UNIVERSITI TEKNOLOGI MARA

CAWANGAN SELANGOR KAMPUS PUNCAK ALAM

ISB511
PRINCIPLES AND PRACTICES OF AR RAHNU

GROUP ASSIGNMENT 1:
AR- RAHNU MUAMALAT & AR- RAHNU AGROBANK

SUBMISSION DATE:
1ST DECEMBER 2022

PREPARED FOR:
DR. MUHAMMAD RIDZUAN BIN ABDUL AZIZ

PREPARED BY:

NAME STUDENT ID NO.

SITI SURAYA BINTI AZHAR 2020476914

NURUL ANISAH BINTI ZAMROS 2020628224
SITI NURFARHANA NABILA BINTI ZAILANI 2020816578
NORATASHA BINTI JAMALUDDIN 2022778793
SRI DELIMA BINTI JANI 2021853674
TABLE OF CONTENTS

1.0 OVERVIEW OF AR-RAHNU ............................................................................................ 1

2.0 HISTORY AND BACKGROUND OF THE AR-RAHNU PROVIDERS ......................... 2

2.1 AR-RAHNU BANK MUAMALAT ................................................................................ 2

2.2 AR-RAHNU AGROBANK ............................................................................................. 4

3.0 PRODUCT FEATURES AND MODUS OPERANDI/MECHANISM .............................. 6

3.1 MUAMALAT BANK AR-RAHNU PROVIDER ........................................................... 6

3.2 AR-RAHNU AGROBANK ............................................................................................. 9

3.2.1 PRODUCT FEATURES OF AR-RAHNU AGROBANK ....................................... 9

3.2.2 MODUS OPERANDI OF AR-RAHNU AGROBANK.......................................... 10

4.0 COMPARISON BETWEEN THE TWO AR-RAHNU PROVIDERS ............................. 11

4.1 SIMILARITIES .............................................................................................................. 11

4.1.1 REQUIREMENT OF APPLICANT ....................................................................... 11

4.1.2 GRADES OF GOLD ............................................................................................... 11

4.1.3 TAKAFUL PROTECTION ..................................................................................... 11

4.2 DIFFERENCES ............................................................................................................. 12

4.2.1 FINANCING AMOUNT ......................................................................................... 12

4.2.2 FINANCING MARGIN .......................................................................................... 12

4.2.3 TENURE FINANCING .......................................................................................... 12

5.0 SUGGESTIONS TO THE AR- RAHNU PROVIDERS TO IMPROVE THEIR

BUSINESSES AND OPERATIONS ...................................................................................... 13

6.0 CONCLUSION .................................................................................................................. 14

7.0 REFERENCES .................................................................................................................. 15

1.0 OVERVIEW OF AR-RAHNU

Microfinance organizations in Malaysia offer borrowers with cash or capital. Micro-

financing typically takes around one hour to complete. Borrowers can get their money and go
about their everyday routine after one hour. Microcredit can be provided to individuals or
groups, frequently without collateral. There are a few microfinance organizations in Malaysia,
including Majlis Amanah Rakyat (MARA, founded in 1966), Amanah Ikhtiar Malaysia (AIM,
founded in 1987), Yayasan Pembangunan Ekonomi Islam Malaysia (YaPEIM, founded in
1993), and Yayasan Tekun Nasional (TEKUN, est. 1993) (Nik Hadiyan Nik Azman, 2020).

Another trend of micro-financing in Malaysia is Ar-Rahnu. Ar-Rahnu, refers to a

Shariah-compliant format of pawning service, equipped with the Islamic economy concept in
its application. Ar-Rahnu is a way of providing short-term funding to a person by pawning his
or her gold as a security to banks or any Islamic pawnshop. It is one of the microfinance
facilities provided to people with middle and lower incomes that need financial assistance such
as low-income family that are particularly micro-entrepreneurs. Ar-Rahnu has existed in
Malaysia since 1992, with the formation of Muassasah Gadaian Islam Terengganu (MGIT)
(Nor Aishah Mohd Ali, 2017).

In addition, Ar-Rahnu is quite popular because of its speedy service and approval,
affordable service fees, and straightforward procedures. Furthermore, issues in obtaining cash
from official and commercial financial institutions have been cited as one of the primary
reasons for people choosing this method. These issues are mostly due to the excessive
bureaucracy of funding agencies and formal financial institutions, which take longer that is, up
to six months to release loans with numerous documents (Nik Hadiyan Nik Azman, 2020).

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2.0 HISTORY AND BACKGROUND OF THE AR-RAHNU PROVIDERS

2.1 AR-RAHNU BANK MUAMALAT

The foundation of the Bank Muamalat logo and brand is a dynamic line that moves
continuously. The single line reflects the primary goals of efficiency and dynamism. The single
line represents an effective, precise, and narrowly focused vision. This demonstrates the close
bond between the Bank and its clients.

Islamic architecture uses the dome as a fundamental component of its design to denote
the location of the mosque and other places of refuge. The five domes stand in for the five
pillars of Islam and the five times that Muslims are required to pray. The logo's hourglass in
the center symbolizes time, which is the lifeblood of a bank. The Sultan blue serves as a regal
color to evoke a sense of power and confidence, while the orange represents the warmth of the
Bank (Bank Muamalat, 2022).

Bank Muamalat Malaysia Berhad is one of Malaysia's two autonomous full-service

Islamic financial institutions. The bank was founded on October 1, 1999, by combining the
assets and liabilities of three local banks, namely Bank Bumiputra Malaysia, Bank of
Commerce (Malaysia), and BBMB Kewangan's Islamic Banking section. The bank's owners
include DRB-HICOM, which owns 70% of the bank, and Khazanah Nasional Berhad, which
owns the remaining shares.

As one of the pioneers of Islamic banking, the Bank is strongly supported by Shariah
scholars who are highly qualified and experienced in Islamic jurisprudence, advising not only
on Shariah products and services but also on parties planning to raise Islamic Capital Issues or
other new innovative products.

Islamic pawn broking, also known as Muamalat Ar-Rahnu, a form of pawn broking.
The qualifying client must submit a request to the Bank for financing for a sum that has been
mutually agreed upon and provide the Bank with agreed-upon gold or gold-related items as

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collateral. The customer is the rightful owner of the gold items under the terms of this product
and consents to pawn this/her/gold customer's items (gold items) recognized by the Bank) as
collateral for the financing obtained from the Bank (Bank Muamalat, 2022).

The bank is a member of the Global Alliance for Banking Values (GABV), an
independent network of banks and banking cooperatives working on the "Principles of
Sustainable Banking" throughout the world. GABV focuses on real-economy returns and
serves as a financial intermediary to assist social and environmental consequences. Bank
Muamalat Malaysia Berhad is the organization's first Islamic bank member (Bank Muamalat
Malaysia berhad, 2022).

Area of services that Bank Muamalat provides for its customers are:

 Deposits and funding options equivalent to those offered by commercial banks

 Investment Account
 Products for wealth management - Ar-Rahnu, Banca Takaful, Gold & Gold-I
Account
 Waqaf products
 Trade finance products
 Participate in capital-raising activities such as the origination, structuring, and
arrangement of Islamic Private Debt, Asset-Backed Securities, and Islamic
Syndicated Financing.
 Corporate consulting and advisory services

The CEO of Bank Muamalat's consumer banking section, Zury Rahimee Zainal, stated
that as a fully Islamic bank, Ar-Rahnu helps Muslims avoid depending on traditional pawn
broking, which contains a usury (riba) aspect, for quick cash. He claimed that "our service is
more transparent and has a low safekeeping value" (New Straits Times, 2019)

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 2.2 AR-RAHNU AGROBANK

First and foremost, the Agrobank logo has a triangle symbol with a circle symbol
underneath it. The floor's central circle emblem represents the power of the bank by
emphasizing the demands of its clients as partners in business.

The triangle emblem represents a broad viewpoint, which is the strength of the bank's
reliance on overly strong alliances and business partners. The triangle is a representation of
stability and dependability. As one of the guiding principles for the bank's success in the future,
bank stability is focused particularly on its financial status and its reputation.

While the color red on the emblem represents vigor, strength, enthusiasm, and
determination in carrying out our nation's responsibility as a top agriculture bank. For
application clarity, the term AGROBANK is written in the color black. The typeface being
utilized is Frutiger, whereby the neat and legible characters make it ideal for printing and
signage (Agrobank, 2020).

Agrobank is a company that offers comprehensive banking services and financial

products. They prioritize the demands of their consumers above all else by offering enticing
goods and services including savings opportunities, banking services, loan options, insurance
coverage, and consulting services.

The Government Development Agency known as Bank Pertanian Malaysia (BPM) was
placed under the Ministry of Agricultural on September 1, 1969, after the Malaysian Parliament
Act was passed. Under the Minister of Finance Incorporated, it is a Government-Linked
Company (GLC) (MFI). After 39 years of involvement in the agricultural banking industry,
Bank Pertanian Malaysia (BPM) was converted to a private company under the Company Act
of 1965. It was first registered under the name Bank Pertanian Malaysia Berhad and has since
changed its name to Agrobank.

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 Gold jewelry can be used as a security against credit under the Ar-Rahnu plan of
Agrobank, which is an Islamic form of pawn broking. The gold jewelry will be kept by the
Bank as collateral, and storage costs will be applied. The amount of the loan that the Bank will
provide the customer will be determined by the current market value of the gold jewelry.
However, depending on the loan margin (%) set by the bank and the type of gold, the loan
amount will be less than the value of the gold jewelry. Both parties have already decided and
agreed upon the safeguarding period and costs (bank and customer) (Agrobank, 2020).

The aim of Ar-Rahnu at Agrobank is to offer a source of rapid funding to people in

order to help them meet their cash flow demands. Additionally, they intend to provide
investment options, particularly to high-income clients and Agrobank wants to prevent its low-
income clients from engaging in unlicensed or illegal finance operations (Agrobank, 2020).

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3.0 PRODUCT FEATURES AND MODUS OPERANDI/MECHANISM

Ar-Rahnu discovered that the dimensions of advantages in Ar-Rahnu, such as excellent

service, gold investment, business capital, transparency, staff competency, and product
features, had a favorable and substantial influence on the institution's long-term connection
with its customers. Focusing on the process will assist Ar-Rahnu service providers in meeting
the expectations of clients and other interested parties. This, in turn, assists service providers
in meeting their return on investment goals.

3.1 MUAMALAT BANK AR-RAHNU PROVIDER

Product Features of Ar-Rahnu

Applicant Eligibility  Open to all Malaysian citizens and Permanent Residents,

aged 18 and above
 Not declared a bankrupt

Benefits  Fully-Shariah compliant product

 Free from Riba’ (usury) and Gharar (uncertainty)
 Fixed Profit Rate on the financing amount
 No early redemption charges
 High margin of advance
 Fast, easy and secure
 Gold cleaning service
 Improve customer experience by providing convenient
online Ar-Rahnu revaluation transaction without present
at BMMB premise. Please refer below pdf attachment for
further information on Ar-Rahnu Online Revaluation.
 All branches can accept the gold bullion for pawning
without opening the seal.

Financing Margin  Up to 80% margin of financing from gold value

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 Financing Limit  Maximum financing amount of RM1,000,000
(RM500,000 for gold jewellery, gold coin, dinar gold bar,
as well as another RM500,000 for physical Muamalat
Gold-i (Perth Mint) Gold Bar) and Muamalat Gold-i
account.

Acceptable Gold  Gold/jewellery (without precious stone) of standards 750,

Collaterals 835, 875, 916, 950 and 999
 Accept all types of gold bars/bars/coins/ wafers of
standards 916, 950 and 999 from all goldsmiths,
institutions, authorized distributors except those
blacklisted by Bank Negara Malaysia (BNM), “Consumer
Alert”, “Fraud Alert” and “SC Security Alert”.
 Muamalat Gold-i account (minimum allowable
transaction is 10 grams and with multiple of every 10
grams i.e. 10 grams, 20 grams, 30 grams).

Pawn Duration  18 months, subject to profit servicing to be paid every 6

(Tenure of Financing) months.

Profit Rate  18 months, subject to 11.25% p.a. on the margin of

financing or 0.9375% monthly.

Comparison On The  Example:

Calculation Of Profit a) Gold value: RM1,000
Rate as Opposed To b) Loan/Financing: RM800 (however customer request
Safekeeping Fee for RM250)
c) Profit Rate Islamic Pawn Broking (Tawarruq): 11.25%
p.a. d) Interest Rate Conventional Pawn Broking: 2% per
month

Payment  Payment for profit-servicing and financing can be made at

our branches, ATM, CDM and Internet Banking.

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Modus Operandi of Ar-Rahnu Muamalat Bank

1. The customer pledges the pawned asset which is jewelry or goods to Muamalat
bank with the conditions set by Muamalat bank for the purpose of the loan
collateral (al-rahn). Muamalat Bank will make an assessment of the quality and
purity of the gold. Based on the evaluation, Muamalat Bank will determine the
loan that the customer is eligible to receive. For example, 80% of the gold value
is pledged.
2. The loan (qard) will be given to the customer in the short term after the pledge
letter is signed.
3. Muamalat Bank is responsible for keeping and guaranteeing (wadi'ah yad
dhamanah) the pledged goods so that they are safe and secure.
4. The customer will pay the loan and wages (ujrah) charged on the security
guarantee and storage of the pledged goods on the customer according to the
terms of the agreement.

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 3.2 AR-RAHNU AGROBANK

Ar-Rahnu financing applied by Agrobank is a short-term Islamic Pawnbroking

Facility that offers customers fast cash by taking gold goods as collateral.

3.2.1 PRODUCT FEATURES OF AR-RAHNU AGROBANK

Shariah Concept Finance for Ar-Rahnu Shariah contracts underpin the Tawarruq
(Commodity Murabahah) and Rahn (Collateral) concepts, which
offer competitive profit rates to customers subject to minimum
eligibility requirements for the purpose of personal consumption,
business working capital, or any other agricultural or non-
agricultural activities aimed at improving the community's
socioeconomic status.
Eligibility Malaysian citizens and/or permanent residents aged eighteen (18)
to seventy (70) years old on the date of application are eligible to
apply.
Financing limit  Minimum Limit per Financing Account: RM100
 Maximum Daily Limit per customer: RM100,000
 Maximum Financing Aggregate per customer: RM150,000
Margin of financing Up to 75% of the current Market Value of the collateralized Gold.
Financing Tenure Contracted Financing Tenure is 36 months.
Acceptable Gold Gold Jewellery
Collateral (Marhun) 999, 950, 916, 875, 835, 750

Gold Coin (999)

1 troy ounce, ¼, ½

Gold Wafer (999)

10g, 20g, 50g, 100g

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 3.2.2 MODUS OPERANDI OF AR-RAHNU AGROBANK

1. The customer pledges the pawned asset, which could be jewellery or goods, to
Agrobank under the terms of the loan collateral (al-rahn). Agrobank will evaluate the
gold's purity and quality. Agrobank will determine the loan that the customer is eligible
for based on the evaluation. For example, 80% of the value of the gold is pledged.
2. After signing the pledge letter, the loan (qard) will be given to the customer shortly.
3. Agrobank oversees keeping and guaranteeing (wadi'ah yad dhamanah) the pledged
goods to ensure their safety and security.
4. According to the terms of the agreement, the customer will pay the loan and wages
(ujrah) charged on the security guarantee and storage of the pledged goods.

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4.0 COMPARISON BETWEEN THE TWO AR-RAHNU PROVIDERS

4.1 SIMILARITIES

4.1.1 REQUIREMENT OF APPLICANT

For similarities of Ar-Rahnu Muamalat Bank and Ar-Rahnu Agrobank, both

banks put requirements for applicant eligibility as open to all Malaysian citizens and
permanent residents aged 18 to 70 years old at the time of application. Apart from that,
the applicant must not have been declared bankrupt in order to establish an Islamic
pawnbroking scheme based on the Shariah concepts of Tawarruq known as commodity
Murabahah and Rahn called Pawn broking.

4.1.2 GRADES OF GOLD

Moreover, these two banks accept the grades of Gold like 999, 916, 875, 835,
and 750. In addition to this, these two banks accept all types of gold, including gold
wafers, bars, coins, and nuggets produced by all goldsmiths, gold institutions, and gold
producers except for companies blacklisted by Bank Negara Malaysia, The Securities
Commission Malaysia (SC) Security Alert, Fraud Alert, Consumer Alert.

4.1.3 TAKAFUL PROTECTION

Pledgor gold collateral is insured through takaful by these two banks, Ar-Rahnu
Muamalat Bank and Ar-Rahnu Agrobank. Pledged gold items are subject to the Takaful
policy, which is funded by the bank. Both banks will compensate the collateral at the
same rate as the original value if it is damaged or lost while in their own custody.

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4.2 DIFFERENCES

4.2.1 FINANCING AMOUNT

There are a few differences between both banks in terms of pawn Islamic
broking. One of them is the amount of financing. For Ar-Rahnu Muamalat Bank, their
minimum financing amount is RM250 for Muamalat Gold-i (MG-i Account), 10 grams,
and in multiples of 10 grams, such as 10 grams, 20 grams, 30 grams, and so on.
Meanwhile, the total maximum financing is RM1,000,000, RM500,000 for gold
jewelry, gold coins, and dinar gold bars, plus another RM500,000 for physical
Muamalat Gold-i (Perth Mint) Gold Bar and Muamalat Gold-i account. For Ar-Rahnu
Agrobank, they have an RM100 minimum limit for each funding account and an
RM100,000 daily maximum limit for each customer. We can see here, there are huge
differences between both banks in terms of the financing amount.

4.2.2 FINANCING MARGIN

The margin in lending is the difference between the amount borrowed and the
value of the collateral used to secure the loan. For these two banks, there is little
difference in their financing margin. Ar-Rahnu Muamalat Bank provides up to 80%
financing margin based on the current value of gold items, also known as marhun value,
which means collateral. Following that, Ar-Rahnu Agrobank has a margin of up to 75%
of the current market value of the pledged gold. The margin difference between the two
banks is only 5%.

4.2.3 TENURE FINANCING

Ar-Rahnu Muamalat Bank's tenure of financing is only 18 months. However,

the pledgor must pay the profit rate payment every 6 months for a continuation up to
the full tenor, and the payment due date must fall on the first of the month of each
payment cycle. The financing term for this facility for Ar-Rahnu Agrobank is 36
months starting from the collateral date until the profit payment deadline. Here, we can
see 18 months’ differences for periods of tenure financing for Ar-Rahnu Muamalat
Bank and Ar-Rahnu Agrobank.

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5.0 SUGGESTIONS TO THE AR- RAHNU PROVIDERS TO IMPROVE THEIR
BUSINESSES AND OPERATIONS

Improve operational effectiveness and strategic positioning. Depending upon the

specific business objectives of each bank, strategic positioning will vary. However, the focus
of this piece is operational effectiveness. Implementing specialist collections and recovery
software is one important way Islamic banks can increase operational effectiveness. A
specialist solution is created from the ground up to increase collections rates, unlike a
collections module that is included with a basic banking system.

Islamic financial instruments can be superior replacements or alternatives to traditional

financial contracts, however they do not work in tandem. This is because Islamic financial
contracts are based on a fundamental principle that is governed by Shariah, or Islamic law. The
Islamic financial system does not permit interest or riba, uncertainty (Gharar), gambling, or
speculation under any circumstances, which is the main distinction between these two financial
systems. Additionally, the majority of the time, conventional financing is not now practised
through partnerships that adhere to the principles of profit-and-loss sharing.

According to the findings of the current study, a successful implementation of the

creative Islamic financing mode of operations can not only help small businesses overcome
their current financial difficulties, but it can also help lenders find solutions to a wide range of
issues that arise when providing financing for small businesses. The suitability of each funding
option can be further investigated in light of factors such as the type of project or business,
sector (agricultural or industry), market conditions, and technological and infrastructural
capabilities. Additionally, it is envisaged that after a thorough analysis of all relevant elements,
choosing the most suitable Islamic financial modes will help to advance the small company
sector not only in Malaysia and Indonesia but also in some other countries throughout the
world.

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6.0 CONCLUSION

Ar-Rahnu is one of the unofficial forms of credit that, by offering fast cash as opposed
to the financing provided by established institutions, can meet the specific financing needs of
female microentrepreneurs. This study organized aspects that affect women micro-
entrepreneurs' decision to employ Ar-Rahnu as a financing medium, a technique that has not
been specifically mentioned in prior studies. The essential reasons motivating women micro-
entrepreneurs to utilize Ar-Rahnu services have been highlighted by the implementation of Ar-
Rahnu in the informal credit market theory. Shariah compliance, customer happiness,
collateral, geography, and service fees are a some of the topics that have been addressed.

One endeavour to improve the current products is the discussion of improving ar-rahn.
The goal of the procedure is to give consumers more options when using the debt-based
contract financing mechanism, not to replace the current product. The current Ar-Rahn product
will be improved when its potential is fully realised and it eventually develops into a
worthwhile alternative product in the financial markets. For the benefit of all parties involved,
this is just the beginning of an ongoing endeavour that has to be carefully evaluated in the
future.

Society's citizens still lack a significant amount of information on Islamic financial

goods. More work needs to be put into educating the public in order to support and develop the
Muslim community in particular as well as raise awareness among the public in general.
However, despite the fact that Malaysia has had the Islamic system in place for more than two
decades. Nevertheless, some sectors of modern Malaysian society shouldn't be drawn to the
Islamic plan.

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7.0 REFERENCES

Agrobank. (2020). Annual Reports of Agrobank 2020. Retrieved from Agrobank:

https://www.agrobank.com.my/wp-content/uploads/2021/11/ShareAR-
ENG_Agrobank-AR2020_0111.pdf

Agrobank. (2020). Lembaran Maklumat Produk. Retrieved from Agrobank:

https://www.agrobank.com.my/wp-content/uploads/2019/07/LEMBARAN-
MAKLUMAT-PRODUK.pdf

Agrobank. (2020). Terma dan Syarat Pembiayaan Ar-Rahnu. Retrieved from Agrobank:
https://www.agrobank.com.my/wp-content/uploads/2019/07/TERMA-SYARAT-
PEMBIAYAAN-AR-RAHNU.pdf

Bank Muamalat. (2022). Bank's Image. Retrieved from Bank Muamalat:

https://www.muamalat.com.my/media-room/banks-image/

Bank Muamalat. (2022, September 13). ISLAMIC PAWNBROKING (MUAMALAT AR-

RAHNU) . Retrieved from Muamalat:
https://www.muamalat.com.my/downloads/consumer-
banking/PDS_Ar_Rahnu_Tawarruq.pdf

Bank Muamalat Malaysia berhad. (2022). Banking. Retrieved from Malaysia International
Islamic Finance Centre: https://www.mifc.com/-/bank-muamalat

New Straits Times. (2019, June 21). Bank Muamalat to grow revenue from Islamic
pawnbroking. Kuala Lumpur, Malaysia.

Nik Hadiyan Nik Azman, M. Z. (2020). The Adoption of Ar-Rahnu and Financial Wellbeing
of Microentrepreneurs in Malaysia. International Journal of Academic Research in
Business and Social Sciences, 36-53.

Nor Aishah Mohd Ali, Y. C. (2017). AR-RAHNU: A REVIEW OF LITERATURE AND

FUTURE RESEARCH. SHS Web of Conferences, (pp. 1-2). Melaka.

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