Legal and Practical Constraints: Tabung Haji

There are legal constraints in Th operations, but at times these are necessary, especially for the protection of depositors’ money and the welfare of the pilgrims. One of the legal restrictions on the Hajj operation, among others, is the quota and Hajj expense per pilgrim. As with other countries, quota on the number of Hajj pilgrims are imposed by the government of Saudi Arabia to ensure that pilgrims can perform their pilgrimage without much inconveniences. However, while in one way quota restriction does negatively impact Th’s operations, it creates a good investment opportunity to Th. Since by having more stable deposits as depositors who wish to perform the pilgrimage have to block in their deposits with Th to be in the queue. This type of deposits can then be used for long term investments.

The government of Malaysia fixes the Hajj expense per pilgrim. Though this constraint limits the opportunity for Th to meet overall Hajj expenses, it certainly is protecting the pilgrims from having to pay too high a cost. However, it is not really a constraint as there is provision that, if necessary, the Hajj expense per pilgrim can be revised yearly. In addition, the government takes into account Th’s advice on the Hajj cost structure before making a final decision. Th’s policy is not to make money from the Hajj. Thus Th charges the pilgrims only the direct expenses incurred (accommodation, transport etc.) and not the indirect expenses (medical, welfare, and withdrawal services)

The legal constraint on the investment is that Th must seek the approval of the minister before disbursing funds for any investment. Among the reasoning behind the restriction is the protection of depositors’ money as the government is guaranteeing the deposits ringgit per ringgit.

Practical constraints: Among the practical constraints facing Th from the external environment are the lack of depth in the Islamic capital market and competition from other conventional financial institutions. The government of Malaysia has put in a lot of effort in developing the Islamic financial system. So far this has resulted in some positive developments like the creation of Bank Islam, Islamic Government Securities, Islamic Bonds and International Islamic Fund. Nonetheless, the overall market share of the Islamic instruments is still much lower than that of the conventional instruments. Some of the Islamic investment opportunities are more attractive than the conventional ones but due to lack of understanding and awareness in Islamic investments, these opportunities are often missed or neglected. Other issues that contribute to the lack of depth in the Islamic capital market are as follows:

1. Lack of floating rate financing
2. Over-reliance on fixed rate financing
3. Absence of benchmarks for Islamic banking
4. Lack of innovation and variety in products

The positive aspect however, is that these issues have not been left ignored rather these are being addressed to the government and recommendations have been proposed such as introduction of floating ijarah and bba, studying the framework for Islamic klibor, encouraging players to intensify R&D and exploring the applications of the mudharaba and musyaraka concept.

The competition from the conventional financial institutions is quite intense as they have already established and positioned themselves long before. They have more branches and larger funds of which they can enjoy economies of scale and thus can provide services at a lower cost. In that context, it was a good move on the part of the government to allow the conventional banks to also offer “Islamic windows” and offer Islamic products using their own infrastructure. This has allowed Islamic banking to expand very rapidly during the 1990’s.

Another constraint is the limitation of activities at branch level as they are basically centres responsible only to collect deposits and facilitate Hajj information and applications.

Source: Towards Islamic Banking: Experience and Challenges, Institute of Policy Studies. Republished with permission.