DEVELOPMENT AND VALIDATION OF A

FINANCIALLY AFFORDABLE ISLAMIC HOME

FINANCING MODEL IN MALAYSIA

BY

MOHD ZAIDI MD ZABRI

A thesis submitted in fulfilment of the requirement for the

degree of Doctor of Philosophy in
Islamic Banking and Finance

IIUM Institute of Islamic Banking and Finance

International Islamic University Malaysia

JANUARY 2018
 ABSTRACT

Home is a basic need. Yet it is becoming increasingly difficult for many Malaysians,
particularly the low- and middle-income households to afford to buy a house. Studies
have shown that the lack of financial affordability is largely due to the existing debt-
based financing model and they have recommended the use of equity-based home
financing model to be offered by financial cooperatives. Hence, this study developed
and validated an integrated Cash Waqf-Financial Cooperative-Musharakah
Mutanaqisah (CWFCMM) Model that could be used to provide financially affordable
Islamic home financing in Malaysia. The study used mixed methods of interviews and
questionnaire surveys. The interviews were conducted with 10 expert informants to
validate the CWFCMM Model. The questionnaires, developed based on the extended
Theory of Planned Behaviour (TPB), were distributed to 417 respondents, out of which
382 were usable. The interview data were analysed using thematic analysis while the
data from the questionnaire survey were analysed using the Structural Equation
Modelling (SEM). Expert informants unanimously agree that the Model is a viable
alternative for financially affordable Islamic home financing model in Malaysia.
Similarly, the findings from the quantitative survey data are also positive and promising.
The study hypothesised that the Behavioural Intention of potential homeowners to
participate in the CWFCMM Model is influenced by Attitude, Subjective Norm,
Perceived Behavioural Control, and Perceived Cost Advantages. The study finds that:
(1) when a potential homeowner has a favourable attitude towards the CWFCMM
Model, he/she is more likely to be a participant; (2) if a potential homeowner believes
that he/she has a greater autonomy over factors that might impede or facilitate their
participation, the stronger his/her intention to participate in the CWFCMM Model; and
(3) a positive perception towards the cost advantages of CWFCMM Model will
influence a potential homeowner’s decision-making process of CWFCMM Model
participation in the future. This study contributes to the development of cash waqf
institutions and financial cooperatives to enhance their capacity and capability, and a
more targeted approach in marketing and promotion to improve the overall attitude and
(existing and potential) donors’ perception on cash waqf. The study also adds stock to
the current literature especially in terms of the additional item of Perceived Cost
Advantages and application of TPB in a new setting of third sector economic institutions
in Malaysia.

ii
 ‫خالصة البحث‬
‫‪ABSTRACT IN ARABIC‬‬

‫يعترب املنزل من احلاجات األساسية‪ .‬ومع ذلك‪ ،‬أصبح من الصعب بشكل متزايدة على الكثري من املاليزيني‬
‫حتمل تكاليف متلّك منزل‪ ،‬وخاصة األسر ذات الدخل املنخفض‪ .‬أظهرت الدراسات أن عدم القدرة على‬
‫حتمل التكاليف يرجع إىل حد كبري إىل النموذج احلايل للتمويل باإلقتراض‪ ،‬واليت دعت الستخدام منوذج‬
‫التمويل العقاري التعاوين القائم بامللكية‪ .‬ومن هنا‪ ،‬طوّرت هذه الدراسة منوذج متويل قائم على الوقف النقدي‬
‫والتعاون املايل واملشاركة املتناقصة (‪ )CWFCMM‬والذي ميكن استعماله لتوفري متويل إسالمي عقاري‬
‫بأسعار معقولة يف ماليزيا‪ .‬استخدمت هذه الدراسة املنهج املختلط (املقابالت واالستبيانات)‪ .‬أُجريت مقابالت‬
‫مع ‪ 10‬خرباء للتحقق من صحة منوذج الــ ‪ .CWFCMM‬مت تصميم االستبيانات باالعتماد على‬
‫النظرية املوسعة للسلوك املنظم‪ ،‬ومت توزيعها على ‪ 417‬مستجيب‪ ،‬ومنها ‪ 382‬فقط كانت صاحلة لالستعمال‪.‬‬
‫مت حتليل بيانات املقابالت باستخدام التحليل املوضوعي يف حني مت حتليل بيانات االستبيانات باستخدام منذجة‬
‫املعادلة اهليكلية (‪ .)SEM‬افترضت الدراسة أن النية السلوكية ملالك املنازل احملتملني للمشاركة يف منوذج‬
‫الــ ‪ CWFCMM‬يتأثر باملوقف الشخصي‪ ،‬والعرف الشخصي‪ ،‬والسيطرة السلوكية املتصورة‪ ،‬ومزايا‬
‫التكلفة املتصورة‪ .‬أظهرت نتائج الدراسة من املقابالت أن لدى املخربين املختصني تصورات واجتاهات إجيابية‬
‫حنو منوذج الــ ‪ . CWFCMM‬اتفق املختصني باإلمجاع أيضا على أن هذا النموذج هو بديل رخيص‬
‫للتمويل العقاري اإلسالمي يف ماليزيا‪ .‬وباملثل‪ ،‬فإن النتائج من بيانات االستبيانات الكمية كانت أيضا إجيابية‬
‫وواعدة‪ .‬استنتجت الدراسة اآليت‪ )1( :‬عندما يكون لدى مالك املنزل احملتمل موقف إجيايب جتاه منوذج الــ‬
‫‪ ، CWFCMM‬فإن احتماله ليكون مشاركا سيكون كبريا‪ )2( .‬إذا اعتقد مالك املنزل احملتمل بأن له‬
‫االستقاللية يف العوامل اليت قد تعيق أو تيسر مشاركته‪ ،‬فإن نية املشاركة يف منوذج الــ ‪CWFCMM‬‬
‫ستزداد قوة؛ و (‪ )3‬التصور اإلجيايب جتاه مزايا تكلفة منوذج الــ ‪ CWFCMM‬سيؤثر يف عملية اختاذ‬
‫القرار يف مالّك املنازل احملتملِني للمشاركة يف منوذج ‪ CWFCMM‬مستقبال‪ .‬هذه الدراسة تساهم يف‬
‫تطوير مؤسسات الوقف النقدية واملالية التعاونية من أجل تعزيز قدرات تلك املؤسسات واستيعاهبا‪ ،‬باإلضافة‬
‫إىل اتباع هنج أكثر استهدافا يف التسويق والترويج لتحسني الصورة العامة وإدراك اجلهات املاحنة (القائمة‬
‫واحملتملة) بشأن الوقف النقدي‪ .‬أيضا تضيف هذه الدراسة قيمة إىل الدراسات املعاصرة خاصة تلك اليت تُعىن‬
‫بالبند اإلضايف من مزايا التكلفة املتصورة وتطبيق ‪ TPB‬يف وضع جديد ملؤسسات القطاع الثالث االقتصادي‬
‫يف ماليزيا‪.‬‬

‫‪iii‬‬
 APPROVAL PAGE

The thesis of Mohd Zaidi Md Zabri has been approved by the following:

Dzuljastri Abdul Razak

Supervisor

Mustafa Omar Mohammed

Co-Supervisor

Razali Haron
Co-Supervisor

Adewale Abideen Adeyemi

Internal Examiner

Rosylin Mohd Yusof

External Examiner

Shahida Shahimi
External Examiner

Ismaiel Hassanein Ahmed Mohamed

Chairperson

iv
 DECLARATION

I hereby declare that this thesis is the result of my own investigations, except where

otherwise stated. I also declare that it has not been previously or concurrently submitted

as a whole for any other degrees at IIUM or other institutions.

Mohd Zaidi Md Zabri

Signature ........................................................... Date .........................................

v
 INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

DECLARATION OF COPYRIGHT AND AFFIRMATION OF

FAIR USE OF UNPUBLISHED RESEARCH

DEVELOPMENT AND VALIDATION OF A FINANCIALLY

AFFORDABLE ISLAMIC HOME FINANCING MODEL IN
MALAYSIA

I declare that the copyright holders of this thesis are jointly owned by the student
and IIUM.

Copyright © 2018 Mohd Zaidi Md Zabri and International Islamic University Malaysia.
All rights reserved.

No part of this unpublished research may be reproduced, stored in a retrieval system,

or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without prior written permission of the copyright holder
except as provided below

1. Any material contained in or derived from this unpublished research

may be used by others in their writing with due acknowledgement.

2. IIUM or its library will have the right to make and transmit copies (print
or electronic) for institutional and academic purposes.

3. The IIUM library will have the right to make, store in a retrieved system
and supply copies of this unpublished research if requested by other
universities and research libraries.

By signing this form, I acknowledged that I have read and understood the IIUM
Intellectual Property Right and Commercialisation policy.

Affirmed by Mohd Zaidi Md Zabri

……..…………………….. ………………………..
Signature Date

vi
 This thesis is dedicated to

My dear parents: Md Zabri Ismail and Zaiton Jusoh

My parents-in-law: Rusli Hasan and Siti Faridah Din

My beloved wife: Nur Ita Jusnita Rusli

My boys: Fateh Baihaqi and Faisal Muttaqin

&

My brother-in-Islam: Al-Marhum Ahmad Muaz Abdul Mutalib–

May we be reunited again in the highest of Jannah. Amin

vii
 ACKNOWLEDGMENTS

I wish to express my utmost gratitude and thanks to those who have assisted me, directly
or indirectly upon completing this thesis. I am grateful to my supervisory committee
members; Assoc. Prof Dr Dzuljastri Abdul Razak, Assoc. Prof Mustafa Omar
Mohammed and Assoc. Prof Dr Razali Haron. Thanks, Dr Dzuljastri, for the invaluable
lessons as an academic. My profound gratitude to my murabbi, Dr MOM–whom I hold
in high esteem both in academia and in life–was always available for practical, and
theoretical advice. Thank you, Dr Razali for the brainstorming session, which finally
lead to a major breakthrough in my mathematical simulation chapter. Their constant
support, encouragement, and patience will always be remembered with appreciation;
without them, this thesis would not have come into fruition. My sincere appreciation to
the Doctorate Support Group members and these ‘chief residents’–Dr Othman Talib,
Prof Ramayah Thurasamy, Prof Dr Trevor Bond and Prof Dr Zainudin Awang. Under
their tutelage, my PhD journey has been an immensely rewarding experience. My
appreciation to the thesis examiners, Prof Dr Rosylin Mohd Yusof, Assoc. Prof Dr
Shahida Shahimi, and Assoc. Prof Dr Adewale Abideen Adeyemi for their remarks and
suggestions that further improved my work.

My gratitude also goes to the informants, questionnaire validators, enumerators

and respondents. Thank you for extending your full cooperation–putting time and effort
into accommodating my interviews, and questionnaire validation and administration. I
am also indebted to the tax-paying rakyat, the Ministry of Higher Education and my
employer, Universiti Sains Malaysia for granting the Skim Latihan Akademik IPTA
(SLAI) scholarship for my postgraduate studies.

I convey my thankfulness to my lecturers, colleagues, key administrators,

supporting staffs, and friends at International Islamic University Malaysia and
Universiti Sains Malaysia. A special note of thanks is due to my brothers- and sisters-
in-arms, especially Dr Zahid Zamri, Dr Nurhasnida Abdul Rahman, Dr Muhammad
Jameel Mohamed Kamil, Assoc. Prof Dr Hanudin Amin, Dr Amirul Faiz Osman, Dr
Nik Hadiyan Nik Azman, Dr Nurshamimitul Ezza Ramli, Dr Anwar Allah Pitchay, Dr
Mohamed Asmy Thas Thaker, Memiyanti Abdul Rahim, Dr Nurul Afidah Yusuf, Ustaz
Dr Mahbubi Ali, and Ustaz Asharaf Mohd Ramli who have been trustworthy
companions throughout my PhD journey. I could always count on them for their
consultations on both academic and non-academic related matters. In addition, I thank
my mentors and dear friends; Rozihana and Rozihanim Shekh Zain, Azlina Datuk Ishak
and family, and Dr Zabeda Abdul Hamid.

I am forever indebted to my beloved parents, Md Zabri Ismail and Zaiton Jusoh,

whose thoughts and prayers are my constant companion. Their constant belief in me
during all these years, especially when I was dismissed from the same university years
ago, brought me to be what and where I am today. My thanks to my siblings; Noor
Zalina, Mohd Syawal, Noor Shahifah, Muhammad Syazwan, and Noor Syazwani, who
were always there, come what may. My special thanks to my parents-in-law; Rusli
Hassan and Siti Faridah Din and sister-in-law; Nur Ida Aniza for the help afforded to

viii
my family. My thanks also to my two boys–Fateh Baihaqi and Faisal Muttaqin, for
always putting a smile on my face despite their father was ‘mentally absent’ most of the
time–more so during the write up stage. Last, but certainly not least, I would like to
acknowledge the support, love, and companionship of my wife and best friend, Nur Ita
Jusnita, who had to endure a challenging life with a pauper academic. To reduce her
sacrifice and understanding into a piece of paper would never do her any justice, which
will always be beyond description. Alas, here’s to many more years to come.

Above all, I thank Allah subhanahu wata’ala, the Beneficent, the Merciful for
His never-ending and countless blessings. In particular, for His easing my quest towards
acquiring knowledge.

ix
 TABLE OF CONTENTS

Abstract .................................................................................................................... ii
Abstract in Arabic .................................................................................................... iii
Approval Page ......................................................................................................... iv
Declaration ............................................................................................................... v
Acknowledgments ................................................................................................. viii
Table of Contents ..................................................................................................... x
List of Tables ......................................................................................................... xiv
List of Figures ....................................................................................................... xvi
List of Abbreviations and Acronyms .................................................................... xviii

CHAPTER ONE: INTRODUCTION .................................................................... 1

Background of the Study ...................................................................... 1
1.1.1 Islamic Home Financing in Malaysia ........................................ 1
1.1.2 Debt-Based Islamic Home Financing Instruments and Its Effect on
Financial Affordability .............................................................. 3
1.1.3 The Potentials of Equity-Based Islamic Home Financing
Instruments ............................................................................... 5
1.1.4 Implementation of MM Home Financing Instrument by Islamic
Commercial Banks: A Departure from the Norm ...................... 6
1.1.5 Financial Cooperative as a Financially Affordable Islamic Home
Financing Institution ................................................................. 8
1.1.6 Lack of Complementary Source of Funds in Financial
Cooperatives ........................................................................... 10
Problem Statement .............................................................................. 12
Research Objectives............................................................................ 15
Research Questions............................................................................. 15
Research Approach ............................................................................. 16
Scope of the Study .............................................................................. 19
Significance of the Study .................................................................... 20
Operational Definitions of Terms ........................................................ 21
Organisation of the Study ................................................................... 22
Chapter Summary ............................................................................... 23

CHAPTER TWO: INSTITUTIONAL BACKGROUND OF ISLAMIC HOME

FINANCING FRAMEWORK IN MALAYSIA: MARKETS, INSTITUTIONS,
AND INSTRUMENTS.......................................................................................... 24
Introduction ........................................................................................ 24
2.1.1 The Importance of Home Financing ........................................ 25
2.1.2 Conventional Home Loan ....................................................... 26

x
 2.1.3 Islamic Home Financing ......................................................... 27
Islamic Home Financing Institutions ................................................... 29
2.2.1 Islamic Commercial Banking Institutions ................................ 32
2.2.2 Government-Owned or -Linked Home Financing Institutions . 35
Islamic Home Financing Instruments .................................................. 39
2.3.1 Murabahah ............................................................................. 42
2.3.2 Bay’ Bithaman Ajil (BBA) ...................................................... 43
2.3.3 Tawarruq ................................................................................ 45
2.3.4 Ijarah/Ijarah Muntahiyya Bi-Tamleek (IMBT) ........................ 46
2.3.5 Musharakah Mutanaqisah....................................................... 48
2.3.6 Ijarah Mawsufah Bi-Dhimmah (IMBD) .................................. 52
Chapter Summary ............................................................................... 53

CHAPTER THREE: ISLAMIC HOME FINANCING FRAMEWORK IN

MALAYSIA: THE EMERGING ISSUE OF FINANCIAL AFFORDABILITY55
Introduction ........................................................................................ 55
The Conflict of Interest: Its Effects on the Financial Affordability of
Islamic Home Financing Instruments .................................................. 56
Are Government-Owned Home Financing Institutions Sustainable? ... 58
The Estimation Techniques: The Application of Purchase- and
Repayment-Affordability Concepts ..................................................... 62
The Data ............................................................................................. 64
Islamic Home Financing Instruments and Its Compounding Effect on the
Purchase-Affordability of Malaysians ................................................. 64
3.6.1 An Illustration of a BBA Home Financing Instrument by Islamic
Commercial Banks .................................................................. 65
3.6.2 An Illustration of an MM Home Financing Instrument by Islamic
Commercial Banks .................................................................. 68
MM Home Financing Instrument by Financial Cooperatives: The Way
Forward .............................................................................................. 69
Islamic Home Financing Instruments and Its Impact on the Repayment-
Affordability of Malaysians ................................................................ 78
Chapter Summary ............................................................................... 81

CHAPTER FOUR: QUALITATIVE VALIDATION OF A FINANCIALLY

AFFORDABLE ISLAMIC HOME FINANCING MODEL ............................... 83
Introduction ........................................................................................ 83
Review of Related Literature: Cash Waqf-Financial Cooperative Home
Financing Based on Musharakah Mutanaqisah Arrangement.............. 84
4.2.1 Financial Cooperative as a Financially Affordable Islamic Home
Financing Institution ............................................................... 85
4.2.2 Financial Cooperative and Its Limitation in Accessing
Complementary Source of Funds ............................................ 88
4.2.3 Cash Waqf as a Potential Source of Funds for Financial
Cooperatives ........................................................................... 90
xi
 4.2.4 The Potentials of Cash Waqf in Malaysia ................................ 96
Conceptual Framework of An Integrated Cash Waqf-Financial
Cooperative-Musharakah Mutanaqisah (CWFCMM) Model .............. 97
Model Specifications ........................................................................ 100
4.4.1 Waqif (Contributor) Requirements ........................................ 100
4.4.2 Cash Waqf Institution ............................................................ 101
4.4.3 Financial Cooperative ........................................................... 102
4.4.4 Joint Management Committee ............................................... 103
4.4.5 Musharakah Mutanaqisah (MM) Home Financing Arrangement
............................................................................................. 104
Research Methods ............................................................................ 105
4.5.1 Sampling Technique ............................................................. 106
4.5.2 Research Instrument: Interview Questions ............................ 107
4.5.3 Data Analysis........................................................................ 108
Findings............................................................................................ 109
4.6.1 Profile of Informants ............................................................. 109
4.6.2 Issues with Current Islamic Home Financing Instruments ..... 113
4.6.3 Issues with Current Islamic Home Financing Institutions ...... 115
4.6.4 Financial Cooperatives as a Financially Affordable Islamic Home
Financing Institution: Capacity and Capability ...................... 117
4.6.5 Operationalisation of CWFCMM Model ............................... 123
Discussion ........................................................................................ 128
Chapter Summary ............................................................................. 132

CHAPTER FIVE: EXAMINING THE BEHAVIOURAL INTENTION TO

PARTICIPATE IN THE CASH WAQF-FINANCIAL COOPERATIVE-
MUSHARAKAH MUTANAQISAH (CWFCMM) MODEL .............................. 133
Introduction ...................................................................................... 133
Review of Related Literature: The Theory of Planned Behaviour ...... 134
Conceptual Framework and Hypotheses Development ...................... 140
5.3.1 Attitude................................................................................. 140
5.3.2 Subjective Norm ................................................................... 141
5.3.3 Perceived Behavioural Control.............................................. 142
5.3.4 Perceived Cost Advantages of CWFCMM Model ................. 143
Research Method .............................................................................. 143
5.4.1 Sample .................................................................................. 144
5.4.2 Sample Size .......................................................................... 146
5.4.3 Research Instrument: Survey Questionnaire .......................... 148
5.4.4 Data Analysis........................................................................ 151
Results .............................................................................................. 154
5.5.1 Exploratory Factor Analysis (EFA) ....................................... 157
5.5.2 Confirmatory Factor Analysis (CFA) .................................... 162
5.5.3 Measurement Validation ....................................................... 163
5.5.4 The Structural Model ............................................................ 167
xii
 5.5.5 Hypotheses Testing ............................................................... 169
Discussion ........................................................................................ 171
Chapter Summary ............................................................................. 174

CHAPTER 6: CONCLUSION ........................................................................... 175

Introduction ...................................................................................... 175
Recapitulation of the Study ............................................................... 175
Contributions and Significance of the Study ..................................... 178
Limitations and Suggestions for Future Research .............................. 181

REFERENCES ................................................................................................... 184

APPENDIX I: INTERVIEW SAMPLE AND PROTOCOL ............................ 199

APPENDIX II: SAMPLE QUESTIONNAIRE ................................................. 201

xiii
 LIST OF TABLES

Table 2.1 Market Share of Home Financing Institutions (2010- 30

2015)

Table 2.2 Home Financing Approved (2010-2015) 31

Table 2.3 Islamic Home Financing Instruments by Islamic 33

Commercial Banks

Table 3.1 Home Financing Institutions and Its Financing Rates 60

Table 3.2 Base Rates and Indicative Effective Financing Rates 65

(IEFR) of Islamic Commercial Banks

Table 3.3 Comparison between Conventional Home Loan by 70

Conventional Bank, and BBA and MM Home Financing
by Islamic Commercial Bank

Table 3.4 Monthly Instalments Schedule for MM Home Financing 74

Table 3.5 Possible Range of Monthly Instalments for MM Home 75

Financing Instrument by Financial Cooperatives

Table 3.6 Comparison between Conventional Home Loan, BBA 78

and MM Home Financing

Table 3.7 Financial Affordability of Islamic Home Financing 79

Instruments and Its Impact on the Median Income of
Malaysian Households

Table 4.1 Summary of Related Literature on Cash Waqf for 94

Financing

Table 4.2 Profile of the Informants 109

Table 4.3 Categorical Themes and Interview Questions 111

Table 5.1 Summary of Related Literature on Islamic Financial 138

Services Selection

Table 5.2 Operationalisation of Measurement Items 147

Table 5.3 Item Pools and Sources 148

Table 5.4 Raters’ Area of Specialisations 149

xiv
Table 5.5 Sample Demographic Characteristics 155

Table 5.6 Knowledge of cash waqf, Islamic home financing, and 156
financial cooperatives

Table 5.7 Eigenvalues, Kaiser-Mayer-Olkin (KMO) Measure of 157

Sampling Adequacy, and Bartlett’s Test of Sphericity
Results

Table 5.8 Analysis of Exploratory Factor Analysis 160

Table 5.9 Parameter Estimates 162

Table 5.10 Parts of the Modification Indices (MI) 164

Table 5.11 Structural Equation Model Results 170

xv
 LIST OF FIGURES

Figure 1.1 Base Financing Rates (1989-2014) 8

Figure 1.2 Research Design 18

Figure 2.1 Composition of Islamic Financing Instruments by Modes 40

(2017)

Figure 2.2 Composition of Islamic Financing Instruments by Modes 41

(2007-2017)

Figure 2.3 Murabahah Home Financing 43

Figure 2.4 BBA Home Financing by Islamic Commercial Bank 44

Figure 2.5 Tawarruq Home Financing 45

Figure 2.6 Ijarah Home Financing 47

Figure 2.7 MM Home Financing 49

Figure 2.8 IMBD Home Financing 53

Figure 3.1 Home Financing Outstanding (2010-2015) 61

Figure 3.2 BBA Home Financing by Islamic Commercial Bank 67

Figure 3.3 MM Home Financing by Islamic Commercial Banks in 69

Malaysia

Figure 3.4 MM Home Financing by Financial Cooperative 76

Figure 4.1 Cash Waqf-Financial Cooperative-MM (CWFCMM) 98

Model

Figure 4.2 MM Home Financing Arrangement 104

Figure 5.1 Theoretical Framework of Theory of Planned Behaviour 135

Figure 5.2 Conceptual Framework of Theory of Planned Behaviour 140

Figure 5.3 Initial Measurement Model 165

Figure 5.4 Final Measurement Model 167

xvi
Figure 5.5 Structural Model 169

xvii
 LIST OF ABBREVIATIONS AND ACRONYMS

AITAB Al-Ijarah Thumma Al-Bay’

ANGKASA Angkatan Koperasi Kebangsaan Malaysia

(Malaysian National Cooperative Movement)
ATT Attitude

BBA Bay’ Bithaman Ajil

BFR Base Financing Rate

BIMB Bank Islam Malaysia Berhad

BNM Bank Negara Malaysia (Central Bank of Malaysia)

BR Base Rate

CAGR Compounded Annual Growth Rate

CFA Confirmatory Factor Analysis

COST Perceived Cost Advantages of CWFCMM Model

CWFCMM Cash Waqf-Financial Cooperative-MM

CWI Cash Waqf Institution

DSR Debt Service Ratio

EFA Exploratory Factor Analysis

FC Financial Cooperative

ICB Islamic Commercial Bank

IEFR Indicative Effective Financing Rate

IMBD Ijarah Mawsufah Bi-Dhimmah

IMBT Ijarah Muntahiyah Bi-Tamleek

INT Behavioural Intention

JMC Joint Management Committee

xviii
KPDNKK Kementerian Perdagangan Dalam Negeri, Koperasi dan
Kepenggunaan
(Ministry of Domestic Trade, Cooperatives and Consumerism)

LPPSA Lembaga Pembiayaan Perumahan Sektor Awam

(Public Sector Home Financing Board)

MFI Microfinance Institution

MM Musharakah Mutanaqisah

PBC Perceived Behavioural Control

SEM Structural Equation Modelling

SKM Suruhanjaya Koperasi Malaysia

(Malaysia Cooperative Societies Commission)

SME Small and Medium Enterprises

SN Subjective Norm

SRIC State Religious Islamic Council

TPB Theory of Planned Behaviour

TRA Theory of Reasoned Action

xix
 CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

1.1.1 Islamic Home Financing in Malaysia

Shelter is, primarily, a basic human need. With it, humans will be able to protect

themselves against the possible threats of their surrounding elements and/or each other.

Consequently, they are more likely to lead happy, productive, and fulfilling lives.

Housing goes beyond the mere physical dimension. Ownership of a roof over one’s

head, in particular, has vast economic, social, and political spill over effects. A house is

an investment asset that generally grows in value over time and hence couples as means

of savings and wealth accumulation. As a long-term asset, easier access to

homeownership helps to contribute to peace, stability, and prosperity of a nation.

A large part of the world’s population requires access to additional funds to own

a house as they are unable to pay in a lump sum. To that end, a focal point of a successful

homeownership program in any given nation is the access to home financing (Chiquier

& Lea, 2009; Hawtrey, 2009; Hussin, 1994; Okpala, 1994; Warnock & Warnock, 2008).

In general, there are two types of home financing in Malaysia, i.e., conventional and

Islamic. Conventional home loans still account for a large majority of the total

outstanding home financing instruments in the market at 74.48% vis-à-vis Islamic home

financing instruments at 25.52% respectively (Bank Negara Malaysia, 2017a).

Nevertheless, in terms of compounded growth rates (CAGR), Islamic home financing

instruments are outpacing the growth of conventional home loans in a span of one

decade (29.82% vs 9.97%). Specifically, from RM8.97 billion as at 30 September 2007,

the value of Islamic home financing instruments have reached RM121.98 billion as at
1
30 September 2017 (Bank Negara Malaysia, 2017a). The growing demand for Islamic

home financing instruments may be credited to the continuous backing from the

Malaysian government. The Prime Minister of Malaysia, Datuk Seri Mohd Najib Bin

Tun Haji Abdul Razak stressed that the Islamic commercial banking and finance

industry plays an important role in the country’s Economic Transformation Program

(ETP). One of the principal aims of the program is to turn Malaysia into the global hub

for Islamic commercial banking and finance by targeting at least one of its Islamic

financial institutions to be the top 10 Islamic commercial banks in the world in terms of

assets by 2020 (PEMANDU, 2015). The same report also outlined the government’s

intention for Islamic home financing instruments to capture up to 40% share of total

home financing instruments in Malaysia by 2020. To this end, the government, for

example, has provided a 20% discount on stamp duty on houses that are financed

through Islamic home financing instruments. The government also offers stamp duty

waivers for refinancing of existing conventional home loans through Islamic home

financing instruments.

Apart from strong government backing, the outlook on Islamic home financing

market remains positive as there are growing, untapped Muslim consumers as potential

homeowners. As of 2010, Malaysian Muslims constitute 61.3% of the 28.3 million

Malaysian population (Department of Statistics Malaysia, 2011). As a Muslim-majority

nation, the elements of shari’ah (Islamic law) and its underlying business ethics

continue to be an integral part of affective commitment dimension as it was outlined in

most of the literature on Islamic home financing’s selection criteria. Specifically, it

includes among others, emphasis on shari’ah principles in the Islamic home financing

instruments and services, transparent and unambiguous commercial transactions, and

avoidance of riba’-based (usury) business dealings (Amin, 2008; Amin, Abdul Hamid,

2
Lada, & Baba, 2009; Shafinar Ismail, Azmi, & Thurasamy, 2014). In addition, the latest

figure for the youth population in Malaysia is reported to be at 13.73 million, which is

over a third of the country’s total population. Out of this, 2.9 million youths are between

the ages of 20-24 years old (Department of Statistics Malaysia, 2015). This represents

another huge potential for Islamic home financing market, as these youths are most

likely to be in the hunt for a home. Therefore, the overall Islamic home financing market

remains an integral part of the larger milieu of Islamic financial institutions’ markets in

Malaysia.

1.1.2 Debt-Based Islamic Home Financing Instruments and Its Effect on Financial
Affordability

Despite the impressive progress made as well as the growing maturity of the Islamic

commercial banking and finance industry, several criticisms have been levelled against

the pervasive use of debt-based Islamic home financing instruments in their portfolio.

If this over-reliance on debt-based Islamic home financing instruments persists as a

mainstay in their portfolio, it is in danger of going against one of the novel, founding

objectives of Islamic commercial banks i.e., the implementation of “a just and equitable

distribution of wealth” (Farook, 2007, p. 31). Scholars have long argued that debt-based

Islamic home financing instruments are in fact, mirror-like instruments of its

conventional counterparts due to their inherently similar benchmarking technique (Ariff

& Rosly, 2011; Hasan & Asutay, 2011; Mohd Yusof, H. Kassim, A. Majid, & Hamid,

2011; Mydin Meera & Abdul Razak, 2005). For example, two of them highlighted that

“…while the BBA is practiced as shari’ah-compliant in some countries, it is,

nonetheless, converging to the conventional mode where the computational formulas

3
are similar to the conventional and where the profit rate tracks the market interest

rate…”(Mydin Meera & Abdul Razak, 2005, p. 4, emphasis added).

In fact, Islamic commercial banks’ continuous concentration on BBA-tawarruq

home financing and its relatively high mark-up charged have left many customers

disillusioned, especially in cases of abandoned housing projects (for further detail, see

Md. Dahlan, 2007, 2011; Md. Dahlan & Syed Abdul Kader Aljunid, 2011). The

extensive use of debt-based home financing instruments accentuates inequality as it

merely redistributes wealth in favour of the suppliers of Islamic home financing capital

regardless of the actual productivity that should result from the Islamic home financing

capital supplied (Dusuki & Bouheraoua, 2011; Ebrahim & Sheikh, 2016). Therefore,

financially unaffordable Islamic home financing instruments offered by Islamic

commercial banks are in danger of compromising Islamic commercial banks’ objective

that was mentioned earlier.

Moreover, several literatures suggested that any increase in Islamic home

financing instrument’s profit rates are detrimental to the financially vulnerable

households in terms of their purchase- and repayment-affordability. A case in point,

even a relatively small shock in Islamic home financing profit rates will result in a

higher, more expensive debt-servicing ratio (DSR) and this will ultimately result in a

lower disposable income. To further illustrate the problem at hand, using a 2014 Bank

of England survey as an example, an interest rate increase of even as small as 2 percent

would likely to raise the proportion of mortgagors with a DSR of at least 40% from its

current level of 4% to around 6%. In other words, the number of financially vulnerable

households would dramatically increase from around 360, 000 to 480, 000 (Anderson,

Bunn, Pugh, & Uluc, 2016).

4
1.1.3 The Potentials of Equity-Based Islamic Home Financing Instruments

Various scholars have therefore called for the equity-based Islamic home financing

instruments to overcome this particularly damning shortcoming. For example, Hicks

(1992) argued that while profit rate has to be paid in good or bad times alike, dividends

from equity-based Islamic home financing instruments can be reduced in bad times and

in extreme situations, even passed (Chapra, 2007). Therefore, the burden of paying the

instalments in such equity-based Islamic home financing instruments is considerably

less. Islamic economics scholars such as Al-Harran (1995) and Chapra (2007) for

example, maintained that as one of wealth redistribution mechanisms, equity-based

Islamic home financing instruments have always been superior products vis-à-vis debt-

based Islamic home financing instruments and hence ultimately, can be used as a mean

to achieve and preserve maslahah (social justice).

For years now, especially in the last decade, there is a growing call from both

practitioners and academicians for the application of equity-based MM home financing

as a more financially affordable form of Islamic home financing instruments (Haneef,

Kunhibava, & Smolo, 2011; Mydin Meera & Abdul Razak, 2005). In fact, some

scholars went even further by suggesting that MM home financing instrument derived

from musharakah contract is superior over any debt-based financing instrument such as

BBA-tawarruq since the element of profit- and loss-sharing is considered to be closer

to justice and the higher objectives of shari’ah (maqasid al-shari’ah) (Abdul Razak &

Amin, 2013; Mydin Meera & Abdul Razak, 2005, 2009). Therefore, there is a need to

gradually minimise the use of BBA-tawarruq and to be eventually averted to equity-

based home financing mode.

Arguably, MM home financing instrument is able to resolve some issues that are

synonymous with BBA-tawarruq home financing instrument. Among others, with the

5
implementation of MM home financing, there is less reliance on debt-based financing

instrument that is heavily influenced by its conventional counterparts. The issue of

gharar (ambiguity) in the case of sale of uncompleted houses, for example, should also

be able to be resolved as the sale of a house under construction is under the purview of

ijarah mawsufah fi dhimmah (forward lease) concept in MM home financing. It is also

as competitive as its conventional counterpart because the monthly instalment is more

flexible with no relatively high selling price issue as opposed to BBA-tawarruq home

financing instrument, which ultimately also resolves the issue of ibra’ (rebate) in the

BBA-tawarruq home financing instrument.

1.1.4 Implementation of MM Home Financing Instrument by Islamic Commercial

Banks: A Departure from the Norm

MM home financing can be regarded as a relatively new Islamic home financing

instruments available in the Malaysian market, which was first introduced in 2006.

Although both academicians and practitioners alike are seeing MM home financing as

a more financially affordable alternative to BBA-tawarruq, Islamic commercial banks,

on the other hand, are somewhat reluctant to partner with their customers in MM home

financing. Presently, there are only 6 out of 16 Islamic commercial banks that are

willing to offer MM home financing in Malaysia 1. This low number of Islamic

commercial banks that offer MM home financing aligns with Mydin Meera and Abdul

Razak’s (2005, 2009) argument that MM home financing is deemed as less attractive

by Islamic commercial banks as its true implementation of MM home financing

instrument is cumbersome and will ultimately yield lower profits. Stated differently, via

maintaining the status quo of promoting debt-based Islamic home financing instruments

1
See Chapter 2 for further detail.
6
in their product offering, Islamic commercial banks are able to earn higher profits.

Ultimately, this trend will continue to make their Islamic home financing instruments

as increasingly financially unaffordable options to potential homebuyers.

Additionally, a quick glance at these MM home financing instruments offered

by participating Islamic commercial banking institutions reveals a departure from the

normative form of MM home financing as practised by financial cooperatives such as

American Finance House LARIBA and Guidance Residential, LLC in the United States

of America (USA) and Ansar Cooperative Housing Corporation Limited in Canada.

This is because Islamic commercial banks use exogenously determined base rate (BR)

or base financing rate (BFR) as their return-on-investment (ROI) benchmark (Shuib,

Borhan, & Bakar, 2011; Shuib, Daud, & Sulaiman@Mohamad, 2014). MM home

financing offered by these financial cooperatives in Northern America, on the other

hand, uses endogenously determined rental rate as a benchmark. Consequently, the use

of BFR by Islamic commercial banks exposes the homeowners to a financially

unaffordable Islamic home financing instrument, as even a slight profit rate increase

will lead to a higher DSR (see Anderson et al., 2016). In this circumstance, MM home

financing instrument offered by Islamic commercial banks will not be a financially

affordable alternative to its much-maligned BBA counterpart. Figure 1.1 further

illustrates the long-term trends in BFR fluctuations in Malaysia.

7
 12.00

10.00

8.00

6.00

4.00

2.00

0.00

BFR (%)

Figure 1.1 Base Financing Rates2 (1989-2014)

Therefore, there are suggestions that the above-mentioned issues pertaining to

MM home financing may be overcome within the financial cooperative framework

where the members provide the funds to benefit themselves. While providing

financially affordable Islamic home financing instruments to its member-customers,

MM home financing also provides returns to the investors in the form of rentals and

sale of properties. Indeed, observations show that globally, MM home financing is being

successfully practised in the financial cooperative setting (Baharum, 2013).

1.1.5 Financial Cooperative as a Financially Affordable Islamic Home Financing

Institution

In its simplest form, the cooperative mode of home financing operates when a certain

group of people that are often bound by a common bond3 organises itself to raise funds

2
The use of BFR was discontinued after 1 January 2015. It was since replaced by base rate (BR), where
the individual ICB has the discretionary ability to determine its own BR that better reflects their respective
cost structure.
3
Specifically, the members either belong to a particular community, share religious affiliation, located
within a geographic group or share a common workplace (see D. McKillop & Wilson, 2015).
8
amongst its members for a specific purpose i.e. purchasing a house for its members. The

funds serve as a specialised mutual saving mechanism for members of the financial

cooperative. In this situation, Ebrahim (2009, p. 869) explained that:

…unlike formal mortgage, the member whom the house is being

purchased shall pay the principal along with an additional amount to the
cooperative. Such amount is paid in lieu of an interest payment in formal
mortgage. This simultaneous action will, therefore, enable the member to
offset the cost of borrowing with the benefit of lending, thus resulting to
a facility with zero interest payment.

Some of the prime examples of cooperative home financing that is based on MM

are American Finance House LARIBA and Guidance Residential, LLC in the USA and

Ansar Cooperative Housing Corporation Ltd in Canada. This arrangement enables

financial cooperative and its member-customers to purchase the house together. The

financial cooperative agrees to sell its shares/units to the member-customer, while the

member-customer agrees to repurchase these shares/units. In this regard, the financial

cooperative allows the member-customer to buy the house directly from the developer

and register it under his/her name. The member-customer leases the financial

cooperative’s shares in the house and gradually repurchases its shares. The house is then

leased at the market value mutually agreed between the financial cooperative and

member-customer, based on the location and specification of the house. The rent is

proportionately divided between them according to their respective shares of the

purchase price. However, the member-customer’s portion will usually be waived by

him/her in order to shorten the redemption period. The additional amount is paid by the

member-customer in instalments to buy back the shares owned by the financial

cooperative. Gradually, with each instalment, the member-customer’s share in the

property increases while the financial cooperative’s share decreases throughout the

9
financing tenure until the member-customer owns the entire shares in the property

(Smolo & Hassan, 2011).

Typically, the price of ownership share is calculated based on the reference to

the market value of the house. Besides sharing some expenses of a capital nature

between the parties based on a pre-agreed ratio, the parties will also share any gain or

loss (if any) for any fluctuation in the value of the house according to the proportion of

shares owned, thus making this model fair and financially affordable to both parties. In

addition, besides enjoying immediate savings in the rental payment in proportion to

his/her increasing investment in the house, the member-customer also enjoys some

flexibility as he/she has a choice of an unspecified time to increase his/her share

ownership. However, the member-customer and financial cooperative will share the

cost of repair as well as the maintenance of the property.

1.1.6 Lack of Complementary Source of Funds in Financial Cooperatives

Home financing or Islamic home financing for that matter is usually of medium- to

longer-term in nature. This phenomenon, more popularly known as ‘liquidity mismatch’

makes it even more difficult for financial cooperatives to offer Islamic home financing

to its member-customers. This is because, with their usually limited internal source of

funds such as member deposits and fees, capital shares, and retained earnings (Besley,

1995; Cornforth & Thomas, 1990; Suruhanjaya Koperasi Malaysia, 2010), they are

unable to offer the longer-term Islamic home financing instrument to their member-

customers. One of the major contributing factors is the inability of financial

cooperatives to directly compete with the sheer scale of deposits received by the Islamic

commercial banking institutions. On the other hand, although a few of these financial

cooperatives receive external financing from the commercial banking institutions, it is

10
disbursed almost exclusively for Islamic personal financing especially among the civil

servants (Suruhanjaya Koperasi Malaysia, 2009). Nevertheless, if this is not the case,

commercial banks would still expect to receive a decent amount of return from their

financing, and undoubtedly, this extra cost will be passed on to the financial

cooperative’s member-customers who opt for MM home financing. This will, in turn,

render it even harder for financial cooperatives to offer a financially affordable Islamic

home financing option to their member-customers.

One of the possible sources of funds that can be tapped by these financial

cooperatives is waqf (endowment). Waqf has long been a pivotal part of Muslims’ daily

life. It helps in the establishment of religious, cultural, welfare and even municipal

administrative institutions. Waqf also serves as a legal means to perpetuate family

property and ensure that it remains intact throughout generations (Çizakça, 1998). In

Malaysia, it is especially true that waqf is almost exclusively associated with endowed

lands to be used for graveyards and mosques building. However, a more contemporary

form of waqf, namely cash waqf has become more prominent in recent years. For

example, there is a growing call in the Malaysian waqf literature for cash waqf to

alleviate financing problems occurring in small and medium-sized industries (SMEs)

(for example, see Ahmed, 2007; M. A. Haneef, Pramanik, Mohammed, Amin, &

Muhammad, 2015; M. A. Haneef, Pramanik, Mohammed, Dahiru, & Amin, 2013).

Notwithstanding, although these literature have unearthed cash waqf as a potential

source of funds, there is a noticeable absence of detailed discussion on the subject matter

leading to a financially affordable source of funds for financial cooperatives in enabling

them to be financially affordable Islamic home financing provider to its member-

customers. As financial cooperative is a member-owned business vis-à-vis the investor-

owned Islamic commercial banks, a potential synergy might be harnessed by both cash

11
waqf and financial cooperative institutions in offering a financially affordable Islamic

home financing for low- to middle-income Malaysian households.

These propositions seem to be appealing, especially within the context of the

transformative paradigm of Islamic economics in general where efforts and policies,

where necessary, should be in place to bring the positive realm of the economy towards

its normative ideals (Zaman, 2009). Nevertheless, any attempt at establishing a similar

financial cooperative concept of MM home financing framework in Malaysia

necessitates a careful analysis of its potentials, suitability, as well as its viability.

PROBLEM STATEMENT

Islamic home financing instruments continue to play an important role in the

development of Islamic commercial banking and finance industry in Malaysia. Its sharp

increase of 29.82% per annum outpaced the average of 9.97% growth in conventional

home loans in the span of ten years (2007-2017). Specifically, Islamic home financing

instruments grew from RM8.97 billion as at 30 September 2007 to reach RM121.98

billion as at 30 September 2017, holding a share of 25.52% of the total home financing

in Malaysia (Bank Negara Malaysia, 2017a). However, in spite of the extensive

government support, as well as the increasing demand amongst potential homeowners

for Islamic home financing in Malaysia, the over-reliance on debt-based Islamic home

financing instruments4 such as BBA-tawarruq continues to be a cause for concern for

shari’ah scholars, academics, and practitioners alike. The reason for this is many see it

as a departure from the normative business mode of Islamic economics–equity-based

home financing instrument. As a result, there are growing calls for Islamic commercial

4
As of September 2017, both murabahah and BBA instruments made up more than half (53.27%) of
total instruments that are currently in use by ICB in Malaysia (Bank Negara Malaysia, 2017c).
12
banks to include equity-based MM home financing instrument amongst its product

offering. However, despite being proven as a better, financially affordable alternative

to BBA-tawarruq home financing instrument (Mydin Meera & Abdul Razak, 2005,

2009), MM home financing instrument is offered only by a handful of Islamic

commercial banks in Malaysia.

A number of studies in the past outlined the reasons for this phenomenon.

Predominantly among them is lower profit yield and inability to manage risks that are

usually associated with equity-based financing i.e. moral hazard and adverse selection

(see A. U. F. Ahmad & Shahed, 2010; Khan, 2010; Smolo & Hassan, 2011). However,

these studies stop short at mathematically proving the extent of how financially

unaffordable these instruments might be as well as examining its potential impact on

the Malaysian households.

Studies by A. U. F. Ahmad (2011) and Ebrahim (2009) for example, have

suggested financial cooperatives to assume the mantle of an alternative, more

financially affordable Islamic home financing institution. This can be achieved mainly

due to their ‘dual bottom line’ nature by focusing on members’ value and equity. As

they do not have to pay dividends to external shareholders, they only need to remunerate

the members’ fees and shares. Simultaneously, they are able to reduce the margin

between the profit rate charged to member-customers and return on deposits by

member-savers (Birchall, 2013a). Notwithstanding, since Islamic home financing

provision is capital intensive in nature, financial cooperatives are facing difficulties to

source for a cheap complementary source of funds. Even prime models of cooperative,

equity-based home financing such as American Finance House of LARIBA have sought

13
external investments from Freddie Mac and Fannie Mae5 to sustain their Islamic home

financing operations. Although a number of Malaysian financial cooperatives receive

external capital from commercial banks, these are for the specific use of personal

Islamic financing for mainly civil servants–a hugely lucrative, almost risk-free market

for both commercial banks and financial cooperatives. This specific disbursement for

Islamic personal financing was so pervasive, it prompted a strong response from

Suruhanjaya Koperasi Malaysia in its “GP7: Garis Panduan Mengenai Pembiayaan

Islam Oleh Koperasi” (GP7: Guidelines on Islamic Financing by Cooperatives)

rebuking this trend and highlight the negative impacts that Islamic personal financing

might have on financial cooperatives’ long-term financial stability (Suruhanjaya

Koperasi Malaysia, 2009).

Therefore, there is an urgent need for a financially affordable, external source of

funds to be injected into financial cooperatives in order to provide a financially

affordable Islamic home financing alternative to its members. There is a growing call

in the Malaysian waqf literature for cash waqf to alleviate financing problems faced by

SME and MFI (see Ahmed, 2007; M. A. Haneef et al., 2015, 2013). Notwithstanding,

there is a dearth of studies that conceptualise a financially affordable Islamic home

financing framework or model(s) that can be empirically tested. It is because, previous

studies on the potentiality of waqf financing are concentrated within the domain of SME

and MFI and more importantly, are mostly conceptual in nature.

5
Freddie Mac or The Federal Home Loan Mortgage Corporation (FHLMC) and Fannie Mae or The
Federal National Mortgage Association (FNMA) are public-government sponsored enterprises that acts
as purchasers of housing loans to obtain liquidity for generating more housing loans in the secondary
market. In Malaysia, the role is assumed by Cagamas Holdings Berhad.
14
 RESEARCH OBJECTIVES

In view of the above-mentioned research gaps, the general objective of this study is to

develop and empirically validate a financially affordable Islamic home financing model

in Malaysia. The specific objectives of this study are as follow:

1. To investigate to what extent the issue of financial affordability in Islamic

home financing instruments in Malaysia exist,

2. To develop an alternative, financially affordable Islamic home financing

model to address the issue mentioned in (1),

3. To empirically investigate the suitability and validity of the “Cash Waqf-

Financial Cooperative-MM Model” or otherwise termed as “CWFCMM

Model” amongst the supply-side stakeholders, and

4. To examine the effect of factors such as attitude, subjective norm, perceived

behavioural control, and perceived cost advantages amongst the demand-

side stakeholder’s intention to participate in the CWFCMM Model.

RESEARCH QUESTIONS

This study is an attempt to answer this general research question of “How valid is the

financially affordable Islamic home financing model that was developed from the

literature?” The specific research questions are also provided:

1. How and to what extent the issue of financial affordability in Islamic home

financing exist?

2. To what extent an alternative, financially affordable model can address the

issue mentioned in (1)?

15
 3. To what extent would the supply-side stakeholders find the CWFCMM

Model is suitable and valid as a financially affordable Islamic home

financing model?

4. How could the factors of attitude, subjective norm, perceived behavioural

control, and perceived cost advantages affect demand-side stakeholder’s

intention to participate in the CWFCMM Model?

RESEARCH APPROACH

Mixed methods research approach has become increasingly common in recent years

and has come to be seen as a distinctive research approach in of itself. It refers to

research that combines quantitative and qualitative methods. The central premise of

mixed methods approach is to allow the strengths and weaknesses of each design to

complement one another (Bryman, 2012; Creswell, 2014).

The philosophical orientation most often associated with mixed methods is

pragmatism (Bryman, 2007, 2012; Creswell, 2014). Pragmatism is primarily concerned

with actions, situations and consequences rather than dwelling on epistemological and

ontological issues (Bryman, 2007) and focuses on solutions to research problem and

discovering ‘what works’ (Denzin & Lincoln, 2005). Patton (2002, p. 72) for example,

stresses the need for pragmatism, moving beyond the competing inquiry paradigms:

Being pragmatic allows one to eschew methodological orthodoxy in

favour of methodological appropriateness as the primary criterion for
judging methodological quality, recognizing that different methods are
appropriate for different situations.

In this study, the author is trying to determine whether the CWFCMM Model is

valid in offering a financially affordable Islamic home financing instrument to the

potential homeowners. Therefore, the author’s decision by orienting towards the

16
philosophical foundation of pragmatism for this study is merited owing to its flexibility.

In achieving the research objectives, a two-phase sequential mixed methods design is

employed in this study, in which qualitative research is conducted first, followed by the

quantitative study. The research design allows the researcher to validate the supply-side

stakeholders’ view on the suitability and applicability of CWFCMM Model. The key

reasons for collecting qualitative data initially are that information on third sector

economic institutions such as financial cooperative and cash waqf institutions especially

in Malaysia is limited and that there are no suitable existing instruments to solicit

opinions from subject matter experts as well as practitioners in the related industries.

Then, by incorporating elements gathered from the interviews, a quantitative survey

instrument was administered to gauge the acceptability of the CWFCMM Model

amongst the demand-side’s stakeholder–potential homeowners. The research design

encompassing both the qualitative and quantitative investigations conducted for this

study is illustrated in Figure 1.2.

17
Figure 1.2 Research Design
Source: Author’s Illustration

18
 SCOPE OF THE STUDY

The present study developed and validated a financially affordable Islamic home

financing model in Malaysia–based on a synergistic venture between financial

cooperative and cash waqf institution in Malaysia. A financially affordable Islamic

home financing instrument is of importance as it has a direct impact on purchase- and

repayment-affordability on households (Stone, 2006).

The major focus for the qualitative part of the study is to validate the financially

affordable Islamic home financing model as developed from the literature. The

interviews were conducted with 10 expert informants, which are directly or indirectly

involved with the supply side of Islamic home financing markets in Malaysia (i.e. waqf

managers, and researchers, shari’ah advisors, cooperative managers, cooperative board

members or “Ahli Lembaga Koperasi”, and regulators from SKM and BNM). The

interviews were mostly carried out in the Greater Klang Valley area within 8 months

from December 2015 to July 2016.

Concerning the respondents for the quantitative part of the current study,

potential homebuyers are selected. Practically speaking, almost all Islamic commercial

banks in Malaysia have a tendency to target potential homebuyers especially through

the “Skim Rumah Pertamaku” (My First Home Scheme). On the other hand, in terms of

government policies, the Malaysian government has given special attention to enable

youth in purchasing their first home. For example, targeted subsidies for potential

homebuyers such as Young Housing Scheme (YHS), which is for married youth aged

25 to 40 years old. The questionnaire survey was administered for 3 months in three

different locations, i.e. Klang Valley, Negeri Sembilan, and Sabah.

19
 SIGNIFICANCE OF THE STUDY

This study offers benefits to both academics and practitioners. On the academic front,

there are two main contributions of this study. First, this study has developed a

theoretical Islamic home financing model called CWFCMM Model that integrates third

sector economic institutions i.e., financial cooperative and cash waqf institution.

Second, this study contributes to Islamic financial services selection studies by

examining the potentiality of Islamic home financing model to be offered by a

synergistic venture between financial cooperative and cash waqf institution through the

extended Theory of Planned Behaviour through the additional factor of Perceived Cost

Advantages of CWFCMM Model.

Concerned with the practical implications, the findings of this study offer

several managerial implications especially to those involved with Islamic home

financing providers and cash waqf institution. This study implies that in order for

financial cooperative to be a viable alternative to the current institutional Islamic home

financing provisional framework, they need to work on several areas such as employing

the correct business model and strategy, ensuring good governance, and enhancing

supervisory capabilities. In regard to cash waqf institution, they only need to work on

their accountability aspect, to be modelled after Wakaf Selangor Muamalat as it is one

of the most pressing issues raised by most informants in this study. This study also

provides empirical evidence from the questionnaire survey that could help financial

cooperative and cash waqf institutions’ managers to gain a better understanding of

potential customers’ preference, and attitude towards alternative Islamic home

financing model and cash waqf in general. It is worth noting that besides elements of

shari’ah-compliancy, respondents value cost consideration as an important factor in

patronising an Islamic financial service.

20
 OPERATIONAL DEFINITIONS OF TERMS

Attitude

It refers to homeowner’s behavioural beliefs and perceived outcome advantages in

CWFCMM Model participation. This definition is adapted from Fishbein and Ajzen

(1975).

Financial Affordability

The measurement of financial affordability of Islamic home financing is affected by the

following two major components; the cost of purchasing the house, and cost of keeping

the house. This definition is adapted from UN-HABITAT (2011).

Intention to Participate in the CWFCMM Model

It refers to the measure of the strength of the homeowner’s intention to participate in

the CWFCMM Model. This definition is adapted from Conner and Armitage (1998).

Islamic Home Financing

Islamic home financing is defined as a type of financing that is secured by a house and

provides a schedule of payments based on profit rate as supposed to the interest rate

offered in the conventional home loan (Amin et al., 2009).

Perceived Behavioural Control

It refers to the degree in which a homeowner believes in their own capabilities to acquire

related information on CWFCMM Model as well as the availability of resources that

may or may not facilitate their participation. This definition is adapted from Burgess,

21
Chang, Nakamura, Izmirian, and Okamura (2016) and Povey, Conner, Sparks, James,

and Shepherd (2000).

Perceived Cost Advantage of CWFCMM Model

It refers to the degree in which a homeowner believes that his/her participation in the

CWFCMM Model will result in better cost advantages in terms of both purchase- and

repayment-affordability vis-à-vis other Islamic home financing models. This definition

is self-developed.

Subjective Norm

It refers to the extent to which a homeowner experiences social normative pressures by

family members, friends, and Islamic finance experts in their CWFCMM Model

participation. This definition is adapted from Fishbein and Ajzen (1975).

ORGANISATION OF THE STUDY

This study consists of six chapters and is structured into three parts. Part one (Chapters

1 and 2) are the introductory part of the study. Chapter 1 provides an overview of the

background of the thesis, the research questions and objectives, the research scope, the

operational definitions of terms used in this study as well as the structure and

organisation of the remaining chapters. The first part of the study was concluded by

Chapter 2, which provides an overview of institutional framework of Islamic home

financing in Malaysia. It includes, amongst others, discussion on the history and current

development of Islamic home financing and its underlying contracts. It is important for

the reader to go through this first part as it sets the tone for the second part of the study.

22
 The second part of the study consists of Chapters 3 through 5, which are stand-

alone chapters with their own Introduction–Literature Review–Methodology–Results

and Discussion–Chapter Summary structures. Chapter 3 is an examination of the issues

of sustainability and financial unaffordability of Islamic home financing framework in

Malaysia. Chapter 4 uses qualitative analysis to develop and validate the Cash Waqf-

Financial Cooperative-MM (CWFCMM) Model in terms of its viability, suitability, and

sustainability. Meanwhile, Chapter 5 uses quantitative techniques to examine potential

homeowners’ intention to participate in the CWFCMM Model using the extended

Theory of Planned Behaviour (Ajzen, 1991). Although each chapter in this part carries

different types of data and method of analysis, the issues discussed are highly correlated

and complementary to each other.

The third and final of part of the study was concluded with Chapter 6, which

provides an integrative conclusion of the whole thesis by bringing together all the works

described in the main chapters and tying it to the research objectives. It also contains

the contributions and significance of the study. The thesis is concluded with the

limitations and suggestions for future research.

CHAPTER SUMMARY

This chapter outlined the background of the study, research issues, and problem

statements. It was followed by the research questions and objectives, which the author

has developed as an attempt to academically investigate the issues at hand. It was then

complemented by the scope of the study that outlined the research parameter.

Operational definitions were also presented to render the right context in alignment with

the author’s research objectives. Finally, the chapter concluded with a presentation of

the overall structure of the six chapters in the thesis.

23
 CHAPTER TWO

INSTITUTIONAL BACKGROUND OF ISLAMIC HOME

FINANCING FRAMEWORK IN MALAYSIA: MARKETS,
INSTITUTIONS, AND INSTRUMENTS

INTRODUCTION

In the previous chapter, the author had raised the contentious issue of the pervasiveness

of debt-based Islamic home financing instruments and its impact on financial

affordability. Scholars have argued that equity-based Islamic home financing

instruments are indeed the solution to this issue. That fact notwithstanding, most

literature have not dwelled in depth into the issues that revolve around the

contemporaneous Islamic home financing institutional framework. Barring a few

studies, what can be currently seen in many literatures are implicit and often

philosophical or legalistic discussions on the general issues regarding debt-based

Islamic home financing instruments. Apart from that, the discussions rarely result in an

alternative, financially affordable model that can be either qualitatively or quantitatively

validated.

A large part of this chapter reviews the institutional backgrounds of Islamic

home financing. It starts with the importance of home financing and proceeds to

differentiate between conventional home loan and Islamic home financing instruments.

The remaining sections review the participating institutions, and as well as the concepts

as applied in various Islamic home financing instruments. The understanding of this

institutional framework is important in illustrating to the readers that conceptually

speaking, there are clear and distinctive features between various Islamic home

financing instruments in the market. This clear demarcation between various concepts

24
as applied in Islamic home financing instruments is essential for the reader to follow

the subsequent discussions in the following chapters (Chapters 3 through 5). Prior doing

so, the study will first review literature related to the importance of home financing.

2.1.1 The Importance of Home Financing

A house is usually characterised by its dual characteristics of consumption and

investment goods. It is perhaps the single most important buy an individual makes in

their lifetime. Due to its medium- to long-term, as well as its expensive natures,

homebuyers, especially in Malaysia are usually unable to acquire a property at an earlier

stage in the life due to the fact that they are unable to pay for it lump sum through

accumulated savings (Chiquier & Lea, 2009; Hawtrey, 2009; Hussin, 1994; Okpala,

1994). Home financing also has indirect effects that go beyond the specific transaction.

A broad access to financially affordable home financing can also have a strong impact

on urban development, as postulated by a former Senior Housing Finance Adviser at

the World Bank, Dr Bertrand Renaud; in which he states, “the way cities are built and

their appearances reflect the way they are financed” (Renaud, 1987, p. 30). Access to

financially affordable home financing can also have desirable spillover effects on socio-

economic cohesion via fostering a healthy, safe, and positive social climate, and

empowering households through community development activities (Shirazi, Zulkhibri,

& Ali, 2012).

Housing-related expenditures represent a large proportion of most Malaysian

households’ consumption. For example, almost half (45.7%) of the Malaysian

households’ expenditures was spent on home financing instalments and its related

expenditures (Bank Negara Malaysia, 2014). Apart from that, home financing is a major

component of Gross Domestic Product (GDP), which typically accounts for 4 to 8

25
percent of a nation’s GDP (Chiquier & Lea, 2009). In fast-growing economies,

however, the share can be much higher. In Malaysia, it constitutes a much larger

component of GDP at 32.4%. Therefore, the ability to efficiently finance such a vital

component of the economic system will have a substantial effect on overall levels of

investment and growth. In order to support a nation’s growth, scholars such as Hawtrey

(2009) argues that the flexibility of home financing markets can be enhanced through

continuous performance improvements, promoting innovation, and technological

capability’s refinements. The same author further argues that by doing so, in turn, will

lower the real cost of housing.

Apart from efficiency, a housing finance system also needs to be sustainable in

the long run. If the performance and quality of a nation’s home financing ecosystem

deteriorate, depositors’ funds will not be efficiently channelled to homebuyers.

Consequently, home financing would become more financially unaffordable (Hawtrey,

2009). For the homebuyers, their repayment capabilities would decrease, and

ultimately, the access-to-home-financing stress indicators would shift dramatically

(Hawtrey, 2009). With the onset Global Financial Crisis 2008-2009, where the home

financing ecosystem almost collapsed, financially affordable home financing has finally

become “a topic whose time has come.” (Hawtrey, 2009, p. xviii).

2.1.2 Conventional Home Loan

In general, there are two types of home financing instruments in Malaysia, as the author

has mentioned in Chapter 1 i.e., conventional and Islamic. Although Islamic home

financing instruments are gaining momentum as its compounded annual growth rate

(CAGR) continues to surpass that of conventional home loans, it is still imperative for

the reader to first understand the structural differences between these two types of home

26
financing instruments. It is because, as of September 2017, at 74.48% out of the total

market share, conventional home loans still dominate the home financing markets in

Malaysia (Bank Negara Malaysia, 2017a).

The conventional home loan is philosophically characterised by the debtor-

creditor relationship where money is treated as a commodity. There are only two

contracts in a conventional home loan i.e., sales and purchase (S&P) agreement and

loan contract (Saiti, Wahab, & Ahmad, 2016). First, the customer enters into an S&P

agreement with a property developer or a seller; after which the customer will sign a

loan contract with a commercial bank if the bank approves the customer’s home loan

application. The customer will then gradually pay off the loan’s principal amount,

which includes the interest. Commercial banks in Malaysia usually charge its customers

using the variable rate structure that is tied to the Base Lending Rate (BLR). However,

conventional home loans that are extended from 2 January 2015 onwards will be using

Base Rate (BR), which is organically determined by amongst others, the commercial

bank’s benchmark costs of funds, and the Statutory Reserve Requirement (SRR).

2.1.3 Islamic Home Financing

Unlike the conventional home loan, Islamic home financing instruments, on the other

hand, have to abide by a set of rules determined by shari’ah (Islamic law), with the

primary objective of helping to achieve the well-being of people both in this worldly

life and in the Afterlife. The sources of rules dealing with Islamic home financing, for

instance, are derived from the Holy Quran and sunnah6 of Prophet Muhammad (peace

6 The sunnah refers to Prophet Muhammad (peace and blessings be upon him)’s actions, sayings and
opinions, or tacit approvals on actions of his companions, as reported in in the books of hadith.
27
and blessings be upon him7). In addition to the Quran and sunnah, ijma’8, qiyas9 and

ijtihad10 provide the hierarchical framework of sources of rules governing Islamic home

financing. Central to this framework is the fundamental prohibitions of riba’ (usury or

interest), gharar (ambiguity), and maysir (speculation). Apart from that, the above-

mentioned sources of rules also prescribed moral/behavioural standards that have an

important bearing on Islamic home financing operationalisation. It includes parameters

on issues such as valid gains on investment, entitlement to profit, money as non-

tradeable goods, and practising transparency and keeping proper documentation (Ayub,

2007).

In the absence of riba’, gharar, and maysir, as well as a number of behavioural

standards as bases for Islamic home financing, Islamic home financing institutions have

a number of tools and techniques to carry out their business activities. In the Malaysian

Islamic home financing system, its instruments can be categorised into three modes; (1)

debt-based Islamic home financing, (2) equity-based Islamic home financing, and (3)

financing for services or work (Abdul Aziz & Gintzburger, 2009). Each mode

represents a different set of instruments and demonstrates a unique type of relationship

between the parties in a transaction. These Islamic home financing instruments, together

with its modi operandi will be discussed in further detail in Section 2.3. Before doing

so, the subsequent section will review the literature on two, biggest Islamic home

7
Whenever Prophet Muhammad’s name is mentioned, it is highly encouraged to read this supplication.
8
Decision or resolution of generality of the shari’ah scholars of any time pertaining to any matters
relating to shari’ah. Ijma’ of the companions of the Holy Prophet is considered by the overwhelming
majority of Muslims as part of the sunnah and an important source for the derivation of laws in the
subsequent periods.
9
A derivation of the law on the analogy of an existing law if the ‘illah (effective cause) of the two is the
same.
10
A derivation of the law in a matter on which the revelation is not explicit or certain, based on evidence
found in the Holy Qur’an and the sunnah.
28
financing institutions in Malaysia–government-owned or -linked home financing

institutions and Islamic commercial banks.

ISLAMIC HOME FINANCING INSTITUTIONS

The role of home financing institutions is essential in assisting a homebuyer. As argued

in Section 2.1.1, most individuals are incapable of buying a house on a cash term and

lump sum basis. The Malaysian commercial banking institutions continue to play an

enduring and important role in homeownership through its funds to homebuyers. In a

space of five years (2010-2015), the commercial banking institutions have consistently

been the major providers of home financing instruments in Malaysia (Table 2.1 and

Table 2.2). Both tables also outline that the government-owned and -linked home

financing institutions’ home financing originations are either reducing their home

financing intermediation programs or merely maintaining their status quo.

29
 Table 2.1 Market Share of Home Financing Institutions (2010-2015)

2010 2011 2012 2013 2014 2015

Home financing institutions
% share
Commercial banks 91.0 91.3 88.4 89.7 89.6 86.2
Lembaga Pembiyaan Perumahan
7.1 7.0 8.4 7.3 7.2 8.2
Sektor Awam (LPPSA)
Bank Kerjasama Rakyat Malaysia
0.5 0.1 0.0 0.5 0.5 1.0
Berhad (Bank Rakyat)
Malaysia Building Society Berhad
0.4 0.5 0.8 0.4 0.7 1.0
(MBSB)
Borneo Housing Mortgage Finance
…n 0.1 0.1 0.1 0.1 0.1
Berhad (BHMF)
Bank Simpanan Nasional Berhad
1.0 1.1 2.3 2.0 1.9 2.2
(BSN)
Sabah Credit Corporation (SCC) … … … … … 1.4
Total 100.0 100.0 100.0 100.0 100.0 100.0

Note. n: Negligible

Source: Author’s Compilation of Bank Negara Malaysia Annual Reports (2010-2015)11

11
These data (Market Share of Home Financing, Home Financing Approved and Home Financing
Outstanding) were no longer reported in Bank Negara Malaysia Annual Report 2016.
30
 Table 2.2 Home Financing Approved (2010-2015)

2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015
Home Financing Institutions
RM million Annual change (%)
Commercial banks 80, 327 88, 808 87, 807 111, 406 115, 628 99, 764 18.6 10.6 -1.1 26.9 3.8 -13.7

LPPSA 6, 254 6, 796 8, 316 9, 042 9, 314 9, 452 5.7 8.7 22.4 8.7 3.0 1.5

Bank Rakyat 402 55 39 566 659 1, 113 73.0 -6.8 -29.1 1, 351.7 16.4 68.9

MBSB 396 512 800 512 936 1, 113 -76.0 29.2 56.3 -36.0 66.6 18.9

BHMF 37 52 91 171 130 95 -37.3 39.9 74.7 86.7 -23.8 -26.9

BSN 900 1, 042 2, 237 2, 533 2, 703 2, 583 12.8 15.8 114.6 13.2 -2.6 -4.4

SCC 3 0 0 0 0 1, 610 -37.0 …n … … … …

Total 88, 319 97, 266 99, 290 124, 230 129, 370 115, 730

Note. n: Negligible

Source: Author’s Compilation of Bank Negara Malaysia Annual Reports (2010-2015)

31
2.2.1 Islamic Commercial Banking Institutions

Except for a decrease in 1999, which was widely-attributed to the after effects of Asian

Financial Crisis in 1997, home financing provision by the commercial banking system

has been on an upward trend. In terms of outstanding amounts, total home financing

instruments (Islamic and conventional) grew at an astonishing rate of 226% from

RM146.60 billion in September 2007 to RM477.90 billion as at September 2017 (Bank

Negara Malaysia, 2017a). Apart from the government-owned institutions, Islamic

commercial banking institutions are the major provider of Islamic home financing

instruments, which were mostly based on murabahah-variants. Islamic home financing

instruments have rapidly garnering market share over the past decade. In terms of the

outstanding amount, Islamic home financing grew from RM8.97 billion in September

2007 to RM121.98 billion in September 2017 (a compounded annual growth rate or

CAGR of 29.82%). In comparison, the total conventional home loan outstanding only

grew at a CAGR of 9.97% during the same period. The author may, therefore, conclude

that Islamic home financing has grown at a higher rate than that of the overall growth

in conventional home loans in Malaysia. Table 2.3 depicts the list of Islamic commercial

banks, and its instrument(s) used in Islamic home financing provision in Malaysia.

32
 Table 2.3 Islamic Home Financing Instruments by Islamic Commercial Banks

Islamic commercial
No. Islamic home financing instrument(s) Mode(s)
bank
AFFIN Home Invest-i
AFFIN Home Assist Plus-i
AFFIN Credit Plus-i
AFFIN Invest Plus-i
1 Affin Islamic Bank AFFIN BNM Priority Sector Home Financing-i MM & MM-Tawarruq
AFFIN Premier Corporate Home Financing-i
AFFIN Home Build-i
AFFIN Extra Plus-i
AFFIN Tawarruq Home Refinancing-i
Home Financing-i (Fixed Rate)
2 Al Rajhi Bank Special House Financing (SHF) BBA-Tawarruq
Malaysia My Second Home – MM2H
3 Alliance Islamic Bank i-Wish Home Financing-i BBA
Home Financing-i (Variable)
4 AmBank Islamic My First Home Scheme-i Tawarruq/Murabahah/Wakalah
Johor Affordable Housing Scheme Home Financing-i
5 Asian Finance Bank Home Financing-i Not specified
Property Financing-i (Tawarruq) – Baiti Home Financing
6 Bank Islam Tawarruq
Property Financing-i (Tawarruq) – Baiti Home Financing Tier
7 Bank Muamalat Home Financing-i Not specified
HSBC Amanah
8 HomeSmart-i MM
Malaysia

33
 Table 2.3 Islamic Home Financing Instruments by Islamic Commercial Banks (continued)

Islamic commercial
No. Islamic home financing instrument(s) Mode(s)
bank
HomeFlexi Smart-i Not specified
Variable Home Financing-i Tawarruq
9 CIMB Islamic Bank
Variable Home Financing-i for PR1MA Homes Not specified
Flexi Home Financing-i Tawarruq
Hong Leong Islamic
10 Hong Leong CM Flexi Property Financing-i Tawarruq
Bank
Kuwait Finance House Ijarah Muntahia Bi Al-Tamlik Asset Acquisition Financing-i IMBT
11
(KFH) Ijarah Mawsufah Fi Al-Zimmah Asset Acquisition Financing-i IMBD
Commodity Murabahah Home Financing-i
12 Maybank Islamic Tawarruq/MM
Priority Financing Scheme
Idaman-i
13 OCBC Al-Amin Bank Manarat Home-i Impian-i IMBT
Warisan-i
Home Equity Financing-i MM/Ijarah/IMBD
14 Public Islamic Bank HomeSave Financing-i
BBA
ABBA House Financing-i
Equity Home Financing-i
15 RHB Islamic Bank MM-Ijarah
Equity Home Financing-i with Redraw Mechanism
Standard Chartered Saadiq My Home-i
16 MM-Ijarah
Saadiq Saadiq My HomeOne-i

Source: Author’s Compilation from Each Islamic Commercial Bank’s Official Websites

34
 Table 2.3 also shows that the most prominent concept used by Islamic

commercial banks in Islamic home financing provision is mainly based on debt-based

instruments such as BBA-tawarruq. More than half (ten out of sixteen) Islamic

commercial banks have murabahah variants in their Islamic home financing instrument

offerings. In official statistics released by Bank Negara Malaysia (Monthly Statistical

Bulletin), as of September 2017, murabahah variants (murabahah, BBA and tawarruq)

remain popular amongst Islamic commercial banks (Bank Negara Malaysia, 2017c).

Then, next only to the Islamic commercial banks, government-owned or -linked home

financing institutions are the second largest Islamic home financing providers in

Malaysia.

2.2.2 Government-Owned or -Linked Home Financing Institutions12

In most countries, including Malaysia, government-owned or -linked institutions

continue to play a prominent role in the provisions of home financing. Previously, all

Government servants in Malaysia were entitled to rent a government quarter at a

nominal rate or a housing allowance in lieu of the first privilege (Hussin, 1994). The

maintenance of the government quarters levied a heavy financial burden since the

nominal rent collected was insufficient to cover the cost of maintenance. Similarly,

housing allowance paid to the government employees also constituted a heavy financial

drain on the public sector. A better alternative would be to provide the Government

12
Government-owned home financing institutions are statutory bodies tasked with administering home
financings for civil servants in Malaysia. The Federal/State Governments guarantee these institutions’
commercial papers/Islamic medium-term notes programmes under their respective bylaws. It includes,
amongst others, Lembaga Pembiayaan Perumahan Sektor Awam, Bank Simpanan Nasional Berhad,
Sabah Credit Corporation, Borneo Housing Mortgage Finance. Government-linked home financing
institutions include a cooperative society i.e. Bank Kerjasama Rakyat Berhad and a building society i.e.
Malaysia Building Society Berhad (MBSB). Bank Rakyat was established under the Cooperative
Ordinance 1948 (known as Cooperative Societies Act 1993) and Bank Kerjasama Rakyat Berhad (Special
Provisions) Act 1978. MBSB is a public listed company that is majority-owned by the Employee
Provident Fund Board (65.28%).
35
employees with loan/financing to purchase their own home. As a result, the LPPSA or

formerly known as “Bahagian Pinjaman Perumahan Perbendaharaan” (Treasury

Housing Loans Division) was established in 1971 with an initial fund of RM20 million

to provide housing loans to eligible Government servants. Since then, the Treasury

Housing Loans Division had emerged as one of the largest providers of home financing

after the commercial banks. The bulk of the loan/financing disbursements were financed

by loan/financing repayments, long-term low-interest loan or low-profit financing from

the Federal Government, Cagamas, the Employee Provident Fund, and a loan/financing

from a consortium of banks (Hussin, 1994). However, since becoming a statutory body

in 2015, LPPSA has been issuing Islamic commercial papers (Islamic Medium Term

Notes) that is guaranteed by the Government (LPPSA, 2016). Currently, the

interest/profit rate charged on home financings granted to all categories of civil servants

is fixed at 4% per annum (Hussin, 1994). LPPSA is currently offering “Skim

Pembiayaan Perumahan Perbendaharaan Islamik” (Treasury’s Islamic Home

Financing Scheme) that is based on BBA, which is still fixed at 4%.

2.2.2.1 Bank Kerjasama Rakyat Malaysia Berhad (Bank Rakyat)

Bank Kerjasama Rakyat Berhad or more popularly known as Bank Rakyat was

established in 1954 as a cooperative society under the Cooperative Society Ordinance,

1948 with its founding objective of channelling funds from the Government to the

farmers. Membership is open to both cooperatives and individuals. Deposits from the

public and long-term loans from the Government are its main sources of funds. Since

its inception, the bank has expanded its scope of operations beyond the traditional

agricultural-based lending to provide other financial services, including bridging and

home financing. Prior to 1993, Bank Rakyat only operates in Peninsular Malaysia but

36
expanded its operation in Sabah and Sarawak after the Cooperative Act was reviewed

in 1993. The dual status resulted in the bank being governed by two bylaws of

Cooperative Societies Act 1993 and Development Financial Institutions Act 2002.

Currently, Bank Rakyat offers “Home Financing-i” that is based on tawarruq

(commodity murabahah).

2.2.2.2 Bank Simpanan Nasional (BSN)

BSN owes its roots to the first Savings Bank service opened in Perak and Selangor,

which dated back to the late 19th century. These savings banks were soon integrated

into the country’s Post Office Savings Bank network. Subsequently, in 1978, following

the gazettement of Bank Simpanan Act 1974, BSN was incorporated as a statutory body

to mobilise savings, especially to small savers, in order to finance public sector

economic development programmes. To achieve this objective, BSN was required to

hold at least 60% of its total investment in Government securities during the period

1984-1992 (70% prior to 1984). In line with the Federal Government’s operating

expenditure reduction, BSN’s mandatory investment in Government securities was

reduced to 50% of its total investment effective from December 1992. This has allowed

BSN to redeploy their resources to other financing activities, including the provision of

home financing. BSN offers the conventional home loan as well as Islamic home

financing instruments. Presently, BSN offers two types of Islamic home financing,

which are BBA-based, i.e., BSN AN NAIM Home Financing-i and Youth Housing

Scheme-i.

37
2.2.2.3 Malaysia Building Society Berhad (MBSB)

MBSB, formally known as Malaya Borneo Building Society Limited, was established

in 1950 as a wholly owned subsidiary of the then known as Colonial Development

Corporation. Its primary objective is to serve the public in the Federation of Malaya,

Singapore, Sabah, and Sarawak by providing loans at financially affordable interest

rates. The Malayan Government became a shareholder in 1954, and four years later, the

Society formed the Borneo Housing Mortgage Finance Berhad to expand their activities

in Sabah and Sarawak. The operations in Singapore were taken over by the Singapore

Building Society in 1969. Earlier in 1963, MBSB became a public limited company and

its shares had been quoted on the Stock Exchange of Malaysia and Singapore. The

company became was incorporated in Malaysia under the Companies Act 1965 on 17

March 1970, before it was listed on what was known as the Kuala Lumpur Stock

Exchange, on 14 March 1972. Currently, the majority of MBSB Employee Provident

Fund (EPF) and naturally obtained most of its funding from the EPF, augmented by

financings from the Bank Negara Malaysia, shareholders’ funds and deposits collected

from the public. At present, MBSB is offering two types of Islamic home financing to

its customers, i.e., MBSB Ultimate-i and MBSB My First Home Scheme-i. Both

instruments are based on BBA.

2.2.2.4 Borneo Housing Mortgage Finance Berhad (BHMF)

BHMF is the counterpart of MBSB in East Malaysia. The company was established in

1958 as the Borneo Housing Development Corporation, wholly owned by the

Commonwealth Development Corporation. In 1975, it was restructured and, at present,

its shares are jointly held by the state of State Government of Sabah and Sarawak. The

major sources of funds for the company are its shareholders’ funds, loans, and deposits

38
from the State Government of Sabah and Sarawak, and loans from the Employee

Provident Fund (EPF). BHMF provides home financing facility to civil servants

(Federal and State) who are serving in the State Government of Sarawak, Statutory

Bodies, and Councils under the Employer's Guarantee Scheme at the most financially

affordable rate of 3%. Apart from that, at a non-subsidised rate of 6.75% to 7.5%,

BHMF also provides home financing to private individuals in Sabah and Sarawak.

2.2.2.5 Sabah Credit Corporation

The Sabah Credit Corporation (SCC) extends financings to mainly the civil servants

(Federal & State) serving in the State of Sabah. The company offers, amongst others,

personal financings, hire purchase, project financing, and home financings. Most of its

gross financing amount (RM2.22 billion or 91.72%) are of Islamic financing

instruments. As of end-2015, at RM58 million worth of home financing outstanding, it

is the smallest amongst the government-owned Islamic home financing institutions in

the country.

The preceding section will elucidate the modi operandi of Islamic home

financing instruments that are widely used by Islamic home financing institutions in

Malaysia.

ISLAMIC HOME FINANCING INSTRUMENTS

At the beginning of Islamic banking and finance development in Malaysia, the

application of the debt-based instruments dominated Islamic home financing market.

As Islamic banking and finance industry was at a nascent stage at that time, debt-based

Islamic home financing instruments offer a similar ‘substance’ to its conventional home

loan counterpart. It made it easier for new customers to familiarise themselves with such

39
a nascent industry. However, recently, there are growing calls for equity-based modes

to replace these debt-based modes. Equity-based Islamic home financing mode is said

to be closer to the normative Islamic economic tenet of risk-sharing vis-à-vis the risk-

transfer nature of debt-based Islamic home financing. Although equity-based Islamic

home financing instrument such as MM has been introduced more than a decade ago,

most Islamic commercial banks were reluctant to offer such mode of financing to their

customers. As seen in Figure 2.1 below, Islamic financing that is based on debt-based

mode accounts for more than half (53.27%) out of total Islamic financing modes vis-à-

vis its equity-based mode such as musharakah and mudharabah, which accounts for a

marginal 9.95%.

19.24%

17.54% 53.27%

9.95%

Debt-based (BBA and Murabahah) Equity-based (Musharakah and Mudharabah)

Lease-based (Ijarah and AITAB) Others (Istisna' and others)

Figure 2.1 Composition of Islamic Financing Instruments by Modes (2017)

Source: Bank Negara Malaysia (2017)

Figures 2.1 and 2.2 have demonstrated Islamic commercial banking entities’

preference for murabahah and its variants over other types of Islamic financing modes.

Islamic home financing or home financing, in general, is the riskiest in nature due to its

40
sheer volume and long duration. Therefore, as investor-owned organisations, they have

to manage their risk profile in order to ‘protect’ their shareholders’ value via fixed rate

returns debt-based financing modes (Ayub, 2007). Debt-based Islamic home financing

is a great risk mitigation tool, whereby the Islamic commercial banks have the ability

to create indebtedness, in which they will have an option for full recourse to the

homebuyer in the event of default.

500,000

450,000

400,000

350,000

300,000
RM Million

250,000

200,000

150,000

100,000

50,000

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Debt-based (BBA and Murabahah) Equity-based (Musharakah and Mudharabah)

Lease-based (Ijarah and AITAB) Others

Figure 2.2 Composition of Islamic Financing Instruments by Modes (2007-2017)

Source: Bank Negara Malaysia (2017)

In general, debt-based Islamic financing mode was on the increasing trend,

which continues to account for at least half of the total Islamic financing modes by

commercial Islamic banking institutions in Malaysia (Figure 2.2). Although its equity-

based mode is also on the steadier and increasing trend, its increase, however, is rather

41
marginal. In order to understand the why Islamic commercial banks are somewhat

reluctant to offer equity-based Islamic home financing mode, it is imperative for the

reader to understand the structural differences between these Islamic home financing

modes and the complexities arise thereof, which are currently in use in Malaysia. It

includes, among others; bay’ bithaman ajil, tawarruq, ijarah, musharakah

mutanaqisah, ijarah mawsufah bi-dhimmah, and istisna’.

2.3.1 Murabahah

Murabahah is a marked-up sale mode. The term, however, is now contemporaneously

referred to a sale and purchase (S&P) agreement whereby the Islamic commercial bank

purchases a house and sells them at a marked-up price, with monthly instalments that

are being paid within a stipulated time frame. The selling price (cost plus profit) must

be disclosed upfront and remains the same throughout the financing duration. The usual

transaction flow is as follows:

i. The customer selects the house (either sub-sale or newly completed

property) that he or she is interested in buying and makes down payment at

this stage. He/she then signs S&P with the seller or developer.

ii. The customer submits an application for financing to his or her Islamic

commercial bank of choice. From a risk management perspective, Islamic

commercial bank usually requires a wa’ad (promise to purchase) from the

customer.

iii. The Islamic commercial bank will buy the house from the owner. It is

common for Islamic commercial banks to make the customers as the legal

owner through a lien and only holds beneficial ownership.

42
 iv. The customer then takes possession of the house and starts making the

monthly instalments to the Islamic commercial bank.

v. Once the customer finishes paying off the monthly instalments, the Islamic

commercial bank will discharge the lien on the house to the customer.

Figure 2.3 illustrates the transaction flow of the murabahah home financing in

Malaysia.

Figure 2.3 Murabahah Home Financing

Source: Author’s Illustration

2.3.2 Bay’ Bithaman Ajil (BBA)

Unlike murabahah, which is a basic cost-plus transaction of Islamic home financing

instrument, BBA on the other hand, is based on a contract where the Islamic commercial

bank simultaneously buys and sells back the house to the customer on a deferred

payment. It basically preceded by bay’ al-inah, a sell and buyback transaction that is

almost universally prohibited in the Middle East. However, bay’ al-inah is widely

43
accepted and practised in the South East Asian region of Malaysia, Indonesia and

Brunei on the premise that it helps to kick-start and develop a rather nascent industry

(Ahmed, 2011; Mohd Yusof et al., 2011). The transactional flow is as follows:

i. The customer selects the house and makes down payment.

ii. The customer, who now by virtue of beneficial owner of the house, sells the

house to the Islamic commercial bank for cash for the remaining balance of

the house price.

iii. The customer then buys back the house from the Islamic commercial bank

on deferred payment basis.

iv. The customer settles the remaining balance of the house price to the

Developer/Seller. Figure 2.4 below illustrates the modus operandi in detail.

Figure 2.4 BBA Home Financing by Islamic Commercial Bank

Source: Author’s Illustration

44
 However, due to various contentious issues revolving BBA home financing

especially in the case of abandoned housing projects (for further detail, see Md. Dahlan,

2009; Md. Dahlan & Syed Abdul Kader Aljunid, 2011), a newer form of home financing

was introduced based on the concept of tawarruq (commodity murabahah).

2.3.3 Tawarruq

Islamic commercial banks typically buy commodities such as crude palm oil (CPO) on

a spot basis from a broker and sell it to the customer on a deferred basis. This is executed

via the murabahah concept and it creates a long-term indebtedness to the bank.

However, unlike the murabahah in Section 2.3.1.1, the house is not the subject matter

for this transaction (Figure 2.5).

Figure 2.5 Tawarruq Home Financing

Source: Author’s Illustration

45
 Rather, it is the CPO or other commodities such as plastic resin and refined,

bleached, and deodorized (RBD) Palm Olein through Bursa Suq Al-Sila’. The Islamic

commercial bank also takes a lien on the house as a collateral. Next, the customer will

sell the CPO to another broker on a spot basis and use the cash to complete the house

purchase. Upon settlement of the entire instalments, the Islamic commercial bank will

release the lien on the house.

Although tawarruq is gaining more popularity as compared to BBA, the

instrument is not without its critics. Although the actual process of tawarruq requires

the exchange of CPO or other types of commodities at Bursa Suq Al-Sila, it seems that

the homeowner is only using this instrument to obtain an end financing of buying a

house (Saiti et al., 2016). Authors such as Ahmed (2011, p. 155) for instance, even went

to the extent of classifying tawarruq as a “pseudo-Islamic” instrument. Hence, the bay’

(trading) model, on which the founding of Islamic commercial banking is premised,

poses new challenges in dealing with a ‘regulatory regime’ designed for an interest-

bearing, debtor-creditor system. For instance, the Capital Adequacy Ratio (CAR) set by

the Basel III imposes higher economic capital requirements on risk-taking exposures

such as MM home financing as compared to one with a lower risk-taking profile.

Therefore, since Islamic commercial banks are unable to participate in the real economy

via equity-based Islamic home financing, they have other tools to conduct their business

operations, amongst others, lease-based Islamic home financing mode.

2.3.4 Ijarah/Ijarah Muntahiyya Bi-Tamleek (IMBT)

Ijarah (leasing) involves the sale of a house’s usufruct. The Islamic commercial bank

retains the ownership of the house, together with all the rights and the responsibilities

that go with an ownership. Different banks may use different terms and variations for

46
this mode i.e., ijarah wa iqtina (buy-back leasing). However, ijarah is best suited to

situations in which the client only requires occupancy. As Malaysia is considered as a

high homeownership country13, this simple ijarah structure cannot fulfil the client’s

objectives of eventual ownership. In Malaysia for example, Islamic commercial banks,

which choose to offer such arrangement will often use ijarah muntahia bi-tamleek or

more popularly known as ‘IMBT’. It is inherently similar in terms of its leasing period

with the original ijarah, however, it ended with ownership transfer through either bay’

(sale) or hibah (gift) (Figure 2.6).

Figure 2.6 Ijarah Home Financing

Source: Author’s Illustration

As a continuity of the previous leasing mode, equity-based Islamic home

financing mode is usually underpinned by ijarah. However, what sets such mode apart

from ijarah is how the relationship starts and ends. Islamic commercial banks in

Malaysia usually offers and executes such mode through MM home financing

instrument. Since MM has an underlying ijarah contract in its instrument, it inevitably

inherits the flexibilities that are associated with ijarah.

13
According to a report of ‘Making Housing Affordable’ by Khazanah Research Institute, Malaysian
homeownership as whole stood at 72.5% in 2010. This is a relatively higher as compared to that of rates
in developed countries, which were below 70% in the same year (Suraya Ismail et al., 2015). In
comparison, homeownership in Australia, UK and US stood at 68.1%, 67.4% and 66.5% respectively.
47
2.3.5 Musharakah Mutanaqisah

Musharakah mutanaqisah (MM) refers to a partnership between an Islamic financial

institution and a customer who jointly own a house. The share of the Islamic financial

institution is further divided into a number of units and the customer is expected to

purchase those units periodically. By doing so, the share of the customer will increase

and the share of the Islamic financial institution will decrease until all the units are

owned by the customer (Usmani, 1999). Pure MM consists of three contracts, namely:

musharakah (partnership), ijarah (leasing) followed by bay’ (sale) or hibah (gift). This

instrument shares many similarities to ijarah because the customer will lease the house

from the Islamic financial institution. Unlike the previous modes and instruments,

which are currently offered by Islamic commercial banks, MM is a more popular choice

among financial cooperatives (Mydin Meera & Abdul Razak, 2005; Shirazi et al.,

2012). The transactions flows are as follow:

i. The customer identifies the house, and negotiates pricing and the terms of

sale with the seller or developer, makes the down payment, signs the S&P

agreement.

ii. A customer approaches an Islamic financial institution to request for home

financing. Once the application is approved, the bank issues a letter of

acceptance, indicating the bank’s agreement to become a musharakah

partner with the customer. Solicitors will prepare a musharakah agreement

detailing the terms and conditions, including the ijarah agreement and the

share purchase agreement. Finally, Islamic financial institution and

customer sign the MM home financing agreement.

iii. The customer holds the property on trust for the musharakah partnership

under a deed of trust.

48
 iv. Customer rents the Islamic financial institution’s share in the house. The

customer will pay an additional amount on top of the rental to buy the

bank’s shares in the house.

v. The customer becomes the sole owner of the house once all periodic

payments as per the facility agreement have been made as the musharakah

and ijarah agreements are terminated. Figure 2.7 summarises the modus

operandi of MM home financing.

Figure 2.7 MM Home Financing

Source: Author’s Illustration

2.3.5.1 The Advantages of MM Home Financing Arrangement

The MM Model offers a relatively cheaper or more financially affordable mode of home

financing, especially from a customer’s point of view, as compared to home financing

through either BBA-tawarruq or conventional home loan (see Chapter 3 for further

detail).
49
 According to Mydin Meera and Abdul Razak (2005), the main advantage of MM

home financing is due to its structural flexibility. Under the MM home financing

contract, there are three contracts involved i.e. musharakah, ijarah, and bay’. This

structure of MM home financing allows the customer to own the property earlier by

redeeming the principal sum of the financier faster. The MM home financing also does

not charge any interest or ‘advanced’ profit as normally practised in BBA-tawarruq. It

is purely based on rental payments of the house and the redeeming of the financier’s

shares. The selling price, under MM home financing, always reflects the market price

and the rental payments are determined by market forces. Meanwhile, in the case of

BBA-tawarruq, the markup price does not necessarily reflect the true market price of

the house, hence making it financially unaffordable to homeowners (Mydin Meera &

Abdul Razak, 2005; Smolo & Hassan, 2011).

The balance amount at any point in time before the termination of the MM home

financing contract could never be larger than the original price/finance of the assets. In

case of defaults, under BBA-tawarruq home financing, Islamic commercial banks are

allowed to impose late payment penalty charge based on the combination of ta’awidh

(compensation) and gharamah (penalty). This can be avoided in case of MM home

financing. Such defaults in MM home financing, however, will merely cause the equity

of a financial cooperative to remain constant and therefore entitled to higher rental

portions when payments are made later. It is believed that these accrued rents may have

“a deterrent impact on a customer who evades repayment as it will remain fixed as long

as no repayment of the principal takes place” (Salama, 1995, p. 32). In the unfortunate

event where a member-customer is unable to service even the rental payments, the

property could then be leased to the third party while the profit will be shared between

the financial cooperative and the member-customer (Smolo & Hassan, 2011). This

50
shows that MM is, as compared to BBA-tawarruq, a relatively more flexible home

financing instrument especially when a member-customer undergoes difficult moments

in life (Shuib et al., 2011; Smolo & Hassan, 2011).

It has been argued that during inflation, as with any other debt-based home

financing, BBA-tawarruq is also adversely affected (Salama, 1995). MM home

financing guards the financial institution against the adverse effects of inflation. As

stated above, the selling of the shares should be carried out at the mark-to-market value.

This means that each share will be sold at its own value at the time of sale itself. This

way, the effects of inflation could be taken into account. Therefore, from Islamic

financial institutions’ point of view, MM home financing instrument stands better than

BBA-tawarruq, murabahah or conventional home loan structures since Islamic

financial institutions can secure a percentage of the value of the house. Consequently,

when the value of the house appreciates with inflation, the shares of the Islamic financial

institutions would increase in value as well. Furthermore, if the house is sold, the

Islamic financial institutions’ share will increase as result of capital appreciation (Smolo

& Hassan, 2011). This makes MM home financing less vulnerable to external factors

such as the movements in interest rate and inflation faced by BBA-tawarruq, rendering

MM home financing a financially affordable Islamic home financing alternative.

In the case of default, the member-customer will be given grace period that

varies depending on the situation. If the non-payment period persists, the financial

cooperative then will work with the member-customer to sell the house. The profit that

arises from such sale (after deducting the balance of payments) will be shared according

to the current equity. Any loss from the sale will be borne solely by the financial

cooperative. There is at least one mechanism that can be used to cushion off the impact

from such non-performing financings that is inspired by the America Finance House

51
LARIBA model. First, the use of sinking fund which is based on ‘historical loss

experience’ and probabilistic approach by taking into accounts of ever-changing

political, economic, and environmental factors (Y. Abdul Rahman, 2014).

Ever-present use of MM home financing will also help to close the gaps, which

are beginning to appear in the home financing market, exemplified by the growing

concern of middle-income households who are neither eligible for preferential

treatments of home financing instruments nor are able to apply for the financially

affordable rate of 4% by LPPSA (Suraya Ismail, Jalil, & Megat Muzafar, 2015). Apart

from that, scholars such as Bendjilali and Khan (1995) and Usmani (1999) agreed that

MM could help minimise the tendency of people to use debt-based home financing

instruments such as BBA-tawarruq since these instruments have their own

controversial issues. In this light, MM home financing is considered being shari’ah-

compliant and it could be made to avoid riba’. This is in tandem with the view of Dusuki

and Abozaid (2007) who argued that the provision of equity-based home financing by

financial cooperatives will facilitate the achievement of Islamic socio-economic

objectives, which include social justice, economic growth, efficiency and stability.

In addition, owing to its flexibility, MM may also be used to finance houses

under construction. The ijarah component for these types of houses, however, will be

based on ijarah mawsufah bi-dhimmah (IMBD).

2.3.6 Ijarah Mawsufah Bi-Dhimmah (IMBD)

IMBD shares similar structures to ijarah for completed property. However, the Islamic

commercial bank will first buy the house (under istisna’14) and leases it to the customer.

14
Istisna’ is defined as ‘order to manufacture’ (Ayub, 2007, p. 263). It is a contract of home purchase by
specification or order, where the price is paid in advance, or in progressive payments.
52
In this modus operandi, Islamic commercial bank is the constructive owner of the house.

During the construction period, if the lessee pays any rental this will be considered as

an advance rental. Although the Islamic commercial bank enjoys the flexibility of

ijarah, as the bank entered into an istisna’ contract with the contractor, the Islamic

commercial bank will bear construction risks. If the project is abandoned, any advance

rentals during the construction period have to be refunded to the lessee. Figure 2.8

provides the transaction flows and illustration of the instrument.

Figure 2.8 IMBD Home Financing

Source: Author’s Illustration

CHAPTER SUMMARY

The preceding sections provided an in-depth discussion on the Islamic home financing

institutional framework in Malaysia. The introduction began with the discussion on the

importance of home financing. The next section further discussed the major roles of

Islamic commercial banks and government-owned or -linked home financing

institutions in Islamic home financing provision in Malaysia. The subsequent sections

expounded the basic Islamic principles of Islamic finance that underpinned Islamic

home financing instruments in Malaysia. A detailed discussion on the Islamic home

financing instruments such as BBA and MM followed. In Chapter 3, the author will be

discussing in greater details about the issues of Islamic home financing markets,

institutions and instruments that inhibit the current institutional framework to offer

53
financially affordable Islamic home financing instruments to its customers. Apart from

that, the author also attempted to mathematically prove that the current institutional

Islamic home financing framework, to a certain extent, are financially unaffordable to

most Malaysian households.

54
 CHAPTER THREE

ISLAMIC HOME FINANCING FRAMEWORK IN MALAYSIA:

THE EMERGING ISSUE OF FINANCIAL AFFORDABILITY

INTRODUCTION

In the previous chapter, the author had reviewed the current Islamic home financing

institutional framework in Malaysia that includes its markets, participating institutions,

and instruments. Official statistics from Bank Negara Malaysia demonstrates that debt-

based Islamic home financing mode such as BBA-tawarruq and murabahah are still the

instruments of choice for the largest Islamic home financing institution in Malaysia–

Islamic commercial banks. This ‘phenomenon’ can be partly explained by its

operational business nature–a profit maximising, commercial entity. McKillop &

Wilson (2011, 2015) for example, have argued that as an investor-owned firm, Islamic

commercial banks might disparate the customer’s needs to simultaneously satisfy

shareholders’ profit expectation.

Although scholars have long argued that equity-based, Islamic home financing

instrument such as MM is a superior mode in the preservation of maslahah (public

interest) (Chapra, 2007; Mydin Meera & Abdul Razak, 2005, 2009), debt-based Islamic

home financing instruments still constitute one of the largest asset classes for Islamic

commercial banks. It is because, at a glance, although Islamic commercial banks do

offer equity home financing mode, its implementation reveals a departure from the

norm–as it still operationally mimics its much-maligned counterpart–BBA-tawarruq.

Scholars such as Mydin Meera and Abdul Razak (2005, 2009) argues that true

implementation of MM home financing yields less profit to Islamic commercial banks

as it is operationally tedious. Indeed, the literature shows that equity-based Islamic

55
home financing modes have been successfully implemented within the financial

cooperative institutional framework. Prime examples of such framework have been

carried out by American Finance House LARIBA and Guidance Residential, LLC in

the USA and Ansar Cooperative Housing Corporation Ltd in Canada. The subsequent

section discusses the existential issues within two, currently largest Islamic home

financing institutions and how they are unable to sustainably provide financially

affordable Islamic home financing instruments to Malaysians in general. Following this

central issue, this chapter then proceeds to employ mathematical simulations to

highlight the existential issue of financial unaffordability in Islamic home financing

instruments (Research Objective #1). This study then proceeds to simulate its direct

impact on the Malaysian households’ monthly expenditures via official data from Bank

Negara Malaysia, National Property Information Centre, and Department of Statistics,

Malaysia. Thereafter, the chapter ends with a summary that suggests the imperative for

a cooperative Islamic home financing model that could be more financially affordable

as compared to the existing instruments in the market.

THE CONFLICT OF INTEREST: ITS EFFECTS ON THE FINANCIAL

AFFORDABILITY OF ISLAMIC HOME FINANCING INSTRUMENTS

In most housing markets, formal forms of home financings, including that of Islamic

home financing instruments are onerous to low-income households (Ebrahim, 2009;

Jones, 2008; Kuen, 2013; Sukumar, 2001). For example, debt-based Islamic home

financing instruments such as BBA-tawarruq would be so financially unaffordable that

these low-income households would have no access to such indispensable asset

(Ebrahim, 2008). Furthermore, these households’ lack of collateral and a higher risk of

defaulting places them in a weaker position to bargain for advantageous terms for their

56
home financing instrument (Gerwyn Griffiths & Howells, 1991; Sukumar, 2001).

Therefore, in order to mitigate these information asymmetry and default risks, Islamic

commercial banks prefer fully collateralised instruments such as BBA-tawarruq (Khan,

2010). As a result, debt-based Islamic home financing modes enable Islamic

commercial banks to earn competitive returns without assuming its proportionate risks

on these modes. That will in turn, result in better profit margin that will be later used to

pay out dividends to its shareholders. If such trend persists, Islamic commercial banks

will eventually turn low- to middle-income households away from the formal housing

market, as they see little to no financial incentive in offering lower-than-market rate

Islamic home financing instruments to these households.

As shown in Chapter 2, despite the growing appeal of Islamic home financing,

there are many Islamic commercial banks that still refuse to finance low- to middle-

income households’ home purchase. It is especially true for households who are

otherwise known as “unbankables” (M. Ahmad, 2015; Dusuki, 2008; Mohammad,

2015). Their reluctance may be caused by concerns about the ability to mitigate the risk

profile usually associated with these unbankables’ uncertainty in monthly incomes, and

the relatively high cost of making smaller disbursements of home financing (Chiquier

& Lea, 2009). Apart from that, prototypical investor-owned firms such as these Islamic

commercial banks also tend to distribute economic returns to shareholders that spread

out across a large economic area or around the world and not necessarily those rooted

in a community-driven financial institution such as financial cooperatives (Azmi, 2011).

57
 ARE GOVERNMENT-OWNED HOME FINANCING INSTITUTIONS
SUSTAINABLE?

Successful home financing systems in existence today developed with some form of

active support by the government. The World Bank (2009), for example, outlined what

government-owned home financing institutions generally represent in an attempt to

provide an institutional answer to at least these three issues: (1) Providing financial

service to jumpstart the ‘infant market’; (2) Catering the needs of population segments

that are underserved by the commercial banking sector, i.e. low- to middle-income

households or informal market segments; and (3) Acting as a policy implementation

tool, i.e. Cagamas Berhad 15 and Danaharta Berhad 16.

However, if the government-owned financing institutions maintain its status quo

through heavily subsidised programs as mentioned in Chapter 2, the decrease in funding

will increase in tandem with the decreasing value of public funds. It was aptly

demonstrated by the wide-ranging spending cuts in the recently tabled Budget 2018.

Table 2.1 and Table 2.2 in Chapter 2 further confirm the fluctuation of home financing

provision by government-owned or -linked institutions in Malaysia. Apart from the

steady increase of home financing provision by commercial banking institutions,

government-owned home financing institutions are slowly reducing their home

financing provision activities. A case in point, Sabah Credit Corporation, a government-

owned home financing institution for civil servants in Sabah (Federal and State), saw a

decrease of almost 50% in home financing provisions within the last five years alone.

15
Cagamas Berhad is a national corporation that securitises home financing in order to channel funds at
lower cost to financial institutions. The corporation achieves this objective by buying amongst others,
Islamic home financings from primary financiers, i.e. Islamic commercial banks through issuance of
sukuk (Islamic bonds).
16
Danaharta Berhad or currently known as Prokhas Sdn. Bhd is a private limited company wholly owned
by Ministry of Finance. It was set up in 1997, as a policy response to the Asian Financial Crisis. It bought
non-performing loans (NPL) from commercial banking institutions to maximise their recovery value. It
has since ceased its operation on 31 December 2005. Currently, Prokhas Sdn Bhd assumes the
management of Danaharta Berhad’s residual assets.
58
This is indeed a worrying trend since Sabah was recorded as having the highest national

house price index or HPI of 319.9 in 201617. It is an increase of 141% from 132.5 in

2006 (National Property Information Centre, 2017). Stated differently, on average,

housing prices in Sabah has increased nearly twofold in a 10-year span. Stated

differently, this caused government-owned home financing institutions such as Sabah

Credit Corporation to disburse as much as 141% more funds to finance its home

financing applicants as compared to what it used to cost them only a decade ago.

As part of their social financing mandate, government-owned home financing

institutions are often the privileged and sometimes exclusive vehicles of rationed

subsidies (Chiquier & Lea, 2009). It is especially true in the case of Malaysian civil

servants. According to the official statistics from the Ministry of Human Resources

Malaysia (2015), civil servants in Malaysia constitutes merely 1.6 million out of the

12.46 million workers in Malaysia. As discussed in Chapter 2, these civil servants are

entitled to Islamic home financing instrument offered by LPPSA at a financially

affordable rate of 4%. Barring the 3% rate offered by Sabah Credit Cooperation that is

exclusive to the state’s civil servants, the LPPSA’s 4% rate is considered as the lowest

rate offered amongst all home financing institutions. However, this presents a dilemma

for the rest of the Malaysian workforce. Where can they also acquire an Islamic home

financing instrument at an equally affordable rate? Table 3.1 below shows the

alternative home financing institutions, together with their financing rates, which the

rest of the Malaysian workforce have to rely upon for their Islamic home financing

needs.

17
The index’s comparative base is 100 and uses the year 2000 as its base year
59
 Table 3.1 Home Financing Institutions and Its Financing Rates

Financing rate for new home financings

Home financing institutions
2014 2015
Commercial banks 4.38 4.54
Treasury Housing Loans Division 4.00 4.00
Bank Kerjasama Rakyat Malaysia 4.76 7.00
Malaysia Building Society Berhad 7.43 ~ 7.54 7.40 ~ 7.61
Borneo Housing Mortgage Finance Berhad 6.75 ~ 7.50 6.75 ~ 7.50
Bank Simpanan Nasional 4.93 4.96
Sabah Credit Corporation 3.00 ~ 7.50 3.00 ~ 7.50

Source: Bank Negara Malaysia Annual Report 2015

Figure 3.1 illustrates the home financing origination trend for the last five years

in Malaysia and it points to the market share consolidation by Islamic commercial

banks. While the total home financing disbursed by LPPSA in terms of absolute value

increased at around 10% over these terms, it remains a marginal provider as compared

to the Islamic commercial banks. Apart from that, this increase can be seen as at the

expense of other government-owned or -linked home financing institutions such as

Sabah Credit Corporation and Borneo Housing Mortgage Finance Berhad, which can

be seen as either reducing or merely maintaining its status quo in their home financing

disbursements. It is also interesting to note that Bank Kerjasama Rakyat Malaysia

Berhad, a cooperative banking entity, is gradually moving away from the home

financing market, as illustrated by their declining market share over the last 5 years

(1.4% in 2010 to 0.50% in 2015).

60
 100%

90%

Percentage of share
80%

70%

60%

50%
2010 2011 2012 2013 2014 2015
Sabah Credit Corporation 0.10% 0.00% 0.00% 0.00% 0.00% 0.00%
Bank Simpanan Nasional 1.20% 1.10% 1.10% 1.30% 1.50% 1.60%
Borneo Housing Mortgage Finance Berhad 0.30% 0.20% 0.20% 0.20% 0.20% 0.20%
Malaysia Building Society Berhad 2.00% 1.70% 1.60% 1.40% 1.20% 1.10%
Bank Kerjasama Rakyat Malaysia Berhad 1.40% 1.10% 0.90% 0.70% 0.60% 0.50%
Treasury Housing Loans Division 9.80% 10.40% 9.90% 9.70% 10.30% 10.50%
Commercial Banking Institutions 85.30% 85.40% 86.30% 86.70% 86.20% 86.00%

Figure 3.1 Home Financing Outstanding (2010-2015)

Source: Author’s compilations of Bank Negara Malaysia Annual Reports (2010-2015)
61
 In view of the above, there is an emerging trend of privatisation of government

home financing institutions in Argentina, Australia, France, Korea, and Spain. The

nature of government intervention has, therefore, evolved into support of securitisation

conduits such that of Cagamas Berhad, specific and targeted subsidies, and preferential

regulatory treatment of home financing instruments (Chiquier & Lea, 2009). For

example, the Malaysian government has been providing tax rebates on interest/profit

payments on home loans/Islamic home financing instruments. Nevertheless, the current

trend is to gradually do away with government-owned or -linked home financing

institutions, because of their poor performance as inefficient financiers and failure to

meet housing policy objectives (Chiquier & Lea, 2009).

THE ESTIMATION TECHNIQUES: THE APPLICATION OF

PURCHASE- AND REPAYMENT-AFFORDABILITY CONCEPTS

The concept of housing affordability has been defined and employed throughout various

policy settings (Gabriel et al., 2006). In this regard, the application and discussion

regarding housing affordability are plentiful, however, there is no universally accepted

definition, thus, making housing affordability, at best, as a vague concept (Hancock,

1993; Linneman & Megbolugbe, 1992; Stone, 2006). That being said, one of the most

popular measures to measure housing affordability is via house price-to-annual income

approach (Cox & Hugh, 2017). Using the conventional ratio concept to define and

measure housing affordability has been the prevailing approach because it is “simple to

understand and apply, because it seems to fit people’s common sense experience, and

because it has a long tradition, the imprimatur of venerable historical authority, and

the official sanction of most governments” (Stone, 2006, p. 179). According to the same

author, however, the concept of housing affordability can be better defined from a deep

62
understanding of the features of housing costs and the associated costs thereof. Such

concept highlights the unique interaction among incomes, housing costs, and the costs

of non-housing necessities.

Therefore, instead of using the house-to-income housing affordability measure,

the author has instead, opted to use financial affordability measures in order to better

reflect such unique interactions. Taking into account the impact of housing-related

expenses on non-housing necessities, financial affordability of an Islamic home

financing can be viewed from at least another two aspects; purchase-affordability, and

repayment-affordability. Purchase-affordability considers whether a household is able

to finance enough funds to purchase a house (Gan & Hill, 2009). Repayment-

affordability, on the other hand, considers the burden imposed on a household for

repaying the (Islamic) home financing without falling below poverty line (Gan & Hill,

2009; Hancock, 1993; McCord, McGreal, Berry, Haran, & Davis, 2011). Both

purchase-affordability and repayment-affordability include additional parameters that

describe the down payment ratio, monthly instalments payment-to-income ratio, the

financing duration and the interest (profit) rate. All these parameters are fixed for

repayment-affordability, with the exception of the interest (profit) rate (Gan & Hill,

2009).

Apart from that, both of these approaches are also aligned with Bank Negara

Malaysia’s context of financial affordability. In its Guidelines on Responsible

Financing (Bank Negara Malaysia, 2012, p. 4) an Islamic home financing instrument is

deemed to be financially affordable “if the amount and terms allow the customer to

reasonably meet the repayment obligations in full throughout the course of financing,

without recourse to debt relief or substantial hardship”. Therefore, the author’s decision

to opt for the purchase- and repayment-affordability approaches is deemed as

63
appropriate. Therefore, in this study, the author opts for these two approaches in proving

the role (or lack thereof) that Islamic home financing instruments play in the financially

affordable home financing provision and its overall impact on the Malaysian

households’ monthly income.

THE DATA

Base rates and indicative effective financing rates of Islamic commercial banks used in

this study are sourced from “Guide to Consumer on Reference Rate and Base Rates &

Indicative Effective Lending Rates of Financial Institutions” and Bank Negara Malaysia

Annual Report 2016 by Bank Negara Malaysia. The house prices and the average rental

prices used in the same section were collected from the National Property Information

Center (NAPIC)’s Annual Property Market Reports 2016. Median household incomes

(national and state-level) used for mathematical simulations in Section 3.8 were

collected from the Household Income and Basic Amenities Survey 2014 by Department

of Statistics, Malaysia.

ISLAMIC HOME FINANCING INSTRUMENTS AND ITS

COMPOUNDING EFFECT ON THE PURCHASE-AFFORDABILITY OF
MALAYSIANS

Scholars have long argued that debt-based Islamic home financing mode such as BBA-

tawarruq that is offered by Islamic commercial banks is more expensive than the

conventional home loans (Ebrahim, 2009; Mydin Meera & Abdul Razak, 2005; Smolo

& Hassan, 2011)–which puts considerable strain on the Malaysian households’

repayment-affordability vis-à-vis their monthly instalments. The following examples

will further elucidate the aforementioned statement.

64
3.6.1 An Illustration of a BBA Home Financing Instrument by Islamic
Commercial Banks

Consider a single-story, terraced house that costs RM350, 000. The customer makes a

down payment of 10 percent and requests from an Islamic commercial bank to finance

the remaining 90 percent, i.e. RM315, 000 using the BBA home financing instrument.

Assuming the Indicative Effective Financing Rate (IEFR) charged by an Islamic

commercial bank is 4.65%18 per annum. However, it can range anywhere in between

4.20%, which is the lowest IEFR in the market as offered by BIMB and the highest at

5.10% by Asian Finance Bank. Table 3.2 below details the Base Rate and its IEFR by

Islamic commercial bank that offers Islamic home financing instruments.

Table 3.2 Base Rates and Indicative Effective Financing Rates (IEFR) of Islamic
Commercial Banks19

Base Rate IEFR

No Islamic Financial Institutions
(%) (%)
1 Affin Islamic Bank Berhad 3.74 4.65
Al Rajhi Banking & Investment Corporation
2 4.10 4.70
(Malaysia) Berhad
3 Alliance Islamic Bank Berhad 3.82 4.75

4 AmIslamic Bank Berhad 3.80 4.50

5 Asian Finance Bank Berhad 3.77 5.10

6 Bank Islam Malaysia Berhad 3.65 4.20

7 Bank Muamalat Malaysia Berhad 3.75 5.05

8 CIMB Islamic Bank Berhad 3.90 4.65

18
It is the median IEFR amongst all Islamic commercial banks
19
The figure is correct as at 1 December 2017

65
 Table 3.2 Base Rates and Indicative Effective Financing Rates (IEFR) of Islamic
Commercial Banks (continued)

Base Rate IEFR

No Islamic Financial Institutions
(%) (%)
9 Hong Leong Islamic Bank Berhad 3.69 4.60

10 HSBC Amanah Malaysia Berhad 3.50 4.85

11 Kuwait Finance House (Malaysia) Berhad 3.10 4.59

12 Maybank Islamic Berhad 3.00 4.35

13 OCBC Al-Amin Bank Berhad 3.72 4.91

14 Public Islamic Bank Berhad 3.52 4.35

15 RHB Islamic Bank Berhad 3.65 4.65

16 Standard Chartered Saadiq Berhad 3.52 4.52

Source: Bank Negara Malaysia (2017)

First, Islamic commercial bank would buy the house for RM315, 000 and then

sell the house to the customer at a profit, with deferred payments over the 30-year

period. The monthly instalments amount is RM1, 624.26, payable for 360 months. The

total financing is RM584, 733 in total. The total profit for the Islamic commercial bank

equals to RM 269, 733, which is almost double the original selling price of RM315,

000. Figure 3.2 below summarises the transaction flows in BBA home financing.

66
 Figure 3.2 BBA Home Financing by Islamic Commercial Bank
Source: Author’s Illustration

However, bear in mind that the above illustration does not account for Islamic

home financing instrument that was offered prior to the introduction of the Base Rate

(BR). In fact, prior the introduction of BR, Islamic home financing modes, including

that of BBA-tawarruq, is usually pegged to the Base Financing Rate (BFR). For

instance, using the above example, Islamic home financing that used BFR (without any

ibra’ or rebate) will have to pay as high as RM1, 839.1720 per month. Although Islamic

home financing with Base Rate (BR) seems a cheaper alternative to the much-maligned

BFR, it is still subject to changes by the individual Islamic commercial bank, as they

need to reflect their cost structure. Therefore, if the cost structure of individual bank

20
The latest BFR prior the introduction of BR was 6.85%.

67
increases, there is always a possibility to see further increases in the BR that will in turn,

result in much pricier Islamic home financing instruments.

3.6.2 An Illustration of an MM Home Financing Instrument by Islamic

Commercial Banks

Unlike the true practices of MM home financing that uses rental rates as a benchmark,

Islamic commercial banks in Malaysia still uses profit rates in its benchmarking (Z.

Abdul Rahman, Ahmad, Mohamed Naim, & Bahaman, 2016; Isamail, Borhan, &

Husin, 2013; Mohd Ali, Markom, & Jamal, 2012; Shuib et al., 2011, 2014). Therefore,

this results in the same amount of monthly instalments as the BBA-tawarruq mode. As

elucidated in Chapter 2, conceptually, MM home financing instrument is inherently

different from BBA-tawarruq home financing instrument. However, MM home

financing as practised by Islamic commercial banks in Malaysia, though contractually

differ from BBA-tawarruq, by using profit rates will result in a similar structure to that

of BBA-tawarruq home financing. As a result, in terms of purchase-affordability, MM

home financing as currently practised by Islamic commercial banks will not be able to

offer financially affordable Islamic home financing solution to Malaysian homeowners.

Figure 3.3 below provides a detailed modus operandi of MM home financing by Islamic

commercial banks.

68
 Figure 3.3 MM Home Financing by Islamic Commercial Banks in Malaysia
Source: Author’s Illustration

MM HOME FINANCING INSTRUMENT BY FINANCIAL

COOPERATIVES: THE WAY FORWARD

The increasing withdrawal by the government home financing institutions, coupled with

the increasing role played by the commercial banking sector in the home financing

market are forcing most Malaysian workforce out of the financially affordable Islamic

home financing option. Mathematical simulations in the preceding section have

illustrated that within the current institutional framework, homeowners are unable to

affordably finance their home purchase Islamic home financing instruments. In fact,

from a purely mathematical standpoint, the conventional home loan is a more appealing

option to the ‘rational borrower’. Consider the following comparison between

69
conventional home loans, and both BBA and MM home financing by Islamic

commercial banks.

Table 3.3 Comparison between Conventional Home Loan by Conventional Bank, and
BBA and MM Home Financing by Islamic Commercial Bank 21

MM by Islamic
Conventional
BBA commercial
home loan
bank
Monthly instalment
1, 624.26 1, 624.26 1, 624.26
(RM)
Total payments in 30
584, 733 584, 733 584, 733
years (RM)
Total interest/profit
269, 733 269, 733 269, 733
(RM)
Balance after 15 years
210, 210.24 292, 366 292, 366
(RM)
APR 4.65% 4.65% 4.65%

From Table 3.3, it is evident that as long as the average profit rates (APR)

between the above-instruments are the same, the total profit in the Islamic home

financing instruments will always equal to the total interest in the conventional home

loan. Notwithstanding that, when the customer wants to opt for early settlement, without

any ibra’ from the Islamic commercial bank (which is subject to bank’s sole discretion),

e.g. after 15 years, the remaining balance under the BBA and MM are always higher

than that of conventional home loan. However, the balance under the conventional is

much lower as the balance is calculated at the present value of the remaining 180

payments (15 years × 12 months). On the other hand, under the BBA and MM, it is

simply the monthly payment times 180 as the total profit for the thirty years is

capitalised upfront.

21
Price of house: RM350, 000; Down payment: RM35, 000; Total loan/financing: RM315, 000; Monthly
rental: RM1, 000

70
 Therefore, there are increasing calls amongst scholars of Islamic economics and

finance for the third sector22 economic institution to address this financial affordability

issue of Islamic home financing instruments (Al-Muharrami & Hardy, 2014; Ebrahim,

2009; Mydin Meera & Abdul Razak, 2009). In fact, these scholars have even

underscored the potential of organising financial cooperatives to offer Islamic home

financing along credit union23 lines as such structure would enhance mutuality in

business dealings. Some of the prime examples of normative form of MM home

financing are currently being offered by American Finance House LARIBA, Guidance

Residential, LLC (both in the U.S) and Ansar and Islamic Cooperative Housing

Corporation Ltd. (Canada).

For these financial cooperatives in North America for example, they offer a

slightly different version of MM home financing as compared to the Islamic commercial

banks in Malaysia. Member-customers will first have to accumulate shares in the

financial cooperative, for at least 6 months up to a certain portion of the house price,

which usually equals to the down payment amount. The financial cooperative will then

buy the house and register it in its name. The member-customer will then enter into a

contract where he/she will pay rent on the share of the financial cooperatives. Member-

customers will also get a dividend from the shares in the house. However, in order to

speed up the member-customer’s equity acquisition, he/she usually forego this dividend

22
Pestoff (1992) defines third sector as a sector that comprises of “cooperatives, voluntary associations,
non-governmental associations, popular movements, and non-profit organisations.” The third sector
importance especially cooperative societies to nation-building has also been officially emphasised by the
Malaysian Government ever since its Fourth Malaysian Plan (1981-1985) (see Othman et al., 2014).
23
Credit union consists of a group of people who shares a common bond. It can be a shared bond through
their profession, social interest, political inclination, and religious affiliation. They will pool their capital
together on a regular basis. These savings are then used to provide home financing to its members. As
their ultimate goal is to help other members (and themselves) in obtaining financially affordable home
financing, they are willing to settle with a usually lower return on their deposits. They primarily rely on
voluntary effort to manage the pooled fund or otherwise known as ‘shares’ (Md Zabri, Abdul Razak, &
Mohammed, 2015).

71
and use it to pay off the financial cooperative’s shares in the house. The member-

customer will continue to acquire the financial cooperative’s shares until it matches the

value of the house. Finally, the title of the house will be transferred to the member-

customer either through bay’ (sale) or hibah (gift).

Consider the same example used for the BBA and MM home financing

instruments by Islamic commercial banks. In this case, a member-customer wishes to

buy a house priced at RM 350,000 and saves up to 10 percent of the price, i.e. RM

35,000. The financial cooperative finances the remaining 90 percent, i.e. RM 315,000.

Now assume that the average rental for similar homes in the locality is agreed upon

between the two parties to be RM1, 000 per month24. According to the MM formula,

however, if the member-customer merely pays RM1, 000 per month, it would take more

than 30 years (exactly 67 years and 3 months) 25 to fully own the house. Therefore, some

additional amount is necessary in order to redeem within thirty years. Here, the rental
𝑅 1000
rate is, 𝑥 = 𝑃 = 350000 = 0.003 and the additional monthly amount needed is:

𝑥 [𝑃 − (1 + 𝑥 )𝑛 𝐶0 ]
𝐴=
(1 + 𝑥 )𝑛 − 1

0.003 [350,000 − (1 + 0.003)360 × 35000]

𝐴=
(1 + 0.003)360 − 1

𝐴 = RM 401.96

24
In Kuala Lumpur, rentals of double storey terrace generally ranged between RM1, 000 and RM2, 000
per month. Premium rentals ranging from RM3, 000 and above per month were recorded in the prominent
areas of Taman Tun Dr Ismail, Bangsar and Hartamas. In Selangor, the prominent areas of Damansara,
Petaling Jaya, and Subang Jaya secured rentals of similar houses of between RM1, 400 and RM3, 000
per month. Other areas generally range between RM800 to RM1, 000 per month. In Johor, areas within
the Nusajaya locality recorded gains and fetched higher prices. For instance, Horizon Hill gained higher
rentals ranging between RM2, 500 and RM3, 000 per month whilst similar properties elsewhere in Johor
Baharu fetched a lower range from RM500 to RM1, 000 per month. In the northern region, similar houses
in Pulau Pinang, particularly on the island, fetched a higher rental range of between RM1, 300 to RM2,
500 per month. In the Seberang Perai locality, rentals were more affordable; generally ranging from
RM500 to RM1, 500 per month (National Property Information Centre, 2017).
25
PV = -315,000 IRR/i = 5.143% (RM1, 000×12/RM350, 000) PMT = 1,000

72
 Therefore, the total payment equals to RM1, 000 + RM401.96 = RM1, 401.96.

Table 3.4 below provides the schedule for the above MM contract.

73
 Table 3.4 Monthly Instalments Schedule for MM Home Financing

Member- Financial
Monthly Monthly Member- Rental Division Financial
Total Customer’s Cooperative’s
Month Rent Redemption Customer’s Cooperative’s
Payment Member- Financial Equity Cash Flow
(RM) (RM) Ratio Equity (RM)
Customer Cooperative (RM) (RM)
A B C=A+B D E F G H

0 0.10000 35, 000 315, 000 (315, 000)

1 1, 000 401.96 1, 401.96 0.10000 100.00 900.00 35, 501.96 314, 498.04 1, 401.96

2 1, 000 401.96 1, 401.96 0.10143 101.43 898.57 36, 005.35 313, 994.65 1, 401.96

3 1, 000 401.96 1, 401.96 0.10287 102.87 897.13 36, 510.19 313, 489.81 1, 401.96

4 1, 000 401.96 1, 401.96 0.10431 104.31 895.69 37, 016.46 312, 983.54 1, 401.96

5 1, 000 401.96 1, 401.96 0.10576 105.76 894.24 37, 524.18 312, 475.82 1, 401.96

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

. . . . . . . . . .

360 1, 000 401.96 1, 401.96 0.99600 996.00 4.00 349, 999.38 0.62 1, 401.96

74
 Table 3.5 Possible Range of Monthly Instalments for MM Home Financing
Instrument by Financial Cooperatives

Total
Monthly rent Monthly Period to acquire
instalment
(RM) redemption (RM) the house
(RM)
800.00 484.77 1, 284.77 30 years

900.00 442.66 1, 342.66 30 years

1, 000.00 401.96 1, 401.96 30 years

23 years and 1
1, 000.00 540.00 1, 540.00
month
21 years and 3
1, 000.00 624.26 1, 624.26
months
19 years and 8
1, 000.00 710.00 1, 710.00
months

Table 3.5 shows the possible range of monthly instalments that can be paid by a

member-customer. While the amount to be paid monthly was between RM1, 540 and

RM1, 71026 under BBA home financing, the monthly amount needed under MM, on the

other hand, is only RM1, 401.96. If the member-customer pays RM1, 624.26 for the

MM mode as in the BBA in Section 3.6.1, then the member-customer can own the home

in 21 years 3 months, i.e., saving about a decade’s worth of monthly instalments. On

the other hand, should the member-customer can afford the higher instalments of say,

RM1, 710, which is the identical monthly instalment offered by Asian Finance Bank,

the member-customer will acquire the house in just under 20 years of monthly

instalments (19 years and 8 months). Unlike the BBA mode, there is a greater flexibility

in terms of monthly instalments for the member-customers. For example, member-

customer may choose to rent the house for as low as RM800, and still able to own the

house by the 360th instalments. Apart from that, the rental payments can be adjusted

26
Using the lowest and highest IEFR of 4.20% (Bank Islam Malaysia Berhad) and 5.10% (Asian Finance
Bank Berhad) respectively

75
according to the locality, types of houses and proximity to public transportation modes.

Figure 3.4 below summarizes the MM home financing arrangement by financial

cooperative.

Figure 3.4 MM Home Financing by Financial Cooperative

Financial cooperative in Malaysia is a cooperative society registered under

Suruhanjaya Koperasi Malaysia (SKM) and their main activity is to offer financing to

their members. These financial cooperatives give out financings to its members from

their capital fees, which are contributed by its members on a monthly basis. It is

obligatory for the financial cooperative members to pay membership fees besides

accumulating the minimum required capital shares to be eligible for financing (i.e.

76
Islamic personal financing, Islamic home financing) from the financial cooperative.

Upon the approval of the Cooperative Board Members, a certain amount of processing

fee and takaful (Islamic insurance) payment will be deducted from the total financing

amount. The repayment will be managed through an automated salary deduction system

administered by the Credit and Banking Services (formerly known as “Bahagian

Perhidmatan Awam” or BPA), ANGKASA.

Cooperative societies in Malaysia consist of mainly finance-based and at

82.53%, they almost single-handedly contributed to the total revenues generated by the

entire cooperative societies in Malaysia (Suruhanjaya Koperasi Malaysia, 2016). The

yearly directories of ‘The Top 100 Cooperatives in Malaysia’ by SKM also highlight

the importance of financial cooperative to the cooperative movement in Malaysia as

almost half (43%) of those cooperatives are financial cooperatives (Suruhanjaya

Koperasi Malaysia, 2016). However, they are almost synonymously equated with

personal financing, which is a core, lucrative, and almost risk-free business activity.

The author’s insight of from a casual glance through the above report shows that most

financial cooperatives that made into the list were concentrated on the Islamic personal

and/or consumption financing instruments as their core business operational model. It

was also seen that only a handful offered Islamic home financing instruments 27.

Moreover, barring the likes of cooperative banking institutions such as Bank Kerjasama

Rakyat Berhad and Koperasi Bank Persatuan, these financial cooperatives are still using

debt-based Islamic home financing mode such as BBA and bay’ al-inah. Their

financing amounts rarely surpass RM100, 000 with chargeable profit rates that are

27
Some of the financial cooperatives in Malaysia that offer Islamic home financing: Bank Rakyat and
Koperasi Bank Persatuan, Koperasi Wawasan Malaysia Berhad (KOWAMAS), Koperasi Polis Diraja
Malaysia Berhad, Koperasi Koswip Malaysia Berhad, Koperasi Pembiayaan Syariah ANGKASA Berhad
(KOPSYA), Koperasi Muslimin Malaysia Berhad, Koperasi Kospeta Malaysia Berhad, Koperasi AIM
Berhad, Koperasi Serbaguna MAS Berhad.

77
usually higher than the ones that are offered by Islamic commercial banks. Unlike its

counterparts in the U.S and the U.K, whose financial cooperatives are active in Islamic

home financing intermediation activities that ultimately help its member-customers to

affordably finance their dream home purchases, a major paradigm shift is needed if they

were to enter the Islamic home financing market.

ISLAMIC HOME FINANCING INSTRUMENTS AND ITS IMPACT ON

THE REPAYMENT-AFFORDABILITY OF MALAYSIANS

Table 3.6 Comparison between Conventional Home Loan, BBA and MM Home
Financing28

MM by
MM by
Conventional Islamic
BBA Financial
home loan commercial
Cooperatives
bank
Monthly
instalment 1, 624.26 1, 624.26 1, 624.26 1, 401.96
(RM)
Total payments
in 30 years 584, 733 584, 733 584, 733 504, 705.60
(RM)
Total
interest/profit 269, 733 269, 733 269, 733 189, 705.60
(RM)
Balance after
209, 057.65 288, 639 288, 639 196, 237.59
15 years (RM)

APR/
4.65% 4.65% 4.65% 3.43%
IRR

This study builds on from previous studies by Mydin Meera and Abdul Razak

(2005, 2009) by mathematically proves the impact of financially unaffordable Islamic

home financing instruments may have on Malaysian households. Table 3.6 outlines the

28
Price of house: RM350, 000; Down payment: RM35, 000; Total loan/financing: RM315, 000; Monthly
rental: RM1, 000

78
total monthly instalments and financing balances are lowest in the MM home financing

by financial cooperative amongst the four financing methods. The mathematical

derivation for MM home financing by Mydin Meera and Abdul Razak (2005) also

shows that at the internal rate of return (IRR) of 3.43% per annum, the return of MM

home financing is solely determined by the rental rate. Interestingly, this return is

independent of the initial capital provided by the financial cooperative nor the duration

of the contract, which is usually the case under BBA financing.

Table 3.7 Financial Affordability of Islamic Home Financing Instruments and Its
Impact on the Median Income of Malaysian Households 29

MI using MM
MI @ 4% MI @ 4.20% MI @ 5.10%
by financial
p.a.30 p.a.31 p.a.32
cooperative
B40 RM730.45 RM748.20 RM830.71 RM677.53
(RM2, 629)33 (27.78%) (28.46%) (31.60%) (28.60%)

Rural RM601.54 RM616.16 RM684.12 RM622.48

(RM3, 123)34 (19.26%) (19.73%) (21.91%) (23.52%)
Malaysia
RM773.41 RM792.21 RM879.58 RM997.53
Median
(16.87%) (17.28%) (19.18%) (21.76%)
(RM4, 585)35

Note. MI: monthly instalment; B40: Bottom 40%; M40: Middle 40%

29
The author used a single story, terraced house’s rental rate and house price of municipalities in states
that have the closest median incomes as proxies (Department of Statistics Malaysia, 2015; National
Property Information Centre, 2017). The financing duration is for 30 years with a 10% down payment.
30
The IEFR for home Islamic home financing instrument by LPPSA. It is the second lowest profit rate
offered by home financing institution in Malaysia.
31
The lowest IEFR offered by Islamic commercial banks by BIMB for 30 years with a down payment of
10%.
32
The IEFR offered by Asian Finance Bank for 30 years with a down payment of 10%.
33
Kelantan (Rental: RM480 per month; House price: RM170, 000; Down payment of 10%)
34
Kedah (Rental: RM500 per month; House price: RM140, 000; Down payment of 10%)
35
Melaka (Rental: RM800 per month; House price: RM180, 000 Down payment of 10%)

79
 Table 3.7 Financial Affordability of Islamic Home Financing Instruments and Its
Impact on the Median Income of Malaysian Households (continued)

MI using MM
MI @ 4% MI @ 4.20% MI @ 5.10%
by financial
p.a.36 p.a.37 p.a.38
cooperative
Urban RM1, 589.79 RM1, 628.43 RM1, 808.02 RM1, 569.11
(RM5, 156)39 (30.83%) (31.58%) (35.07%) (30.43%)

M40 RM2, 019.47 RM2, 068.54 RM2, 296.68 RM1, 857.01

(RM5, 465)40 (36.96%) (37.85%) (42.03%) (33.98.21%)

Note. MI: monthly instalment; B40: Bottom 40%; M40: Middle 40%

By translating the IEFR into practical examples, Table 3.7 highlights the wide

extent of financial unaffordability of Islamic home financing instruments may have on

the Malaysian households, as none of the instruments by Islamic commercial bank

(IEFR that ranges from 4.20% to 5.10%) is financially affordable to the Malaysian

households. At the lowest IEFR continuum, the LPPSA’s rate of 4% provides the

‘softest’ impact on the Malaysian households. For example, Islamic home financing

instalments constitute 19.26% and 16.87% of the rural and Malaysian median’s

household incomes respectively. This puts into question again on the limited availability

of the LPPSA’s affordable Islamic home financing profit rate to the rest of the

Malaysian masses.

However, for Malaysia’s B40, urban, and M40 households, they are definitely

better off with the true implementation of MM home financing by financial

36
The IEFR for home Islamic home financing instrument by LPPSA. It is the second lowest profit rate
offered by home financing institution in Malaysia.
37
The lowest IEFR offered by Islamic commercial banks by BIMB for 30 years with a down payment of
10%.
38
The IEFR offered by Asian Finance Bank for 30 years with a down payment of 10%.
39
Johor (Rental: RM1, 200 per month; House price: RM370, 000; Down payment of 10%)
40
Wilayah Persekutuan Labuan (Rental: RM1, 300 per month; House price: RM470, 000; Down payment
of 10%)

80
cooperatives. In fact, if we were to opt for the ‘Housing Cost Burden41’ approach, MM

by financial cooperatives is the best option middle-income households that mostly

reside in towns and cities (Abdul Rahman Embong, 2011). As the housing prices for

the latter two cases increase, pegging the internal rate of return (IRR) against the rental

rates as supposed to the base rate (BR) proves that MM home financing instrument is

indeed a superior instrument vis-à-vis BBA home financing instrument.

It is also interesting to note that despite opting for rental rates that are on the

near-premium continuum as in this study, it still provides amongst the softest cushions

against the impact that it can have on these households’ monthly incomes. The

flexibility of MM can also enable a member-customer to redeem the financial

cooperative’s principal sum, without the need to compute rebates as in BBA (Mydin

Meera & Abdul Razak, 2005). On the other hand, should a member-customer finds

him/herself in a financial difficulty in servicing the monthly instalments, he/she may

negotiate for lower rental rates, or buying his/her house at a comparatively cheaper

location, they might be able to enjoy lower monthly instalments. Table 3.7 above also

shows that as financial cooperative is usually geographically focused (Azmi, 2011) and

therefore will respond better to the specificities of MM home financing’s

operationalisation.

CHAPTER SUMMARY

This chapter has presented a comparative, financial affordability analysis of debt- and

equity-based Islamic home financing modes by participating institutions in Malaysia.

The results from the mathematical simulations have reconfirmed some of the literature’s

41
Households that pay more than 30% are considered housing cost-overburdened. The approach was
introduced by the US Department of Housing and Urban Development.

81
argument for MM home financing by financial cooperative as a better alternative to the

ones offered by commercial banking institutions, which include both conventional

home loan and Islamic home financing instruments (BBA and MM). Apart from that,

this study departs from studies by Mydin Meera and Abdul Razak (2005, 2009) by

mathematically simulating the wide extent of financial unaffordability of Islamic home

financing instruments might have on the Malaysian household incomes. The study will

now proceeded to develop and qualitatively validate an alternative, financially

affordable Islamic home financing model to address the above-mentioned issue.

82
 CHAPTER FOUR

QUALITATIVE VALIDATION OF A FINANCIALLY

AFFORDABLE ISLAMIC HOME FINANCING MODEL

INTRODUCTION

The previous chapter has mathematically simulated that the normative form of equity-

based Islamic home financing is more successfully implemented within the financial

cooperative framework. However, Founder and Resident Shari’ah Supervisor of

American Finance House LARIBA, Dr Yahia Abdul Rahman (2014, p. xxiii) pointed

out the difficulty in sourcing out funds to sustain their business operation:

LARIBA had very humble means, and it lacked enough capital. We used
to finance a home once every two to three months (the terms of financing
were onerous: 40 percent down and a seven-year term) and a car every
month, because we had a tough time convincing our friends to invest in
the company.

Hence, in order for financial cooperatives to offer financially affordable Islamic

home financing instruments to its member-customers, it is imperative for them to be

able to acquire a financially affordable source of funds. As this chapter will later discuss

in detail, the author will first develop a financially affordable Islamic home financing

model through the integration of funds from the cash waqf institution within the original

framework of equity-based Islamic home financing by financial cooperatives (Research

Objective #2). Subsequently, the study will qualitatively validate the Cash Waqf-

Financial Cooperative-MM (CWFCMM) Model amongst the supply-side’s

stakeholders (Research Objective #3).

This chapter begins with the review of related literature, which informs much of

the conceptual framework of cash waqf-financial cooperative home financing based on

MM arrangement. It is followed by a discussion of the model’s detailed specifications.

83
The chapter then discusses the methodology used to achieve Research Objective #3,

which includes, amongst others, the sampling technique, research instrumentation, and

data analysis technique employed. Subsequently, the chapter proceeds to highlight and

discuss major findings from the study. The chapter ends with a summary.

REVIEW OF RELATED LITERATURE: CASH WAQF-FINANCIAL

COOPERATIVE HOME FINANCING BASED ON MUSHARAKAH
MUTANAQISAH ARRANGEMENT

Cooperative mode of home financing operates when a certain group of people get

together to raise funds among themselves for a specific purpose i.e. purchasing a house

for its members (Ebrahim, 2009). The funds serve as a specialised mutual saving

mechanism for cooperative members. This mode of home financing is deemed to be

appropriate for low- to middle-income households who are unable to secure a

financially affordable home financing instrument. For example, this application of

cooperative home financing was found to be practised by certain tribes in Oman. Richer

members of the clan make monthly contributions to a specialised, welfare fund. This

fund would, in turn, be used by other less-to-do members of the clan for funerals,

wedding, study grants, and interest-free home financing or otherwise known as qard

hasan (Ebrahim, 2009). The same author argued that granting this qard hasan home

financing serves as a type of investment for the poorer tribe members and consequently,

promote unity amongst the tribe members. Accordingly, these members would be able

to own a house and enjoy the economic status usually associated with owning a house.

As they climb the socio-economic ladder, this will eventually enable them to help other

unfortunate members of the tribe (Ebrahim, 2009).

Essentially, one of the defining characteristics of a financial cooperative is that

it is owned by the majority of its members through shares that are not freely negotiable

84
(Fonteyne & Hardy, 2011). Normally, each depositor has at least one share, which can

be redeemed only upon the closure of the member’s deposit account. In addition,

financial cooperatives usually practice ‘one member-one vote’ regardless of his/her

position in the financial cooperative and/or the number of his/her share of assets. This

ownership structure forms the basis for control of the financial cooperative’s

management. This ownership and control structures are what distinguish a financial

cooperative from an archetypal Islamic commercial bank–an investor-owned firm

owned by negotiable shares (Al-Muharrami & Hardy, 2014). Prime examples of

successful implementation of cooperative home financing include American Finance

House LARIBA and Guidance Residential, LLC in the USA and Ansar & Islamic

Cooperative Housing Corporation Limited in Canada. These organisations were

established with the primary aim of providing a financially affordable, Islamic home

financing option to their religiously conscious community members. Interestingly,

unlike the above example in Oman that uses qard hasan, these financial cooperatives

utilise the MM home financing arrangement.

4.2.1 Financial Cooperative as a Financially Affordable Islamic Home Financing

Institution

It has also been argued that financial cooperatives provide effective opportunities for

the implementation of community participation ideals and that these organisations are

more likely to promote authentic forms of participation than that of government-owned

home financing institutions and/or (Islamic) commercial banks (Davidson, Johnson,

Lizarralde, Dikmen, & Sliwinski, 2007). One of the benefits to be gained by financial

cooperative’s members through this financial sharing scheme is the ability to channel

85
the value added from the business to themselves rather than to investor-owners of

Islamic commercial banks.

For instance, in the case of Islamic home financing, financial cooperative may

practices profit-sharing mechanism through price subsidies structure. This can be

implemented by charging lower interest (profit) rates on (Islamic) home financing

instruments and giving out a higher interest (profit) rate on deposits (Hart & Moore,

1998; Reichert & Rubens, 1994). Such profit-sharing mechanism can be made possible

as there is no separate shareholders’ interests and financial cooperatives can be expected

to work in the interests of both sets of members (savers and customers), namely in

offering a financially affordable Islamic home financing instrument. Therefore, this will

render the financial cooperatives as a more financially affordable Islamic home

financing provider, especially to low- to middle-income households. Since member-

owners and member-savers or -customers are practically of the same entity, financial

cooperatives can afford to have a dual bottom line focusing on its members’ financial

values as well as carrying out non-financial mandate such as their members’ socio-

economic well-being (Birchall, 2013a; Zeuli & Radel, 2005). As a result, financial

cooperative may leverage on their lack of profit-maximisation constraint to pursue an

expansion in remunerating their member’s shares. As they do not have to remunerate

external shareholders, theoretically, they are able to reduce the margin between the

profit rates they charge to member-customers and pay to member-savers. Therefore,

they may charge their Islamic home financing instruments at a price below the market

rate by incorporating the anticipated lower-than-market financing profits into the

instruments. In bad times, the retained earnings can be built up to cushion them against

poor performance as they do not have the need to distribute as much dividend to

members (Birchall, 2013a).

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 In addition, this prevents a conflict of interest between a financial cooperative’s

member-owners and its member-saver or -customers. Economists have long ago

attributed this paradoxical relationship between an Islamic commercial bank’s

shareholders and its depositors/customers to the problem of agency. It is because equity

shareholders may prefer to assume a higher risk profile for an Islamic commercial bank

as compared to the depositors. Shareholders assume a limited liability but enjoy

unlimited upside potential for profit. Depositors, on the other hand, do not share in the

profits, but they do share the risks disproportionately. In financial cooperatives, this

particular agency problem is avoided, since the member-owners and member-saver or -

customers’ structures usually overlap (Birchall, 2013a).

Business activities including that of Islamic home financing intermediation

activities that eventually result in excessive profits are a direct result of the pressure to

obtain higher dividends imposed by external shareholders in Islamic commercial banks.

For example, such external pressure may also lead to disbursement of insecure

financings and the sale of complex instruments to manage their risk profiles, which was

proven during the Global Financial Crisis in 2008-2009. On the other hand, financial

cooperatives are not subjected to pressure from external shareholders for immediate

returns, and this result in a longer-term focus on their business decisions and financing

policies. Unlike Islamic commercial banks, financial cooperatives are almost

exclusively located within a given community and regard their members-customers’

needs as their main priority. Their business strategy centres around relationship-

building as a number of studies have found that financial cooperatives are more willing

to establish a long-term relationship with their member-customers (Ayadi, Llewellyn,

Schmidt, Arbak, & Groen, 2009; Azmi, 2011). Apart from that, larger and less-

regionally focused Islamic commercial banks are less capable of processing and

87
transmitting the softer forms of relational information through their hierarchical

structures (Ayadi et al., 2009).

This mutuality element that is ever-present in the financial cooperative

framework is also greatly emphasised in Islamic jurisprudence, where more inclusive

obligations to various stakeholders have long been recognised (Bendjilali & Khan,

1995; Dar & Presley, 2000; El-Gamal, 2007). In addition, financial cooperative’s

ownership structure is tantamount to the risk-sharing element that is greatly espoused

in Islamic economics literature, as there is an existence of a risk-sharing element

between member-savers and the member-customers of Islamic home financing. This is

because, these categories of stakeholders largely overlap, and the remuneration from

deposits and return on financing instruments are often explicitly linked to the

profitability of the financial cooperatives (Fonteyne & Hardy, 2011).

4.2.2 Financial Cooperative and Its Limitation in Accessing Complementary

Source of Funds

Most financial cooperatives are dependent on internal fundraising from member

deposits and fees, capital shares, and retained earnings (Besley, 1995; Cornforth &

Thomas, 1990). In order to participate in the Islamic home financing market, financial

cooperatives will require substantial financial resources at their disposal that can extend

for a considerable length of time, and such funds should be available at reasonable profit

rates (Pathak & Kumar, 2008). Securing financing is a difficult task, particularly as it

stretches over a long period i.e., up to thirty years. Therefore, the problem of raising

adequate financing at a reasonable cost ranks amongst one of the key issues facing most

of the financial cooperatives in the Islamic home financing market.

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 In the National Cooperative Policy (NCP) 2010-2020 for example, the ministry

in charge of cooperatives, Minister of Domestic Trade, Cooperatives, and Consumerism

(KPDNKK) stated that one of the most pressing issues faced by the overwhelming

majority of the cooperative societies in Malaysia is the lack of access to capital.

Financial cooperatives’ home financing capabilities are significantly affected by the

availability of internal funds. Specifically, due to their inherently flat ownership

structure, their capital acquisition is limited by the number, wealth, and risk-bearing

tendency of their current members. Apart from that, due to the non-transferable shares

structure, financial cooperatives have limited access to external financings such as

public debt and equity markets (Chaddad & Cook, 2004).

Authors such as McCord, McGreal, Berry, Haran, and Davis (2011) for instance,

stressed the importance of improving external capital requirements for financial

cooperatives in order to ease the pressure in offering financially affordable home

financing for a foreseeable future. However, only a handful of financial cooperatives in

Malaysia receives external financings from Islamic commercial banks and/or from the

government and this, however, remains a marginal trend. What little external financings

that these financial cooperatives receive, especially from the Islamic commercial banks,

are used for mostly Islamic personal financing for civil servants–a hugely lucrative and

almost risk-free market segment for these cooperatives. This is because, financial

cooperatives in Malaysia have exclusive access to the “Bahagian Perkhidmatan Kredit

dan Perbankan” (BPKP)’s direct deduction facility of civil servants’ salaries–making

this line of business almost a risk-free venture for most financial cooperatives. In other

words, Islamic commercial banks have been using these financial cooperatives as a

financial conduit to gain access to the hugely lucrative Islamic personal financing

market for the Malaysian civil servants.

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 These external financings from Islamic commercial banks for the specific use of

Islamic personal financing were so pervasive, it prompted a strong rebuke from SKM,

that introduced a guideline titled “GP7: Garis Panduan Mengenai Pembiayaan Islam

Oleh Koperasi” (GP7: Guidelines on Islamic Financing by Cooperatives) on 16

November 2009 (Suruhanjaya Koperasi Malaysia, 2009). The guideline, amongst

others, highlights various issues surrounding Islamic financing by financial

cooperatives. Besides highlighting the issue of the pervasive use of external financing

from commercial banks, the guideline also highlights the various processing fees

imposed on Islamic financing by financial cooperatives (e.g. financial cooperatives’

commission, agent’s commission, contribution to a sinking fund, bank charge, takaful

charges, stamp duty, lawyer’s fee, management, and postal fees) that could reach as

much as 35% of total financing. In comparison, similar products by BSN and Bank

Rakyat would only impose fees amounting to no more than 0.5% of the total financing

amount.

4.2.3 Cash Waqf as a Potential Source of Funds for Financial Cooperatives

Previously, nation-building activities in the Muslim empire were successful because of

the collective efforts of all Muslims including ordinary Muslims. One of such

mechanisms is waqf (pl. awqaf). It has facilitated the establishment of mosques,

hospitals, libraries, schools, and similar public institutions. The ongoing success of

these institutions for centuries has only been possible due to the continuous albeit small

donations made by an immense number of ordinary people who are enlightened by the

spirit of Islamic gift economy (zakat, sadaqah, and waqf). The Islamic waqf model was

so influential that it helped to establish Oxford University–what is now universally

known as the “quintessential English academic institution” (Gaudiosi, 1988, p. 1231).

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 Having said that, Muslim population’s real property and wealth did not grow in

tandem with the rapid increase in the Muslim population of late42. This can be partly

explained by the fact that Muslims, especially in Malaysia are somewhat reluctant to

participate in waqf due to a widely-held perception that it can only be performed through

land donations for mosque building and/or graveyards (Mustaffa & Muda, 2014;

Shakrani, Noor, & Ali, 2003). The general Muslim population simply believes that only

by doing so, it can fulfil the three conditions of waqf i.e. perpetuity, irrevocability and

inalienability (Mohammad, 2008; Mohsin, 2013). All waqf related matters in Malaysia

are exclusively managed and supervised by the respective State Religious Islamic

Council (SRIC), as enshrined in the Ninth Schedule (State List-List II) of Federal

Constitution.

In recent years, cash waqf has come into prominence in Malaysia. The

commencement of the use of cash waqf in Malaysia came into place after the

“Muzakarah Jawatankuasa Fatwa Majlis Kebangsaan Hal Ehwal Agama Islam”

(Discussions by the Fatwa Committee of the National Council for Islamic Affairs) at its

conference in 2007, issued a fatwa on the permissibility of cash waqf. Through proper

cash waqf management, it is possible to maintain as well as enhance the waqf value.

Anyone, irrespective of his/her financial condition, could be involved by contributing

as little as RM10 within the prescribed cash waqf systems. Furthermore, cash waqf is

far more important since it is more productive in addressing the community’s needs

compared to land, buildings, books, and cattle (Mohamad Suhaimi, Ab Rahman, &

42
As of 2015, Christians (31%) and Muslims (24%) made up two of the largest religions of the world. In
recent years, there were more babies that were born to Christian mothers than to any other religion.
However, in the period of 5 years (2010-2015), births to Muslims made up nearly a third (31%) of all
babies born around the world. Pew Research Center, a nonpartisan fact tank based in Washington, DC is
projecting that Muslims will grow more than twice as fast as the overall world population between 2015
and 2060. Specifically, while the world’s population is projected to increase by 32% in the next five
decades, Muslim population on the other hand, is expected to increase by as much as 70% (Pew Research
Center, 2017).

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Marican, 2014; Mohsin, 2013). As a result, cash waqf has the potential to be harnessed

as an integral enabler in contemporary socio-economic development frameworks

(Abdallah, 2010; Alias, 2012; Kahf, 1998; Mohd Arshad & Mohamed Haneef, 2016;

Mohsin, 2013; Sanusi & Mohd Shafiai, 2015).

Despite its increasing prominence, authors such as Adeyemi, Ismail, and Hassan

(2016) observed that Malaysians, in general, are not aware of various cash waqf

schemes that are already in place. The authors were able to empirically attribute this

problem to social culture, lack of promotion, and lack of understanding.

Notwithstanding, despite its low level of awareness, a sizeable body of literature

underscore the potential of cash waqf for financing, especially for poverty alleviation

initiatives–primarily via microfinance institutions (MFI) (Abdullah & Ismail, 2014;

Duasa & Mohd Thas Thaker, 2016; Kaleem & Ahmed, 2010; Md Saad & Anuar, 2009;

Mohamad Suhaimi et al., 2014; Mohamed Haneef et al., 2015, 2013; Mohd Thas

Thaker, Mohammed, Duasa, & Abdullah, 2016; Sadeq, 2002; Shahimi, Marzuki, &

Embong, 2013).

For example, conceptual, model-building studies investigated the issues and

problems faced by microfinance institutions (MFI) and proposed poverty alleviation-

models within the Islamic gift economy framework for resource-poor countries

(Abdullah & Ismail, 2014; Kaleem & Ahmed, 2010; Md Saad & Anuar, 2009; Mohd

Thas Thaker et al., 2016; Sadeq, 2002). These authors then went on to suggest, amongst

others, cash waqf as a potential source of funds for Islamic MFI due to its inherent

flexibility and sustainability. Shahimi et al. (2013) on the other hand, departed from

these conceptual, model building studies in their empirical analysis and utilised Systems

Dynamics approach to simulate the potential impact of cash waqf might have on poverty

alleviation. Their simulated models were able to demonstrate cash waqf’s ability as an

92
effective poverty alleviation mechanism. A case in point, their simulated models

showed that in theory, they are able to reduce the Malaysian Federal Government

budget by more than RM13 billion or an average of RM433 million per annum over a

30-year period.

Deriving from the earlier model-building study on integrated cash waqf micro

enterprises investment (ICWME) by Mohd Thas Thaker et al. (2016), Duasa and Mohd

Thas Thaker (2016) embarked on its validation study and empirically examined factors

that cause MFI to favour internal source of funds vis-à-vis external source of funds.

They then observed the high probability of the surveyed MFI to participate in the

ICWME model. In a similar vein, Mohamed Haneef et al. (2015, 2013), developed an

integrated waqf-based Islamic microfinance model (IWIMM) and quantitatively

validated the IWIMM model as one of the mechanisms to alleviate poverty in two

separate locations i.e., Bangladesh and Kuala Selangor, Malaysia.

Mohamad Suhaimi, Ab Rahman and Marican (2014) and Mohd Ramli and Jalil,

(2014) on the other hand, carried out case studies on waqf fund schemes by SRICs of

Penang and Selangor respectively. The waqf fund schemes, together with zakat, were

found to play an important role in the economic development of the Muslim

communities in Penang and Selangor. While these waqf fund schemes are structurally

different (Waqf Fund Scheme is run solely by Penang SRIC and “Wakaf Selangor

Muamalat” is jointly run by Perbadanan Wakaf Selangor and Bank Muamalat Malaysia

Berhad), both of these studies agree that cash waqf is a viable alternative source of

funds.

Notwithstanding the overwhelming majority of the studies found within MFI

frameworks, there is a notable absence of literature on a practical model that could be

implemented to solve the needs of potential homeowners for a financially affordable

93
Islamic home financing option. Apart from that, as most model-building studies were

conceptual in nature, there is also a lack of empirical research in validating these

models. Furthermore, those amongst the few that carried out model-validation studies

exclusively utilised quantitative methods such as Structural Equation Modelling (SEM)

and Systems Dynamics Approach (Duasa & Mohd Thas Thaker, 2016; Mohamed

Haneef et al., 2015, 2013; Shahimi et al., 2013). A noticeable gap in the literature is

also observed on a financial intermediary that can channel the cash waqf to help low- to

middle-income households acquire a financially affordable Islamic home financing

instrument. Nevertheless, a study done by Mohammad (2015) noted the possibility of

waqf bank to act as such conduit. The author, however, subscribed along the lines of the

above-mentioned studies in limiting cash waqf’s potential as a financing tool within

MFI and thus, leaving out its potential to fulfil the need for financially affordable

Islamic home financing to Muslims. Therefore, the present study departs from the

above-highlighted studies by qualitatively investigating the potential role of cash waqf

in the integrative framework to provide a financially affordable Islamic home financing

solution to potential homeowners via financial cooperatives in Malaysia.

Table 4.1 Summary of Related Literature on Cash Waqf for Financing

Author(s) (Year) Title

Usurious piety: The cash waqf controversy in the Ottoman

Mandaville (1979)
empire

Çizakça (1995) Cash waqfs of Bursa, 1555-1823

Kahf (1998) Financing the development of awqaf property

Sadeq (2002) Waqf, perpetual charity and poverty alleviation

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Table 4.1 Summary of Related Literature on Cash Waqf for Financing (continued)

Author(s) (Year) Title

Peranan wakaf dalam pembangunan ekonomi umat Islam dan
Ab Rahman (2009) aplikasinya di Malaysia (The role of waqf and its applications
in the economic development of Muslims in Malaysia)
Md Saad and Anuar Cash waqf and Islamic microfinance: Untapped economic
(2009) opportunities

Kaleem and Ahmed The Quran and poverty alleviation: A theoretical model for
(2010) charity-based Islamic microfinance institutions (MFIs)

Ab Rahman and Wan The concept of waqf and its application in an Islamic insurance
Ahmad (2011) product: The Malaysian experience

Mohamed Haneef et al. Integration of waqf and Islamic microfinance for poverty
(2013) reduction: A survey in Kuala Selangor, Malaysia

Financing through cash-waqf: A revitalization to finance

Mohsin (2013)
different needs

Potential of cash waqf for poverty alleviation in Malaysia: A

Shahimi et al. (2013)
System Dynamics approach

Abdullah and Ismail Al-Tawhid in relation to the economic order of microfinance

(2014) institutions

The challenge in poverty alleviation: Role of Islamic

Hassan (2014)
microfinance and social capital
Mohamad Suhaimi, Ab
The role of share waqf in the socio-economic development of
Rahman and Marican
the Muslim community The Malaysian experience
(2014)
Mahamood and Ab Financing universities through waqf, pious endowment: Is it
Rahman (2015) possible?

Mohamed Haneef et al. Integration of waqf-Islamic microfinance model for poverty

(2015) reduction: The case of Bangladesh

Sanusi and Mohd Shafiai The management of cash waqf: Toward socio-economic
(2015) development of Muslims in Malaysia

Duasa and Mohd Thas A cash waqf investment model: An alternative model for
Thaker (2016) financing micro-enterprises in Malaysia

Mohd Arshad and

Third sector socio-economic models: How waqf fits in?
Mohamed Haneef (2016)
Mohd Thas Thaker,
Developing cash waqf model as an alternative source of
Mohamed, Duasa, and
financing for micro enterprises in Malaysia
Abdullah (2016)

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4.2.4 The Potentials of Cash Waqf in Malaysia

In recent years, cash waqf shot into prominence in various countries, Malaysia included.

The commencement for the use of cash waqf in Malaysia was marked by the

“Muzakarah Jawatankuasa Fatwa Majlis Kebangsaan Hal Ehwal Agama Islam”

(Muzakarah of the Fatwa Committee of the National Council for Islamic Affairs) ruling

on the permissibility of cash waqf in Islam on 12 April 2007. All waqf-related matters

in Malaysia, except the Federal Territories of Kuala Lumpur, Labuan, and Putrajaya are

supervised and managed by each state’s respective SRIC. They are responsible to issue

their own respective fatwa or fatawa (legal opinions) regarding the permissible areas in

which the funds received under the cash waqf form can be spent or invested.

Currently, cash waqf is promoted and managed by seven SRICs, although the

value of these cash waqf is relatively small as compared to the total awqaf land values

(Mohsin, 2013). The author further highlighted that there are three Federal Government

foundations, namely Yayasan Pembangunan Ekonomi Islam Malaysia (YaPEIM),

Yayasan Dakwah Islamiah Malaysia (YADIM), and Yayasan Waqaf Malaysia have

launched their respective own cash waqf schemes.

Apart from these cash waqf schemes, there is also a unique corporate stock-cash

waqf hybrid applied by Johor Corporation (JCorp). It endowed its shareholdings in three

publicly traded companies43, which were valued at RM344.22 million as of 31

December 2016, to its subsidiary, Wakaf An-Nur Berhad. Dividends from these waqf

shares are re-invested and distributed to SRIC and charities. Furthermore, Wakaf An-

Nur is permitted by its corporate constitution to invite the public to purchase stock in

43
Al-Salam REIT Bhd. (9.98%), KPJ Healthcare Bhd. (7.2%), and Al-‘Aqar Healthcare REIT Bhd.
(2.52%),

96
the company by way of “saham wakaf” (cash waqf certificate), thus adding cash to its

waqf assets of publicly traded shares. Another corporate waqf venture is Wakaf

Selangor Muamalat, which has been jointly established by Perbadanan Wakaf Selangor

(PWS) and Bank Muamalat Malaysia Berhad (BMMB). Bank Muamalat’s foray into

the cash waqf initiative adds another dimension to the cash waqf schemes as it has a

wider reach to the general population through its extensive banking networks. Its

customers are able to join the scheme in a multitude of ways such as hibah (gift) from

their Wadi’ah Savings Account, standing instructions, and debit from current or savings

account and local checks.

CONCEPTUAL FRAMEWORK OF AN INTEGRATED CASH WAQF-

FINANCIAL COOPERATIVE-MUSHARAKAH MUTANAQISAH (CWFCMM)
MODEL

This model is proposed as an alternative to the existing Islamic home financing

framework for helping out potential homeowners to realise the dream of owning a home

via a financially affordable, shari’ah-compliant instrument. As discussed in the

preceding sections, a joint venture between cash waqf and financial cooperative

institutions can be utilised as an alternative method to provide a financially affordable

Islamic home financing solution. This conceptual model was built by integrating two

studies by Mohd Ramli and Jalil (2014) and Mohsin (2013) with some additions and

adjustments from the author. However, both of these studies are conceptual in nature

and this study builds from these premises and qualitatively validates their suitability

and applicability within the current institutional Islamic home financing framework.

Building on the MM arrangement, this research proposes the use of MM home financing

under the cash waqf institutions and financial cooperative initiatives (Figure 4.1).

97
Figure 4.1: Cash Waqf-Financial Cooperative-MM (CWFCMM) Model
Source: Adapted from Mohd Ramli and Jalil (2014) and Mohsin (2013)

98
The proposed model involves the following stages:

i. The financial cooperative sources its funds from two major sources:

a. Existing source of funds is derived from its members through

members’ contractual saving, share capitals and fees, and investment

instruments.

b. The proposed source of funds is derived mostly from cash waqf

institutions (CWI).

(i) The donors (individuals, institutions, corporations, and

governments) contribute cash waqf to CWI with the intention of

creating a perpetual waqf fund. The donors will in return, receive

waqf certificates for their contributions. CWI may work hand-in-

hand with corporate donors in carrying out their corporate social

responsibilities (CSR) initiatives. The CWI will then act as a

mutawwali (manager) of the fund and will be responsible for

making the necessary investment decisions regarding the pooled

cash waqf funds.

(ii) CWI will invest the pooled funds in income-generating assets

such as property, equity or unit trust funds. Mohsin (2013) for

instance, suggested that 50% of the accumulated funds are

channelled for investment and the balance to be diverted back to

the fund to ensure its perpetuity. At the end of the investment

tenure, the principal amount will be returned to the fund. The

remaining 50% profit portions are used to finance cooperative

home financing ventures with financial cooperatives. However,

prior receiving the cash waqf fund, financial cooperatives must

99
 undergo strict prudential requirement checks under the purview

of Suruhanjaya Koperasi Malaysia (SKM) and ANGKASA.

ii. The financial cooperative managers will then invest the pooled funds

(existing source of funds and cash waqf funds) accordingly. The investment

can be made in the form of profit-loss sharing partnership through MM

home financing instrument.

iii. Revenue will be distributed accordingly, i.e. dividends on savings,

investments, and retained earnings as well as the contribution to the cash

waqf funds to ensure its perpetuity.

MODEL SPECIFICATIONS

This study proposes a new model by integrating cash waqf into the financial

cooperative’s MM home financing model. This model is tentatively termed as

“CWFCMM Model.” As stated in the preceding section, its most important components

include the donors, cash waqf institution (CWI), financial cooperative, and joint

management committee (JMC).

4.4.1 Waqif (Contributor) Requirements

Waqif is a person who contributes to the waqf fund. He/she must be physically and

mentally sound. The decision to donate should not be a result of coercion. As waqf is

considered as philanthropy, the waqif should not expect any return. Under this model,

the waqif can be represented by individuals, institutions, corporations, and

governments. The fund donated as waqf is technically called mawquf. The existence of

mawquf should be certain and it must be durable. Waqf benefits distribution can

essentially be in two forms, namely waqf khairy and waqf dzurry. In waqf khairy, the

100
waqif does not limit his/her waqf benefits distribution target, whereas, in waqf dzurry,

the waqif limits his/her waqf benefits distribution to only his/her family. In the current

study, the author focuses on the former. Accordingly, after the cash waqf fund is

collected from the donor, CWI can use the fund to assist financial cooperatives.

Meanwhile, for waqf management, there are two types of waqif’s interests. In

the first, the waqif fully delegates his waqf management authority to mutawwali. This

practice is called waqf mutlaq. The second practice is called waqf muqayyad in which

the waqif stipulates that the donated fund should be managed in a particular way and

the proceeds must be delivered to a specific target. For this Model, the author opts for

the former. Hence, CWI will finance the financial cooperative’s MM home financing

to their member-customers by using the profits generated from the cash waqf fund’s

investment.

4.4.2 Cash Waqf Institution

There is a need for a third sector participation, such as financial cooperatives in offering

an alternative, financially affordable Islamic home financing instruments to potential

homeowners in Malaysia. In order to do so, first, a professionally established and

operated CWI can be incorporated as a subsidiary of SRIC along the model practised

by either Waqaf An-Nur Corporation Berhad, which is currently engaged with

Corporate Share Waqf or Perbadanan Wakaf Selangor. Waqaf An-Nur Corporation

Berhad is an entity of Johor Corporation (JCorp) that focuses on waqf share. Waqaf An-

Nur Corporation Berhad is appointed as a “Nazir Khas” or Special Mutawwali by the

SRIC in Johor to manage the waqf share on their own. However, Waqaf An-Nur

Corporation Berhad is required to pay 5% of the manfaah or return to SRIC. Meanwhile,

Perbadanan Wakaf Selangor (PWS) is placed under the purview of Selangor SRIC.

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PWS issues waqf certificate to raise the cash waqf in Selangor. However, PWS is still

under the purview of Selangor SRIC and is monitored by them. To raise funds, CWI

collects cash donations as well as issues waqf certificates. After collecting the cash waqf

fund, CWI manages the waqf fund in a manner that enhances the utility of the collected

funds. As a waqf fund manager, CWI is obliged to manage the funds productively and

ensure that the amount does not fall below the initial or principal amount. Therefore,

CWI as a mutawwali must prove to be infallible, highly capable and effective in helping

financial cooperatives’ MM home financing efforts. In the CWFCMM Model, CWI

allocates a certain portion of the profits from the invested funds to assist financial

cooperatives in providing MM home financing to its member-customers. CWI will

continuously screen and monitor the performance of financial cooperatives, along with

the entire joint-management committee (JMC). The profit generated from the MM

home financing can be used to cover the operating expenses of JMC.

4.4.3 Financial Cooperative

For the purpose of this study, CWFCMM Model is proposed for existing financial

cooperatives that are facing the problem of accessing complementary sources of funds.

In this model, prior receiving external financing from cash waqf institutions (CWI),

financial cooperatives must strictly comply with “Garis Panduan Mengenai

Pembiayaan Islam Oleh Koperasi” (Guideline on Islamic Financing by Cooperatives)

and “Garis Panduan Tadbir Urus Syariah” (Guideline on Shari’ah Governance) by

Suruhanjaya Koperasi Malaysia (SKM). The full compliance to such guideline can be

verified by both SKM and CWI. Besides that, CWI needs to ensure that the financial

cooperatives, which receive their funding are technically sound and financially stable.

For a start, they can refer to the ‘Top 100 Cooperative Profiles’ listing published

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annually by SKM. However, there are also more technically sound and financially

stable financial cooperatives that can be considered albeit their smaller size. For these

smaller financial cooperatives, the CWI may perform their due diligence with the help

of ANGKASA, the national umbrella body for cooperative movement in Malaysia.

4.4.4 Joint Management Committee

Cash waqf institution (CWI) and financial cooperatives (FC), along with the State

Religious Council (SRIC) will need to form a joint management committee (JMC).

Modelling after the JMC set up by Wakaf Selangor Muamalat (Mohd Ramli & Jalil,

2014), the detailed breakdown of the CWFCMM Model’s JMC is as follows:

i. Advisory committee from SRIC,

ii. A chairman,

iii. A secretary, and

iv. Joint secretariat (6 members–3 from FC and 3 from CWI)

The JMC will be responsible to channel the source of funds to finance FC’s

Islamic home financing operation. The involvement of SRIC as the sole waqf trustee in

most states of Malaysia as well as FC will ensure a systematic management of the

pooled funds.

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4.4.5 Musharakah Mutanaqisah (MM) Home Financing Arrangement

Figure 4.2 MM Home Financing Arrangement

Figure 4.2 shows the structure of the proposed financing arrangement under the

CWFCMM Model. The proceeding figure shows the MM arrangement that will involve

three distinct contracts, namely (i) contract of shirkah (partnership), (ii) contract of

ijarah (lease), and (iii) bay’ (sale) contract. The proposed MM home financing

arrangement involves the following stages:

i. Member-customer identifies the house, submits a project proposal, and

applies for the financing.

ii. Once the application has been approved, the financial cooperative enters a

musharakah arrangement with the member-customer.

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 iii. Member-customer either leases the financial cooperative’s share in the

house or shares the profit and loss with the cooperative. Member-customer

uses his/her portion of the lease rental amount to buy the financial

cooperative’s share in the house. Apart from that, the member-customer

may put additional amount(s) to increase his/her share redemption.

iv. The partnership is terminated when the member-customer owns the total

share of the house, after which the title will be transferred to him/her.

RESEARCH METHODS

The development of the proposed CWFCMM Model is strengthened in terms of its

suitability, applicability and its prospects in the Islamic home financing market by

interviewing experts from various fields across different institutions such as

academicians, Islamic commercial banking practitioners, waqf managers, and shari’ah

scholars. This method is known as a qualitative research method and it is applied when

the focal area is in the niche area and for gaining a better understanding of the topics.

Qualitative research helps in “understanding the meaning people have constructed, that

is, how people make sense of their world and the experiences they have in the world”

(Merriam, 2009, p. 13). The following four characteristics are identified by most as key

to understanding the nature of qualitative research: (1) the researcher tends to focus on

the process, understanding, and meaning, (2) the researcher is the primary instrument

of data collection and analysis, (3) the process is inductive, and (4) the instrument is

richly descriptive. To that end, a qualitative researcher tends to answer the “what”,

“how” and “why” questions. The strength of qualitative research lies in its ability to

provide complex textual descriptions of how people experience a given research issue.

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Qualitative research can also help in the interpretation and better understanding of the

complex reality of a given situation and the implications of quantitative data.

The steps in a qualitative analysis include: (1) preliminary exploration of the data

by reading through the transcripts and writing memos, (2) coding the data by

segmenting and labelling the text, (3) using codes to develop themes by aggregating

similar codes together, (4) connecting and interrelating themes, and (5) constructing a

narrative (Creswell, 2014).

4.5.1 Sampling Technique

The selection of experts in the current study was based on purposive sampling.

Purposive sampling is one of the most common sampling strategies whereby the group

of informants are preselected based on a particular research question. The main

objective of purposive sampling is to produce a sample that can be considered

“representative” of the population (Battaglia, 2008). Purposive sample sizes are often

determined based on the theoretical saturation (the point in data collection when new

data no longer brings additional insight to achieve the research objective). This study

opted for expert sampling which is a subset of purposive sampling. It is used for two

reasons, which are (i) extracting the views of people with specific expertise and (ii)

providing evidence for the validity of research outcomes (Trochim & Donnelly, 2006).

The selection criteria for experts were based on their qualification, area of

specialisation and working experience. However, this part of the study opted to exclude

the potential homeowners as this is a supply-driven model, which is in line with the

Malaysian experience in Islamic banking and finance development–which is a directive,

top-down approach (Ismal, 2013; Warde, 2010). Meanwhile, in terms of the number of

informants that were chosen for the study, the author adopted the consensus theory

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developed by Romney, Weller and Batchelder (1986). Consensus theory is based on the

principle that experts tend to agree more with each other than do novices and uses a

mathematical proof to argue for their case. Romney et al. (1986) also found that small

samples are sufficient in providing complete and accurate information within a

particular cultural context, as long as the informants are experts in the domain of

inquiry. The author applied recommendations of Guest et al. (2006) and Malterud et al.

(2015), that a purposive sample of 6 to 10 informants with diverse experiences may

provide sufficient information in an interview-based study. Based on the analysis, the

author posited that for the most part, data saturation (Guest et al., 2006) had occurred

by the tenth interview and hence, satisfied the minimum number of sample size.

4.5.2 Research Instrument: Interview Questions

The selection of research instrument often reflects the information needed to answer the

research questions. In this case, semi-structured interviews were employed to obtain in-

depth information to answer the following research question: “To what extent would

supply-side stakeholders (Islamic commercial bank’s managers and shari’ah advisors,

financial cooperatives’ senior managers, waqf researcher, waqf managers, and

regulators from Bank Negara Malaysia and Suruhanjaya Koperasi Malaysia) find the

CWFCMM Model is suitable and valid as a financially affordable Islamic home

financing model?”

In order to conduct good interviews, the author prepared a semi-structured

interview guide, which summarises the content that will be covered during interviews

(Morgan & Guevara, 2008). It serves as a parameter that ensures all particular sub-

topics of interest have been covered and more detailed or thoughtful information can be

obtained (Merriam, 2009). Besides keeping the interviewer within the line of inquiry,

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the guide helped the interviewer to focus on social cues such as intonation of voice,

facial expression or body language which could add more value and meaning to the

verbal response (Sulaiman, Liamputtong, & Amir, 2014).

Then, a pilot test was carried out before the actual face-to-face interview took

place. The main purpose of performing the pilot interviews was to revise the order of

the interview guide as well as developing additional probing questions (Ivankova,

Creswell, & Stick, 2006; Merriam, 2009). The pilot study was carried out on three

informants from three different institutions (Foreign-owned Islamic window, Yayasan

Waqf Malaysia, and Bank Negara Malaysia). The pilot interviews took approximately

60 to 90 minutes to complete. The result indicated consistency in the answers given by

the respondents. It also indicated that they were able to understand the questions clearly

within the themes of the study.

4.5.3 Data Analysis

Braun and Clarke's (2006) six phases of thematic analysis framework were used as a

method for data analysis. According to the same authors, thematic analysis is defined

as “a method for identifying, analysing, and reporting patterns (theme) within data”

(Braun & Clarke, 2006, p. 79). The rationale for using thematic analysis in this study is

driven by some advantages it possesses, which include: (i) the ability to summarize key

features of large data; (ii) the ability to highlight the similarities and differences of data;

(iii) the ability to generate unanticipated insights, and (iv) in this case of proposing a

financially affordable Islamic home financing model by financial cooperatives and cash

waqf institutions, its usefulness in making the analysis suit the relevant policy

development (Braun & Clarke, 2006). This method is descriptive, which goes by the

following phases: acquiring a sense of the data through verbatim data transcription,

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initial code generation that represents any interesting features that emerge through the

entire data set, collating codes into potential themes, reviewing the themes, defining and

naming the themes, and producing a scholarly report of the analysis. All interviews were

conducted mainly in the English language. The interviews lasted about 60 to 90 minutes

on average and were carried out between December 2015 and July 2016. To ensure

complete data management and analysis, the author utilised Atlas.ti 7 (Student License).

FINDINGS

4.6.1 Profile of Informants

Ten informants representing multiple stakeholders in the CWFCMM Model have

agreed to participate in the interviews. Listed in Table 4.2 are the detailed breakdown

of informants’ respective institutions and positions.

Table 4.2 Profile of the Informants

No Institution Position

Manager, Banking Supervision

1 Bank Negara Malaysia Department (Islamic Banking and
Development Financial Institutions)
Koperasi Ma’ahad Tahfiz Tijarah
2 Vice Chairman
Gombak Berhad

3 Foreign-owned Islamic window Vice President II

4 Universiti Sains Islam Malaysia Senior Lecturer/Waqf Researcher

5 Urus Maju Ehsan (M) Sdn. Bhd.44 Managing Director (Operations)

44
Urus Maju Ehsan (M) Sdn. Bhd. is a waqf property developer in the state of Selangor. It is a wholly
owned subsidiary of Perbadanan Wakaf Selangor (PWS).

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 Table 4.2 Profile of the Informants (continued)

No Institution Position

6 Perbadanan Wakaf Negeri Sembilan Executive

Executive Vice Chairman (Financial

7 Suruhanjaya Koperasi Malaysia
Services Sector Development)

8 Malaysian-owned Islamic bank Shari’ah Officer, Shari’ah Division

Koperasi Belia Islam Malaysia

9 Chief Executive Officer
Berhad

10 Malaysian-owned Islamic bank Shari’ah Committee Member

After the thematic analysis was performed, four categories of themes have

emerged under these broad headings: issues with current Islamic home financing

instruments, issues with current Islamic home financing institutions, capacity and

capability of financial cooperatives as a financially affordable Islamic home financing

institution, and operationalisation of CWFCMM Model. These categorical themes and

their ensuing sub-categorical themes are presented in Table 4.3.

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Categorical Themes
1. Issues with current Islamic
home financing instruments
2. Issues with current Islamic
home financing institutions
3. Financial cooperative as
an affordable Islamic home
financing institution
Table 4.3 Categorical Themes and Interview Questions
Interview Questions Sub-Categorical Themes
 Why do you think debt-based instruments such as bay’ bithaman 1.1 Debt-based Islamic home
ajil (BBA) and tawarruq (commodity murabahah) continue to financing and its effect on financial
play an integral part in Islamic home financing by Islamic affordability
commercial banks?
 Why do you think Islamic home financing instruments are 1.2 Lack of interest in musharakah
financially unaffordable? munataqisah (MM) home financing
 Why Islamic commercial banks seem reluctant to offer equity- by Islamic commercial banks
based instruments such as MM in Islamic home financing?
 How can we improve the role of government home financing 2.1 Government home financing
institutions in providing financially affordable Islamic home institution: A non-sustainable model
financing?
 Why do you think Islamic commercial banks are unable to offer 2.2 A conflict of interest between
financially affordable Islamic home financing instruments to its depositors and shareholders in
customers? Islamic commercial banks
 How do you foresee the role that can be played by financial 3.1 Business model and strategy
cooperatives in offering financially affordable Islamic home 3.2 Good governance
financing to its member-customers? 3.3 Risk management
3.4 Regulation and supervision
3.5 Human resource management
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 Table 4.3 Categorical Themes and Interview Questions (continued)

Categorical Themes Interview Questions Sub-Categorical Themes

4. Operationalisation of  How can waqf fund be utilised to enable financial cooperatives in 4.1 Mobilisation of cash waqf funds
CWFCMM Model offering financially affordable Islamic home financing to its member- 4.2 Investment and management of
customers? waqf funds
 How will the proposed Cash Waqf-Financial Cooperative-MM 4.3 Institutional platform(s) of
(CWFCMM) Model play a vital role in providing financially affordable choice
Islamic home financing solution to homeowners? 4.4 An urgent need for a paradigm
 This model incorporates a true implementation of MM that uses rental shift for waqf
rates as supposed to the Base Rate (BR) used by Islamic commercial
banks. How will this arrangement address the financial affordability
issue in Islamic home financing instruments?
 In order to operate this model, should this model involve State
Religious Islamic Councils (SRICs) and/or corporate sector? Why?
 What kind of challenges that may arise in materialising the above Cash
Waqf-Financial Cooperative-MM (CWFCMM) Model? In what way
and how?
 From your point of view, in what way the critical factors might
contribute to the success of financial cooperatives in offering the Cash
Waqf-Financial Cooperative-MM (CWFCMM) Model? How?

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4.6.2 Issues with Current Islamic Home Financing Instruments

The majority of the informants agreed that there are fundamental issues with the current

Islamic home financing instruments. The interview questions, along with the additional

probing questions, have revealed two emergent sub-categorical themes: the financial

unaffordability of debt-based Islamic home financing and limited availability of equity-

based Islamic home financing instruments offered by Islamic commercial banks. The

following excerpts from two informants explained the ‘rationale’ for this convergence

between debt-based Islamic home financing and conventional home instruments as well

as its consequential effect upon Islamic commercial banks:

BBA offer a similar process, characteristics, and output as compared to

conventional [home loan]. That is why I don’t prefer ‘al-inah’ or BBA.
With similar [profit] rates, they can fit the conventional [bank]’s interest
rates. It is convenient to both Islamic banks and their customers to use
BBA. At the beginning of the establishment of BIMB, you start with
BBA. Because this is the instrument that can fit the conventional [bank]’s
characteristic perfectly. And then, after many cases, the dispute on BBA,
and then now, starting from 2012, when BNM issues a circular on bay’
al inah that strengthen shari’ah requirement of bay’ al inah to the extent
that it is very difficult for the industry to comply with. Then, they try to
find another alternative to bay’ al inah to provide financing to customers.
Then they will go for what? Tawarruq! Which is in substance, can offer
similar characteristics and features to bay’ al inah as well as the
conventional one with only a very slightly different [structure] (Shari’ah
Advisor, Malaysian-owned Islamic bank).

If we look at the current situation, Islamic bank’s profit rate always moves
in tandem with conventional bank’s interest rates. However, unlike the
conventional banks, Islamic banks [sic] suffer on the thinning profit
margin, as their operating costs are relatively higher (Manager, Central
Bank of Malaysia).

An informant, who has been observing the same trend within the takaful (Islamic

insurance) industry, revealed that Islamic commercial banks will nevertheless, continue

its over-reliance on BBA-tawarruq. He further predicted that this trend would not be

slowing down, at least not in the immediate future:

It is convenient to both Islamic banks and their customers to use BBA.

Therefore, whichever direction they opt to revolutionise their

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 instruments, it will end up offering aqad that has similar characteristics
as the conventional [bank]’s (Shari’ah Advisor, Malaysian-owned
Islamic bank).

Although MM home financing is acknowledged by academicians, shari’ah

scholars, and practitioners alike (for example, see R. Haneef et al., 2011; Meera &

Razak, 2005), there is a lack of takers amongst Islamic commercial banks themselves

for MM home financing as it is too complicated to be implemented in the truest sense

as it involves at least three parties to a contract. The tri-partite nature of MM home

financing, for example, will only increase the financing costs such as shari’ah-related

costs, legal as well as documentation costs for Islamic commercial banking institutions.

As they are benchmarking their instrument offerings vis-à-vis the conventional ones,

any increase in cost, along with its inherent risks will be transferred to the customers in

order to maintain their instrument’s competitiveness vis-à-vis the conventional home

loan instruments. An informant further elaborated on the tedious nature of MM home

financing:

MM involves multiple contracts. So, [it is] more sophisticated and

complicated. It is not too friendly. Sometimes, the banks themselves do
not want [to offer MM] because they don’t understand it well. It is
especially harder as they may incur shari’ah risk. From the customer’s
perspective, using MM incur at least two costs–from fees and margins
that arise from the combination of ‘shirkah’, ‘ijarah’, and ‘sale’. BBA is
a straightforward sale. There is only one margin (Shari’ah advisor,
Malaysian-owned Islamic bank).

Another informant was inclined to have the same opinion:

MM is a bit tedious as it involves many parties. As compared to BBA, it

has only two parties (Chief Executive Officer, Koperasi Belia Islam
Malaysia Berhad).

An informant, however, claims that the current MM home financing instruments

in Malaysia is in actual fact, an al ijarah thumma al bay’ instrument (lease contract

followed by ownership of asset through a sale contract) or more popularly known as

AITAB:

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 When people think of musharakah, they think that that the losses will be
borne together. Whereas in fact, the musharakah portion is very small
and it is insignificant. Because it only [sic] coming at the beginning of
the contract. After that, the contract is governed under ijarah–which is a
fixed income. It is not a pure musharakah in the ideal sense. Musharakah
is only in the sense of ownership acquisition. Then the ijarah comes in.
So, the income does not come from musharakah. It comes from ijarah
and sale. The musharakah does not generate any profit. It is in fact–an
AITAB! In my opinion, AITAB and MM are the same in terms of its
economic output and its contextual relationship. There’s no substantial
difference between MM and AITAB. MM is not a profit-sharing contract.
It falls, for me, under sale-based financing as well (Shari’ah Advisor,
Malaysian-owned Islamic bank).

4.6.3 Issues with Current Islamic Home Financing Institutions

Both Islamic commercial banks and government-owned home financing institution,

namely LPPSA are two main home financing institutions in Malaysia. As illustrated in

Chapter 2, the rate of outstanding home financing for both institutions stands at 86.2%

and 8.2% respectively.

The newly corporatized LPPSA, also previously known as “Bahagian Pinjaman

Perumahan” (BPP) for example, is a government-owned and -funded home financing

institution. Ever since its inception in 1970, the interest/profit rate charged on housing

loan/Islamic home financing to all categories of civil servants has remained fixed at the

financially affordable rate of 4% per annum. It is the second lowest financing rate next

only to the 3% profit rate by Sabah Credit Corporation, which is also a government-

owned home financing institution. An informant noted a dangerous domino effect on

the government’s fiscal health if the civil servants continue to rely on government-

owned home financing institutions to provide financially affordable Islamic home

financing solution:

Although the government still disburses Islamic home financing, in my

opinion, it is not sustainable. If we take a look at my own field of research
[waqf for higher education financing], at the end of the day, it depends

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 entirely on the government’s fiscal health and capability. Now we’re
seeing that the government is gradually reducing its budget for higher
educations. And it’s not impossible for it to happen to Islamic home
financing [by LPPSA] (Waqf Researcher, Universiti Sains Islam
Malaysia).

However, Malaysia employs 1.26 million civil servants or only about 11 percent

of the labour force. The remaining labour force of 13.32 million has to depend mainly

on the Islamic commercial banks to finance their home purchase. The median profit rate

charged by Islamic commercial banks, for example, stood at 4.65% (see Chapter 3 for

further detail). This has created a considerable gap for the rest of the labour force in

their search for a financially affordable Islamic home financing solution. Evidently,

Islamic commercial banks are unable to even match the 4% profit rate offered by

LPPSA. This can be partly explained by Islamic economists such as Dar and Presley

(2000) and Sarker (2001), who have identified the relationship between an Islamic

commercial bank’s shareholders and its depositors as an ‘agency problem’. Equity

shareholders may prefer a higher risk profile for as compared to that of depositors as

they assume limited liability. Apart from that, equity shareholders’ profit potential is

unlimited, whereas the potential downward adjustment for losses is limited.

Nevertheless, regardless of their risk preference’s profiles, both shareholders and

depositors would expect some kind of return on their investment/saving. As a result,

Islamic commercial banks are unable to assume the mantle of the provider of a

financially affordable Islamic home financing institution akin to government-owned

home financing institutions.

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4.6.4 Financial Cooperatives as a Financially Affordable Islamic Home Financing
Institution: Capacity and Capability

Several authors have highlighted the possibility of financial cooperative as a financially

affordable Islamic home financing provider (Ebrahim, 2009; Mydin Meera & Abdul

Razak, 2005, 2009). That being said, for a financial cooperative to be a viable alternative

to the already-established Islamic commercial banks and government-owned financing

institutions, all informants unanimously agree that financial cooperatives must develop

their internal capacity and capability to offer financially affordable Islamic home

financing. Their responses can be sub-categorically themed into five critical

components: business model and strategy, good governance, risk management,

regulation and supervision, and human resource management. The following sections

elaborate the above-mentioned critical components of any given financial cooperative

in offering MM home financing.

4.6.4.1 Business Model and Strategy

Suruhanjaya Koperasi Malaysia, in its National Cooperative Blueprint 2002-2020 has

outlined financial services as one of its national key economic areas (NKEA)

(Suruhanjaya Koperasi Malaysia, 2010). The same report, however, encourages

financial cooperatives to branch out into newer financial service instruments such as ar-

rahn (Islamic pawn broking), instead of heavily depending on Islamic personal

financing instruments as their key economic driver. An informant stressed the danger

of over-relying on Islamic personal financing as a mainstay of their business model, as

well as the way forward for these financial cooperatives:

Yes, 90% of [financial] coop gives [Islamic] personal financing (IPF). It

will weaken/ruin our economy–increasing the household debt. You’re not
going to contribute to the nation building. We want to control this [from
going out of control]. IPF is a very profitable business as it is a guaranteed

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 payment system by ANGKASA. The concept needs a change. The
portfolio needs to be diversified. The composition needs to be gradually
reduced. Now we have 90% of IPF, then the target would be 70%, and
afterwards, 50%. (Executive Vice Chairman, Suruhanjaya Koperasi
Malaysia).

For many years, issues such as the lack of capital in most financial cooperatives

typically characterised cooperative movement in Malaysia and around the world

(Banerjee, Besley, & Guinnane, 1994; Bidin, 2007; Birchall, 2013a). Subsequently,

these problems have resulted in poor cash flow and financial performance,

mismanagement, and non-compliance with the Cooperative Societies Act 1993 and its

related legislation (Bidin, 2007; Othman, Mansor, & Kari, 2014). These problems are

making it even more difficult for a financial cooperative to acquire the sheer volume of

funds needed in order to be a viable, financially affordable Islamic home financing

provider. However, an informant revealed that there is one potential source of funds

that can be tapped by financial cooperatives:

Currently, we have 13, 000 cooperative societies. Their funds are mostly
being deposited in commercial banks. However, commercial banks are
not disbursing enough financing. Their requirements are also quite
stringent. What we have proposed in our discussions is for these deposits
to be pulled out and put into cooperative banks or financial cooperatives.
This is immediate fund (Executive Vice Chairman, Suruhanjaya Koperasi
Malaysia).

However, if the current financial cooperatives are to transform themselves into

cooperative banking institutions, the same informant highlighted the importance of not

losing track of their original mission, that is to help their members (see Birchall, 2012;

G. Griffiths & Howells, 1990):

We don’t want another commercial bank like Maybank. We’ve enough

of that [referring to commercial banks]. We’ve enough cooperative
banks. There is no need for a direct competition. Because the market is
too small. So, the value proposition of a new cooperative bank is to help
the underserved market–those who [sic] are turned away from the
commercial banks–but based on Islamic concepts. People who have the

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 potential but unable to obtain formal financing (Executive Vice
Chairman, Suruhanjaya Koperasi Malaysia).

Nonetheless, it was rather heartening to note that an informant (and his financial

cooperative) is even open to the idea of implementing MM home financing if they have

a financially affordable source of funds at hand:

We still have home financing instruments. But we cannot disburse them

anymore as we have cash flow problem. We can only give our Islamic
personal financing as it is in smaller amounts. The fund is just not there.
If we do have the fund, for example, a ‘free fund’, we’d be delighted to
give out Islamic home financing to our members. If we have the fund,
there’s nothing to stop us from implementing the real cooperative spirit–
helping out our members (Chief Executive Officer, Koperasi Belia Islam
Malaysia Berhad).

4.6.4.2 Good Governance

Unlike investor-owned firms such as Islamic commercial banks, financial cooperatives

differ from other enterprises in their concept, organisational structure, governance and

equity management (Birchall, 2012; Othman et al., 2014). Most notably, financial

cooperatives are characterised by their “one member, one vote” feature regardless of

his or her investment and he/she actively participates in policy setting, including

selecting board members (International Co-operative Alliance, 2017). In some financial

cooperatives, and especially in the case of Malaysia, its members tend to appoint

politicians and/or influential public figures to be their board members (Cuevas &

Fischer, 2006; Jalil, Hamid, & Rohim, 2012). Despite this, in order to ensure good

governance is practised in financial cooperatives, a vice executive chairman of SKM

revealed the way forward albeit the slight departure from normative cooperative

principles:

We tell them [financial cooperatives] that there is no shortcut. You have

to strengthen your corporate governance. That’s why we need to ensure
that Cooperative Board Members (CBM), at least three of them are our
appointees–members who have the experience, qualification in managing

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 a [cooperative] bank. It is because; the current cooperative system in
choosing their CBM is based on popular vote. You’ve to be a candidate
[for CBM]. If you lobby, then you’ll be one. We need to modify our
current guideline, granting the right for SKM to appoint permanent
CBMs. Then we’ll be able to overcome a major problem in financial
cooperatives–authorised signatories. The current system will result in
different CBMs in 3 years. Asset managers are not willing to deal with a
business entity that does not have authorised signatories (Executive Vice
Chairman, Suruhanjaya Koperasi Malaysia).

4.6.4.3 Risk Management

Financial cooperatives, just like any other not-for-profit financial institutions, put

special emphasis on the need to maximise ‘members’ surplus’ (Canning, Jefferson, &

Spencer, 2014; Goglio & Alexopoulos, 2014). Therefore, they usually undertake

different risk profiles than that of Islamic commercial banks. An executive vice

chairman of SKM stressed the importance of the following risk management

requirement:

If financial cooperatives want to secure deposits from non-members, this

is when we’re going to come in. we need to make sure they have the
capability, high corporate governance, and strong risk management to
manage this fund. We don’t want people to lose their deposits. You need
to have the system, expertise. We’ll be doing stress tests. We don’t want
them to merely finance business ventures. We expect them to help
cooperative members as well (Executive Vice Chairman, Suruhanjaya
Koperasi Malaysia).

4.6.4.4 Regulation and Supervision

A number of informants emphasised the importance of SKM to play a more proactive

role in the development of financial cooperative in general:

Eventually, these cooperative banks will come into our purview. They’ve
moved into shadow banking. They are in fact, commercial banks. In order
to enforce their collective governance structure (as a cooperative society),
you need to have a strong regulatory body to oversee their operations
(Manager, Central Bank of Malaysia).

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 SKM needs to play their role. They have their own guidelines. But it is
inadequate at best. The current one is not enough. We, the bankers are
‘tired’ of reading the guidelines [by BNM] (Shari’ah Officer, Malaysian-
owned Islamic bank).

One informant, however, adopted a cautionary tone on how SKM still has a long

way to go:

There was one instance, where we went into the field with SKM to
develop their supervisory capability, as we did the supervisory activities
together. The first few days, they were with us [BNM]. Then they
disappeared. The big issue here is governance and capacity. And the
expertise in manning Islamic financing operations: who is their shari’ah
committee members? (Manager, Central Bank of Malaysia)

On the other hand, should financial cooperative face issues or problems

consequential of carrying out this model, an informant proposed a way to circumvent

this predicament:

You get the annual general meeting (AGM) to approve of a very loose
approval. Don’t be specific. That’s the only way to do it. If there’s a query
from SKM, you’ll say, “We’ve already got the resolution.” But the
resolution is not specific. Let say if you want to set up this [CWFCMM
Model]. You go to the AGM and say, “We want to set up housing
investment portfolio. We want to raise RM10 million. And these are the
flows that we’re going to adhere.” Get it approved by the AGM and pass
it to SKM! (Vice Chairman, Koperasi Ma’ahad Tahfiz Tijarah Gombak
Berhad).

An informant revealed one major difference in the governance structure between

BNM and SKM–perhaps explaining the root cause of the above-highlighted

shortcomings:

I am seconded from Bank Negara. We are different. We’re very

professional. We address the issue head on! We don’t report to Ministry
[of Finance] (MoF). We are totally independent. Bank Negara reports to
the Minister of Finance, not MoF itself. Currently, we, the SKM are
subject to policies that are determined by the Ministry [of Domestic
Trade, Cooperatives and Consumerism]. I’m not one to say that this is
wrong. It is only that the Ministry has different priorities [as compared to
us]. They have their own agenda in helping out villagers and fishermen.
(Executive Vice Chairman, Suruhanjaya Koperasi Malaysia).

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4.6.4.5 Human Resource Management

The old method of running a financial cooperative with straightforward management

schemes through relatively simple administrative practices is no longer adequate. To

ensure growth, financial cooperatives need to hire sophisticated, professional

management in order to deal with the increasingly complex, specialised, and unique

Islamic financial services. For example, there is a need for additional education and

training regarding Islamic financing instruments, sound asset/liability management, and

various risks management techniques. An informant reveals the dire need for such

training:

The project is as viable if the persons running [sic] it. Viability rests on
the people. They can ‘twist and turn’. For me, that’s top priority. Then
only you can say about return on investment (ROI), resources. They are
not even able to compute ROI, return on equity (ROE), return on assets
(ROA)! (Vice Chairman, Koperasi Ma’ahad Tahfiz Tijarah Gombak
Berhad).

In the case of financial cooperatives, it has been generally argued that lack of

good managers makes it difficult for these types of businesses to survive (Basterretxea

& Albizu, 2011). In general, financial cooperatives are facing an uphill battle to attract

and retain valuable managers, as the salary limitations such as the material incentives

or career structure are incomparable to Islamic commercial banks. One informant gave

the following example of the huge pay gap between financial cooperatives and its

commercial banking counterparts:

When we talk about human capital, one of the big limitations–is their
inability to match other sectors. For example, my [remuneration] package
is being paid by Bank Negara [Malaysia]. That’s why I don’t mind
coming here [SKM]. Besides that, the training is just inadequate.
Although Cooperative College Malaysia (CCM) does play its part, it
needs improvement. When it comes to new sectors, are they capable of
taking cooperatives to the next level? (Executive Vice Chairman,
Suruhanjaya Koperasi Malaysia).

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4.6.5 Operationalisation of CWFCMM Model

This study proposes the mobilisation of cash waqf institutions to act as a complementary

source of funds to be used by financial cooperatives. The informants shared their

concerns on the Model’s modus operandi, and more importantly, the way forward to

operationalise it. This ‘CWFCMM Operationalisation’ theme emerged from three main

questions, as outlined earlier in Table 4.3. The majority of the informants affirmed the

suitability of CWFCMM Model in assisting the low- to middle-income Malaysian

households to own a house through financially affordable Islamic home financing

instruments. Below are the respondents’ views that were generated from the interviews:

I agree wholeheartedly with this model. Because this method can truly
mobilise funds from the public. But Malaysians can’t see past this. If we
look at Turkey, for example, their waqf is very much ‘alive’ amongst
them. Take another example, Oxford University, even though they’re
non-Muslims, the ‘spirit of waqf’ exists (Chief Executive Officer,
Koperasi Belia Islam Berhad).

We need to implement this [model] as the risk is well-shared. It is good

for the community and is really within cooperative principles (Vice
Chairman, Koperasi Ma’ahad Tahfiz Tijarah Gombak Berhad).

In Kuala Lumpur, everyone can’t afford to buy houses anymore. When

they went to the bank, they’re inundated with terms and conditions. In the
end, they’ll take in even more debts. The idea should be that we can at
least match the LPPSA’s rate [of 4%]. If the government is no longer
capable to subsidise civil servant’s home financing, that’s okay and
understandable. But they need to help us in establishing these cash waqf
institutions. Support the cooperative movements as well. If they’re not
able to directly contribute to the [CWI] funds, they can at least encourage
the GLC [government-linked companies] to contribute as part of their
CSR [corporate social responsibilities] (Waqf Researcher, Universiti
Sains Islam Malaysia).

Since the proposed CWFCMM Model can be implemented, the informants were

further queried about the finer details of the workings of the model. In response, the

informants raised several issues regarding its modus operandi. The subsequent views

derived from the interviews were collated into the following sub-categorical themes:

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mobilisation of cash waqf funds, investment and management of cash waqf funds, the

institutional platform of choice, and the urgent need for a paradigm shift for waqf.

4.6.5.1 Mobilisation of cash waqf funds

Since cash waqf contributions can be endowed via small amounts, one of the fastest

ways to mobilise cash waqf fund is via mandated salary deductions by Muslim civil

servants. An informant from an SRIC’s incorporated company that manages waqf cited

an example from the state of Sarawak:

If we get Muslim civil servants for a mandated, monthly salary deduction

even at RM1 or even RM5, I don’t think that they’d mind that at all. Our
fund will increase dramatically (Executive, Perbadanan Wakaf Negeri
Sembilan).

Another informant cited one local example of waqf fund mobilisation where they

engage in initiatives to harness the expertise and heighten the awareness of waqf in a

university (see Chaabane et al. 2015) by appointing them to be their waqf collection

agent:

We have been working together with a university on mutawwali

appointment. We can simultaneously educate them on matters pertaining
waqf (Executive, Perbadanan Wakaf Negeri Sembilan).

Another informant stressed the need for the government to go an extra mile by

encouraging its linked companies (GLCs) to facilitate cash waqf mobilisation:

Since they [government] is no longer capable of providing financially

affordable Islamic home financing directly to the people, they need to
play a facilitator role instead. If they can’t provide yearly contributions
[to the fund], they need to encourage their GLCs to do so. It means,
instead of normal contribution through their CSR, they can donate to this
[cash waqf] fund. The Islamic brotherhood spirit is better embodied here
[in waqf] (Waqf Researcher, Universiti Sains Islam Malaysia).

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4.6.5.2 Investment and management of waqf funds

Some State Islamic Religious Councils (SRICs) are only keen to convert the cash waqf

funds into real assets through shari’ah practice of istibdal. One of them, however, has

added an extra element of ‘waqf multiplication’. Here is how it is done:

Once we have the waqf lands to be developed, we’ll first put a ‘value’ on
them. Although we have them free [of charge], we’ll still put a value on
them anyway. Say 10-acres of land valued at RM2 million. Then, we’ll
account them into the gross development costs (GDC). After we
developed them, whatever proceeds we get, we’ll not merely replace the
waqf land, but we’ll add say, another 2 to 3 acres on top of that 10-acres
(Managing Director, Urus Maju Ehsan (M) Sdn. Bhd.).

An informant shared an exciting prospect with the cash waqf’s investment

vehicles, besides the real estate option, which seems to be the default option for many

SRICs:

We are moving towards equity and unit trust. Real estates are being
implemented right now. But both equity and unit trust is still in the
prototyping stage (Shari’ah officer, Malaysian-owned Islamic bank).

One informant, on the other hand, preferred if the CWI opts for a safer

investment vehicle–sukuk (Islamic bonds) and Islamic fixed deposits in order to stay

true to the perpetuity nature of waqf (see Mohammad, 2008; Mohsin, 2013):

Sukuk is more secure due to its fixed-income nature. These [equity and
unit trust] vehicles incur higher risks. They [fixed-income investment
vehicles] are more suitable to the nature of waqf. Take equity for
example. What if the Securities Commission downgrades some counters
in our portfolio to non-shari’ah compliant? Then we’ll have to withdraw
our funds, and perform the income-purification process (sic). Does the
nature of the capital market have its ups and downs? If it does go up, it
augurs well for the waqf fund. But what if it goes down? (Shari’ah
Advisor, Malaysian-owned Islamic bank).

The informant then proceeded to argue for an agent-based (wakalah) contract to

be implemented by in the joint-management committee (JMC):

Using musharakah in the JMC structure is too complicated for my liking.

It is because, if there is an interdependency between JMC and financial
cooperative, it will indemnify the contract. For example, if there is an
abandoned house issue, will it affect the cash waqf institutions as well?

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 Structurally, wakalah is simpler and the fee is not that much. (Shari’ah
Advisor, Malaysian-owned Islamic bank).

4.6.5.3 Institutional platform: SRIC or corporate?

The informants were asked about their views regarding the institutional platform to

establish CWFCMM Model. Among the options given to the informants was whether

the CWFCMM Model should be operated under SRIC’s entity or corporate entity.

Majority of the informant mentioned that CWFCMM should be operated as a separate

entity to that of the SRIC and to be modelled after the corporate sector. Below is one of

the respondents’ views that were generated from the interviews:

It is high time that we revisit this rule [SRIC as the sole waqf trustee]. If
we continue to do so, it will surely impede the potential for waqf to grow
(Chief Executive Officer, Koperasi Belia Islam Malaysia Berhad).

However, an informant advocated a different direction altogether, citing the

example of the current joint venture between Selangor State Islamic Religious Council

and Bank Muamalat Malaysia Berhad. By doing so, SRICs will be able to overcome the

widely held, negative perception amongst waqf donors–the lack of trust and

accountability (see Ihsan & Mohamed Ibrahim, 2011):

I prefer a combination of corporate and sole trustee [institutions] as we

can harness expertise from both parties. This is a very good approach in
carrying out this [model]. If we were to put everything into SRIC’s hands,
it will do more harm than good. For example, if we look at the element
of trust, I’ve yet to see an annual waqf report–a good measurement of
accountability by these SRIC. That’s why corporate waqf is
circumventing this. They tend to do away with SRIC’s involvement
altogether (Waqf Researcher, Universiti Sains Islam Malaysia).

Moving forward, the same informant repeatedly alluded to the need for full

accountability by cash waqf institutions:

One of the way [for this model to work] is to establish a sense of

accountability–reporting every activity held by them. We have no idea
how much money they have accumulated so far. They’ve only mentioned
about their [waqf] projects–Development Funds, People’s Bazaar. Take

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 the [waqf] hotels for example. “Okay, we’ve built hotels on waqf land.”
So what? Where [sic] the money [from the hotel’s operation] has gone
into? We’d like to see where the benefit/profit from such projects is
going. Are they really going to the needy? We have to remember another
thing–our donor base is more likely to be middle class individuals. Most
of them are degree holders–they’re more likely to [go] for accountability
(Waqf Researcher, Universiti Sains Islam Malaysia).

4.6.5.4 Waqf: An Urgent Need for a Paradigm Shift

A large number of informants agreed on the dire need for a paradigm shift from the old

mentality of waqf–from land for mosques and graveyards (see Shakrani et al. 2003;

Mustaffa & Muda 2014) to a more contemporaneous form of cash waqf:

The mentality of waqf is for mosques and graveyards–for the afterlife.

What we currently have [waqf property] is not big enough to
‘revolutionise’ cooperatives. However, we do need this kind of
[CWFCMM] model to help out our members (Executive Vice Chairman,
Suruhanjaya Koperasi Malaysia)

Waqf in Malaysia, from my understanding, the widely-held perception is

that waqf is only to be used for mosques and graveyards (Shari’ah
Officer, Malaysian-owned Islamic bank).

The public is only interested in endowing their lands for graveyards and
mosques. When we talk about commercialisation, they are somewhat
apprehensive (Executive, Perbadanan Wakaf Negeri Sembilan).

However, there is a long way to go for this, considering that an informant

revealed his concern for a surprisingly basic need at Perbadanan Wakaf Negeri

Sembilan–full time-staffs:

Staffing is my biggest concern. I’m the only one who’s been appointed
as a full-time, permanent staff. My other staffs are what we called
‘sukarelawan dakwah’ (voluntary preacher) appointees by SRIC. They
are being paid allowances instead of full salary. We have seven (7) staffs.
If even half of us went out there [to do promotional activities], then our
basic task at hand [of running the office] wouldn’t be completed
(Executive, Perbadanan Wakaf Negeri Sembilan).

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 DISCUSSION

The findings from this study are novel in that they are a description of the applicability,

suitability, and the sustainability of the potential venture between cash waqf institutions

and financial cooperatives toward achieving the financially affordable Islamic home

financing provision. The narratives in this study also showed that even the practitioners

in the Islamic commercial banking and finance industry share the same sentiments on

the prevailing issues and problems that have been ‘plaguing’ the overall Islamic home

financing institutional framework.

A case in point, most informants have noted the same ‘mirror effect’ of Islamic

home financing instruments to its conventional home loan counterparts, especially the

BBA-tawarruq home financing which is widely discussed in the literature. For example,

as argued by Mydin Meera and Abdul Razak (2009, p.3):

Due to arbitraging activities, the BBA has converged to the conventional

mode where the computational formulas are similar to the conventional
and where the profit rate tracks the market interest rate. Instead of
charging the customer interest, financiers charge a profit rate that is
dependent on the market interest rate.

At least two other informants have attributed this substantial similarity due to

the dual or parallel banking structures. Another informant argued that unlike the

conventional banks, Islamic commercial banks need to bear costs that are unique to

them–shari’ah-related costs. It involves at least an additional layer of operational

structure, which involves documentation, contract execution, governance, and remedial

action(s) upon non-shari’ah compliant events. Consequentially, these extra costs render

most Islamic home financing instruments as a financially unaffordable alternative even

to its conventional home loan counterparts. As a result, financially unaffordable Islamic

home financing instruments offered by Islamic commercial banks are in danger of

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compromising one of Islamic commercial banks’ original and novel objectives, namely

to implement “a just and equitable distribution of wealth” (Farook, 2007, p. 31).

As a relatively new Islamic home financing instrument available in the market

which was first introduced in 2006, academicians and practitioners alike are seeing MM

home financing as a more financially affordable alternative to BBA (Mydin Meera &

Abdul Razak, 2005, 2009; Smolo & Hassan, 2011). Presently, however, there are only

6 out of 16 Islamic commercial banks in Malaysia that are willing to offer MM home

financing (see Chapter 2). This rather low number of Islamic commercial banks that

offer MM home financing is in tandem with Mydin Meera and Abdul Razak's (2005)

argument that MM home financing is less attractive for Islamic commercial banks since

its true implementation would yield lower profits. Several informants who are actively

involved in the Islamic commercial banking industry have further attested to the

complexity of contracts for the genuine implementation of MM home financing. At

least one informant seemed to be in agreement with Mydin Meera and Abdul Razak

(2009)’s assessment regarding BBA home financing’s simplicity. Ultimately, if this

trend persists, it will render Islamic home financing instruments as financially

unaffordable options to potential homebuyers.

Apart from that, a quick glance at the MM home financings offered by

participating institutions revealed a divergence from the original modus operandi of

MM home financing as originally practised by financial cooperatives such as American

Finance House LARIBA and Guidance Residential, LLC in the USA and Ansar Co-

operative Housing Corporation Ltd in Canada. This is because they use the

exogenously-determined base financing rate (BFR) or base rate (BR) (Isamail et al.,

2013; Mohd Ali et al., 2012; Shuib et al., 2014). MM home financing by these financial

cooperatives, on the other hand, use endogenously determined rental rate as a

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benchmark. One informant who is also a shari’ah advisor even went to suggest that

MM home financing as practised by Islamic commercial banks in Malaysia is in fact

‘AITAB in disguise’. The informant further argued that the musharakah (partnership)

portion of the MM home financing in Malaysia is in fact, only comes at the beginning

of the contract, and mimics AITAB for the remainder of the financing duration.

Therefore, MM home financing instruments currently offered by Islamic commercial

banks have digressed from the normative form of MM home financing by financial

cooperatives, especially in Northern America; hence, they expose the Malaysian

homeowners to financially unaffordable Islamic home financing instrument. As MM

home financing by Islamic commercial banks uses BFR/BR as a benchmarking tool,

even a slight profit rate increase will eventually lead to a higher debt-service ratio (DSR)

(Anderson et al., 2016).

Previous work suggests that issues such as the lack of capital, conventional

activities, weak structure, and the absence of good corporate governance in some

cooperatives characterised the typical financial cooperative movement in Malaysia

(Bidin, 2007; Othman et al., 2014). As revealed by the then Former Minister of

Domestic Trade, Cooperatives and Consumerism (KPDNKK) Dato’ Seri Ismail Sabri

Yaakob, most of the internal audit committees appointed by members of financial

cooperatives in Malaysia have failed to discharge their fiduciary duties, functions, and

responsibilities (Jalil et al., 2012). An informant who is also a financial cooperative’s

vice chairman suggested that financial cooperatives and to a larger extent, cooperative

societies, tend to appoint board members among politicians and/or public figures who

usually lack expertise as compared to their incumbent management team.

Therefore, to overcome the above-mentioned issues, one of the National

Cooperative Policy’s (2002-2020) strategic cores which is to empower the financial

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cooperative through effective monitoring and enforcement activities needs to be

implemented (Suruhanjaya Koperasi Malaysia, 2010). The Malaysian Cooperative

Societies Act (2007) governs Islamic home financing, just like other types of Islamic

financing instruments. As financial cooperatives are getting more involved in the

financial services market, SKM has created a supervisory unit, “Unit Khas

Pembangunan Sektor Kewangan Koperasi” (Financial Services Sector Development’s

Special Unit) with seconded Bank Negara Malaysia supervisory officers in order to help

with the overall financial cooperatives’ supervisory activities. However, two informants

from Bank Negara Malaysia agreed that there is a huge gulf in supervisory capabilities

and qualities between SKM and that of BNM’s. Apart from that, some of the informants

have also argued that there is an urgent need for the cooperative board members (CBM)

to be more proactive as there is a tendency amongst them to be apathetic on ‘tactical

matters’ (Mohd Roslin & Rosnan, 2012).

In the National Cooperative Policy (NCP) 2010-2020, the ministry in charge of

cooperatives, Minister of Domestic Trade, Cooperatives and Consumerism (KPDNKK)

contended that the majority of the cooperatives are small in size and most importantly,

capital or source of finance (Suruhanjaya Koperasi Malaysia, 2010). As of now,

however, most cooperatives are dependent on the internal resources of capital (i.e.,

share capital, member’s fees, and retained earnings). Although some exceptions are to

be made for some financial cooperatives, they tend to disburse this external source of

funds in the form of Islamic personal financing (IPF). Although IPF is a hugely lucrative

market segment for these financial cooperatives, participation in the Islamic home

financing market is an actualisation of one of their core, organisational purposes–

helping out their members in need. To that end, there is a potential for a synergistic joint

venture between them and cash waqf institutions.

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 It was demonstrated from the findings that the overwhelming majority of the

informants were open to the idea of implementing the CWFCMM Model, albeit with

some adjustments to its operationalisation aspects. However, most of the informants

expressed their concern on issues related to accountability (or lack thereof) amongst

SRIC in waqf-asset management, which is the sole trustee of waqf-related matters in

their respective state. Although they are open to the implementation of this model, they

alluded to an urgent need for a paradigm shift amongst Malaysian Muslims regarding

waqf since the old mentality of waqf associates it exclusively for use for graveyards,

mosques, and tahfiz schools (Mustaffa & Muda, 2014; Shakrani et al., 2003). They also

called for a contemporaneous use of cash waqf as well as the commercialisation of waqf

lands.

CHAPTER SUMMARY

This study contributes to the financial cooperative and Islamic finance literature by

demonstrating their unique value proposition in helping out the marginally excluded

low- to middle-income Malaysians to affordably own a house. Despite its huge

potential, this research has managed to shed light on the varying degree of latent issues

and challenges that might arise out of this CWFCMM Model. Financial cooperative and

cooperative movements in general have a long way to go in proving themselves to be a

viable alternative by practising correct business models, implementing good

governance structure, and acquiring the right tools and people for the job at hand. On

the other hand, cash waqf institutions and SRICs, in general, need only to work on their

accountability issue.

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 CHAPTER FIVE

EXAMINING THE BEHAVIOURAL INTENTION TO

PARTICIPATE IN THE CASH WAQF-FINANCIAL
COOPERATIVE-MUSHARAKAH MUTANAQISAH (CWFCMM)
MODEL

INTRODUCTION

After having qualitatively validated the CWFCMM Model amongst the supply-side

stakeholders in Chapter 4, this chapter embarks on testing the acceptability of the model

on arguably the model’s most important stakeholder–potential homeowners. In order to

do so, the best way is to gauge the customer’s intention to participate in CWFCMM

Model using the Theory of Planned Behaviour (Research Objective #4). This chapter

begins with the contextual argument for the use of an extended Theory of Planned

Behaviour (TPB). The conceptual framework was developed via a review of related

literature to support the use of TPB in determining the behavioural intention of potential

homeowners to participate in the CWFCMM Model. Literature support for the four

research hypotheses is also presented. The research methodology used in the study is

introduced including the rationale for its use, the sampling plan, the research instrument

development, and data analyses procedures. The chapter then proceeds to present the

results and the subsequent discussion. This chapter ends with the summary. Before

reviewing empirical applications of TPB, this chapter provides a brief historical

overview of TPB and the preceding Theory of Planned Action (TRA), which provides

the basis for TPB.

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 REVIEW OF RELATED LITERATURE: THE THEORY OF PLANNED
BEHAVIOUR

Since Icek Ajzen first introduced the Theory of Planned Behaviour (TPB) in his seminal

work, “From Intentions to Actions: A Theory of Planned Behavior” more than 30 years

ago, this theoretical framework has arguably become one of the most influential and

frequently cited for the prediction of human social behaviour (Ajzen, 2011; McEachan,

Conner, Taylor, & Lawton, 2011). Nosek et al. (2010) for instance, by means of

“cumulative” and “career-stage” indicators, rated Ajzen’s research programs as having

the highest scientific impact amongst his fellow North American social psychologists.

TPB was developed from the Theory of Reasoned Action (TRA), which argues

that most human behaviour is autonomous (Fishbein & Ajzen, 1975). Human

behaviours are often influenced by their behavioural intention, which is defined as the

likelihood to act and the immediate determinant of a behaviour (Ajzen, 1985). Fishbein

and Ajzen (1975) claimed that behavioural intention is the best predictor of human

behaviour. Thus, it is highly probable that human intention can be a measure of actual

behaviour if one’s intention is properly analysed. In TRA, an individual’s intention is a

function of his/her attitude towards behaviour and their belief that other people who are

important to them think they should or should not perform it (Fishbein & Ajzen, 1975).

Many behaviours, however, are not always autonomous (Ajzen, 1991). This leads to

one of TRA’s most fundamental limitations: that the theory overlooks the importance

of consumer’s autonomous control on his/her decision-making, which is also referred

as “planned”.

Therefore, Ajzen (1991) extended the TRA by adding an additional factor–

perceived behaviour control and subsequently introduced TPB. Perceived behavioural

control is one’s perception about his or her capability to successfully engage in a

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behaviour (Ajzen, 1991). This factor refers to the perceived ease or difficulty of

performing the behaviour. The more resources and opportunities an individual has

relative to a particular action, he or she will more likely to engage in a specific

corresponding behaviour. Likewise, if individuals perceive external obstacles as well as

deficits in their personal capabilities, he or she is less likely to perform the behaviour

(Ajzen, 1991). In summary, TPB postulates that individual’s intentions and his/her

subsequent behaviours are determined by three factors: attitudes toward the behaviour,

subjective norms, and perceived behavioural control (Figure 5.1).

Figure 5.1 Theoretical Framework of Theory of Planned Behaviour

Source: Ajzen (1991)

Historically, TPB has been applied in a variety of studies to investigate and

explain the determinants of human social behaviours, especially those related to health

(Burgess et al., 2016; Giles et al., 2007; Hales, Evenson, Wen, & Wilcox, 2010; Kassem

& Lee, 2004; McEachan et al., 2011) as well as business and management (Gopi &

Ramayah, 2007; Kautonen, van Gelderen, & Fink, 2015; Wang & Ritchie, 2012).

Nevertheless, it was Fishbein and Ajzen’s (1975) Theory of Reasoned Action (TRA)

which has primarily been used in studies on Islamic financial services instruments

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selection in Malaysia (Amin, 2012a, 2012b; Amin, Abdul Rahman, Sondoh Jr, & Chooi

Hwa, 2011; Amin, Ghazali, & Supinah, 2010; Md. Taib, Ramayah, & Abdul Razak,

2008). Even recent studies regarding the behavioural intention of Muslim consumers

i.e. in Bangladesh in choosing Islamic financial instruments (Sharma, Newaz, & Fam,

2016) and micro-entrepreneurs in using an Islamic micro-investment model (R. Abdul

Rahman, Muhammad, Ahmed, & Amin, 2016) employed TRA, albeit with some

additional factor(s) to form the conceptual framework of their respective studies.

Although TRA factors included both attitude and subjective norms in their

theoretical framework, it lacks the autonomous control factor. Therefore, during the last

five years, especially in the Malaysian setting, TPB has been widely applied to

understand factors associated with patronisation of Islamic financial services

instruments such as Islamic home financing and takaful (Amin, Abdul Rahman, &

Abdul Razak, 2013, 2014a, 2014b; Md Husin, Ismail, & Ab Rahman, 2016). Therefore,

in juxtaposing these studies against the current study, TPB is viewed as a more relevant

framework as it incorporates the element of ‘planned’. This is because the investigation

on the application of CWFCMM Model requires potential homeowners who participate

in a financially affordable Islamic home financing scheme to voluntarily become a

member of a financial cooperative. In addition, they need to make regular financial

commitments to the cooperatives for at least 6 months prior to their participation in the

CWFCMM Model. As such, TPB is deemed as appropriate. That being said, the study

also incorporated TRA in the review of the related literature as both TPB and TRA share

the “attitude” and “subjective norm” constructs.

Apart from that, a noticeable gap is observed in the literature of Islamic financial

services selection, namely the absence of any study that applies the TRA/TPB to

investigate the patronisation of Islamic financial services instruments by third sector

136
economic institutions i.e. cash waqf and/or financial cooperative. Although there was

one major American study which applied TRA for loan applications from a credit union

(Ryan & Bonfield, 1980), to the best of the author’s knowledge, no known research has

been published on determinants of homebuyers’ intention to use Islamic home financing

services by financial cooperatives using the TRA/TPB framework in Malaysia.

Therefore, this study contributes to the knowledge in the related domain by providing

evidence for the factors influencing MM home financing by financial cooperatives

using the TPB framework. Table 5.1 provides a summary of previous studies on Islamic

financial services selection studies.

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 Table 5.1 Summary of Related Literature on Islamic Financial Services Selection

Author(s)/Year Title Country Respondents Underpinning Theory

Factors influencing intention to use
West Malaysia Postgraduate
Md. Taib et al. (2008) diminishing partnership home TRA
(Klang Valley) students
financing
Determinants of qardhul hassan
H. Amin, Ghazali, and East Malaysia Islamic bank
financing acceptance among Malaysian TRA
Supinah (2010) (Labuan) customers
bank customers: An empirical analysis
Determinants of customers' intention to
H. Amin, Rahman, Jr, Islamic bank
use Islamic personal financing: The Malaysia TRA
and Hwa (2011) customers
case of Malaysian Islamic banks
An analysis on Islamic insurance East Malaysia Undergraduate
H. Amin (2012a) TRA
participation (Labuan) students
East Malaysia (Kota
Patronage factors of Malaysian local
H. Amin (2012b) Kinabalu and Bank customers TRA
customers toward Islamic credit cards
Labuan)
Factors influencing Malaysian bank
customers to choose Islamic credit East Malaysia
H. Amin (2013) Bank customers TRA
cards: Empirical evidence from the (Labuan)
TRA model
H. Amin, Abdul An integrative approach for
East Malaysia (Kota TPB and Innovation
Rahman, and Abdul understanding Islamic home financing Bank customers
Kinabalu) Diffusion Theory (IDT)
Razak (2013) adoption in Malaysia
H. Amin, Abdul East Malaysia (Kota
Consumer acceptance of Islamic home
Rahman, and Abdul Kinabalu and Bank customers TPB
financing
Razak, (2014a) Labuan)

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 Table 5.1 Summary of Related Literature on Islamic Financial Services Selection (continued)

Author(s)/Year Title Country Respondents Underpinning Theory

Willingness to be a partner in
H. Amin, Abdul
musharakah mutanaqisah home
Rahman, and Abdul Malaysia Bank customers TPB
financing: Empirical investigation of
Razak (2014b)
psychological factors
The roles of mass media, word of Decomposed Theory of
Md Husin, Ismail, and West Malaysia Prospective takaful
mouth and subjective norm in family Planned Behaviour
Ab Rahman (2016) (Kuala Lumpur) purchasers
takaful purchase intention (DTPB)
Determinants of intention of using
Usman and Lizam Potential
mortgage in financing home ownership Nigeria (Bauchi) TPB
(2016) homeowners
in Bauchi, Nigeria
Muslim religiosity, generational
Sharma, Newaz, and
cohorts and buying behaviour of Bangladesh Muslim consumers TRA
Fam (2016)
Islamic financial products
Abdul Rahman, Micro-entrepreneurs’ intention to use
Muhammad, Ahmed, Islamic micro-investment model Bangladesh Micro-entrepreneurs TRA
and Amin (2016) (IMIM) in Bangladesh

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 CONCEPTUAL FRAMEWORK AND HYPOTHESES DEVELOPMENT

Based on the theoretical framework from both Theory of Reasoned Action (TRA) and

Theory of Planned Behaviour (TPB) which were reviewed in the preceding section, the

following conceptual framework (see Figure 5.2) was developed.

Figure 5.2 Conceptual Framework of Theory of Planned Behaviour

Note. The path between Intention and Behaviour is not estimated

Specifically, the research study empirically tested the extended TPB model with

the following constructs: Attitude, Subjective Norm, Perceived Behavioural Control,

and Perceived Cost Advantages of CWFCMM Model.

5.3.1 Attitude

Ajzen (1991, p. 188) defined attitude as “the degree to which a person has a favourable

or unfavourable evaluation or appraisal of the behaviour in question”. Previous studies

have thus far established that attitude can predict the behavioural intention to use

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Islamic financial services instrument (R. Abdul Rahman et al., 2016; Amin, 2012a,

2013, Amin et al., 2013, 2011, 2010, Amin, Abdul Rahman, et al., 2014a, 2014b; Md.

Taib et al., 2008; Sharma et al., 2016). Although most of these studies involved

investigations of the behavioural intention to choose Islamic home financing instrument

such as MM (Amin et al., 2013; Amin, Abdul Rahman, et al., 2014a, 2014b; Md. Taib

et al., 2008; Usman & Lizam, 2016), it is interesting to note that most of them were

carried out on Islamic commercial banking instruments, and none is done within the

context of Islamic home financing instrument by financial cooperatives. As argued by

scholars such as Ebrahim (2009) and Mydin Meera and Abdul Razak (2005), the current

MM home financing practices in Islamic commercial banks reveal a marked departure

from the normative form of MM home financing as originally practised by financial

cooperatives in North America. Therefore, there might be some attitudinal items on the

business values and models of financial cooperatives such as common bond (see

Birchall, 2012, 2013b) that might not be captured in the previous studies. Therefore, if

a homeowner has a favourable and positive attitude towards CWFCMM Model, he or

she will be more likely to be a participant. In view of this, the following hypothesis was

formulated:

H1: Positive attitude about the CWFCMM Model is a significant predictor of

Malaysian potential homeowners’ intention to participate in the CWFCMM Model.

5.3.2 Subjective Norm

Ajzen (1991, p. 188) defined subjective norm as the “perceived social pressure to

perform or not to perform the behaviour”. In studies on Islamic financial services

selection, social pressure especially from family members, close friends and influential

figures have been found to be a significant predictor of behavioural intention (R. Abdul

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Rahman et al., 2016; Amin, 2012a, 2012b, 2013, Amin et al., 2013, 2011, 2010, Amin,

Abdul Rahman, et al., 2014a, 2014b; Md. Taib et al., 2008; Md Husin et al., 2016;

Usman & Lizam, 2016). As purchasing a house is one of the biggest financial decisions

that potential Muslim homeowners need to make in their life, they are more likely to be

overwhelmed by the social pressure to obtain a shari’ah-compliant home financing. If

those important to them expect them to participate in schemes that are permissible by

shari’ah, there is a likelihood that their intention to use CWFCMM Model would be

high or vice versa. It is therefore hypothesised that:

H2: Positive subjective norm for participating in the CWFCMM Model is a

significant predictor of Malaysian potential homeowners’ intention to participate in the

CWFCMM Model.

5.3.3 Perceived Behavioural Control

Ajzen (1991, p. 188) defined perceived behavioural control as “perceived ease or

difficulty of performing the behaviour and it is assumed to reflect past experience as

well as anticipated impediments and obstacles”. In Islamic financial services study

setting, it was found that perceived behavioural control have a significant effect on the

behavioural intention (Amin et al., 2013; Amin, Abdul Rahman, et al., 2014a, 2014b;

Usman & Lizam, 2016). However, unlike these studies that were centred on Islamic

home financing instruments by Islamic commercial banks, potential CWFCMM Model

participants have to actually join a financial cooperative for at least six months, save up

enough money in the cooperative shares that eventually equal to the down payment

required to buy their house. Hence, the homebuyers have to make autonomous decisions

to overcome these constraints. If the perceived control over these constraints is high,

142
then the intention and ability to participate in the CWFCMM Model will be high.

Therefore, is it hypothesised as follows:

H3: Perceived behavioural control over the decision of participating in the

CWFCMM Model is a significant predictor of Malaysian potential homeowners’

intention to participate in the CWFCMM Model.

5.3.4 Perceived Cost Advantages of CWFCMM Model

Although TPB is well-known for its parsimony (Ajzen, 2011), the theory is, in principle,

“open to the inclusion of additional predictors if it can be shown that they capture a

significant proportion of the variance in intention or behaviour after the theory’s current

variables have been taken into account” (Ajzen, 1991, p. 199). As CWFCMM Model is

proposed as a financially affordable alternative as compared to its Islamic commercial

banking counterparts, it is more likely that potential homeowners perceive its cost

advantages as an important determinant to participate in the model. In fact, several

researchers have found that the price or the perception of financial cost advantages are

influential on Islamic banking customers’ intention to use of Islamic banking and

financial services (Amin, 2008; Amin et al., 2009, 2011; Dusuki & Abdullah, 2007).

Therefore, the study aims to investigate the following hypothesis:

H4: Lower perceived financial and economic cost of participating in CWFCMM

Model is a significant predictor of Malaysian potential homeowners’ intention to

participate in the CWFCMM Model.

RESEARCH METHOD

In essence, quantitative research is a type of research that explains phenomena based on

numerical data which are analysed using statistically-based methods (Yilmaz, 2013).

143
Quantitative research method tends to be very specific in nature and falls into three

categories namely (a) descriptive (b) comparative and (c) relationship (Onwuegbuzie &

Leech, 2006). This study used descriptive and relationship research methods. The

descriptive method seeks to quantify responses between one or more variables.

Meanwhile, relationship method is concerned with trends between (or among) two (or

more) variables. This method poses questions that often use words such as “relate,”

“relationship,” “association,” “trend,” and “affect”. They generally demand large

randomly selected representative samples in order for researchers to generalise their

findings from the sample i.e. from where the logic and power of probability sampling

derive their purpose and generalisation. The results of this study were estimated using

descriptive analysis and Structural Equation Modelling (SEM).

5.4.1 Sample

According to Bryman (2012, p. 187), a population is defined as “the universe of units

from which the sample is to be selected”. Therefore, this study considered potential

homebuyers. The author also decided to use one of probability sampling approaches i.e.

stratified sampling technique. The study sample was collected from the Greater Kuala

Lumpur (Kuala Lumpur and Selangor), Negeri Sembilan, and Sabah. These states were

selected based on their economic development status (Bank Negara Malaysia, 2016;

Samsinar Md. Sidin, Zawawi, Yee, Busu, & Laili Hamzah, 2004). According to the

same authors, these states are located in different parts of Malaysia (Greater Kuala

Lumpur and Negeri Sembilan represent West Malaysia and Sabah represents East

Malaysia respectively).

In addition, the Greater Kuala Lumpur area is the country’s fastest-growing

metropolitan regions in Malaysia (Peh & Low, 2013). Negeri Sembilan and Sabah, on

144
the other hand, were chosen according to their respective development status. Negeri

Sembilan represents a moderately developed state while Sabah represents one of the

less-developed states in Malaysia. In terms of GDP per capita, Greater Kuala Lumpur,

Negeri Sembilan and Sabah also ranked first and fifth for Kuala Lumpur and Selangor

respectively, seventh for Negeri Sembilan and twelfth for Sabah. Apart from that,

according to Property Market Report 2015, these four states represent more than a

quarter (34.9%) of the newly-completed residential units in Malaysia 45 (National

Property Information Centre, 2016). Apart from that, Greater Kuala Lumpur’s

neighbouring cities such as Nilai and even as far as Seremban in Negeri Sembilan also

act as ‘feeder cities’ as these cities have long been at the receiving end of the Greater

Kuala Lumpur’s economic spillover effects. Meanwhile, although Sabah is ranked as

one of the less-developed states in Malaysia, the state has the highest house price index

in the country, with 319.9 in the third quarter of 201646. This can be partly attributed to

the fact that Sabah is one of the most popular states to invest in property, especially

amongst the Malaysia My Second Home (MM2H) Programme participants (Daily

Express, 2014; Smith, 2014). Studies on Islamic home financing instruments for

example, revolve in either West Malaysia (mainly in the Greater Kuala Lumpur region)

(Abdul Razak & Md. Taib, 2011) or East Malaysia (mainly in Sabah) (Amin, 2008;

Amin et al., 2009, 2013, Amin, Abdul Rahman, et al., 2014a, 2014b; Amin, Rahman,

& Razak, 2014). Table 5.1 also exhibits a noticeable absence of studies that incorporate

samples from both regions and therefore, the author intends to extend the sampling area

to include both regions.

45
Kuala Lumpur, Selangor, Negeri Sembilan, and Sabah has 6, 384, 14, 050, 5, 224, 2, 549 completed
units respectively
46
The index uses year 2000 as the base year

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 Moreover, the unit of analysis selected is the potential homeowners. Unit of

analysis refers to the level of aggregation of the data collected during the subsequent

data analysis stage (Sekaran & Bougie, 2010). This study used judgmental sampling in

order to identify respondents based on the following criteria:

i. First, the respondent must be an existing customer of at least one Islamic

financial institution in Malaysia.

ii. Second, the respondent must have the desire or intention to buy a house in

the future.

iii. Third, the respondent must be at least 21 years of age as this indicates that

he/she has the financial and legal capacity to enter into an agreement with a

financial institution in purchasing as well as servicing a house using a home

financing facility.

In lieu of the above, the respondents of the study were recruited among the

academic and non-academic staff of International Islamic University Malaysia (IIUM),

Universiti Sains Islam Malaysia (USIM), and Universiti Malaysia Sabah (UMS). In

addition, this study also opted to include postgraduate students in the sample. These

three universities were chosen to represent the Greater Kuala Lumpur, Negeri Sembilan,

and Sabah respectively.

5.4.2 Sample Size

Regarding the sample size, the author considered three works. According to Hair, Black,

Babin, and Anderson (2014), a sample size ranging between 200 and 400 is sufficient

under SEM to get precise results. In a different method of selecting sample size in SEM,

Schreiber, Nora, Stage, Barlow and King (2006) for example suggested that the total

number of sample size in a study should be followed by the number of its parameters

146
i.e. a minimum of 10 respondents per parameter. For the purpose of this study, items

were developed to measure five constructs: Attitude, Subjective Norms, Perceived

Behavioural Control, and Perceived Cost Advantages of CWFCMM Model, as well as

Intention. Therefore, since this study consisted of 26 parameters which were developed

based on TPB, the total number of samples should be at least 260 respondents. Table

5.2 details the scales that were used to quantify the hypothesised constructs from TPB.

Table 5.2 Operationalisation of Measurement Items

Dimensions Conceptualisation Operationalisation

A homeowner’s
Attitude behavioural beliefs and
The extent of homeowner’s positive
towards perceived outcome
attitude towards CWFCMM Model
Behaviour advantages in CWFCMM
Model participation
A homeowner’s perceived
The degree of perceived social
social pressure to
Social Norms pressure to participate or not to
participate in CWFCMM
participate in the CWFCMM Model
Model
The extent to which a homeowner
Perceived Cost A homeowner’s perceived believes that his/her participation in
Advantages of cost advantages that can be the CFFCMM Model would result
CWFCMM gained by participating in in better cost advantages vis-à-vis
Model the CWFCMM Model other Islamic home financing
models

Perceived A homeowner’s perceived

To what extent homeowners
Behavioural ability to participate in
perceived ease to participate in the
Control CWFCMM Model

A homeowner’s plan or The degree to which homeowners

Intention goal to participate in are ready to participate in the
CWFCMM Model CWFCMM Model

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5.4.3 Research Instrument: Survey Questionnaire

The questionnaire was divided into three sections (A, B, and C). Section “A” (eight

items) covered the demographic background of respondents while Section B (ten items)

collected respondents’ background knowledge regarding waqf, Islamic home financing,

and financial cooperatives. Most of the formats in the Section “A” and “B” of the

questionnaire included dichotomous answers such as “Yes” and “No”. Later, in section

“C”, the questionnaire was adopted and/or adapted based on Theory of Planned

Behaviour (TPB) in gauging their acceptance and behavioural intention to participate

in the CWFCMM Model.

Table 5.3 Item Pools and Sources

Number
Dimensions Examples of item measure Source
of items
Participating in the CWFCMM
Attitude
Model will be of benefit to me as
towards 9 Self-developed
the selling price is to be based on
Behaviour
rental values.
Adapted from
My religious teacher would
Subjective Nasco, Toledo,
3 condone my participation in the
Norms and Mykytyn
CWFCMM Model.
(2008)
Participating in the CWFCMM
Perceived Model will enable me to pay
Adapted from H.
Cost 4 lower monthly instalments as
Amin (2008)
Advantages compared to the ones offered by
Islamic commercial banks.
Adapted from
Perceived It is entirely up to me whether I Povey, Conner,
Behavioural 7 participate in the CWFCMM Sparks, James,
Control Model or not. and Shepherd
(2000)
Adapted from
I intend to participate in the Kautonen, van
Intention 3
CWFCMM Model. Gelderen, and
Fink (2015)

148
 For the TPB section in the questionnaire, this study developed the items by

adopting and adapting measures developed by previous studies which applied TPB in

their research framework (Ajzen, 1991; Amin, 2015; Beck & Ajzen, 1991). This section

consisted of four major theoretical constructs, namely Attitude, Subjective Norms,

Perceived Behavioural Controls, and Perceived Cost Advantages of CWFCMM Model.

Each construct was assessed by means of several questions. Items were developed to

measure each dimension in TPB based on their operationalised and existing questions,

as stated in Tables 5.2 and 5.3. Each question in Section C was measured by a Likert-

type scale, from 1 (strongly disagree) to 10 (strongly agree) (Dawes, 2008; Hair, Hult,

Ringle, & Sarstedt, 2014; Norman, 2010). This 10-point scaling enables the Likert scale

to yield a symmetric system with equidistant attributes that approximate an interval-

level measurement. It would then enable the corresponding variables to be used in the

SEM (Hair, Hult, et al., 2014).

Four raters were invited to validate the suitability of the items that captured the

underlying dimensions of TPB. The purpose was to ensure the validity, readability, and

comprehensibility of the questionnaire. All four were lecturers of different disciplines

in local higher education institutions.

Table 5.4 Raters’ Area of Specialisations

Rater Specialisations
1 Islamic banking and finance, Islamic accounting, Islamic marketing
2 Research methodology and business statistics
3 Psychometrics
4 Business and commerce, and education

The raters found several inappropriate items in terms of item structure, grammar,

suitability to the local context, and generalisability to the broader context. For instance,

149
the demographic indication of marital status of divorced/widow was removed. Most of

the items under the “Subjective Norm” construct were either moderately or poorly

matched and further refinements were made to address the raters’ comments. For

instance, “My religious teacher thinks that I should participate in the CWFCMM Model’

was improved as “Islamic finance experts such as Ustaz Dr Zaharuddin Abdul Rahman

and Datuk Dr Mohd Daud Bakar think that I should participate in the CWFCMM

Model” to better reflect the Malaysian context. Overall, the twenty-six (26) initial items

were retained and the TPB scale was formed.

Following this, the questionnaire was translated into Bahasa Malaysia for

simplicity and a better understanding of the enumerators, as well as the respondents.

The dual-language (English and Bahasa Malaysia) version of the questionnaire was then

administered in the study. Prior the field study, however, a pilot test was conducted to

ensure the appropriateness of the content, wording, sequence, format, layout, and

instruction. This sample was excluded from the study.

417 questionnaires were then distributed amongst respondents in International

Islamic University Malaysia, Universiti Sains Islam Malaysia and Universiti Malaysia

Sabah, which represented the Greater Kuala Lumpur, Negeri Sembilan and Sabah

respectively. Prior the face-to-face questionnaire administration, the enumerators will

first explain the mechanism of the model using Figure 4.1 as a visual aid. The

respondent was then given a quiet time of their own to answer the questionnaire and

may approach the enumerator whenever he/she has any question. However, the

enumerators were given strict reminder not to interfere or lead the answers given by the

respondents.

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5.4.4 Data Analysis

There were two stages of analyses: (1) Exploratory Factor Analysis (EFA) and (2)

Confirmatory Factor Analysis (CFA). Both stages were performed via IBM® SPSS®

Amos 21. SPSS® 21 was employed to analyse the descriptive data of the respondents

and the response score of the measuring items as well as to perform data screening.

SPSS® 21 was also employed to run the Exploratory Factor Analysis (EFA) in

identifying a smaller set of factor structures of Behavioural Intention that is best

explained by its underlying items. Meanwhile, Amos was used in managing the CFA to

validate the measurement model of a construct and to test the stated hypothesis in the

path model. The statistical method employed in testing the path model was Structural

Equation Modelling (SEM).

SEM is a second-generation method of statistical analysis developed to cater the

limitations in the traditional ordinary least square (OLS) regression, especially when

dealing with latent constructs in a model. It is especially true for genetics and economics

researchers in the 1960s and 1970s, enabling them to explain the relationships among

multiple variables (Hair, Black, et al., 2014). The following four aspects distinguish

SEM from the earlier generation of multivariate procedures (Byrne, 2010). First, by

demanding the pattern of inter-variable relations to be theoretically specified, SEM

lends itself well to the analysis of data in a confirmatory approach. By contrast, it is

difficult to perform a hypothesis testing via traditional multivariate procedures, as they

are essentially descriptive by nature (e.g. exploratory factor analysis). Second, unlike

traditional multivariate procedures, SEM is able to provide explicit estimates of

measurement error variance parameters. Alternative methods, especially those rooted

in regression, or the general linear model assume that the error in the independent

variables would vanish. Thus, applying those methods when there are errors in the

151
independent variables is tantamount to ignoring the errors–which may lead, ultimately,

to serious inaccuracies–especially when the errors are sizeable. Third, although data

analyses using the former methods are based exclusively on observed measurements,

SEM procedures are able to incorporate both unobserved and observed variables.

Fourth, SEM methodology allows for modelling complex multivariate relations, as well

as point and/or interval indirect effects estimations.

In this study, the first step in data analysis was to set up the SPSS ® data file by

entering and listing all the variables (questionnaire items) in the same order in which

they appear in the questionnaire (Francis et al., 2004). The second step was to conduct

data screening in order to fulfil the assumptions of normality. This was done by

inspecting the distributions of each variable and checking for data entry errors by noting

whether responses were in the range represented in the response format.

A total of 417 responses were recorded in the IBM® SPSS® 21 file. As

respondents had complete freedom over their participation in the survey, a significant

number of incomplete responses were recorded. All the incomplete responses

containing missing data (of more than 20%) were deleted. Responses with a standard

deviation of below 0.5, which represent unengaged responses, were also eliminated.

Unengaged responses refer to ‘suspicious’ response patterns–for example, same

response pattern for several groups of items or page (e.g. 1111, 5555 or 8888). In

addition, the imputation regression was carried out to solve the missing value. This

approach would help the author to fill the missing value with a close probability of the

previous value. Moreover, boxplot was suggested to identify outliers in datasets.

Finally, cases with high-risk outliers were identified and removed. As a result, a total

of 382 usable questionnaires were retained, well above the minimum number of 260

samples required (see Section 5.4.2).

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5.4.4.1 Exploratory Factor Analysis (EFA)

The goal of Exploratory Factor Analysis (EFA) is to identify a smaller set of factors of

Behavioural Intention that is best explained by its underlying items. Principal

components extraction method and variation maximisation (varimax) orthogonal

rotation were used to produce the uncorrelated extracted factors with eigenvalues

greater than 1.0 using SPSS® Version 21.0. The initial label of each underlying

dimension of Behavioural Intention was reinterpreted to ensure conceptual consistency

of the conceptual meaning indicated by the corresponding items. There are two

statistical measures to examine the underlying items for the extracted factor structure of

each variable: standardised factor loadings and Cronbach’s alpha. The adopted cut-off

value of standardised factor loading is 0.50 and above (Hair, Black, et al., 2014) whereas

the Cronbach’s alpha is 0.70 and above (Nunnally & Bernstein, 1994).

5.4.4.2 Confirmatory Factor Analysis (CFA)

Confirmatory Factor Analysis (CFA) is used to validate Behavioural Intention scale in

terms of convergent and discriminant validity after EFA (Worthington & Whittaker,

2006). Convergent validity measures the extent to which indicators of a specific

construct share a high proportion of variance in common (Hair, Black, et al., 2014).

Hair et al. (2014) argued that there are three statistical measures in determining the

convergent validity: (1) factor loadings, (2) average variance extracted (AVE), and (3)

composite reliability (CR). High factor loadings would indicate that they converge on a

common, latent construct. AVE is a measure of convergence among a set of items,

computed as an average percentage of variance explained among the items of a latent

construct in SEM (Hair, Black, et al., 2014). CR refers to a measure of reliability and

internal consistency of the items that represent a latent construct in SEM. The adopted

153
cut-off values of these three statistical measures are as follows: (a) Standardized factor

loading (λ) is .50 and above, (b) AVE is .50 and above, and (c) CR is .60 and above.

Hair et al (2014) recommended these cut-off values.

Discriminant validity measures the degree to which a construct and its indicators

are different from another construct and its respective indicators (Bagozzi, Yi, &

Phillips, 1991). Discriminant validity is fundamentally justified based on the existence

or non-existence of cross-loading between the constructs, between- and within-

construct error variance (Hair, Black, et al., 2014). The absence of cross loading

indicates that the discriminant validity is warranted. Alternatively, a more rigorous way

to examine the discriminant validity can be referred to in Fornell and Larcker's (1981)

criterion. Fornell and Larcker’s criterion ascertains that if the square root of AVE of a

particular variable is greater than the correlation between a variable with other variables,

then the discriminant validity is guaranteed.

The model fit evaluation aims to examine whether the CFA fits the data (Kline,

2011). In this study, the justification of the model fit of CFA was based on its absolute,

incremental, and parsimonious fit indices. The indices and their respective cut-off

values were determined using root mean square error of approximation (RMSEA ≤

0.08; Browne and Cudeck, 1992), comparative fit index (CFI ≥ 0.90; Bentler, 1990),

chi-square statistics, χ2, and normed chi-square, χ2/df (χ2/df ≤ 3.0; Marsh and Hocevar,

1985).

RESULTS

The TPB questionnaire initially consisted of twenty-six (26) items that were used to

measure five dimensions: (1) Attitude, (2) Subjective Norm, (3) Perceived Behavioural

154
Control, and (4) Perceived Cost Advantages of CWFCMM Model and (5) Intention.

Table 5.5 shows respondents’ demographic characteristics.

Table 5.5 Sample Demographic Characteristics

Demographics Characteristics Number %

Education level SPM or lower 53 13.9
STPM/STAM/Diploma 55 14.4
Bachelor 191 50.0
Master 70 18.3
PhD 13 3.4
Religion Islam 362 94.8
Christian 15 3.9
Buddha 3 0.8
Hindu 2 0.5
Position Postgraduate student 136 35.6
Academic staff 34 8.9
Management staff 38 9.9
Supporting staff 45 11.8
Other 129 33.8
Ethnic Malay 302 79.1
Chinese 4 1.0
Indian 2 0.5
Kadazan 15 3.9
Bajau 23 6.0
Other 36 9.4
Monthly income Less than RM2,500 287 75.2
RM2,500 to RM3,500 28 7.3
RM3,500 to RM4,500 26 6.8
RM4,500 to RM5,500 18 4.7
RM5,500 to RM6,500 7 1.8
RM6,500 to RM7,500 5 1.3
More than RM7,500 11 2.9
Age Less than 26 214 56.0
26 to 30 80 20.9
31 to 35 32 8.4
36 to 40 16 4.2
41 to 45 13 3.4
46 to 50 12 3.1
51 and above 15 3.9

Table 5.5 shows that the overwhelming majority of the respondents were female

and held at least a bachelor degree. What is more, they also were earning less than RM2,

155
500 per month at the time. This is in line with the Malaysian Household Income Survey

2014, which states that the median income of Malaysian households is RM5, 465. Apart

from that, the respondents were mostly young students of less than 35-year-old (85.3%)

and Muslim (94.8%). Several literature (e.g. H. Amin, 2008; H. Amin et al., 2009; H.

Amin, Abdul Rahman, et al., 2014a; Bassir, Zakaria, Hasan, & Alfan, 2014; Ismail et

al., 2014; Md. Taib et al., 2008) have pointed out that Muslims, to a varying degree, are

more likely to opt for Islamic home financing instruments out of their commitments to

adhere to shari’ah principles. Hence, they are more likely to be in the hunt for a

financially affordable Islamic home financing in the future. As outlined in the Scope of

the Study, the target respondents for the study are youths as they are eligible recipients

of priority financing schemes such as Young Housing Scheme (YHS) and My First

Home Scheme or “Skim Rumah Pertamaku” by the Malaysian Government. Therefore,

researching the behaviour of a financially affordable Islamic home financing adoption

via these respondents is merited.

Table 5.6 Knowledge on cash waqf, Islamic home financing, and financial
cooperatives

Question Answer Number %

Are you aware that cash can also be contributed as Yes 285 74.6
waqf? No 97 25.4
Do you have any basic understanding about cash Yes 207 54.2
waqf? No 175 45.8
Yes 104 27.2
Do you currently contribute to any cash waqf fund?
No 278 72.8
Do you have any account(s) in Islamic commercial Yes 286 74.9
banks? No 96 25.1
Do you use any Islamic home financing instrument(s) Yes 41 11.8
in Islamic commercial bank(s)? No 341 88.2
Are you aware of the existence of MM home Yes 159 41.6
financing product? No 223 58.4
Do you have any basic understanding of MM home Yes 101 26.4
financing? No 281 73.6

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 Table 5.6 Knowledge on cash waqf, Islamic home financing, and financial
cooperatives (continued)

Question Answer Number %

Are you aware that there are financial cooperatives, Yes 203 53.1
which offer financing to their members? No 179 46.9
Yes 57 14.9
Are you a member of any cooperative societies?
No 325 85.1
Do you use any financing product(s) offered by Yes 38 10
financial cooperative(s)? No 344 90

Of those sampled, 74.6% were aware of cash waqf. However, even a smaller

percentage of them had a basic understanding of how cash waqf works and ultimately

contributed to cash waqf schemes. Less than half of the respondents (41.6%) were aware

of MM home financing. Furthermore, a fraction (14.9%) of the respondents was

cooperative members and out of those, only 10% of them actually used financing

product offered by financial cooperatives.

5.5.1 Exploratory Factor Analysis (EFA)

In this study, EFA was run separately on five primary factors, namely (1) Attitude, (2)

Subjective Norm, (3) Perceived Behavioural Control, (4) Perceived Cost Advantages of

CWFCMM Model, and (4) Intention.

Table 5.7 Eigenvalues, Kaiser-Mayer-Olkin (KMO) Measure of Sampling Adequacy,

and Bartlett’s Test of Sphericity Results

Factor Eigenvalue KMO Bartlett’s Test

χ2 = 997.77, df = 36,
Attitude 7.009 0.918
sig = 0.000
χ2 = 177.89, df = 3,
Subjective Norm 2.412 0.694
sig = 0.000
Perceived Behavioural χ2 = 405.27, df = 21,
3.348 0.755
Control sig = 0.000

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Table 5.7 Eigenvalues, Kaiser-Mayer-Olkin (KMO) Measure of Sampling Adequacy,
and Bartlett’s Test of Sphericity Results (continued)

Factor Eigenvalue KMO Bartlett’s Test

Perceived Cost
χ2 = 488.89, df = 6,
Advantages of 3.583 0.834
sig = 0.000
CWFCMM Model
χ2 = 169.53, df = 3,
Intention 2.430 0.707
sig = 0.000

Table 5.7 shows that the KMO values recorded for all four factors were above

the cut-off value of 0.50. In this study, KMO for each factor ranged between 0.694 and

0.918. Apart from that, all five factors possessed eigenvalues of more than 1. This

indicates that the data were appropriate for factor analysis.

The EFA then extracted five orthogonal factors, which represented five

dimensions: Attitude, Subjective Norm, and Perceived Cost Advantages of CWFCMM

of CWFCMM Model, Perceived Behavioural Control as well as Behavioural Intention.

The loadings of the items ranged from 0.57 to 0.97, above the cut-off value of 0.50 as

recommended by Hair and Black et al. (2014). The first factor comprised Item 1 through

Item 9. These items described Attitude. The second factor, which described Subjective

Norms, consisted of three items, namely, Items 10, 11, and 12. The third factor

described Perceived Behavioural Control. Four items, namely, Items 13 through 19

were found to provide a meaningful relationship to this factor. The fourth factor that

described Perceived Cost Advantages of CWFCMM Model was constructed with four

items, namely Items 20, 21, and 23. The fifth factor that described Behavioural

Intention, which was constructed with three items, namely, Item 24, 25, and 26.

Notably, Cronbach’s alpha of 0.90 is the highest amongst the five factors. This revealed

that the internal consistency estimation appeared adequate and above the cut-off value

of .50. This revealed that the internal consistency estimation appeared adequate. In other

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words, these items appeared to be able to measure its underlying factor. Table 5.8

summarises the EFA results. As all 26 items were above the recommended cut-off

value, the analysis continued with the examination of CFA.

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 Table 5.8 Analysis of Exploratory Factor Analysis

Item Item description Loading Label α

Participating in the CWFCMM Model will allow me to jointly purchase my house with my financial
1 0.80
cooperative members.
Participating in the CWFCMM Model will allow me to share the profit and/or loss with my financial
2 0.78
cooperative members.
Participating in the CWFCMM Model will be of benefit for me as the instalment payment is to be
3 0.80
based on rental values.
Participating in the CWFCMM Model will enable me to purchase additional shares earlier to settle my
4 0.78
outstanding sum.

Attitude
Participating in the CWFCMM Model will enable my financial cooperative to share ownership and 0.96
5 0.72
liability, which is beneficial to me.
Participating in the CWFCMM Model will enable me to buy my home in a shari’ah-compliant manner
6 0.80
vis-à-vis the conventional home loan.
7 Participating in the CWFCMM Model will enable me to contribute to the development of cash waqf. 0.78
Participating in the CWFCMM Model will enable me to purchase my home in a manner that is closer
8 0.76
to the concept of maslahah (preservation of public interest).
Participating in the CWFCMM Model will enable me to help my fellow financial cooperative members
9 0.79
to own a home.
10 My family thinks that I should participate in the CWFCMM Model. 0.93

Subjective
Norm
11 My close friends think that I should participate in the CWFCMM Model. 0.93
0.88
Renowned figures in Islamic finance such as Ustaz Dr Zaharuddin Abdul Rahman (UZAR) and Sheikh
12 0.83
Datuk Dr Mohd Daud Bakar think that I should participate in the CWFCMM Model.

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 Table 5.8 Analysis of Exploratory Factor Analysis (continued)

Item Item description Loading Label α

13 It is fully my decision to participate in the CWFCMM Model. 0.83
14 I can easily participate in the CWFCMM Model if I want to. 0.82

Perceived Behavioural
I need to have a basic understanding and knowledge of Islamic finance if I were to choose the Islamic
15 0.75
home financing.

Control
I have access to basic Islamic finance references that indicate what is and what is not Islamic home 0.86
16 0.60
financing.
17 I am aware of which home financing instruments are shari’ah-compliant. 0.65
18 I will save enough funds in my financial cooperative in order to participate in the CWFCMM. 0.74
19 Participating in the CWFCMM will not be time-consuming 0.80
Participating in the CWFCMM Model will enable me to pay lower monthly instalments as compared to
20 0.94
the ones offered by Islamic commercial banks.

CWFCMM Model
Perceived Cost
Advantages of
By participating in the CWFCMM Model, I will enjoy lower fees/service charges as compared to the
21 0.97
ones offered by Islamic commercial banks.
0.96
Overall, the economic cost of participating in the CWFCMM Model is lower as compared to the ones
22 0.92
offered by Islamic commercial banks.
There is a better financial incentive by participating in the CWFCMM Model as compared to the ones
23 0.95
offered by Islamic commercial banks.
If CWFCMM Model enables me to acquire affordable Islamic home financing, I intend to find
24 0.90

Intention
sufficient information about the model in order to become one of the participants.
0.88
25 I will make the necessary plans to participate in the CWFCMM Model. 0.94
26 I intend to participate in the CWFCMM Model. 0.87

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5.5.2 Confirmatory Factor Analysis (CFA)

Upon the completion of CFA on a different set of respondents, however, Items 16 and

17 were excluded because the loadings were below the cut-off values of 0.50. Apart

from that, the analysis also relocated two of the items (18 and 19) from the Perceived

Behavioural Control factor to the Perceived Cost Advantages of CWFCMM Model.

Table 5.9 shows the final factor loadings for the rest of the factors.

Table 5.9 Parameter Estimates

Standardised Factor Loading (λ)

Perceived Perceived Cost
Item Subjective
Attitude Behavioural Advantages of Intention
Norm
Control CWFCMM Model
1 0.83
2 0.85
3 0.86
4 0.90
5 0.89
6 0.87
7 0.86
8 0.85
9 0.76
10 0.98
11 0.91
12 0.63
13 0.88
14 0.84
15 0.63
16 Deleted
17 Deleted
18 0.69
19 0.69
20 0.91
21 0.92
22 0.93
23 0.93
24 0.82
25 0.94
26 0.86
AVE
0.73 0.73 0.63 0.73 0.77
(%)
CR 0.96 0.89 0.83 0.94 0.91

Note. AVE: Average Variance Explained; CR: Composite Reliability

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 Table 5.9 also shows the AVE estimates for Attitude, Subjective Norm,

Perceived Cost Advantages of CWFCMM, Perceived Behavioural Control, which were

are all above the cut-off value of 0.50. This indicates that at least 63% of the variance

in these four dimensions was shared with Behavioural Intention. All the square root

values of AVE were found to be greater than the corresponding correlation between the

dimensions of Behavioural Intention. Therefore, Fornell and Larcker’s (1981) criterion

signified the discriminant validity of Behavioural Intention. Stated differently, the

dimensions of Attitude, Subjective Norms, Perceived Cost Advantages of CWFCMM,

and Perceived Behavioural Control were truly distinct from one another. Furthermore,

CR estimates for the four dimensions were found to be above the cut-off value of 0.60.

In fact, the CR estimates for Attitude, Subjective Norm, and Perceived Behavioural

Control were considered high, with 0.81, 0.74, 0.77, and 0.86 respectively. Overall, the

results presented good reliability over the scale measured and signified the convergent

validity of Behavioural Intention.

5.5.3 Measurement Validation

The initial measurement model incorporated five latent factors as indicated by the

respective items pertaining to each scale: Behavioural Intention (INT), Attitude (ATT),

Perceived Behavioural Control (PBC), and Perceived Cost Advantages of CWFCMM

Model (COST) (Figure 5.3). Two fitness indices in the measurement model did not

achieve the required level. First, the normed Chi-square of 3.316 exceeds the cut-off

value of 3.0. Second, the RMSEA recorded the value of 0.091, which exceeded the

required value of 0.08. It shows that there is a redundancy among the items in the

measurement model. The items’ redundancy can be observed through their

Modification Indices (MI).

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 MI is the amount of change in Chi-Square if a certain fixed parameter was to be

freed in the subsequent re-estimations (Byrne, 2010). MI value of 4 or greater shows

that the model fit could be further improved by estimating the corresponding path

(Bagozzi & Yi, 2012; Hair, Black, et al., 2014). Therefore, the author has set ten

correlated measurement errors of redundant items as a ‘free parameter’ and re-estimated

the new measurement model. The correlated measurement errors are shown in Table

5.10 and the final measurement model is shown in Figure 5.4.

Table 5.10 Parts of the Modification Indices (MI)

Path MI Par Change

e1 <–> e2 50.274 0.556
e1 <–> e3 26.213 0.409
e1 <–> e6 42.384 -0.456
e2 <–> e3 32.194 0.343
e3 <–> e4 42.697 0.386
e3 <–> e5 24.852 -0.302
e6 <–> e8 21.918 0.262
e8 <–> e9 47.372 0.502
e12 <–> e13 29.978 0.176
e14 <–> e15 50.304 0.899

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Figure 5.3 Initial Measurement Model

Note. “e” refers to measurement error

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 The final measurement model was found to have the goodness-of-fit indices that

fulfilled the cut-off values. This includes the RMSEA = 0.06 and CFI = 0.97. The

normed chi-square, χ2/df = 1.93, was found to be below the cut-off value, as suggested

by Marsh and Hocevar (1985). This showed that the overall model fit was acceptable.

Based on the findings, it can be concluded that a set of 24 items were statistically valid

in measuring the Behavioural Intention to participate in the CWFCMM Model.

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 Figure 5.4 Final Measurement Model

Note. “e” refers to measurement error

5.5.4 The Structural Model

Once all the constructs in the measurement model are validated and fulfilled the

required fit indices, a structural model can be tested and the main analysis using SEM

167
can be carried out. A structural theory depicts conceptual relationship among factors in

the model. The single-headed arrow is used to test the causal effects, while the double-

headed arrow is used to test the correlation effects among factors (Figure 5.5). The final

structural model contained 24 items. Each indicator was connected to the underlying

theoretical construct in a reflective manner. The standardized estimate for the model is

presented in Figure 5.5. The value of the coefficient of determination or otherwise

known as R2 was 0.65. The figure indicates that the contribution of exogenous

constructs ATT, SN, PBC, and COST in estimating the endogenous construct INT is 65

percent. Following the criteria provided by Cohen (1988), the value of R 2, which was

0.65, was qualified as a medium size because it was bigger than the minimum threshold

of 0.10.

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 Figure 5.5 Structural Model

Note. “e” refers to measurement error

5.5.5 Hypotheses Testing

Four hypotheses were analysed in this study. The proposed hypotheses were examined

by looking at the significance, signs, and the magnitude of the estimated coefficients

(Hair, Black, et al., 2014). Research hypothesis one through four were tested using

confirmatory factor analysis and structural equation modelling. The results of the

hypothesis tests are summarised in Table 5.11.

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 Table 5.11 Structural Equation Model Results

Standardised Standard Critical

Parameter p-value
Coefficient Error Ratio
H1: ATT → INT 0.32 0.068 4.797 ***
H2: SN → INT 0.06 0.043 1.109 0.267
H3: PBC → INT 0.26 0.055 4.222 ***
H4: COST → INT 0.31 0.063 4.696 ***

Note. p-value < 0.001

The estimates of the standardised coefficients showed that the path between ATT

and INT was positive and significant and thus hypothesis H1, positive attitudes about

the CWFCMM Model is a significant predictor of Malaysian potential homeowners’

intention to participate in the CWFCMM Model, was supported. The results also

revealed that the path between PBC and INT was positive and significant. It, therefore,

supported hypothesis H3, perceived behavioural control over participating in the

CWFCMM Model is a significant predictor of Malaysian potential homeowners’

intention to participate in the CWFCMM Model. Apart from that, path coefficient

between COST and INT was also positive and significant. Hypothesis H 4 lower

perceived financial and economic costs of participating in the CWFCMM Model is a

significant predictor of Malaysian potential homeowners’ intention to participate in the

CWFCMM Model was supported as well. In addition, as can be seen in Table 5.8 and

Figure 5.5, the estimates of the standardised coefficients showed that the direct effect

of attitude on intention was the strongest compared to other hypothesised paths.

On the other hand, hypothesis H2, positive subjective norms for participating in

the CWFCMM Model as a significant predictor of Malaysian potential homeowners’

intention to participate in the CWFCMM Model was not supported.

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 DISCUSSION

In general, the use of TPB in the current context was supported and extended by this

study. TPB has emerged as one of the most influential and popular conceptual

frameworks for the study of Islamic banking and finance services selection, and much

support have been obtained for the efficacy of the theory as a predictor of intentions.

The findings of this study provide both theoretical and managerial implications in

comprehending the determinants of potential homeowners’ intention to acquire a

financially affordable Islamic home financing solution. This study found three factors,

which may explain the behavioural intention to participate in the CWFCMM Model in

Malaysia that can be added to the literature of Islamic financial services selection

criteria.

First, the significant ‘attitude-intention’ relationship provided strong support that

potential homeowners’ positive attitude towards Islamic home financing instruments

strengthens intentions to participate in Islamic home financing, while negative attitude

weakens them. This could explain why the uptake of Islamic home financing

instruments continue to surpass those of their conventional home loan counterparts

(Bank Negara Malaysia, 2017a). The importance of attitude in Islamic home financing

instrument selection criteria is also consistent with H. Amin et al. (2013, 2014a, 2014b)

and Md. Taib et al.'s (2008) studies, which assert that homeowners’ attitude is one of

the most important elements in the area of Islamic home financing instrument selection.

With that being said, as this study is juxtaposed within the third sector economic

institutions of financial cooperative and waqf, it is also important to note the incremental

additions to the literature in terms of its industry-specific items. For example, it

includes, amongst others; joint-purchase (Item 1, 0.83), profit- and loss-sharing (Item

2, 0.85), rental value as a benchmark (Item 3, 0.85), purchase of additional shares to

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settle outstanding sum (Item 4, 0.90), shared ownership and liability (Item 5, 0.89),

contributing to the development of waqf (Item 7, 0.85), and preservation of maslahah

(Item 8, 0.85) and help fellow cooperative members to own a home (Item 9, 0.76).

Second, the significant ‘perceived cost advantages of CWFCMM Model-

intention’ relationship also provided strong empirical support for the CWFCMM

Model. Next only to attitudinal factor, the results highlight the importance of price

consideration in selecting Islamic home financing instrument. As Islamic home

financing in Malaysia involves huge and not to mention long financial commitment for

families, even a small difference in monthly instalments provided by a financially

affordable Islamic home financing instrument will offer a much-needed respite for low-

to middle-income families (Amin, Abdul Rahman, et al., 2014a; Chiquier & Lea, 2009).

Besides that, the respondents believe that their participation in the CWFCMM Model

would yield a better financial return as compared to the ones offered by Islamic

commercial bank (Item 23, λ=0.86) by way of better economic costs (Item 22, 0.93) and

lower service fees (Item 21, 0.92). It is also interesting to note that Items 18 and 19 were

originally grouped under “Perceived Behavioural Control” factor. However, post-CFA,

the respondents perceived these two items as factors of Cost Advantages instead.

Although participation in the CWFCMM Model would require some form of financial

commitment from the respondents, the respondents were even open to the idea of saving

up with their financial cooperative of choice for at least 6 months prior to joining the

model (Item 16, λ=0.69). Apart from that, it is very interesting to note that the

respondents seem to perceive time as a part of the perceived cost advantages (Item 17,

0.69).

Third, although the respondents identified two of the original items in the

construct as Perceived Cost Advantages of CWFCMM Model, ‘perceived behavioural

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control-intention’ relationship has also been acknowledged as a key factor influencing

the respondents’ intention to participate in the CWFCMM Model. As indicated in the

literature review, not until recently, the overwhelming majority of studies on Islamic

financial services instrument selection in Malaysia had applied TRA (Amin, 2012a,

2012b, Amin et al., 2011, 2010; Md. Taib et al., 2008). As TPB incorporates the

volitional control factor into the TRA, perceived behavioural control has been found as

a significant predictor of behavioural intention to purchase Islamic home financing

instruments (Amin et al., 2013; Amin, Abdul Rahman, et al., 2014a, 2014b; Usman &

Lizam, 2016). As CWFCMM Model is theoretical in nature and incorporates the third

sector economic institutions of waqf and financial cooperative, the respondents

indicated that they are well and truly prepared to seek more information prior to

becoming a participant in the CWFCMM Model (Item 15, λ=0.63). Although Ajzen

(1991) argued that the lack of information about a behaviour may reduce the accuracy

of prediction, this study proved that it was not the case as the respondents have shown

that they still feel they have full autonomous control over their decisions (Item 13,

λ=0.88; Item 14, λ=0.84).

However, the insignificant path coefficient between subjective norm and

intention points out that the respondents did not consider pressures from their traditional

forms of referents to be important in adopting Islamic home financing instrument. This

finding departs from what is usually a strong predictor of intention in other studies on

Islamic home financing instrument selection (Amin et al., 2013; Amin, Abdul Rahman,

et al., 2014a, 2014b; Md. Taib et al., 2008; Usman & Lizam, 2016). At this juncture,

without father research, one can only speculate about this departure from previous

literature. Nevertheless, as explained by Azjen (1991), it might be that personal

consideration in the form of the attitudinal factor has ‘overshadowed’ the influence of

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perceived social pressure. Apart from that, this finding might also reflect the loss of old

social networks and the fact that new ones are yet to be developed, as most of these

respondents are of what sociologists coined as Generation-Y or “Gen-Y”. Amongst the

traits that are usually associated with these generations is independence. Therefore, they

are likely to turn to the Internet for information rather than relying on the traditional

form of social networks (Bolton et al., 2013). Under these conditions, a measure of

subjective norm-intention may add little to the accuracy of the prediction. Keeping these

potential improvements in mind, further research is thus needed to examine the factor

of perceived social pressure in the context of financially affordable Islamic home

financing instrument by cash waqf and financial cooperatives.

CHAPTER SUMMARY

The overriding aim of this study was to examine the Behavioural Intention to participate

in the CWFCMM Model that was developed in Chapter 4 as a multidimensional

construct with four different forms of normative influence: (a) Attitude, (b) Subjective

Norm, (c) Perceived Behavioural Control, and (d) Perceived Cost Advantages of

CWFCMM Model using the Theory of Planned Behaviour. Among these influences,

only Subjective Norm was not found to be a significant factor in examining potential

homeowners’ intention to participate in the model.

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 CHAPTER SIX

CONCLUSION

INTRODUCTION

This chapter will first recapitulate the previous chapters’ conclusions based on the

research objectives of the study (Section 6.2). The ensuing Section 6.3 highlights the

contributions of the study to the body of knowledge and its potential implication for

third sector policy initiatives. Finally, Section 6.4 highlights the limitations of the study

and provides suggestions for future research. The chapter ends with the author’s

concluding remarks.

RECAPITULATION OF THE STUDY

The potential synergistic venture between cash waqf institutions and financial

cooperatives in the CWFCMM Model proved that theoretically speaking, third sector

economic institutional players are able to fill the gap in the financially affordable home

financing provision left by both Islamic commercial banks and government home

financing institutions.

The first objective of the research was to investigate the issue of financial

affordability in Islamic home financing instruments in Malaysia. The author first

reviewed the literature on the reasons why Islamic home financing–if operated within

the present system–will not be able to contribute to a financially affordable Islamic

home financing solution to the Malaysian households. For example, in the case of

Islamic commercial banks, their inability to be a financially affordable Islamic home

financing provider can be attributed to the following reason i.e., the conflicting interests

of depositors and shareholders. The former is risk-averse in search of a safe haven and

175
the latter is a risk-taker in search for a better return. However, in reality, both

shareholders and depositors (or investment account holders) of Islamic commercial

banks would expect some form of return on investment (ROI). Although there is nothing

wrong with this objective, this ROI would only be achieved by figuratively ‘stand on

the back of someone else’s shoulders’. That someone’s shoulders, in this case, are

potential homeowners who can only finance their home purchase via debt-based Islamic

home financing instruments such as BBA-tawarruq.

With around 10% of home financings coming from government-owned or -

linked home financing institutions, they are the second largest home financing providers

in the country. However, with the downward movement of oil prices, one of the largest

economic contributors to this nation, spells an uncertain future for the Malaysian

economy. This was indicated by the numerous Federal Budget cuts and surely, this will

affect government-owned or -linked home financing providers’ intermediation

capabilities. Furthermore, most Malaysians are not able to enjoy the financially

affordable rate of 4% offered by LPPSA and this leaves them with fewer alternatives

concerning financially affordable Islamic home financing options. With most

Malaysian households financing their home purchases via the commercial banking

system, the mathematical simulations in Chapter 3 also re-confirms the financial

unaffordability of the current Islamic home financing instruments being offered by

Islamic commercial banks. Taking into account the median income households,

financially unaffordable Islamic home financing instruments such as the BBA-tawarruq

and even MM by Islamic commercial banks are putting unnecessary strain on what is

an already overstretched monthly income. The study also re-affirms the flexibility of

MM home financing by financial cooperatives. It is even more important to note that

176
out of five (5) cases of household incomes; MM home financing is the most financially

affordable out of three (3) cases–B40, urban and M40.

The second objective of this study was to develop a financially affordable,

alternative Islamic home financing model that can overcome the issue of financial

affordability mentioned in Research Objective #1. As demonstrated in Chapter 3,

equity-based, MM home financing is best suited to be implemented within a financial

cooperative setting. Notwithstanding, the one major factor that impedes financial

cooperative’s Islamic home financing capability is the lack of funds. Therefore, the

author has proposed for an integrated framework that incorporates an alternative source

of funds from the cash waqf institutions. As waqf-related matters in Malaysia are under

the purview of the respective State Islamic Religious Councils, they are potential

challenges that might arise before this model could even take off.

The third objective of this study entailed evaluating the validity of the model,

termed as “Cash Waqf-Financial Cooperative-MM (CWFCMM) Model” developed in

Research Objective 2. After numerous interviews with the supply side’s stakeholders,

most of the informants tend to agree that this model is workable–albeit not in the

immediate future. It is because the knowledge and awareness of Malaysians even in

basic matters on waqf is rather rudimentary. It is also imperative for financial

cooperatives to make sure that its capacity and capability to become financially

affordable Islamic home financing institutions are in place. Due to the complexity of

the home financing market, financial cooperatives need to have a solid and clear

business strategy, good governance, better risk management, and specialised human

resources. Another take-home message from the interviews is that there is an urgent

need for stronger and more competent supervisory capabilities of Suruhanjaya Koperasi

177
Malaysia, to be modelled after the strong and widely recognised, competent supervisory

capabilities of Bank Negara Malaysia.

The study then surveyed one of the most important demand side’s stakeholders

in the model–the potential homeowners. This is to achieve the study’s fourth objective–

examining the effect of factors such as attitude, subjective norm, perceived behavioural

control, and perceived cost advantages which will affect potential homeowners’

intention to participate in the CWFCMM Model. Using an extended Theory of Planned

Behaviour, the author investigated the behavioural intention of the potential

homeowners to participate in the model. Interestingly, despite the complexities of the

CWFCMM Model (as mentioned by several respondents), they are interested to

participate in the Model. On top of that, the respondents are even open to the idea of

saving up for at least 6 months with their financial cooperatives of choice prior joining

in the Model.

Apart from that, this study also found that what was usually a strong predictor

behavioural intention to use Islamic financial services–subjective norm–is not the case

in the study. The author postulated that since most of the respondents are of Gen-Y (and

later), they are more likely to be independent of the normal social network. This study

has shown that they are also more likely to do independent information searches prior

joining in the Model and are willing to learn more about Islamic home financing in

general.

CONTRIBUTIONS AND SIGNIFICANCE OF THE STUDY

Currently, what can be seen in many literature with respect to the TPB in the field of

Islamic home financing are scanty and disjointed discussions. Apart from that, these

literature are usually carried out for patronising Islamic commercial banking

178
instruments. This study, therefore, built on the plethora of studies, which have been

published on factors regarding the selection of Islamic banking and financial services.

There is already a dearth of studies in the domains of financial cooperatives and waqf.

To the best of the author’s knowledge, this study is one of the first to integrate the third

sector economic institutions of cooperative and waqf.

In addition, this study contributes to the social psychology literature by

extending TPB in three key ways. First, the TPB was applied to the third sector

institutions of financial cooperative and waqf sectors as supposed to the Islamic

commercial banking institutions. Second, this additional factor of Perceived Cost

Advantages of CWFCMM Model adds to the growing body of knowledge to support

the inclusion of additional factors in the TPB. Third, this study reveals a slight departure

from the body of knowledge as the subjective norm or social pressure, a usually strong

predictor in Islamic financial services selection studies is not as significant as previous

works within the same milieu.

This CWFCMM Model is expected to further maximise the potential of waqf to

be used in alleviating the Malaysian potential homeowners to realise one of the maqasid

al-shari’ah–protection of life. Monthly instalments by the financial cooperatives’

member-customers can be carried out through automatic payroll deductions

administered by the Credit and Banking Services (formerly known as “Bahagian

Perhidmatan Awam” or BPA), ANGKASA, and hence, provide CWI with a steady

source of income and cash flow. It is widely acknowledged by both regulators, scholars,

and the financial cooperatives fraternity that lack of capital is one of the hindering

factors that may detract financial cooperatives from performing their roles in nation-

building activities. This model suggests that the use of cash waqf to complement their

internal sources of income in enabling them to offer financially affordable Islamic home

179
financing instruments to their member-customers. In addition, this model will also

optimise the networking opportunities of third sectors (waqf institutions and financial

cooperatives) and gradually move away from the costlier source of funds provided by

commercial banking institutions. Increasing the number of Islamic home financing

providers into the market will only benefit potential homeowners. It is especially true

for the self-employed and private sector employees that are unable to enjoy the rather

financially affordable Islamic home financing by government-owned home financing

institutions grant to the civil servants. Apart from that, the informants have highlighted

that there is an urgent need for the cash waqf schemes, which were managed by their

respective SRIC to improve their accountability. It is, after all, funds that belong to God,

so to speak. Of the best ways for them to do so is to publish their professionally audited

financial statements on mainstream newspapers, much like what is being done by one

of Malaysia’s better-known NGO exports–Mercy Malaysia47.

Owning a home is a dream of most Malaysians and many are hampered by the

ever-increasing costs associated with owning one. This put their dreams even farther

from their reach as government-owned or –linked home financing institutions also bear

the brunt of the Federal Government’s budget cuts, coupled with the financially

unaffordable options offered by commercial Islamic banking institutions. Hence, this

potential synergy will increase the wider Malaysian population access to financially

affordable Islamic home financing. In addition, financially affordable Islamic home

financing will increase the rates of homeownership and in the end; bring about positive

effects usually associated with homeownership.

47
Mercy Malaysia is a Malaysia-based NGO that was established in 1990. It provides, amongst others,
humanitarian reliefs in disaster-stricken areas. Mercy Malaysia has published its professionally audited
accounts since 2004, detailing its balance sheets, statement of cash flows and incomes.

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 LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH

Some caveats for the current study need to be noted. Despite its contributions to the

body of knowledge, this study has a number of limitations that researchers in the field

will need to address in future studies. It can be grouped into its respective

methodologies–qualitative and quantitative.

Qualitatively, although the point of saturation mostly occurs by the tenth

interview, despite representing various institutions and are from different backgrounds,

they are ultimately in the same field and locality–mostly Islamic finance and Malaysia.

Although the author has cited American House Finance LARIBA (AFHL) as a prime

example of a working, MM home financing model, the author did not manage to

interview AFHL representative(s). Although their model works in a different

institutional framework altogether, some valuable and practical insights might be

gained by their representation in the sample size. Quantitatively, the study did not

examine the ability of intent to predict actual behaviour–a core TPB tenet. One of the

reasons that this association was not analysed is because a number of studies have

determined that among the TPB constructs, the intention is the most powerful predictor

of behaviour (Taylor & Todd, 1995). Pragmatically, cross-sectional data was obtained

for the study, which precluded researching whether one’s intent actually leads to

behaviour which would have required longitudinal data.

As an informant from Perbadanan Wakaf Selangor pointed out, “waqf (and self-

help group) thrives in conditions where there are no ‘crutches’–when they (the Muslims

in Muslim-minority countries) have to rely only upon each other and often receives little

to no help from government agencies. Future researchers, therefore, might want to look

at case studies as practised in Muslim-minority countries such as Singapore. For

181
example, although there are only 457, 435 Muslims in Singapore48, yet they are able to

contribute to the “Mosque Building and Mendaki Fund” (MBMF), which amounted to

SGD 6 million per annum. MBMF is a dedicated fund for mosque building and

redevelopment, provision of educational and social programmes for Muslims as well as

supporting current and future Islamic education needs in Singapore (Mohsin et al.,

2016). Although institutionally different from what is practised in Malaysia, fresh and

practical insights might be found from best practices from these countries especially on

how they have managed to within the legal constraints, which can be ‘extrapolated’

from, and implemented by our third sector economic institutional players.

The way forward in the application of TPB within the Islamic financial services

selection studies is to go for the indirect measures i.e., mediating and/or moderating

factor(s). Apart from that, future research might want to factor in the new social network

that affected most of today’s Generation-Y (Gen-Y) populations, which was born after

1981. For instance, a study by Bolton et al. (2013) found that Gen-Y’s extensive use of

social media already has an all-encompassing impact on the marketplace, workplace,

and society. Hence, although the study adapted Subjective Norms items for research

that has been done no more than five years ago, there seems to be a wide departure in

terms of the social network structure that the current study might have missed out on.

Finally, while the current study has reasonably extended the original TPB model, there

is a need for a broader variety of predictors (e.g., shari’ah-compliancy or religiosity)

should be incorporated in this study’s conceptual framework. Such efforts would enable

a more comprehensive understanding of Islamic banking and finance customers’

decision-making process.

48
The number is correct as of 2010 (Singapore Department of Statistics, 2011)

182
 It may be concluded, therefore, that financially affordable, Islamic home

financing instrument could be applied within the integrated framework of cash waqf-

financial cooperative-MM. This conclusion is concurrent with the aim of this study as

mentioned in Chapter 1, which is to formulate and validate an Islamic home financing

instrument, which can be considered as an alternative to the pervasive use of debt-based

Islamic home financing instruments in the current market. The author is hopeful that

the failure of the current Islamic home financing institutional framework in financially

affordable Islamic home financing provision may be overcome with this proposal based

on the synergistic ventures between third sector institutions of financial cooperative and

cash waqf institutions.

As the discussion and presentations in the previous chapters demonstrate, this

research has fulfilled its aim and established its hypothesis that it is possible to provide

financially affordable Islamic home financing to Malaysians based on the principles of

shared equity. This CWFCMM Model, as repeatedly asserted in this study, transcends

the current malaise of over-reliance on debt-based Islamic home financing within the

Islamic commercial banking system. Nevertheless, the result of this study is akin to

previous studies are not the goal in of itself. It does not even bring us close to the

attainment of al-falah. It is, however, an ongoing journey and the end is not yet in sight.

Hopefully, this study could bring us even an inch closer in our collective endeavour to

preserve the maslahah. Allahumma ameen.

183
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 APPENDIX I: INTERVIEW SAMPLE AND PROTOCOL

1. At The Start of the Interview

 Turn recorder on
 Greeting
 Reinstate the purpose of the project
 Restate consent parameters and clarify agreement to informant
 Remind informant the questions are meant to stimulate their thinking. They
may answer or not as they wish
 They may add to or address aspects not directly related to the question but
which come to mind
 Check the recorder is working properly

2. The Interview Questions

This is not an exhaustive list as additional questions can and will be asked as needed
during each interview.

a) General Question
1. Can you briefly explain the role of Islamic home financing plays in
realising one of the basic human needs?
2. Why do you think that Islamic home financing is important for the
development of Islamic banking and finance in Malaysia?
b) Islamic Home Financing Instruments
1. Why do you think that debt-based instruments such as bay’ bithaman ajil
(BBA) and tawarruq (commodity murabahah) continue to play an integral
part in Islamic home financing by Islamic commercial banks?
2. Why Islamic commercial banks seem reluctant to offer equity-based
instruments such as MM in Islamic home financing?
3. Why do you think that Islamic home financing instruments are financially
unaffordable?
c) Islamic Home Financing Institutions
1. How can we improve the role of government home financing institutions in
providing financially affordable Islamic home financing?
2. Why do you think that Islamic commercial banks are unable to offer
financially affordable Islamic home financing instruments to its customers?
3. How do you foresee a role that can be played by financial cooperatives in
offering financially affordable Islamic home financing to its member-
customers?
d) Cash Waqf-Financial Cooperative-MM (CWFCMM) Model

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 1. How can waqf fund be utilized to enable financial cooperatives to offer
financially affordable Islamic home financing to its member-customers?
2. How will the proposed Cash Waqf-Financial Cooperative-MM (CWFCMM)
model play a vital role in providing financially affordable Islamic home
financing solution to homeowners?
3. This model incorporates a true implementation of MM that uses rental rates
as supposed to the Base Rate (BR) used by Islamic commercial banks. How
will this arrangement address the financial affordability issue in Islamic
home financing instruments?
4. In order to operate this model, should this model involve State Religious
Islamic Councils (SRICs) and/or corporate sector? Why?
5. What kind of challenges that may arise in materialising the above Cash
Waqf-Financial Cooperative-MM (CWFCMM) model? In what way and
how?
6. From your point of view, in what way will the critical factors that might
contribute to the success for financial cooperatives to offer the Cash Waqf-
Financial Cooperative-MM (CWFCMM) model? How?

3. Conclusion
 Ask the informant if there is anything they wish to add
 Thank the informant for their time and contribution to the research
 Remind the informant of the contact details on the information sheet should they
have any queries or concern in the future

4. Finish the interview

Ensure the sound file is saved as soon as practicable to the Dropbox file for safe-keeping

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APPENDIX II: SAMPLE QUESTIONNAIRE

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