It is one of the micro-credit and financial instruments available to Muslims, especially those from the lower income group. There are about 140 Islamic pawn-broking outlets throughout Malaysia helping the lower-income groups obtain quick and easy access to cash. Unlike conventional pawn-broking, the repayment period under Ar-Rahnu is less stringent and in the event of a default resulting in the pawned item being sold off, any extra proceeds from the sale of the pawned item will be returned to the customer. Islamic Pawn Broking services are popular with both financial institutions and consumers. Providing the customer with the option to obtain cash to fulfil immediate financial needs, this service secures short term financing through personal surety or pledge. Thus, the risk of incurring losses in this model is very low. Under the Ar-Rahnu principle, something you own (such as gold jewellery), is used as a surety against the credit. In practice, the bank will retain the gold as collateral, and charge for safekeeping service. The gold will be valued at the prevailing market price. The amount extended by the bank will be slightly lower than the market value of the gold. The safekeeping period is predetermined and agreed to by both parties. At the end of this period, the financing must be repaid to the bank and the collateral reclaimed. No interest is charged, but if the financing is not repaid within the agreed period, the bank retains the right to seize and auction off the gold used as collateral. The main features of Islamic Pawn Broking are as follows:-
a. Qardhul Hasanb. Al-Rahnuc. Al-Wadi’ahThe Rahnu mode of operations entails:1) Financing amount and gold value – Margin is at 50%-70% against market value of gold item pawned. Usually, financing will be given based on the value of the gold item, the client's background/whether regular wage earner or business owner. The valuation is based also on the purity of the gold item. For example 85 carat gold carries a value of RM25 to RM26 per gm whereas gold of 90 carat and above will carry a value of RM29 to RM33 per gm. 2) Example of safekeeping charges: -
Ar-Rahnu or Pawn-Broking is an activity whereby a valuable item is collateralized to a debt, which may be utilized as payment should the debt not be repaid within the agreed period.
In the event that the debtor is not able to repay the debt, the pawned asset will be disposed of to settle the outstanding amount and any surplus will be refunded to the owner of the asset. However if the owner cannot be traced, it is the responsibility of the Islamic pawnbroker to place the fund in the Baitul Mal account.
A combination of three concepts are applied for the short term financing under Islamic Pawn broking, they are: -
Scenario/example: Take a chain or bracelet with a gold value of RM4, 000. At a margin of 50%, is at RM 2,000-00 as such the safekeeping charges would be RM 82 (from 2.05 % x RM 4,000) per month at a grace period of 6 months would be RM 492-00. By end of the 6th month, the customer need to payback an amount of RM2,492-00 (amount + safekeeping fee).Actually, there is an issue with regards to this practice of charging a safekeeping fee; the Shariah issue appears when the safekeeping charges are based on a percentage of the Marhun (jewellery pledge) value. In Shariah, it is not advisable to link the safekeeping fee to the benevolent loan or Qardhul Hasan amount or financing amount because it can lead to Riba. To avoid Riba, many Islamic Pawn Broking entrepreneurs link the safekeeping fee to the marhun value. However, there is one more thing to take into account to prevent Riba. One must bear in mind that a transaction involving the same type of Ribawi material (in this case gold or silver with Ringgit currency notes) must adhere to the stated condition: “The transaction must be done immediately”. Therefore, when the safekeeping fee is linked by percentage to the marhun value (as in the above practice) it may be regarded as a Riba Nasiah transaction due to the delay in returning the prices. One could say that the delayed amount is a safekeeping fee but in actual fact, when the safekeeping fees is linked by percentage to the marhun value (gold and silver) it is considered as a trading transaction for businesses and no longer a safekeeping fee based on ar-rahn concept. As an alternative, the permissible safe keeping fee must be based actually on the deposit boxes fee, it can be as follows : -
|RM1 – RM200 ||1.65% per month |
|RM201 - RM999||1.85% per month |
|RM1, 000 & above||2.05% per month |
|RM1 – 500||RM 03.50 per month |
|RM501 – 1000||RM 09.50 per month |
|RM1001 – 2,000||RM 21.00 per month |
|RM2001 – 3,000||RM 31.05 per month |
|RM3001 – 4,000||RM 42.00 per month |
Calculation ExampleJewellery Pledge Value : RM 4,000Financing amount : 50% of RM 4,000 = RM 2,000 (Qardhul Hasan=benevolent loan)Maturity period : 6 monthOn maturity : Customer will return RM 2,000 + Safe Keeping FeeSafekeeping fee : (RM 42 x 6 months) = RM 252 (much lower than the percentage model) In summary, the following conditions must be complied with:a) The safe keeping charges shall not be linked by percentage to the Marhun value.b) The Bank may impose safekeeping fee at actual cost only.c) The safe keeping charges are based on one standard only.
For those who want to enter into Ar-Rahnu business, it is advisable to take into account the following conditions:
q Always comply with its mission and objective, that is, to perform “Social obligation” for needy people.
q The financing amount disbursed to customers shall be based on Qardhul Hassan at all times and the safekeeping fee cannot be related to Qardhul Hasan amount.
q The safekeeping fees shall be much lower than Conventional pawn broking fees. Therefore, it is not advisable for Islamic Pawn Broking entrepreneurs to impose high safekeeping fees. It must be understood that by linking the safekeeping fee to the marhun value by percentage, typically the fee would be higher. In the end, it will not be suitable for micro-credit financing.
q In case of failure to return the Murtahin Bih (financing amount) in which the Rahin (customer) cannot be contacted, the Marhun can be sold and if there is any surplus, it shall be placed in a separate account should any claims be made by the owner or his heir. It is very important that the Ar-Rahn company does not use that balance amount for any purpose.
q If the customer (rahin) requests for the extension of maturity period, it must be negotiable and the Ar-Rahn company must not impose any extra charge except for the storage fee. Lastly, there is room and there are opportunities to extend the Islamic Pawn Broking Scheme to other commodities and properties and it is not limited only to gold jewelleries. * The writer is a Senior Shariah Compliance Manager, Product Development Division, RHB ISLAMIC Bank Berhad.
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