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Towards Islamic Banking: A Case Study of

Pilgrims Management & Fund Board, Malaysia

[Khalid Rahman is Director Institute of Policy Studies, Islamabad]

The subject and debate on Islamic Banking is not new in Pakistan. It has been
going on both at private and government levels since the country’s inception. As
a result of this somewhat heated debate a lot of literature has been produced by
scholars as well as professionals arguing the viability or otherwise of the system.
Federal Shari’ah Court judgment about elimination of Riba (1991) and the follow-
up Supreme Court Appellate Bench Judgment (1999) have strengthened the
legal dimension of the debate. Some steps at official and state levels have also
contributed to this debate. These include provisions in the constitutions of
Pakistan, reports of the Council of Islamic Ideology and Panel of Bankers, Self-
Reliance Committee and various other committees and commissions the latest of
whom was the Islamisation Commission set up in 1997.

Although many of the provisions and reports still await genuine action, these
have nevertheless greatly contributed to the subject by outlining and designing
Islamic modes and relevant rules, laws and procedures applicable in modern day
banking. Thus in a way Pakistan can rightly claim playing a leading role in the
development and the process of Islamisation of financial system particularly at
the theoretical level. It is however an admitted fact that things did not move
further at the practical level.

What really are the reasons for this lack of progress at the practical level?
Different people may have different perceptions on the issue. Proponents of the
Islamic banking generally attribute it to the lack of will and commitment of the
successive governments and of the government machinery at various levels.
While this view carries weight one can not ignore other dimensions of the issue.
Most important being the impression at various levels that Islamic banking has
not been in practice anywhere in the world in its real spirit and therefore in the
absence of the tested alternative Islamic model there is little likelihood of a
successful beginning, instead any new experiment may backfire. Though this
impression may not hold ground, it does indicate towards a general lack of
awareness about the Islamic banking alternatives that are already in practice.

This situation has two-fold effect. Because of lack of progress on the practical
plane, apprehensions are increasing as if the Islamic banking lacks the modes
required to cope with the modern day business. Simultaneously, the increasing
apprehensions are making it more difficult to start adopting the alternative

While there is no doubt in saying that such apprehensions are quite opposed to
the reality, yet it highlights the need to learn about the concept and practice of
Islamic banking by discussing successful experiences in Islamic banking and
finance. Experiments have been undertaken all over the world and may prove
helpful in overcoming our inhibition after removing unjustified apprehensions. The
task has become all the more important particularly in the context of recent
Supreme Court Shariat Appellate Bench Judgment since this will help make a
whole hearted beginning. This, however, requires studying in detail the
institutions claiming to be operating on interest-free basis, focusing particularly
on the level of success they have achieved, compatibility with Shari’ah in their
working and impact on society.

Pilgrims Management Fund and Board of Malaysia (Malaysian name: Tabung

Haji) is one such experience. Started in 1963 with the objective to facilitate
Malaysian Muslims to perform Haj by pooling and investing their savings, this
institution can rightly be called a pioneering and successful experience in the
field of Islamic finance and banking. Beginning its business in 1963 with only
1281 members and a total deposits of 46600 Malaysian Ringit, the quasi-
government body (in accordance with the parliament act 1969) now has a
membership (account holders) of around 4 million and deposits of more than 2
billion US Dollars. The number of account holders when seen in proportion to the
total Malaysian Muslim population, i.e. 12 million, is an indicator of how popular
and successful this experience is in Malaysia.

Going through the concept, working and the final product which Tabung Haji (TH)
offers one wonders why such an experiment has not been adopted in other
Muslim countries. In terms of marketing, TH has come up with a product that
satisfies two fundamental human needs: religious as well as financial. In order to
be able to meet financial requirement for performing Haj, Malaysian Muslims
used to save money in unsystematic and traditional methods. Most believed that
money kept under the bed, pillow, in the pot and underground is not only safe but
also such a method of saving is free of Riba. They would never like to keep these
saving in the conventional banks simply because these banks are not run on
Riba-free basis and obviously the money kept for a pious purpose should not be
mixed with Riba. Thus, from purely economic point of view, a huge amount of
money remained idle and did not generate any economic activity. Then there
were practices of selling off land and property to raise enough funds to perform
Haj. This again did not contribute to economic growth of the individuals as well as
national economy. Tabung Haji came with an appropriate answer to the two

TH operates as an alternative financial institution providing halal investment

opportunities to Malaysian Muslim depositors. Its functions can be classified in
three major categories: Haj Services, Deposits and Investments.

Any Malaysian Muslim can open his or her account with Tabung Haji. The
minimum monthly installment can be as low as RM 10 for adults and RM 2 for
children. TH has a network of 111 branches that collect the savings. Besides its
own branches, TH collects savings from its members through post offices, as
well. While deductions from salaries is another mode of collection. As regards to
withdrawal, it is as simple as in any financing institution. An additional facility for
Tabung Haji account holders is that a special withdrawal network is also
available to them during Haj in Saudi Arabia. The amounts so collected are
invested in selected investment establishments spread across a diverse range of
investment portfolios. The organization has an investment Advisory Council that
is responsible to advice and supervise investment matters. It targets multi-
faceted Investment projects in conformity with Shari’ah guidelines and strong
growth potentials. At present the total value of investment is around US$ 4 billion.

The multi-faceted projects undertaken by Tabung Haji include short and long-
term investments, equality investments, unit trust investments, schemes offered
by government, real estate investments for office and commercial use as well as
investments in subsidiary companies. TH itself owns 12 subsidiaries. These
companies are engaged from the traditional sectors of agricultural, plantation or
real estate business to the most modern Information Technology. In 1995, under
an amendment in the act, Tabung Haji has been allowed to expend its operating
framework and now it is able to extend its business activities even outside

Profits earned from investments are professionally handled and channeled to the
depositors’ accounts. Tabung Haji terms it as ‘Bonus’. It is not only tax free but
also exempted from ‘Zakat’. This is because Tabung Haji makes the tax and
Zakat payment on behalf of the depositors. It is significant to note that during the
last ten years this ‘Bonus’ (after tax and Zakat payment) has been 8-9.5% per
annum. Keeping in view the low inflation rate of around 2% in Malaysia during
the same period, this profit is highly competitive and explains why Tabung Haji
has been so successful in attracting depositors in large numbers. It is also
important to note that while Bonus is itself very competitive, the account holders
get the added satisfaction that Tabung Haji provides significant social services
through Zakat collected from the depositors’ accounts. This amount is distributed
among the needy as per specified Quranic categories through Malaysian States
in proportion to the total deposits of their (states) account holders.

Have the deposits and investments in any why effected the original mandate of
Tabung Haji i.e. facilitating the performance of Haj? No doubt, it has effected
very positively. As a matter of fact Malaysian Muslims are enjoying a number of
benefits which are not available to pilgrims from other countries. The most
significant is the cost aspect. At present, the costs involved in performing Haj for
Malaysian Hajis is $2,300 while Hajis going from the same nearby areas of
Indonesia and Singapore have to pay $3,200 and $5,300 respectively. This is
only because Tabung Haji is in a position to subsidize many of the expenses
involved in Haj management. It has an exclusive department responsible to take
care of all the services required in respect of Haj. Security, welfare, medical and
other emergency services during Haj are provided free of charge. The
department ensures adequate accommodation, safe and comfortable travel
arrangements, and comprehensive training and information for the pilgrims. Thus
from registration for Haj to the return of the Hajis, TH has virtually taken over all
the functions supposed to be taken care of by ministries of Haj in other countries
like Pakistan. This is indeed an added advantage to the government and the
society both from economic and administrative point of view.

A very important factor in Tabung Haji’s success is its highly dynamic and
dedicated workforce. It is significant to note that TH is managing all its affairs 
providing Haj services, maintaining a network of 111 branches with 4 million
accounts and US $2 billion investments  with a team of only around 1200. It is
really a very efficient management by any standard.

Tabung Haji is one of the many examples how Islamic teachings can be
implemented in today’s modern world and once implemented how useful,
beneficial these can be to the individuals as well as for the government and the
society. And one does not require anything extraordinary for such an experience.
It is the will and commitment on the part of the government to provide the
required infrastructure and a sincere whole-hearted beginning.