CHAPTER 8:

Islamic pawnbroking
(Al-Rahn)

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 Content
 Introduction
 The concepts and principle of al-Rahnu
 Rulings on al-Rahnu
 Terms and conditions of a al-Rahnu transaction
 Features of al-Rahnu
 Advantages of al-Rahnu
 conclusion

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 INTRODUCTION

 People say diamonds are women’s best friend. In reality, gold jewelry
is their true friend – at least true among Malaysian women.
 Gold jewelry functions as:
 Enhancing women’s look,
 Exclusive image / distinguish
rank: more gold implies wealth,
 Saving as its price is more stable
and normally appreciates,
 A collateral whenever cash is needed.
 Men can also share the benefit when emergency occurs.
 Why?
 Because gold can be exchanged for cash instantly and redeemed back
after a certain period.
 Introduction
 The pawnbroking business was introduced in malaysia in
the early 19th century. The activities of the pawnbroking
system in malaysia are governed by Pawn Broking
Trustee Act 1972.
 The conventional pawn broking system is popular for quick cash
borrowings. Mostly this ‘quick cash’ is borrowed by low income
earners in the rural areas. But there are downsides to this
conventional pawnbroking service: the high interest charges and
unfair practices.
 As such, al-Rahnu or islamic pawnbroking offers an alternative
kind of pawnbroking scheme.

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 Introduction
 The establishment of Islamic bank, Insurance through
Takaful, the scheme of banking without interest (free
interest scheme) and the Islamic system of Rahn are
examples of regulating economic activities on Islamic
lines by the Muslims in Malaysia.
 Normally, customers for Islamic banking activities are
from the middle class of society and above, while
customers for al-Rahn are from the middle class of
society and lower.
 Without Islamic mortgage system, lower income group
of Islamic society, will be pushed to engage with interest
practiced by Pawnbroker shops and “Along” in fulfilling
their needs.

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 THE CONCEPTS OF AL-RAHN

 Al-rahn, translated into English means pledge or pawn. Rahn is

a contract of security.
 Al-rahn literally means thing given to a person as security for
fulfillment of a contract; payment of debt; etc; thing put in
pawn.
 Al-rahn in Islamic law means to pledge or lodge real or
corporeal property or material value, in accordance with the
law, as a security for debt or pecuniary obligation, so as to
make it possible for the creditor to regain the debt or some
portion of the goods or property.

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 CONCEPT AND PRINCIPLE OF A-RAHNU

 Al-Rahnu is an Islamic pawnbroking facility. It is

defined as a charge on property or asset in respect of a
debt. It provides an assurance of payment of such debt
by the debtor to the creditor. It allows the holder of such
asset to liquidate the asset and set it off against the debt
once due as a result of default by the debtor.
 The objective of al-Rahnu is to convince the owner of a
debt that his right over the debt will not be lost, should
the debtor fail to settle the debt. As such, it can be used
as a mechanism of financing without usury.

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 CONCEPT AND PRINCIPLE OF A-RAHNU

 In Islamic jurisprudence, the concept of al-Rahnu is defined as

possession offered to a creditor as security for a debt to enable the
debt to be repaid should the debtor fail to make his repayment for
the amount due to the creditor. The practice of al-Rahnu is probable
from the shariah perspective. The ruling is based on sunnah that,
when the Prophet Muhammad S.A.W passed away, his shield was
with a Jewish man in Medina as collateral.

 The following 5 pillars should exist as essential element:

i. There must be a pledgor (rahin)

ii. There must be a pledgee (murtahin)
iii. There must be a debt (marhun bih)
iv. There must be a valuable asset (marhun)
v. There must be agreement in concluding the contract- ijab and qabul
- Offer and acceptance. (sighah)

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Conditions Relating To Pledged Thing (al-marhun)
 Anything which can be bought in Islamic law can be pledge.
 The pledged property must be possessed by pledgor (al-rahin) or
debtor.

Conditions Relating To Debt (al-marhun bih)

 Debt should exist at the time of ‘aqd (contract).
 The object (‘ain), amount and kind should be known to the both
parties contracting al-Rahn.
 Pledgee has the right to keep the pledged thing as evident from
the Quranic injunction: “with possession (may serve the
purpose)”.
 However, the parties to the contract of al-Rahn may agree to
entrust the pledged thing to a third person known as the ‘adl or
amin.

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 The basis of al-Rahn in Shari’ah
 All Islamic jurists agree that the practice of al-rahn is lawful and
permitted by Islam.
 It is based on the Quranic verse in Surah al-Baqarah, verse 283, in
which Allah says:
If you are on a journey, and cannot find a scribe, a pledge with
possession (may serve the purpose). And if one of you deposits a
thing on trust with another, let the trustee (faithfully) discharge
his trust, and let him fear His Lord. Conceal no evidence; for
whoever conceals it – his heart is tainted with sin. And Allah
Knows all that you do.
 The meaning of the word al-rahn and journey (safar) does not
give a meaning that journey is to be a condition for al-rahn.
 But, it just shows that security by al-rahn can replace the security
by writing which is hard to be found in the journey.
 There is a consensus among the jurists that the contract of pledge
is legal and everything which can be bought can be pledged.
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 Terms and conditions of al-Rahnu transaction
The indebted party shall not be coerced into pledging of collateral
An orphan’s property cannot be pledged as collateral by a trustee
unless under exceptional circumstances for protecting the interest
of the orphan.
The property held as collateral shall be a liquid asset
The property held as collateral shall be distinct from other
properties
The ownership shall not be changed; therefore, the owner is
responsible for the cost of up keeping the property even when it is
pledged as collateral. Likewise, the owner shall continue enjoying
any secondary benefits derived from the property.
If the property held as collateral is lost or damaged while in
possession of the trustee, without any negligence on his part, there
is no guarantee by the trustee.
The ownership of the property cannot be transferred until the debt
is settled or the creditor allows for such a transaction.
If the borrower cannot pay back on the expiry of the period of a
debt, the judge can order the property pledged as collateral to be
sold in the open market.
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 Features of al-Rahnu
 Al-Rahnu facilities a micro credit facility and secured
safe-keeping with insurance coverage for pawned items.
The purpose of this principle is to facilitate financing
aimed at helping members of the society when they are
desperately in need of money for a good reason, by
taking a valuable asset as collateral.
 Usually, the facility amount is between RM5,000 and RM50,000.
The margin of financing granted is between 60% and 75% of the
value of the asset pledged as collateral. Repayment is either by
installments or in a lump sum amount.
 The tenure of this facility is usually between three
months and three years. The amount of money imposed
as safekeeping fee is from RM0.40 to RM0.60 for every
RM100 depending on the value of the pawned item
(marhun)

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 Features of al-Rahnu
 Jewellery Pledge Value : RM 4,000
 Financing amount : 50%
 Maturity period : 6 month
 Safe keeping fee :
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

 On maturity, Customer will return: ?

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 The Operation of al-Rahnu in Malaysia
 Operation of Muassasah Gadaian Islam Terengganu (1991).
 Operation of Kedai al-Rahn, Kelantan
 Operation of Skim al-Rahn at Bank Rakyat.

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 4. In the Era of Islamic Resurgence
Terengganu
 In Terengganu Peraturan Muassasah Gadaian Islam 1991
(Regulation of Foundation of Islamic Pledge 1991), was
passed under the Enakmen Pentadbiran Hal Ehwal Agama
Islam Terengganu 1986.This enactment gives the power
to Majlis Agama Islam dan Adat Melayu Terengganu set
up the Islamic pledge through the Muassasah Gadaian
Islam Terengganu (MGIT). This MGIT was launched on
January 23, 1992 at Kuala Terengganu.

Kelantan
 In Kelantan the scheme of Al-Rahn is set up on March 12,
1993. The main feature that distinguish it from
conventional pawnshops is, it does not allow the forfeiture
of valuables. Apart from that the system also does away
with interest charges and only levy certain fees for the
safe
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1. Operation of Muassasah Gadaian Islam Terengganu

 Terengganu became first state in Malaysia to

introduce al-Rahn in 1991.
 The Muassasah is fully sponsored by State
Government of Terengganu.
 Its operations is conducted by Majlis Agama Islam
and Adat Istiadat Melayu Terengganu.
 The main objective of the Muassasah is to help the
needy people of Terengganu through the giving of
a loan with a security. The loan given is free from
interest.
 However pledgor is encouraged to make a
donation to Muassasah as a administration cost.
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 Procedure of al-rahn in Muassasah
 When receive any article to be pawned, Muassasah
should record it in a book with all the details which are
fixed in the regulation, and later gives a pawned letter in
its standard form, to a pawnor.
 When pawnor deposits his property (jewellery) for
pawning, he must give the true informations or
declarations needed by Muassasah.
 The amount of loan must not be over than 75% of value
of pawned article and not more than RM1500.00.
 No service charge is obliged on the pawnor.
 This service is opened to the people of Terengganu who
domicile are in the state or those whose domocile are in
Terengganu and in addition,17 they must be a muslim.
 Procedure…..

The minimum period of redemption is three months.

However, the pawnor can apply for extending the
period of redemption, and Muassasah can give
permission for extending it not more than three months.
If the pawned article is not redeemed after six months, a
notice of fourteen days should be issued to the pawnor
to choose either to buy that article or to find out any
buyer on behalf of him.
The balance of the amount can be claimed by the
pawnor within four months. If there is no claim within
four months, Muassasah must send the amount to the
Yang Di Pertua of the Majlis who, later, will put it into
the Akaun Amanah Kumpulan Wang Majlis, whereby
the owner can request his share.
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 2. Operation of Kedai Rahn, Kelantan
 Al-Rahn in Kelantan is set up in March 12, 1993.
 It is owned by Permodalan Kelantan Berhad.
 Al-Rahn in Kelantan is governed by Pawnbrokers Act
1972 except for Section 17 and 23.
 To ensure that Kedai al-Rahn will not involve in riba, it
has alternatives for section 17 that are Qard hasan,
Bai’ biThaman Ajil, bai al-wafa’, service charge (upah)
and wadiah or safe-keeping fee.
 As for licensing, Kedai al-Rahn follows the Section 7
and 10 of Pawnbroker Act 1972 :
No person shall act as a pawnbroker except under a
license granted under this Act.
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 Procedure and Principle of the operation
 A loan is given without interest based on Qard
Hasan.
 The security or the item pledged is restricted to
gold item only.
 After paying the debt, the pledgor can redeem the
item provided that he pays the expanses for safe-
keeping as required.
 The fee of safe-keeping is based on the value of
the valuable and is adjusted for the value of the
loan given.
 The pledge is redeemed is not later than six
months.
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 Procedure…… Kedai al-Rahn, Kelantan

 The maximum amount of loan is RM5,000.00 or

60% of the value of marhun.
 The rate of safe-keeping fee is based on the value
of the item and not the total amount of loan.
Item worth Cost of safe-keeping
(Every RM100.00)
RM1 – RM400RM0.75 per month
RM401- 2000 RM0.90 per month
RM2001-10000 RM1.00 per month
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 Example of the calculation of fee

 Pawn items (value): RM5000

 Total loan: RM2500
 Pawn period: 3 months
 The Pawnor has to pay for fee:
RM5000 is (50 x RM100)
The fee is:
= 50 x RM1 (cost per month for every RM 100) x

3 months
= RM150.00
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 3. Operation of Skim al-Rahn Bank Rakyat
 Bank Rakyat has established a project Skim al-Rahn at its
counter which launched on October 27, 1993.
 The project was implemented as a joint venture between Bank
Rakyat and Yayasan Pembangunan Ekonomi Islam Malaysia
(YPEIM).
 The operation of pawnshops is governed by the Pawnbrokers
Act 1972. According to Section 46(c) of the act, Bank Rakyat is
exempted from the provisions of the Act in the sense that it does
not need any licence to operate Al-Rahn services.
 Section 46(c) states that:
The following person shall be exempted from provision of this
act: (c) any cooperative society registered under any written law
force in the Federation relating to cooperative society”.

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 Procedure
 A loan is given without interest based on Qard Hasan.
 The security or the item pledged is restricted to gold
item only.
 The customers are required to pay the loan and the fee
for safe-keeping which is calculated monthly.
 The fee of safe-keeping is based on the value of the
valuable and is adjusted for the value of the loan given.
 The period permitted is six months, which starts from
the date of pawning.
 Upon expiration of redeemable period, a pawnor is
given three months grace period which starts from the
expiration of redeem period.
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 THE ADVANTAGES OF AR-RAHNU
 Gender Sensitivity:
 Gold jewelries are women’s asset.
 According to Islam, women have rights to their belongings.
 A lot of women involve in small scale businesses.
 Therefore, co-operatives offering the Al-Rahnu scheme are
sensitive to women’s need and welfare.
• Interest free.
• Transparent and customer friendly counters.
• All transactions are recorded clearly.
• Secured safekeeping with insurance coverage for the pawned
items.
• Issuance of notices to customers.
• Excess from the auction will be returned to the customer.
THANKS

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