Rahn In Islamic Banking & Finance

Syeda Rokash Raza - 17456

Syed Mazhar Ul Haq - 17389
Fatima Bano - 17522
Rukhshan - 14327
Fariha - 17096
 RAHN:
“Refers to taking an asset as security against a debt,
whereby, the secured asset can be utilized to repay debt
in case of non-fulfilment of the financial obligation”
•Arabic noun, derived from “Rahana”
•Rahana = Constancy and Continuity or holding and binding
•Also termed as pledge, collateral, pawning etc
•Murtahin: Pledgee cum creditor
•Rahin: Pledgor cum debtor
•Since Rahn is a charitable contract, therefore, it does not require any
financial obligation on the part of the Murtahin when the Rahin gives him/
her the pledged object.
•Similar to other charitable contracts such as Hiba (gift), qard ( loan), and
wadi’ah (deposit).
 Shariah Justification
Quran

“If you are on a journey and cannot find a scribe then use the receipt of pledged objects.” (Quran, 2:283)

Sunnah

❏ The Prophet (SAW) bought some food (on credit) from a jew and he pledged his iron shield to him. (Al
Bukhari #2068)
❏ Abu Hurayrah stated: ‘pledged riding animals may be mounted in exchange for their expenses : and ones
who rides or drinks is thus responsible for the animal’s expenses.’ ( Al-Bukhari, # 2512)
❏ Prophet (SAW) stated: ‘ The ownership link between a pledged item and its owner is not severed; he is still
responsible for its expenses and he is entitled to its profit.’ (Al-Daraqutni, Hadith # 2923)
❏ Majority jurists except Mujahid and Zahiri says that Rahn is also permissible at time of non-travel as
Prophet (SAW) permitted it without any restrictions.

Ijma
Muslim Scholars unanimously agree that Rahn is permissible
BASIC RULES AND CONDITIONS OF
A RAHN CONTRACT
1. Conditions related to the pledged object ( marhun):
The pledged object must fulfil the conditions of a sale object so that it
can be sold to repay the debt.
Based on the maxim that ‘properties ineligible for sale are ineligible for
pledging.’
Conditions related to the pledged objects are:
● Valued property
● Permissible item
● Should be existent at the time of contract
● Should be deliverable
● Should be precisely determined ( quantity, value, and
essence)
● Should be of sufficient value to cover debt amount
● Should be in possession of the pledgee
● Should be non- fungible and not usufruct
● Should be pledged together if objects are naturally
connected
2. Conditions related to underlying debt/ liability:
● Must not arise from Shariah non-compliant contract or activities.
● Must be an established, binding and enforceable one, either
through a loan, sale, or damages in the torts against a property.
● Must be known and defined to both contracting parties; if one of
the parties are uncertain of the debt, the pledging is considered
invalid.
● Must be matured/ binding.
● Shafi and Hanbali allows liability that is based on usufruct in
Rahn while Hanafi and Maliki prohibits.
3. Conditions related to receipt/possession of the
pledged object:
The pledged asset should be in receipt or possession of the
pledgees. There are several conditions for the validity of Rahn,
mainly:
● Permission of the debtor
● Eligibility of the contracting parties
● Permanency of possession
4. Conditions related to management of Rahn:
●The pledger is responsible for the asset's maintenance costs.
●The benefits derived from the asset belongs to its owner.
●The pledgee should not utilize the pledged asset except with the
consent of pledger.
●The pledger must acquire the consent of the pledgee if he wishes to
conduct a transaction involving the transfer of ownership of the pledged
asset, such as a sale, hibah, or waqf.
●The pledger and the pledgee may mutually agree upfront.
●If asset is sold at the price higher than the amount of outstanding debt,
the pledgee is liable to return the difference to pledger after deduction
of actual expenses incurred during the liquidation process.
APPLICATION IN ISLAMIC FINANCE
Rahn can take form of valuables such as:
1) Property Documents
2) Vehicle Documents
3) Sukooks
4) Jewellery

TWO PARTIES
BANK (Pledgee) CUSTOMER (Pledgor)

Provides financing to Provides valuable item

STARTING
the customer as collateral

Bank returns valuable MATURITY Customer pays off the

item to customer debt
 Shari’ah Issues in Application of Rahn

Issue 1: Pledging an Asset on Two Financing Facilities:

● Customer may create the second pledge on the same asset, in such a case if value of asset is sufficient to secure both debts
with the consent of the first creditor (pledgee) -> Lawful
● If the asset is insufficient to cover both debts -> some jurists say it’s impermissible
● Some jurists say, it is lawful as long as first creditor has given the consent
● AAOIFI says if the pledgees are equally ranked then consent of all is important and right in the asset will be shared
according to their debts

Issue 2: Conventional Fixed Deposit Certificate as a Security in Islamic Financing:

● Pledging conventional fixed deposit as a security can raise a shari’ah issue as the shariah requirement of asset is not fully fulfilled
● SAC-BNM resolved the issue by saying that such an asset can be used as a security upto the principal amount, (interest
excluded)
● Principal of the fixed deposit is considered as a type of right and asset of the customer
● Among requirements of pledged asset → valuable and deliverable; The pledged asset can be tangible property or receivable and
cash.
● SAC-BNM in this matter says that the requirements have been satisfied