o_19pnflapa4g41tajpob1kl5tda.pdf

Small Business Owners’ Response towards Patronage of Islamic Pawn
Broking Service in Pahang
Siti Aishah Binti Mohamad a , Ilyani Azer b , Mohd Faizal Azrul Azwan B Che Harun @
Mohammad c
Universiti Teknologi Mara (Pahang), Lintasan Semarak, 26 400 Bandar Tun Razak (Jengka),
Pahang, Malaysia
a sitia@pahang.uitm.edu.my, b ilyaniazer@ pahang.uitm.edu.my, c faizal@pahang.uitm.edu.my
Abstract
Rapid development of Islamic pawn broking has taken place throughout Malaysia with the
setting up of many islamic pawn shops. Islamic pawn shop provides reliable micro credit
facility to the members of public and small business that can promote socioeconomic
development of the target groups,especially in developing of small entrepreneurs by providing
start up capital for small business. A study found that only 32.3 percent of the Ar- Rahnu
customers need money for working capital and to start new business. In order to know the
response, three independent variables have been chosen; customer service, cost of loan and
security. The selected variables are important factors to be considered before a business owner
deciding for the financial resources. The aim of the research is to determine the response of
small business owners toward the patronage of Ar Rahnu servive and to examine the most
significant factor that influenced them to use this service. The result found that, there is no
significant relationship existed between the selected variables with the small business owners
respond toward Ar Rahnu service. This is due to high percentage of small business owners need
fund for their start up capital. Since Ar Rahnu is the last resort for them to get fund, the selected
variables do not directly influenced them to patron the service. The Statistical Package for the
Social Sciences (SPSS) version 20 has been used to test correlation, regression and descriptive
analysis. The findings from this study would contribute to the socioeconomic development of
Malaysian by providing information to Islamic pawn broking and other financial institutions in
making improvement to help and attract more small business owners to pursue their service.
Keywords : Islamic pawn broking, customer service, cost of loan, security
Introduction
Pawning has been a popular practice since pre – Islamic era. The needy placed their jewellery as
collateral to get money especially for emergency purposes. Now, the fund provided by pawn
shop is not limited for the emergency purpose, it also provides micro credit financing to the
small business owners for start up and working capital. The first Islamic pawn broking
institution in Malaysia is Muassasah Gadaian Islam Terengganu (MGIT). Then Minister of
Finance introduced Ar - Rahnu Scheme through the collaboration of Bank Negara Malaysia,
Islamic Economic Development Foundation Malaysia (YPEIM) and Bank Kerjasama Rakyat

Malaysia Berhad (Bank Rakyat). The main objective of this scheme is to provide micro credit
facility to the members of the public, to be used as a start up capital for small business and
indirectly for socioeconomic development of the target groups. A study [1] found that only 32.3
percent of the Ar- Rahnu customers need money for working capital and to start new business.
Other reasons for customers use Ar - Rahnu services were to solve unexpected problems,
children’s school expenses and daily expenses, which contribute 67.7 percent. Finding from the
study conducted [2] shows that about 60 percent of respondents borrowed fund due to personal
expenses.
The demand of Islamic pawnshop service is highly demanded at certain areas especially in
Kelantan, Terengganu Selangor and Kedah [3]. It is crucial to study because there is limited
research conducted to examine the response of customers in Pahang towards Islamic pawn
broking especially among small business owners. Generally, the concern of this paper is to
investigate the factors that contribute to patronage of Ar – Rahnu as small business owners’
source of finance. Specifically the investigation has the following objectives:
1. To examine the relationship and significant level between customer service, cost of
loan and
security with the customers response.
2. To identify the most significant factor that influence small business owners’ to patron
Ar – Rahnu service.
The findings from this study would contribute to the socioeconomic development of Malaysian
by providing information to Islamic pawn broking in making improvement and attract more
small business owners to pursue pawn broking service.
Islamic Pawn Broking (Ar Rahnu)
Islamic pawn broking (Ar – Rahnu) was initiated by Yayasan Pembangunan Ekonomi Islam
Malaysia (YaPEIM) and Bank Negara Malaysia. The scheme steering Committee was
established in 1992 to realise the establishment of the Islamic pawn broking. Ar - Rahnu was
introduced and implemented through Bank Kerjasama Rakyat Malaysia (1993), Bank Islam
Malaysia Berhad (1998) and Koperasi YaPEIM Berhad (2000). This study choosed Ar – Rahnu
YaPEIM because the main business is pawning and easier to collect the data on customer
respond towards Ar Rahnu services. The main objective of Ar – Rahnu YaPEIM is to provide
convenient, fast and reliable micro-credit facilities especially for the lower income group to be
used as start - up capital for small businesses and other productive activities for socio-economic
development of the community. Ar – Rahnu is seen as giving large contributions to small
business owners such as a source of start up capital, capital injections and working capital [4].
In 2012, Ar – Rahnu YaPEIM has 103 branches around Malaysia including Sabah and Sarawak.

Table 1: The distributions of Ar – Rahnu YaPEIM Branches in Malaysia
State
Ar Rahnu Branches
Kedah 13
Pulau Pinang 8
Perak 13
Selangor 7
Kual Lumpur 4
Johor 15
Terengganu 6
Pahang 10
Negeri Sembilan 4
Kelantan 15
Melaka 2
Perlis 1
Sabah 3
Sarawak 2
Total 103
Source: http://yapeim.net.my/ar-rahnu-yapeim
The Role of Ar – Rahnu as Source of Capital
There are a lot of small business owners exist inside our society and they located at all places.
They need fund starting from small amount up to thousands of ringgit. Therefore Ar- Rahnu
scheme can contribute to their business. The problem of getting loan from financial institution is
normally due to the collateral issue and complicated procedures. Generally the small business
owners do not have large possession of assets and bank does not accept gold in their normal
practice. Besides, bank also request for guarantor and a list of information about the business.
With the Ar- Rahnu scheme all these difficulties had been overcome.
Literature Reviews
Islamic Pawn broking (Ar-Rahnu scheme) means a pledge or a security related to a loan [5].
Under the Shariah, Ar-Rahnu is by definition, possessing a guarantee. The Quran refers to the
idea of mortgage as ‘mortgage with possession’ (rihanun maqbudha). Ar - Rahnu is seen to be
given large contribution to the socioeconomic development of society in Malaysia. However Ar
– Rahnu only accepts gold or jewelery made of gold as pledge item [6].
The importance of pricing system or cost of loan in loan application has been examined in the
prior study. The concern over higher interest rates, usurious and exploitative activities imposed
by the conventional pawnshop makes the customers choose to deal with the Islamic pawnshop
[7]. A result from a study [8] found that, customer prefer Islamic pawn broking because it
service charge relatively cheaper. The cheap cost of loan is the main factor to choose Ar -

Rahnu as financial assistant [9]. However, there are results reveal that pricing of the Ar - Rahnu
shop does not contribute significantly towards the acceptance of an Ar - Rahnu shop [10,11].
Islamic pawnshop should offer a quick and convenient way to borrow money [12]. The loan
will be pledged with the assets to secure the loan. The study in the USA [13] found that
financial factors (interest for saving accounts, fund safety and loan availability) play an
important role in customers’ decision to take out a loan from a particular financial institutions.
Moreover, other study conducted on customers of conventional and Islamic banks in Jordan,
found that another important factor affecting customers’ decision to choose a bank is bank
confidentiality [14]. Safety aspect covers external and internal security systems in which
involve usage of safety instrument as well as security guard and secure room that is immune
from theft or robbery [15]. Nevertheless, there is a study found that security has no significant
relationship with customer acceptance [16].
Customer usually expects efficient service, so customer turnover should be at optimum level
[17]. They translated the quality services as shorter waiting period, fair rotation system,
consistency of valuation of gold, as well as friendly customer service and professionalism.
Pawnshop also gives flexible service to the customer about giving back the loan. Islamic based
pawn shop must maintain the record of customers, keep the record confidentially and treat the
customers fairly regardless their races or religions [18]. The Islamic based pawnshop must
stress the important of customer service in order to strengthen the customer base, in addition to
‘syariah’ view concern. Islamic pawnshop offer convenient, fast and efficient services to
customer [19]. Storage charge, locality, management practice and service quality were found
have significant relationship with the customer acceptance on Islamic pawn broking service
[20]. Customer prefer the good service, responsible and always made Islamic ways as the
number one [20]. Islamic pawn shop was suggested to offer a quick and convenient way to
borrow money [21]. A further study on respondents in Labuan [22] found that pledge asset and
customer service are significantly associated with acceptance of Islamic pawn broking. A result
from a study showed that good customer service was appeared to be less important factor that
influencing public to pursue Ar-Rahnu service [23].
Research methodology
The sample of this study is customer of Ar - Rahnu YaPEIM among small business owners in
Pahang. The data was collected through a survey. The questionnaire distributed randomly to the
customer of Ar – Rahnu among small business owners in Pahang, using convenience sampling
technique. The data collection method is using self-administered questionnaires. The
questionnaires constructed are comprised of 2 sections. Section A, consist of the three factors
that influence small business owners to choose Islamic pawn broking as source of finance and
the respond of customers. These constructs had been operationalised by multi-item measures
using 5 point Likert-Scales format, anchored by strongly agree (5); agree (4); neutral (3);
disagree (2) and strongly disagree (1) scales. Section B consist of demographic profile about
gender, age, race, education level, income level, branch of Ar Rahnu and purpose of loan had be

collected. All the data were analyzed by using the Statistical Package for the Social Sciences
(SPSS) version 20 to test its correlation, regression and frequency analysis.
Finding and Discussion
Data analysis and findings in this section were classified into 3 sections which are respondents’
demographic profiles, correlation analysis and regression analysis.
Table 1: Respondents’ Demographic Profiles
Demographic Frequency Percentage [%]
Gender
Male 123 42.41
Female 167 57.59
18-25 1 0.34
26-30 33 11.38
Age
31-35 64 22.07
36-40 61 21.03
41-50 74 25.52
51 and above 57 19.66
Malay 184 63.45
Race
Chinese 60 20.69
Indian 46 15.86
Degree 1 0.34
Diploma 14 4.83
Highest Education level STPM 70 24.14
Secondary school 168 57.93
Primary school 37 12.76
below RM3000 71 24.48
Income
RM3001-6000 123 42.41
RM6001-9000 62 21.38
RM9001-12000 34 11.72
Mentakab 7 2.41
Bandar Jengka 1 0.34
Kuantan 105 36.21
Branch
Bentong 63 21.72
Jerantut 5 1.72
Muadzam Shah 64 22.07
Rompin 19 6.55
Kuala Lipis 26 8.97
to start a business 121 41.72
Purpose of Loan
to expand the business 78 26.90
to buy fixed assets 53 18.28
to finance working capital 38 13.10
Table 1 reflects the demographic profile of the respondents by gender, age, race, education
level, income, Ar - Rahnu branch and purpose of loan. In terms of gender, the male respondents
represented 42.41 percent and female respondents 57.59 percent. The biggest group of the

espondents (25.52 percent) are between 41-50 years old and the smallest group is between 18-
25 years old. The majority of respondents were Malay (63.45 percent) followed by Chinese
(20.69 percent) and Indian (15.86 percent). The highest education level of respondents is
secondary school represented 57.93 percent and only 0.34 percent of the respondents are degree
holder. 42.41 percent of the respondents had RM3001-RM6,000 income per month and only
11.72 percent of respondents had income between the range of RM9,001 – RM12,000.36.21
percent of respondents are customers of Ar - Rahnu Kuantan branch and only 0.34 percent of
the respondents are customer of Ar - Rahnu Jengka branch. Most of the respondents (41.72
percents) need funds to start their business and 13.10 percent need to finance their working
capital. Other purposes of loan are to expand their business (26.90 percent) and to buy fixed
assets (18.28 percents). This is due to the difficulty to obtain loan from banking institution or
government agency to start the business.
Table 2: Correlation Analysis
Cost of loan Customer service Security
Cost of loan Pearson Correlation X X X
Sig. [2-tailed] X X X
N X X X
Customer
service
Pearson Correlation -.132 * X X
Sig. [2-tailed] .024 X X
N 290 X X
Security Pearson Correlation .113 .265 ** X
Sig. [2-tailed] .056 .000 X
N 290 290 X
Respond Pearson Correlation .010 -.009 .012
Sig. [2-tailed] .872 .874 .835
N 290 290 290
*. Correlation is significant at the 0.05 level [2-tailed]
**. Correlation is significant at the 0.01 level [2-tailed]
Correlation analysis was used to explain the relationship between cost of loan, customer service
and security with small business owners respond towards Ar - Rahnu service. The strength of
the association between variables is based on the absolute size of the correlation coefficient
[24]. From the value of correlation, there is no significant relationship exist between customer
respond with cost of loan, customer service and security. In other words, it means that small
business owners respond towards the patronage of Ar - Rahnu service was not affected by cost
of loan, customer service and security.
Table 3: Regression Analysis ( Coefficients a )
Unstandardized
Coefficients
Standardized
Coefficients
Model
B Std. Error Beta t Sig.
1 (Constant) 3.900 .588 X 6.631 .000
Cost of loan .006 .054 .006 .102 .918
Customer service -.024 .121 -.012 -.200 .842

Security .027 .114 .015 .240 .810
Regression is another technique for measuring the linear association between a dependent and
independent variable [25]. Multiple linear regressions are an estimation of the linear relationship
between a dependent variable and one or more independent variable [26]. From the analysis,
result for regression coefficient shows that there is no significant relationship between all
variables; cost of loan, customer service and security with customers respond.
Conclusion
The findings from the data analysis show that the three variables are not influenced the small
business owners to patron the Ar - rahnu service. This is due to the function of Ar - rahnu as the
last resort for the small business owners to get fund, so the three factors not influenced them
directly to patron the service. This result supported by the studies conducted previously that
found service quality, cost of loan and security are less important factor that influencing
customers to pursue Ar - Rahnu service [27, 28].
The result from frequency analysis shows that large percentage (41.7 percent) of small business
owners’ patron the Ar - rahnu service to obtain the start up capital. As small business owner it
is very difficult to obtain loan from financial institutions if they do not have collateral.
Additionally, the agency such as Amanah Ikhtiar Malaysia (AIM) provides financial assistance
to the hard core poor but not for the middle level income group. TEKUN Nasional provides
financial support for working capital and buying the fixed assets but not provide fund for start
up capital. To start a business, the middle level income group of people have no option for their
external source of finance except for pledging their jewellery to Ar - Rahnu. The announcement
made by Prime Minister, Datuk Seri Mohd Najib Tun Razak to introduce the unique financing
scheme named New Bumiputra Entrepreneurs Starting Scheme (Superb) to assist start up
companies is the good news for the business owner.
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