291.1514 14 152.3615 15 88.2086

16

17

Citibank Berhad

232.6456 17

18

Deutsche Bank

366.9420 18 19

20

21 22 23

Deutsche Bank (Malaysia) Berhad HSBC Bank Malaysia Berhad Industrial and Commercial Bank Of China (Malaysia) Berhad J.P. Morgan Chase Bank Berhad OCBC Bank (Malaysia) Berhad Standard Chartered Bank Malaysia Berhad Sumitomo Mitsui Banking Corporation Malaysia Berhad The Bank of Nova Scotia Berhad The Royal Bank of Scotland Berhad United Overseas Bank (Malaysia) Berhad

323.8741

35.3191 270.4251 239.4338

172.8216 349.2407 130.2475

0.0000

299.5999 159.4844 300.7500

Islamic Versus Conventional Banking

213

average value, the bank is not stable. The data used are from the years 2000–2011. The average value for all banks is 180.0521. The stability of a bank is important because it strengthens the bank’s position in the world market. Table 4 shows the analysis of the banks’ stability based on ˇ ak and Hesse (2010), the standard of the z-score as used by Altman (1968), Cih´ Gamaginta (2011), Beck, Demirguc-Kunt, and Merrouche (2013) and Boyd and Runkle (1993). Generally, all the banking institutions in Malaysia in the last 12 years of study show that, of 18 Islamic banks, only 8 are highly stable; for conventional banking, there are only 11 banks that are stable. There are six Islamic and four conventional banks that are less stable. Another four Islamic and eight conventional banks are at a medium level, as shown in Table 4. It is apparent that there is no significant difference between the stability of Islamic banks and conventional banks. However, the instability of Islamic banking is higher than conventional banks, which indicates that Islamic banks are more vulnerable to banking and economic risks. This illustrates that the banking industry must improve the management and operation of their businesses to better confront economic crises that occur, such as the sub-prime mortgage crisis of 2007–2008 in the United States.

5. Conclusion The development of conventional and Islamic banking systems has made Malaysia a reference point for the implementation of a dual system of banking. The expansion of the banking system in Malaysia, with efficient regulation from its central bank, has led to foreign banks operating in Malaysia. Thus, the banking system in Malaysia has succeeded in breaking onto the global market. Despite this, both the Islamic and conventional banking systems need further improvement to deal with unexpected economics crises and increased competition between the two. Hence, Islamic banking must be refined, especially for improving their stability to attract the investment needed for further improvement in their performance.

Acknowledgment This article is funded by University Malaya Research Grant (UMRG): RP034C17HNE Penetapan Piawai Pengambilan Risiko Pembiayaan Bagi Perbankan Islam Malaysia: Dasar Pengurusan Strategik, Kehematan Makro dan Kestabilan.

References Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589–609. Bank Negara Malaysia (BNM). (2011). Implementation of Basel III. Retrieved from http://www.bnm.gov.my. Accessed on May 15, 2013.

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Index Allocation expenditure, 37 financing allocations, 193 optimal allocation, 183 reduction, 37 Application cash waqf, 79 insurance, 138 maslahah. See Maslahah physical condition, 140 rejection, 148 tawarruq, 171–172, 175–176 Asset durable asset, 58 liquidation, 105 quality, 200, 205 real estate loan, 182 transferrable assets, 51 waqf assets, 55 Asset liability management (ALM), 183, 184 Asset Structure Management, 181, 182, 185, 189 Banda Aceh academic experts, 107–109 low-income earners, 106–107 takaful practitioners, 109–111 Banking conventional banking, 198, 199, 205 Islamic banking. See Islamic Banking management, 181 Banking products, 169, 170 Banking sector, 62, 183 Bank Muamalat Malaysia Berhad (BMMB) Modus Operandi of products, 176–177

tawarruq application, 171–172, 175–176 Bank Negara Malaysia (BNM), 22, 137, 172, 188, 200 Bank’s characteristics, 198, 200, 205 Bay’ al-tawarruq BMMB products, 172 commodity market share platform, 172 definition, 170–171 Bazar Wakaf Rakyat construction, 95 economic activity, 89 Kelantan, 89–95 spiritual development, 95 BMMB. See Bank Muamalat Malaysia Berhad (BMMB) Bond, 52, 105 Business transactions, 171, 175 Capital adequacy, 184, 205 Capital adequacy ratio, 204 Cash flow facility, 172 Cash waqf agriculture, 79–80 arguments of Aceh scholars, 58–60 economic development, 78–79 education, 77–78 flexible and benefit, 55–56 health, 79 Kelantan State, implementation, 76 Majelis Ulama Indonesia, 51–53 MUI scholars in Aceh, 60–63 religious purposes, 80 ruling, 50–51 scholars of Aceh, 56–58 social well-being, 78 socio-economic development of society, 69–71

216

Index

Collateral, 183 Commodity, 172–173, 175, 177 Community Banda Aceh, 106 family takaful, 163 financial education, 111 Indonesian Waqf Fund (TWI), 71 Muslim, 36, 87–88, 163 public health sector, 129 Consumerism, 23 Control variable, 193 Conventional economics, 4 financial system, 170 insurance, 122, 152, 154 Conventional banking characteristics, 198, 206–209 loans, 210 mean value, 205 profile comparison, 205 ROAE ratio, 210 z-scores, 211–212 Corporate Social Responsibility, 10 Corruption, 4, 6 Counterparts, 4 Credit risk, 185, 204 Data collection, 39, 75, 91 Debt acquisition, 20, 23, 24 credit card debt, 20 impact, 20 Maqasid al-Shariah, 24 purposes, 30 Debt Management Programme (DMP), 22 Demand, 103, 118, 183, 194 Demographics, 127, 129 Dependent variable, 185 Descriptive statistics, 189, 190, 200 Determinants, 103, 185, 193–194 Development export possibilities, 9 Kelantan, 88

micro-takaful, 105 social welfare ranking, 104 socioeconomic, 10 Documentation, 21, 124, 176, 177 Economic development Bazar Wakaf Rakyat, 92 cash waqf, 78–79 micro-takaful, 104 waqf, 86 Economic foundation, 11 Enterprise, 9, 10, 12, 14 Entrepreneur, 4, 7, 9, 13, 14 Entrepreneurship challenges, 15 concept, 9 Islamic perspective, 12–13 sustainable entrepreneurship development, 9–12 Equity, 9, 200, 204 Fatwa cash waqf, 50, 53 MUI, 54, 55, 61, 63 scholars, 60, 61, 63 Fee rates, 38 Financial literacy, 20 Financial markets, 199 Financial performance, 204 Financial statements, 188 Financing products, 4, 177 profitability, 185 Funds application, 175 cash waqf, 68 infaq funding, 42 tabarru’, 126, 148 takaful, 122 Global, 41, 102, 119, 198 Government allocation reduction, 37 entrepreneurship development, 13

Index hospitals, 129 micro-takaful, 109, 113 participation, 10, 11 Government association, 52 Gross domestic product (GDP), 22, 73, 90, 120, 193 Halal protection plans, 154 Holy Qur’an, 4, 7 Household debt, 20–25, 31 Income distribution, 4 micro-takaful, 113 respondents, 157 Income group, 108, 123 Increment, 38 Independent, 53, 85, 137, 152 Independent Variable, 189, 191 Indicators, 104, 182, 199, 202, 205 Indonesia cash waqf, 50, 54, 63, 64 Islamic and conventional banks, 199 micro-takaful, 103, 112 Indonesian Waqf Fund (TWI), 70 Infaq categories, 36 development, 37 educational funding, 36 Inflation, 59, 193, 199 Interest rate, 10, 182, 184, 185, 193 International Islamic University Malaysia (IIUM), 70 International Monetary Fund (IMF), 123, 200 Interviews academic experts, 106, 111 cash waqf, 78 low-income earners, 106 qualitative data analysis, 124 questions, 39 takaful practitioners, 106 Islamic banking assets, 211

217

financing, 193 institutions, 170, 177, 178 performance, 199 Islamic banking products, 169, 170 Islamic banking system, 198, 213 Islam/islamic concept and definition, 5–8 entrepreneurship, 13–14 microenterprise development, 10–11 perspective, 12–13 Islamic Banks, 174 agricultural sector, 10 Bangladesh, 200 conventional banks, 201, 213 Malaysian Islamic Banks. See Malaysian Islamic Banks loans, 205 profitability, 199 return on average asset (ROAA), 205 subsidiaries, 200 total income, 199 Islamic bonds, 52 Islamic economics aim, 4 charity, 6 concept, 5–8 definition, 8–9 entrepreneur, 9 entrepreneurship development, 3 entrepreneurship, 9, 12–15 quality, 4 sustainable entrepreneurship development, 9–12 Islamic equity, 170 Islamic financial product, 170 Islamic financial system, 170, 171 Islamic financing, 10, 122, 123 Islamic insurance Malaysia, 153 risk, 152, 117–130 takaful. See Takaful

218

Index

Islamic law dalil, 50 economic principles, 4 entrepreneurship, 13 Maqasid al-Shariah, 24 Muslim community, 154 risk, 152 small- to medium-sized enterprises (SMEs), 12 takaful, 137, 163 waqf, 85 Zakat, 36 Islamic principles, 118, 156, 159, 160, 161 Islamic state, 7 Islamic teachings, 85 Islamic value, 8 Kelantan Bazar Wakaf Rakyat, 89–91, 92–95 data collection, 75 Kelantan Islamic Religious Council (MAIK), 69 Muslim community, 87–88 population, 88 research methodology, 91 society, 71–72 socio-economic condition, 73–75, 88–89 waqf, 76–80 Legal Islamic legal maxim, 147, 149 Maslahah, 31 requirements and policies, 183, 184 waqf, 60, 85 woman costs, 128 Low-income earners, 86, 103, 104, 106–107 Macroeconomic, 182, 185, 188, 198, 199 Macroeconomic determinant, 185, 187, 193–194 Macroeconomic variable, 194

Malaysia Bazar Wakaf Rakyat, 83–96 cash waqf, 51, 68–69 household debt, 22–23 Infaq, 35–43 Islamic banking institutions, 169–178 Islamic Financial Services Act (IFSA), 153 Islamic insurance business, 153 Kelantan Society, 71–75 Takaful, 117–130 underwriting process, takaful products, 135–149 Malaysian banking sector characteristics, 197–213 data and methodology, 188 empirical findings, 189–194 empirical variables, 185 model specification, 185 research methodology, 200–205 stability analysis, 197–213 Malaysian government, 38 Malaysian Islamic banking bank-specific determinants, 193 correlation coefficients, 189 descriptive analysis, 189 financial condition determinants, 193 macroeconomic determinants, 193–194 Malaysian Islamic Financial Services Act 2013, 148 methodology, 185–188 model estimation results, 192 model selections, 189–192 Management asset, 171, 181–182, 185, 189 banks, 204, 213 education and knowledge, 10 financial resources, 198, 199 household debt, 19–31 infaq, 39, 41 liability, 171, 183, 184

Index profits and expenditure management, 199 risk, 102, 136, 152, 118 takaful, 153 waqf, 70 Market price, 187 Marketing, 4, 10, 14, 103, 108, 111 Marriage, 7, 121 Maslahah, 149 cash waqf, 56 debt purposes, 30 dharuriyyat, 24 hajiyyāt, 24 levels, 27–28 Malaysian Muslim, 23 tahsiniyyat, 24 takaful, 149 Measurement, 156, 203 Micro-takaful, 103 academic experts, 107–109 Banda Aceh, 106–111 concept, 104–106 definition, 123 low-income earners, 106–107 research, 106 takaful practitioners, 109–113 Money supply, 186, 193, 199 Murabahah, 177 Muslim Community Bazar Wakaf Rakyat, 93 cash waqf, 56, 71, 78, 80 educational funding, 36 Kelantan, 72, 76, 87 maslahah. See Maslahah mutaqaddimin scholars, 54 Southern Thailand, 154, 156, 157 Waqf, 67, 68 Muslim consumer, 23 Muslim countries, 15, 70, 104, 118 Muslim population, 103 Net profit, 199, 203 Non Performing Loan, 204

219

Occupation, 79, 137, 142, 144, 156, 157 Ownership asset ownership, 172, 186 commodity ownership, 174, 177 foreign ownership, 199 land ownership, 102 Malaysian Islamic banks, 188 rights, 85 tabarru, 154 Panel data, 188, 194 Perception, 9, 39, 107, 108, 155, 184 Performance banking performance, 198, 199, 200, 204 financial performance, 204 international market performance, 11 Islamic banking, 198, 204 programming model, 184 stock market, 187 Policy banks internal policy, 182 conventional life insurance policy, 155 economic policy, 15 expansionary monetary policy, 194 fiscal policy, 4, 24 higher premium policy, 138 macroeconomic policy, 182 microeconomic policy, 11 Micro-takaful, 105 New Economic Policy (NEP), 120 policy document, 105 privatisation policy, 120 rate-setting process, 144 social and economic policy, 7 takaful, 105 Population Kelantan, 71–72, 79, 87, 88 Malaysia, 198, 126 Muslim population, 103

220

Index

risks, 102 statistics, 145 World Bank, 101 Portfolio, 138, 182, 183 Potential agriculture, cash waqf, 79–80 economic development, cash waqf, 78–79 education, cash waqf, 77–78 health, cash waqf, 79 infaq, 41–42 micro-takaful implementation, 106–111 religious purposes, cash waqf , 80 social well-being, cash waqfi, 78 women, 127 Poverty distribution, 88, 89 incidence, 78 Poverty Line Income (PGM), 74 poverty alleviation, 4, 5, 9 poverty reduction, 8, 36, 74, 101 takaful, 122 Privatization, 7, 10–11, 193, 129 Producer, 9 Profit rate, 183 Profitability, 94, 182, 183, 185, 204 Profitability of Islamic Bank, 199 Property financing, 23 Proportion of assets, 183 Random effect model, 189, 192 Reduction, 74, 129, 175, 184, Regulation, 129, 183 Researchers, 39, 41, 75, 91, 103, 124 Return, 21, 27, 183, 184, 194 Return on Asset (ROA), 203, 204, 205, 210, 211 Return on Average Asset (ROAA), 205, 210 Return on Average Equity (ROAE), 205, 210

Return on Equity (ROE), 204, 210 Return on investment, 194 Risk classification, 184 management, 117, 118, 136, 152, 171, 182 women, 118–122 Sale contract, 177 Scholars of Shariah, 22, 25, 53 Securities, 25, 52, 183, 184 Shariah advisory members, 163 debt acquisition, 24 Islamic law, 103 non-compliance, 122 objectives, 26 rationalisation, 24 riba, 136 underwriting, 144–149 Shariah Advisory Council, 137, 171 Shariah compliant, 27, 153 Short term, 26, 183, 184, 205, 210 Society Bazar Wakaf Rakyat, 83–96 infaq, 42 Kelantan, 67–80 micro-takaful, 101–113 Muslim society, 8, 55, 63 takaful, 154 ummah, 36 South Thailand, 151–163 Stability, 28, 147, 197–213 financial stability, 147, 152, 184 Stakeholders, 10, 67–80 Takaful benefits, 109 family takaful, 151–164 health takaful products, 135–149

Index vs. micro-takaful, 105. See also Micro-takaful practitioners, 106, 109–111 and women, 122–124 Underlying, 182 Underwriting age, 139 family background, 142 gender, 139–140 hobbies, 142–143 medical history, 140–141 occupation, 142 personal life, 141 physical condition, 140

221

Variable, 185–187, 189, 200 Wakalah, 126 Waqf. See Cash waqf Women career risk, 127–128 crime risk, 121–122 health risks, 118–120 takaful, 122–124 Women’s takaful products., 124, 125, 127, 128 World Bank, 101, 102 Zakat, 7, 41, 59, 77, 89 Zakat funds, 40, 68

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