Islamic Hire Purchase Facility in Malaysia - Research Paper Example

Chapter Five 5.0 Conclusions, Recommendations and Limitations 5.1 Conclusions 5.1 Conclusion on Major Findings of the Study The five major findings of the study helped reach the following conclusion. The study first concluded that although some practitioners in the industry maintained that their AITAB version is Shariah-compliant, there is need to make AITAB fully Shariah-compliant by achieving a consensus among the Islamic banking and financial institutions. The study also concluded that, AITAB is being overseen and implemented based on the conventional Hire Purchase Act 1967. Deductively this practice can be concluded on by being regarded as highly inappropriate. As the study concluded, AITAB is a hire purchase product construed in the spirit of Ijarah, an Islamic banking protocol. This presents a problem in that, a conventional legal framework is administrating an Islamic banking product. While to an extent the facility allows for individual banks to implement a version of AITAB approved by their Shariah compliance committee as well as the Bank Negara Malaysia approved Shariah Advisory Council, there is a rich minefield of variations and confusion in how AITAB performs in the Malaysian market. Further, the study concluded that a solution for the existing discordance in implementing AITAB to its full potential lay in the development and enactment of a separate Islamic Hire Purchase Act in Malaysia. It was an emphatic conclusion of the study that, for AITAB to fully function as a Shariah-compliant product in Malaysia, there is the need to institute a national Islamic Hire Purchase Act prescribing the legal parameters of AITAB products and services in the true spirit of Islamic Banking principles and separately from the conventional hire purchase practices. The study also concluded that there was need to initiate reform platforms inclusive of all stakeholders in the Malaysian Islamic banking industry, both public and private in the attempt to make AITAB fully Shariah compliant and a fully developed banking product in Malaysia. A collaborative approach of this magnitude would easily achieve the much needed legal and structural changes. This study was instrumental in identifying the potential of AITAB in the Malaysian banking industry. It was thus logically concluded in the findings that AITAB has an enormous potential in Malaysia today if only it attains a uniform practice, regulation and implementation. Conclusively therefore, the initiative for such changes would lead to great benefits. Examples of such benefits include national economic development, eradication of poverty, industry growth and development of an internationally acclaimed Islamic banking hub in Malaysia. Moreover, the implementation of AITAB in most Malaysian Islamic banks was wrongly based on the financial lease principle instead of the more appropriate and fully Shariah-compliant operational lease principle. The banks opt for the financial principle despite being in contravention to the spirit of Ijarah because it helps them push maintenance costs to customers and also to transfer asset ownership, which would be impossible if the operational lease principle was employed. AITAB would only become fully Shariah compliant if and only is it was offered on the operation lease principle. The study concluded that it would require the presence of enabling legal and structural frameworks to eliminate the barriers that make most bankers opt for the financial lease approach, such as a clear provision on the liability of maintenance costs and the issue of transferring ownership. 5.2 Current Issues on the Implementation of AITAB Banks are commercial enterprises whose main interest is to invest their capital in areas with a higher Rate of Return. Islamic banks will therefore adapt to the lack of legal and structural frameworks administrating the hire purchase practices for Shariah compliance. The study also ascertained that banks must always ensure their offers on AITAB products leave a considerable margin of return to cover their operations costs and profit. This will mean that in conceiving an Islamic Hire Purchase Act defining Shariah compliance, the guidelines must also streamline the practice in ways that benefit both the customers and the banks. Shariah compliance must not be pushed to the extents that it only benefits customers and exposes the providers to great risks. Notably, the study established that the chances of AITAB growing to fits full potential are minimal, if there are no legal guidelines addressing risks and potential pitfalls. As the study found out, forcing the Islamic to confront more risks than their conventional counterparts, above those of Shariah compliance was an undoing to AITAB as well as the development of Islamic banking in general. Some of the ways in which they are already adapting include focusing their AITAB products only on short-term leasing prospects with less than 10 years tenure, as a way of reducing AITAB operation risks within current legal restrictions as mentioned above. Such strategies according to the study are aimed at reducing risks until the repossessions and maintenance costs issues are addressed. When it comes to implementing AITAB in a way that exploits its full potential, the study found that it is also vital that the industry works towards reducing the level and prominence of risks associated with AITAB. Relying on the fact that the public does not know about the lack of a repossession provision for defaulted payments (something the study found to be widely in practice among the bankers) cannot work if public awareness increase. Conclusively therefore, the anticipated Islamic Hire Purchase Act could easily address these risks by streamlining such areas as repossession, ownership, liability to maintenance and insurance costs. It is also noteworthy that the study established the need for man power development in anticipation of wide scale implementation of AITAB. Providing the Shariah-based products and services such as AITAB on a wide scale will necessarily rely on availability of Islamic scholars with the knowledge and experience of Islamic banking. Conclusively therefore, the need for training and deployment of Islamic banking manpower should be undertaken as a gradual accumulative process. Some key Malaysian institutions of higher learning have already integrated the Islamic banking curriculum in their programs in a bid to create adequate manpower for a filly operational Islamic banking hub in Malaysia. Such practices must necessarily continue if the industry is to fully embrace the potential of AITAB. 5.2 Recommendations Accruing from the perceptions of the bankers interviewed in this study on AITAB’s implementation in Malaysia, it is the first recommendation of this study that there is urgent need to make AITAB fully Shariah-compliant by achieving a consensus among the Islamic banking and financial institutions nationally. The paper recommends the enactment of a separate legal and institutional framework that caters for Islamic hire purchase. The legislation of a separate Islamic Hire Purchase Act should in this case be a priority initiative followed by a stakeholders' central body charged with the mandate of enforcing Shariah compliance along a national standardizing scale for all AITAB products and services irrespective of the providers. There is need to stop implementing AITAB based on the conventional Hire Purchase Act 1967 since this exposes the hire purchase product construed in the spirit of Ijarah, to a minefield of product and service variations in the industry. Being an Islamic banking product, AITAB should only be administrated by Islamic banking protocols independent of individual bank’s policies. This will allow AITAB to grow as a singular product in the Malaysian market, having similar features such as standardized Shariah compliance. The Bank Negara Malaysia approved Shariah Advisory Council will also gain in having a legal framework on which to base approval of AITAB products and services. As concluded above, the study found that the sole solution to the existing discordance in implementing AITAB to its full potential lay in the development and enactment of a separate Islamic Hire Purchase Act in Malaysia. Instituting a national Islamic Hire Purchase Act will help prescribe the legal parameters of AITAB products and services in the true spirit of Islamic Banking principles and separately from the conventional HP practices. These monumental changes and initiatives cannot be attained by isolated efforts like has been the case in the last decade. It is therefore the recommendation of this study that the reform initiatives be inclusive of all stakeholders in the Malaysian Islamic banking industry, both public and private. With such collaboration, the initiatives would easily achieve the much-needed legal and structural changes. Given the enormous potential that AITAB has in Malaysia today, provided that, there is a uniform practice, regulation and implementation, stakeholders would stand to benefit from a collaborative effort. On 7th July 1998, the Shariah Advisory Council held its 14th security commission meeting and determined that both the finance lease and operating lease practices and products are Shariah compliant as long as those practices and products are offered without any form of penalty (Securities Commission 2009, pp. 89). In Malaysia, all financial lease products are only offered by those financial companies registered with the Central Bank of Malaysia(Securities Commission 2009, pp. 89). Most of the companies now operating financial leases are subsidiaries of other financial institutions such as banks. There are also some non-financial lease companies currently offering leasing products based on operating lease (Securities Commission 2009, pp. 89). In practice, financial lease differs from operating lease in that the operating lease denies the customer an option of buying the leased assets at the end of the tenure as financial leases do (Securities Commission 2009, pp. 89). Nonetheless, both the financial and operating lease companies adopt a similar approach of calculating rental leases (Securities Commission 2009, pp. 89). Both usually base that calculation on the value of the financed asset, charged rate of returns and the duration of the financing tenure (i.e. Asset Value x Percentage Rate of returns x No. of Years). In those institutions whose practices are not governed by Shariah compliance like the Islamic banks are, the financial and operating lease arrangements usually impose very high penalty rates for late payments (Securities Commission 2009, pp. 89). This payment penalty works in discouraging late payments during the tenure of a lease contract while also protecting the leasing institutions from the exposure to losses that might accrue as a result of opportunity loss (Securities Commission 2009, pp. 89). After deliberations an indepth research, the Shariah Advisory Council determined that both the operating lease and financial lease are permissible in Islamic banking practices (Securities Commission 2009, pp. 90). This was mainly because financial and operating leases normally adopt mechanisms and practices that correspond to Ijarah and AITAB. The SAC determined that these two practices are alike and Shariah compliant as long as they omit the penalty clause included by conventional banking practices (Securities Commission 2009, pp. 90). To an extent, current AITAB products have some traits corresponding to Ijarah but on the issue of maintenance costs and ownership, the two part ways. If an institutions wishes to use either of the principles in its Hire Purchase products and services, all the institution has to do is to omit the late payment penalty and the product is endorsed as ‘Shariah compliant’ (Securities Commission 2009, pp. 90). The procedures according to SAC grants the lessee the right to utilize the leased asset for the duration of the lease (tenure), mutually agreed upon at the commencement of a lease contract (Securities Commission 2009, pp. 90). Such a beneficiary (the assets consumer), is also mandated to pay for the consumption of such a product within a duration mutually agreed with the lesser. Even while the asset is being consumed (used) however, both mechanisms retains the asset ownership with the lesser (Securities Commission 2009, pp. 90). Two issues accrue from this scenario. The Islamic finance notion of Ijarah agrees with this practice since the assets can greatly benefit the lessee for the duration of the tenure and for a pre-agreed sum of money. Nonetheless, as in Ijarah, the ownership of such a leased asset remains with its lesser. Ijarah thus grants the lessee only the right of benefiting from the asset simply because he or she is paying a price for that benefit (Securities Commission 2009, pp. 90). In the conventional sense, this is not a practice of buying and selling and for Islamic banking practitioners to include it as such, fails to capture the concept of Islamic leasing or high purchase in their true light. Most banks have employed the FATWA concept to justify their transfer of maintenance costs and ownership to lessees. What they end with in the name of AITAB cannot be regarded as Shariah compliant since it contravenes the Ijarah spirit of leasing. Secondly, it emerges that AITAB is better captured and practiced under operational lease than financial lease if it is to be fully Shariah compliant. The operation lease agrees to the spirit of Ijarah where maintenance costs are footed by the lesser and not the lessee. More than leasing, AITAB currently comes out as a financing contract since unlike Ijarah and the operating lease principle, financial lease allows the customer (lessee) the option of buying the asset at the end of a leasing contract which translates to transfer of ownership prohibited by Ijarah’s leasing (Securities Commission 2009, pp. 90). The lessee can also decide to dispose off the asset once the lease tenure is concluded (Securities Commission 2009, pp. 90). Again, if the lessee wishes to purchase the asset after financing its lease fully, then a new contract has to emerge (Securities Commission 2009, pp. 90). This is the maxim upon which AITAB is currently based and thus the belief that it is not Shariah compliant as it would be if it embraced the operating lease principle. Another point worth of note is that during the 20th Meeting held in July 1999, the Shariah Advisory Council of Malaysia resolved to endorse a minimal late payment penalty on AITAB and other leasing products offered by Islamic banks in Malaysia (Securities Commission 2009, pp. 90). The SAC resolved to adopt Bank Negara Malaysia’s directive that only 1% be charged as the late payment penalty and that even when imposed, that the late payment penalty be calculated based on basic value and not the compounded value of the asset (Securities Commission 2009, pp. 91). More importantly, the SAC resolved that there ought to be a difference on the penalty rate imposed by institutions providing either the operating lease of the financial lease as long as such a penalty remained within the 1% limits (Securities Commission 2009, pp. 91). It is therefore an important recommendation of this study that AITAB be newly implemented based on the operational principle and not the financial lease principle, as is the current practice. Claiming that AITAB is currently Shariah-compliant while it is being offered under the financial principle is self defeating. Banks should progressively strive towards a fully Shariah compliant AITAB, instead of using their Shariah boards to endorse a FATWA-based AITAB version on the financial lease principle. Only an operational lease AITAB version would be Shariah compliant since it would embrace the spirit of Ijarah, prohibiting the transfer of maintenance costs and ownership to a lessee. This would require the presence of enabling legal and structural frameworks recommended earlier, to eliminate the barriers that make most bankers opt for the financial lease approach. The anticipated Islamic Hire Purchase Act should spell out the issues of maintenance costs and ownership in such ways as will allow the banks to embrace the operational lease principle which they are currently reluctant to, for then and only then, would AITAB become fully Shariah compliant. 5.3 Study Limitations Despite efforts to minimize the limitations of the study, several limitations were impossible to completely eradicate. Measures were however initiated to reduce the impacts of these overarching limitations to the best extent possible. To begin with, the research relied solely on face-to-face interviews of 20 respondents, 17 of whom were top ranking executives and managers of Malaysian Islamic banks. The first limitation encountered in this approach was the amount of time and effort needed to secure interviews and conduct them, with these extremely busy individuals. Sometimes, the interview sessions were harried to fit to the allocated timeframe on their schedule. A lot of time was wasted in the data collection stage, time that would have otherwise been valuable in other stages of the study. This was a significant limitation in that the time allowed for the study as part of the curriculum was also restrictive. More significantly however, the ability to reduce bias and subjectivity in analyzing the data collected was a chief limitation. This was a qualitative data analysis that was subject to high levels of subjective interpretation. To reduce the limitation of the qualitative data analysis methods, a highly efficient qualitative analysis software, Nvivi, was employed. The software allows the researcher to arrive at objective findings from the interview responses. To avoid selective listening by the researcher during the interviews, the researcher tape recorded all the interviews for later reference during data analysis. The interviews also limited by the limited quantifiability of the data collected to a large extent since respondents were free to give any answer to the open-ended questions used in the interviews. Other instruments of data collection could have provided more quantifiable data, but they could not have captured the mandate of the study essentially i.e. the perceptions of the bankers. The researcher used document analysis to support the findings and insights of the interviews in a way that enabled reliable findings to emerge despite the lack of quantifiable data. On a matter as gravely important as this, the study would have benefited from a much larger sample. It could have included customers of the banks as well as other stakeholders of the industry. However, due to time and resource limitations, the researcher found it prudent to limit the focus of the study to covering only the perceptions of the bankers. The researcher also included two high-ranking officials, one from Bank Negara Malaysia and the other Domestic Trade Co-Operatives and Consumerism Ministry. This helped imbibe a balanced approach to the focused study. References Securities Commission Malaysia 2009, Resolutions of the Securities Commission Shariah Advisory Council, Securities Commission Malaysia, Kuala Lumpur, pp. 89-91. Gintzburger, AHM 2009, The Sources in Variation in the Application of Shari’a-Compliant Finance Contracts: A Comparative Analysis of Shari’a Scholars, Shari’a Board Roles, and Regulatory Variations in Malaysia and the Gulf Cooperation Council (GCC) States, MPhil Thesis, Australian National University. MASB 2010, Malaysian Accounting Standards Board Exposure Draft: Technical Release i–2 Ijarah, Malaysian Accounting Standards Board. Read More