PRINCIPLES AND PRACTICE OF AR RAHNU ( ISB511)

INDIVIDUAL ASSIGNMENT :
“ SMALL MEDIUM ENTREPRENEUR ACCEPTANCE OF AL-
RAHNU IN MALAYSIA”

PREPARED BY :
NAME NURUL NADHIRAH BINTI HISHAMUDDIN

MATRIX 2022923703

CLASS BAE6A

PREPARED TO :
MOHAMMED ‘IZZUDDIN BIN ISMAIL
 TABLE OF CONTENT

1.0 INTRODUCTION..............................................................................................................................................
2.0 RESEARCH PROBLEMS.................................................................................................................................
3.0 RESEARCH OBJECTIVE................................................................................................................................
4.0 RESEARCH QUESTION..................................................................................................................................
5.0 DATA AND SOURCES.....................................................................................................................................
6.0 FINDING AND DISCUSSION..........................................................................................................................
6.1 THE AR-RAHNU SERVICE PROVIDER....................................................................................................
6.2 HOW AR-RAHNU CAN HELP ENTREPRENEUR....................................................................................
6.3 ADVICE OR SUGGESTION TO CHOOSE AR RAHNU...........................................................................
6.4 WHY CHOOSE AR RAHNU COMPARE TO CONVENTIONAL PAWNSHOP......................................
6.5 THE NORMALLY USE AR-RAHNU SERVICE BY ENTREPRENEUR.................................................
7.0 CONCLUSION...................................................................................................................................................
8.0 REFERENCES...................................................................................................................................................
9.0 APPENDIX..........................................................................................................................................................

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1.0 INTRODUCTION

Ar-rahnu is an Islamic contract that offers the pledging of valuable assets as collateral to
provide financial services to individuals to meet their debt liabilities or financial obligations. ar-
rahnu customers need to bring valuable leased goods to the ar-rahnu center to be pledged at the
current value of the pledged goods. If the customer agrees to the terms and agrees to repay the
loan within a certain period and amount, they receive the loan and the item is held as collateral.
The ar-rahnu party or the lessee will receive additional payment or interest as a wage for keeping
the collateral only, no excessive interest to the extent of burdening the borrower. If the loan is
not paid, the Ar-Rahnu provider has the right to sell the item to recover the loan amount. Ar-
Rahnu services are regulated by the Malaysian government to ensure fair practices and customer
protection.

Many have the intention to open or have a business but the lack of financial capital is a
factor in the destruction of the intention. Therefore, alternatives and services like this made in
Islamic finance have helped small and medium entrepreneurs pursue their goals. Therefore, the
acceptance of ar-rahnu among small and medium entrepreneurs is increasing in Malaysia.
Perhaps because Islamic-based financing products according to Islamic financial principles are
faster, easier, transparent and clearer in the process of obtaining financing by pledging their
valuable assets as collateral. Indirectly able to benefit entrepreneurs who need immediate funds
for their business operations. Therefore, this ar-rahnu is very useful for entrepreneurs who need
short-term liquidity but want to maintain ownership of their assets.

In addition, the Ar-Rahnu plan generally has many benefits and advantages in the
services it provides. Among them is Ar-Rahnu, a Sharia-based micro-lending program that offers
loans without interest (riba), risk (gharar), gambling, and exploitation. What borrowers need is
their commitment to gold as collateral for loan repayment. From a selection point of view,
entrepreneurs with a less than perfect credit score or limited credit history may still be eligible to
be financed through ar-rahnu. Overall, small and medium entrepreneurs in Malaysia may accept
Al-Rahnu due to its adherence to Islamic principles, accessibility, collateral-based financing,
higher interest rates low, and cultural and religious acceptance.

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 Therefore, research began to investigate small medium entrepreneur acceptance of Al-
Rahnu in Malaysia. The study's key goal is to see how Ar-Rahnu can help dan can change the
perception of the entrepreneur in Malaysia and aspects that influence the acceptance of Small
Medium Entrepreneur Acceptance of Al-Rahnu in Malaysia. As a result, the name of ar-rahnu
service, comparison, normal use and the significance and acceptance of Ar-Rahnu to small
medium entrepreneurs will be known in this study.

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2.0 RESEARCH PROBLEMS

Sources from Semantic scholar

The acceptance of ar-rahnu by small and medium businesses in Malaysia did not increase
dramatically after it was announced by Islamic finance with the aim of helping small and
medium businesses to obtain capital financing. This is because there are some problems
identified before continuing with this research study. Among them is the lack of awareness and
understanding among small and medium entrepreneurs in Malaysia about the concept and
benefits of ar-rahnu, which has limited their willingness to accept it. in addition, competition
from conventional financing options. Research can investigate the competitive landscape and
assess the factors that influence the choice of small and medium businesses between Al-Rahnu
and conventional financing options.

In addition, the lack of success stories that showcase Ar-Rahnu's positive results is also
another research problem for new businesses to assess Ar-Rahnu's capabilities and build trust
and raise awareness in helping small and medium businesses. in addition, cultural and religious
reservations. due to ar-rahnu from islam which is based on islam, maybe some small and
medium businesses have doubts about culture and religion in the implementation of the financial
product. and finally the problem in this research is the limited awareness of the qualification
criteria that make the specific qualification to get ar-rahnu payment not well and clearly known.
Hence, this research is to examine and assess the aspects that influence the acceptance of Small
Medium Entrepreneur Acceptance of Al-Rahnu in Malaysia.

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3.0 RESEARCH OBJECTIVE

● To examine and assess the aspects that influence the acceptance of Small Medium
Entrepreneur Acceptance of Al-Rahnu in Malaysia.
● To assess the level of awareness and understanding of Al-Rahnu among small medium
entrepreneurs in Malaysia.
● To investigate the barriers and challenges faced by small medium entrepreneurs in
accessing Al-Rahnu services and the impact on their acceptance of this financing option.

4.0 RESEARCH QUESTION

● What is the name of the Ar-Rahnu service provider that you choose?
● How can Ar-Rahnu help you?
● Who is giving advice or suggestions to choose Ar-Rahnu ?
● Why do you choose Ar-Rahnu compared to conventional pawn shops?
● When do you normally use Ar-Rahnu services?

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5.0 DATA AND SOURCES

RESPONDENT 1

NAME Nor Aina Nabihah Binti Nor Hisham

AGE 27

PHONE NUMBER 018-3992824

LOCATION Sepang, Selangor

BUSINESS Car rental

RESPONDENT 2

NAME Muhammad Danish Shahmi Bin Mohamad Syafiq

AGE 25

PHONE NUMBER 017-2487532

LOCATION Tanjung Malim,Perak

BUSINESS Dropship Secrezz & Yenz

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 RESPONDENT 3

NAME Wan Nur Aqmar Dayana Binti Wan Asmawi

AGE 22

PHONE NUMBER 013-7592793

LOCATION Sepang,Selangor

BUSINESS Dropship Wawa Cosmetics

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6.0 FINDING AND DISCUSSION

6.1 THE AR-RAHNU SERVICE PROVIDER

Ar-Rahnu is a form of islamic pawnbroking or gold-based financing commonly offered

by banks or financial institutions in Malaysia. There are many ar Rahnu service providers in
Malaysia, these are Ar-Rahnu institution for small medium entrepreneur :

1.AR RAHNU YAPEIM 2. AR RAHNU BANK RAKYAT

3. AR RAHNU AGROBANK 4. AR RAHNU BANK MUAMALAT

5. AR RAHNU BANK ISLAM 6. AR RAHNU POS

6. AR RAHNU PUBLIC GOLD 7. AR RAHNU TEKUN

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6.2 HOW AR-RAHNU CAN HELP ENTREPRENEUR

Ar Rahnu as an islamic pawnshop helps and reduces the burden of small and medium
entrepreneur individuals who need immediate cash. For them ar-rahnu is a mechanism that has a
way to help its customers. Based on the feedback from the respondents I have interviewed, they
stated that Ar Rahnu helps in planning the financial plan in advance because of the flexible
repayment. Since it has Flexibility and convenience repayment terms, they can adjust payments
based on current cash flow. It is able to reduce the stress from the classic way where they have to
stay with a fixed monthly payment.

In addition, loans from pawnbrokers that do not have interest are also among the
advantages of ar Rahnu in helping borrowers or small medium entrepreneurs. This is because
they will not feel burdened and think negatively about the ability to repay if the interest is high
like the story that appeared in the newspaper in February 2021 which is "beware of pawnshop
fraud" which gives awareness that there are cases of conventional pawnshops charging high and
irregular interest rates so that the lessee's debt will increase and the leased goods will disappear.
Such cases and situations told by the respondents made them realize that ar Rahnu is the Islamic
pawnbroker who helps them by charging a storage fee as a wage for storing valuables only
unlike oppressive conventional pawnbrokers.

Next, providing support for small businesses is a point emphasized by respondents. This
is because entrepreneurs can use Ar-Rahnu to mortgage equipment or inventory so that they can
get the cash they need to operate. If you are stuck in need of finance with an immediate rate or
emergency cash in the face of business financial problems, Ar Rahnu is able to help by providing
loans according to the terms and terms of consent.

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6.3 ADVICE OR SUGGESTION TO CHOOSE AR RAHNU

Choosing the right Ar-Rahnu provider can be crucial for a positive experience. Here are some
individuals and resources that can offer advice and suggestions to help you make an informed
decision:

i- Financial adviser
Financial advisers between the relevant parties to be trusted because they are experts in Islamic
finance who are able to analyze the borrower's financial situation and present the pros and cons
of Ar Rahnu. They can also compare the fees, terms and Shariah compliance of different
providers. Their advice and recommendations for making a pawnshop choice are a reliable
source. In addition, the advantages and trust in financial advisers recommending the appropriate
Ar-Rahnu option for specific needs and risk tolerance in deciding to choose Ar Rahnu.

ii- Family and friends

Family is the group that becomes the backbone in all situations whether happy or sad. while
friends are the people who are there during times of trouble and happiness. therefore, advice and
Their recommendations are from people who can be trusted and may have experience in using ar
Rahnu services. They can share their personal experiences and offer insight into the quality of
service and reliability of a particular provider.

iii-Consumer reviews and online forums

Online platforms can provide valuable information and feedback from other users. Reading
reviews, comments and listening carefully to online forums dedicated to Islamic finance or Ar-
Rahnu can offer a real-world perspective and highlight potential red flags. If there are questions
during an online forum, continue to ask the informant to better understand the policies and
procedures of Rahnu.

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6.4 WHY CHOOSE AR RAHNU COMPARE TO CONVENTIONAL PAWNSHOP

There are several reasons why small and medium entrepreneurs in Malaysia may accept and
utilize Al-Rahnu which is an Islamic pawnbroking service compared to conventional pawnshops.
These reasons include:

1. Islamic Financing: Al-Rahnu follows the principles of Islamic finance, which prohibits
interest-based transactions. This makes it more attractive to Muslim entrepreneurs who want to
adhere to Islamic principles and avoid conventional interest-based financing options. However,
conventional pawn shops follow principles and operate on conventional financial principles.
Charges interest on the loan amount.

2. Accessibility: Al-Rahnu offers an accessible and convenient financing option for small and
medium entrepreneurs who may not have access to traditional banking services or find it difficult
to obtain loans from financial institutions. The requirements for Al-Rahnu are typically less
stringent, making it easier for entrepreneurs to obtain financing.However, for conventional pawn
shops it is difficult to get a loan from a financial institution because its strict and complicated
requirements have slowed down the process.

3. Collateral-based Financing: Al-Rahnu provides financing against the pledge of valuable

assets, such as gold or valuable jewelry. This collateral-based financing allows entrepreneurs to
unlock the value of their assets without having to sell them outright. It can be particularly useful
for entrepreneurs who need short-term liquidity but want to retain ownership of their assets.
However, conventional pawn shops pledge items that are accepted by the bank for any valuable
item such as car, house, television or anything that is valuable.

4. Lower Interest Rates: Al-Rahnu generally offers lower interest rates compared to conventional
pawnshops or money lenders. This makes it a more affordable financing option for small and
medium entrepreneurs, especially those who may not have strong credit histories or collateral to
offer. However, conventional items charge interest on the loan amount.

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Both Ar-Rahnu and conventional pawn shops provide quick cash by accepting valuables as
collateral. However, they differ significantly in their underlying principles and operational
aspects. Here is the difference between Ar-Rahnu and conventional pawn shops :

AR RAHNU CONVENTIONAL PAWNSHOP

Based on Islamic principles, Financial Operates on conventional financial

avoiding interest (riba) considered principles principles. Charges interest on the
prohibited. Charges a storage fee for loan amount.
safekeeping collateral.

Only pure gold accepted, Items Any valuable items

ornamented gemstones on gold
items will not be valued

Governed by Shariah law and Legality Regulated by general financial laws

regulations specific to Islamic applicable to pawnbroking.
finance.

Generally offers flexible repayment Loan terms Often has shorter loan terms with
terms with installments. May allow higher interest rates for late
extended pawn periods and potential payments. May have stricter
for renewal. redemption guidelines.

Ensures Shariah compliance in all Shariah Not inherently Shariah-compliant

aspects of operation, including compliance due to charging interest.
contracts, fees, and asset disposal.

Primarily caters to Muslims seeking Target audience Open to anyone needing quick cash,
Shariah-compliant financial regardless of religious affiliation.
solutions.

Pledged items will be auction Default Not transparent

publicly, Transparent and notice
will be sent

Requires minimal documentation Documentation Requires documentation, but they

and relies primarily on the often consider creditworthiness and
assessment of the value of the other factors in addition to the value
pledged item of the items

Have coverage (Takaful) Insurance Not covered, if the pledged item are
lost, only a 25% compensation is
offered

The balance after the auction will be Balance after Not be returned to the pledgor

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returned back by the company to the auction
pledgor

Emphasis on social responsibility Overall approach Primarily driven by profitability and

and ethical financial practices. Aims maximizing returns on loans.
to assist borrowers and avoid
predatory lending.

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6.5 THE NORMALLY USE AR-RAHNU SERVICE BY ENTREPRENEUR

There are several situations faced by small and medium entrepreneurs to choose ar-rahnu
services. Among them is the need to buy business inventory. mortgaging assets to obtain cash in
order to purchase inventory or raw materials. in addition, to add machines or tools for business
facilities so that production runs smoothly and quickly to be able to collect profits to pay
collateral. Cash flow management is also one of the situations that businesses often face to cover
operating expenses such as salaries and rent. As an example of the situation faced by the
respondent during the covid 19 pandemic, the rental car business that was not well received due
to the malaysia movement control order (MCO) by the government has made it difficult for the
business owner to pay the monthly rent of the car that has not yet been paid off.

Next is, immediate financial needs. The unexpected situation became a situation that the
business faced in expenses such as the respondent faced, that is, his stock of dropship goods was
destroyed and faced damage because his house was flooded and he could not save his business
goods. Therefore, he has made the decision to pledge his jewelry with the services of ar rahnu
bank rakyat as capital to buy all merchandise. It is not an easy decision but the spirit and
convenience of ar rahnu has given him a path and light. In addition, seasonal income fluctuations
also affect fluctuating income, Ar-Rahnu can help bridge the financial gap during lean periods.

Nevertheless, the next situation is someone who doesn't have a bank account. People who
don't have a bank account or credit history may find Ar-Rahnu as their only available loan
source. not all banks offer ar rahnu services, there may be many conventional banks or pawnshop
centers that are easy to reach destinations in remote areas. but in regions with limited banking
infrastructure, Ar-Rahnu pawnshops offer important financial services to the local community .

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7.0 CONCLUSION

Bank rakyat, Agro bank, Yapeim, Tekun, Bank islam and Bank muamalat are among the
banks that are expanding to provide facilities for entrepreneurs to get services. This is because
small and medium entrepreneurs in Malaysia have widely accepted and supported ar Rahnu in
malaysia. Although the conventional pawn shop also improves its services, the Islamic pawn
shop system has its own advantages that make it more accepted and recognized. This acceptance
can be attributed to several factors, including the benefits it offers such as access to quick and
easy financing, interest rates which are lower than conventional pawnbrokers, and in line with
Islamic principles.The Shariah-compliant approach based on Islamic principles shows that Ar
Rahnu is more clear, orderly, transparent and easy to access as a small and medium entrepreneur.
ar Rahnu also does not charge interest without burdening interest charges or the existence of riba
in the transaction but only the wages of taking care of the collateral attracts the interest of
borrowers. In addition, Ar Rahnu provides them with alternative and accessible financing options
to support their business operations and growth.

Overall, the positive acceptance of Ar Rahnu among small and medium entrepreneurs in
Malaysia is driven by the benefits of the system, services, ease of access, Islamic principles and
the facilities provided. It has become an alternative financing option in supporting the growth
and development of small and medium enterprises in Malaysia and has the potential to continue
contributing to the country's entrepreneurial ecosystem.

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8.0 REFERENCES

➢ N.Ali, Yang Chik Johari,M. Fatah (2020) Ar-Rahnu: A Review of Literature and Future
Research.https://www.semanticscholar.org/paper/Ar-Rahnu%3A-A-Review-of-
Literature-and-Future-Ali-Johari/8d47a9bc7bf86656a68fe2dc254b46e837c7586d
➢

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9.0 APPENDIX
Feedback and interview season :
RESPONDENT 1

RESPONDENT 2

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RESPONDENT 3

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