Economic and Religious Significance of the Islamic and Conventional Pawnbroking in Malaysia: Behavioural and Perception Analysis

Abstract

Operating alongside with the formal financial sector, there has been less recognition about the important role played by informal finance through their complementary role in providing credit to the society. Among informal finance, pawnshop has grown in importance over the past few years especially during the tough economic climate. In Malaysia for instance, the pawnbroking business has served people in need of small instant cash since the 19th century in various forms. Due to the excessive interest rate and other malpractices imposed by the conventional pawnshops, Malaysian government initiated the first Islamic pawnbroking in 1992 which was set up by the Terengganu Islamic Religious and Malay Customs Council namely as the Muassasah Gadaian Islam Terengganu, which has experienced an overwhelming success in terms of expanding in the informal economy. In 2010, there were 329 of institutions offering Islamic pawnbroking operating side by side with 259 licensed conventional pawnshops which shows a remarkable increase in the Islamic pawnbroking.

Given this background, the research aim is to explore and analyse the socio-economic consequences of pawnshops crediting in Malaysia through the perceptions of the participants. In doing so, this study will examine the factors determining people’s preferences for pawnshop and also exploring the perceptions and opinions of the customers and the participating pawnbrokers in Malaysia on various aspects and consequences of pawnbroking. Importantly, it will analyse specifically the impact of Islamic pawnbroking on the socio-economy of the Malaysian society.

In an attempt to fulfill the aims of the research study, first, the questionnaires survey were administered to both customers and pawnbrokers of the conventional and Islamic pawnshops in order to distinguish the processes of lending, factors determining pawnshops’ selection, and also the perceptions of Malaysian customers and pawnbrokers regarding the role of pawnshop institution in social development hence in economic development related issues. Second, a semi-structured interview were subsequently conducted with the leading individuals of the Islamic pawnbrokers in order to develop in-depth ideas and understanding about the underlying principle of Islamic pawnbroking and other issues related. Furthermore, a SWOT analysis is employed to analyse the prospect of Islamic pawnbroking in future with possible recommendations that could be considered by the government, pawnbrokers, and the customers as well.

The findings from the surveys analysis demonstrate that the customers of Islamic pawnshops attest the positive role of pawnshop in both economic and social aspects of their lives especially in the case of low-income groups as compared to the conventional pawnshops. On the other hand, the results from the pawnbrokers’ analysis revealed that Islamic pawnbrokers demonstrated a promising prospect of the pawnshops’ business as compared to the conventional pawnbrokers as the latter operates with profit maximization and neglect the social welfare of the customer. Importantly, while the findings of the study renders valuable information in terms of behavioural dimension and customer preferences in pawnbroking, the findings are also useful for the businesses and government in considering the future development related to ar-rahn shops.