Unique Financial Institution

In terms of historical evolution of Islamic banking, mention should also be made of a unique financial institution which is generally not mentioned in the discussions of Islamic banking but whose significance, importance and uniqueness demands it. This financial institution is the Pilgrims Management and Fund Board of Malaysia, popularly known as Tabung Haji.

Reason for the establishment of this institution was the desire of Malaysian Muslims that “money spent on pilgrimage must be clean and untainted of riba.” Since this was not possible by putting the money with the ordinary commercial banks, this desire necessitated the establishment of a special financial institution. Consequently, a pilgrims’ saving corporation was established in 1963 which was later incorporated into the Tabung Haji in 1969.

The goals of the Tabung Haji are:

• To enable Muslims to save in order to provide their expenses for performing the pilgrimage (Hajj) or for other expenses beneficial to them;
• To enable Muslims through their savings to participate in investment, industry, commerce and plantations as well as in real estate, according to Islamic principles; and
• To provide for the protection, control and welfare of Muslims while on pilgrimage through various facilities and services of Tabung Haji.

To achieve these goals the board is assigned to collect savings through its branch offices and other agencies such as post offices, and to invest the depositors’ savings in “accordance with the investment principles and tenets of Islam.”

Tabung Haji started with 1,281 depositors in 1963 and a total of M$46,600 in deposits. By the end of 1985, it had 65 branches all over the country, the number of depositors 867,220 and total deposits exceeding one billion Malaysian dollars. Financial activities of the Tabung Haji are managed by a department of finance and investment which has six divisions, viz. finance, saving and withdrawals, securities, land and buildings, property management and computer. It has also established five subsidiary companies dealing with plantation, pilgrim transportation, construction and housing and property management.

As far as the management of funds is concerned, Tabung Haji works as a saving and investment institution. It basically operates on the principle of al wakalah al mutlagah (absolute power of attorney) through which the depositors give their consent to Tabung Haji to manage their deposits for the purposes of investment. It had several schemes to attract the deposits, c.g. direct deposits, deposits through branches and post offices, salary deduction schemes, children’s saving schemes. Withdrawals are allowed up to 100 percent of the cash balance with the fund. However, normally only one withdrawal is allowed within six months. The persons who are registered to perform Hajj during a given year are not normally allowed to withdraw in that year.

For making investments in accordance with the Islamic principles, Tabung Haji uses mudarba, and musharakah as modes of investment. In order to assure that it docs not violate any Islamic principle, it used to consult the National Fatawah Committee of Malaysia. However, after the establishment of the Bank Islam Malaysia, it uses the services of the Shari‘ah supervisory board attached to this bank. The investment of Tabung Haji has taken four forms: investment in shares, in subsidiary companies, in land and buildings and short-term investment. After substracting the operating expenses and the payment of Zakah, profits are distributed among the deposit holders. Generally, the rate of dividend has been around 8 and 8.5 percent.

Although Tabung Haji is not a bank, it works very much the same way as an Islamic bank docs. It also performs two important banking functions, i.e. accepting the deposits and making investment. In fact, Tabung Haji is a good example of how a specialised financial institution could work successfully in accordance with the Islamic principle.

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.