The mechanism of Islamic pawn broking8 The performance of Ar-Rahnu10 Analysis on Ar-Rahnu collateral security structure12 Can it really help the small business proprietor? 17 An issue related to Ar-Rahnu19 Conclusion21 References23 Appendix25 Abstract This study aims at analyzing the collateral security structure of Ar-Rahnu, to find out whether it can really help the small business proprietor. This research will be conduct by conceptually analyzing other paper works and researches. Documentary analysis will be used to facilitate the research.
Based on the previous studies, by learning the performance of Ar-Rahnu, the operation model of Islamic pawn broking institutions in Malaysia and analyzing on the collateral security structure of Ar-Rahnu, this paper found that Ar-Rahnu can really help the small business proprietors by lending money to them for their short term financing or in case of emergency with little charging of storage fees. For the purpose of deep study, an issue related with Ar-Rahnu is also discussed in this paper, in order to enhance the stability of Ar-Rahnu industry in Malaysia.
Key terms of the research 1. Ar-Rahnu 2. Islamic pawn broking 3. Collateral 4. Small business 5. Gold dinar Introduction Islamic pawn broking is usually noted as Ar-Rahnu which is defined as a method of providing short term financing to people who are poor or need money by pledging their gold or jewelry to pawnbroker as a security (Amin and Chong, 2011).
Ar- Rahnu is one of the products that have been introduced by Islamic bank to help people especially the needy and poor.
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In that point, Islamic pawnshop is the most appropriate mechanism to provide a financial product for the lower-income group and small business proprietor which usually they have very limited capital or have been excluding from the mainstream financial system. Ar-Rahnu is a product that uses to help people and it was differ from the conventional pawn broking system where the latter imposes high interest rates (two percent per month or 24 percent per annum) and other unfair practices on the borrower. This view has been supported in the work of (Bhat and Sinnakkannu, 2008, p. ).
The establishment of Islamic pawn broking institution in Malaysia was started since January 1992, when the Muassasah Gadaian Islam Terengganu (MGIT), was set up by the Terengganu State Islamic Affairs and Malay Customs (Bhatt and Sinnakkannu,2008; Amin and Chong, 2011).
Then in March 1992, the first Kedai Ar-Rahnu has being established in Kelantan by Permodalan Kelantan Berhad to operate in the pawn broking business. On 21 August 1993, The Malaysian Minister of Finance has announced of Ar-Rahnu scheme.
This is the first cooperation of the Islamic pawn broking in Malaysia between Bank Negara Malaysia Islamic Economic Development Foundation Malaysia (YPEIM) and Bank Kerjasama Rakyat Malaysia Berhad. In this collaboration, each parties has their own roles to ensure the successful of the scheme, Bank Negara Malaysia was supply the expertise in financing field. While, the Islamic Economic Development Foundation Malaysia or YPEIM act as the funder of and Bank Kerjasama Rakyat Malaysia Berhad supply the infrastructures and managing the transaction.
Then, On 27 October 1993, Bank Kerjasama Rakyat Malaysia Berhad has launched six branches of first phase of Ar-Rahnu scheme. Now, the Bank Kerjasama Rakyat Malaysia Berhad is offering the Ar-Rahnu scheme at all his branches throughout Malaysia. Other than that, the YPEIM had also taken the initiative to launch 17 counters of Ar-Rahnu scheme through YPEIM co-operatives and nowadays the Ar-Rahnu Scheme also available and operate at Bank Islam, EON bank and Bank Pertanian Malaysia.
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In Malaysia, both of the conventional pawn broking and the Islamic based pawn shops are regulated by the Pawnshop Act (1972) and Pawnshop Act (1972) ( Ismail and Ahmad, 2012).
The mechanism of Ar-Rahnu concept is the borrower (Ar-Rahin) is required to pledge or produce redeemable collateral (Ar-Rahn) in the form of a gold or silver to ensure repayment of the loan (Bhat and Sinnakkannu, 2008, p. 2).
The function of redeemable collateral to this contract is as a security to the lender (Al- Murtahin) if the borrower failed to pay the debt.
The Al- Murtahin have right to sell the collateral to recover the loan if the borrowed sum is not repaid at maturity date. Since most of customers in Malaysia that using Ar-Rahnu has a lower income and was small business proprietor. So the aim of this study is to analyze on the collateral security structure of Ar-Rahnu, and find out wether it can really help the small business proprietors. Though many scholars said Ar-Rahnu is designed to help the poor and needy, no one of them try to find how it can help the needy and small business proprietors by analyzing the collateral security structure of Ar-Rahnu.
This study is also ambitious to identity one of the current issues which is related to Ar-Rahnu in order to enhance the strength of Ar-Rahnu concept applied in Malaysian Islamic finance industry. Literature Review Due to the rapidly growth of Islamic pawn broking industry, there are more and more scholars are interested in studying Islamic pawn broking from various perspectives. One of them found out that most of the customers of pawn shop in Malaysia were women. According to Amin (2011), most of the customers of Islamic pawn and conventional pawnshop were women.
This situation happens because most of the women have and owned the jewelleries and it was one of their assets. In Islam perspective, women have a right to their belonging. So they have right to make their asset especially the jewellaries as one of the item for collateral for a debt. Amin (2011) find out that, it is fact that most of the users of Ar-Rahnu in Malaysia are women, owing to the link between jewellery as a product of women whilst it is haram to those man. Amin (2011) states that, Ar-Rahnu which is presently available in Malaysia supplies two distinct benefits for Muslimah.
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Firstly, it allows Muslimah to obtain quick cash for emergency and transaction purposes. Secondly, it avoids Muslimah from involving in loan-shark and interest-based loans. Ismail et al. (2012) argued that Microenterprise can be defined as a small financial loan that made for poverty individual that seeking for fund to started his own business. According to Appannam and Doris (2011) the word micro can be refer as the small size of the loans made, small size of savings made, the smaller frequency of loans, shorter repayment periods and amounts, the micro/local level of activities and the community-based immediacy of microcredit.
According to Maamor and Ismail (n. d) pawnshops play an important role in providing funds especially for those who have difficulties in obtaining funds from the formal financial institutions and the establishment of the conventional and Islamic pawnshops in Malaysia contributes benefits for the society because it has a potential for microenterprise. Collateral is an easier source of capital for small and medium-size traders as well as companies that are just beginning (Othman, Hashim and Abdullah, 2012).
However Muslims are prohibited from joining or participating in the conventional financial system because it was an interest based financial system which is again on the Shariah principles. This is including the conventional pawn broking where it has the element of injustice. The Islamic principles has puts the implementation of justice and equality among the people as one of its objectives in commercial dealings (Ibrahim, 2006).
So Ar-Rahnu is introduced for Muslims as the solutions of this problem.
According to Hamid (2003) Ar-Rahnu scheme has being introduced as an alternative for the conventional pawn broking which are not allowed in Islam. It was designed to help the Muslim during their hardship and giving them dept with the collaterals (Ahmad, Mansor and Nadiah, 2012).
Besides offering permissible collateral, Ar-Rahnu scheme is more convenience for consumers that have poor credit and would be denied loans from the banking institutions (Amin et al. ).
According to Meera (n. ) Ar-Rahnu is a form of micro credit where the borrower places non-financial asset mainly gold or jewelry as collateral for the loan and this concept is different from the conventional pawn broking. Othman et al. (2012) Through Ar-Rahnu collateral, it is much faster and easier since it using the gold in the transaction. Khan and Nisar (2004) has highlighted that the collateral is an important instrument for the security of loan providing financial institutions. This is because the collateral raises the borrower cost of default and thereby acts as a disincentive to default.
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While Amin (2011) mention that there are two reasons why Muslim need the Ar-Rahnu system which are too allows the Muslim to obtain the quick cash for emergency and transaction purposes and to avoid Muslim from involving in the activities which is prohibited in Islam such as in loan-shark and interest-based loans. Methodology This research will be conduct conceptually by analyzing others paperwork and research. We will also analyzing the data from written document that are connected with our research. The research will be done by using documentary analysis or documentary research.
Documentary analysis is a form of research rather not bother, it does not require the involvement of human participants, and it is one that provides an opportunity for valuable and often unique in the way of Ar-Rahnu collateral security structure help small business proprietor. In this study, the document or journal will be analyzed to the way of Islamic pawn broking helping the small business proprietor. Data from the documents will be analyzed using content analysis approach. The content within a content analysis approach to data analysis is any content, texts, images, figures, tables, charts, graphs, in the document.
The data that we found will be analyze and interpret so that we can come out with a new finding. To make a reliable research, we will use only solid and trusted document or data to interpret. The proposed methodology is an appropriate method for this research project. This project is design to analyze on how Ar-Rahnu collateral security structure can help the small business proprietor. This research is a study of different documents. Like this case, the method of documentary analysis is a suitable method. The mechanism of Islamic pawn broking
In general, there are four concepts that been used in Ar-Rahnu scheme of Islamic pawnbroking, which are al-qardhul hassan, al-wadiah yad dhammanah, al-ujrah and ar-rahn. 1) Qardhul Hasan ( benevolent loan) A financial institution will grant a benevolent loan or loan without interest to the applicant who is going to pawn his valuable item. The benevolent loan was issued under the concept of Qardhul Hasan, which stipulated that the applicant only need to pay the amount borrowed at the maturity date. 2) Wadiah Yad-Dhamanah ( safekeeping with guarantee)
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Under this concept, the pawnbrokers performed as a custodian, trustee and guarantor to safeguard the valuable item, they are liable for any loss or damage to the pledged property. 3) Al- Ujrah (storage fees) Al- Ujrah concept states that valuable item keeper is permissible to charge a storage fee for the safe keeping of pledged property. Usually, there is a standard formula to determine the amount of these fees on the base of the rules of different companies. 4) Ar-Rahnu (collateral) The applicant is required to provide a valuable item as collateral to avoid the failure of payment.
Once the borrower failed to pay the loan after a prolonged period, the Islamic pawnbrokers will put the collateral on auction if they would like. As a whole, the mechanism of Islamic pawn broking can be illustrated as below. Figure 1: Ar-Rahnu Pawn broking Business Source: Razak, A. A. Malaysian Practice of Ar-Rahnu Scheme: Trends and Development. Under the mechanism of Islamic pawn broking, the borrower (Rahin) is required to pledge or produce collateral (Rahn) which can be redeemed such as gold or jewelry to undertake repayment of the loan.
Once the loan was paid, the collateral or the guaranteed instrument will be return back to the borrower (Rahin) by the Islamic pawn broking (Murtahin).
In case of the borrower cannot pay the loan by the end of the contract, he can ask for periodic loan extension with an additional storage fee need to be paid (Rosly, 2005).
If the borrowed sum is not repaid at the time of maturity which is the date after extension, the Murtahin has the right to put the collateral on auction.
The remaining amount after deducted the loan and storage fee will be return back to the Rahin. The performance of Ar-Rahnu The fact of the increases in Ar-Rahnu institution cannot be denied since it was being introduced for the first time in early 90’s under the cooperation of YPEIM and Bank Rakyat. According to Malaysian Islamic Economic Development Foundation (YPEIM), Ar-Rahnu scheme that introduce by them has benefited over 4. 3 million people since it being introduced in 1993 with the cooperative of Bank Rakyat.
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Other than that, Minister in the Prime Minister Department, Datuk Seri Jamil Khir Baharom has claim that the cumulative financing for the scheme through Bank Rakyat and YPEIM has whopping RM 5. 4 billion in year 2010. However, there is no exact data of the increasing of Ar-Rahnu institution in Malaysia that are provided by The Central Bank of Malaysia. Bank Rakyat is one of the banks in Malaysia that offer Ar-Rahnu financing. From the graph, we can see that, in 2007 Bank Rakyat has successfully make Ar-Rahnu financing for RM 594,694 and has increase to RM 734,584 in 2008, increasing about RM 139,890.
Higher demand for Ar-Rahnu financing has make it increasing until 2010, where in 2009, Ar-Rahnu financing has increase about RM 204,456 and in 2010 Ar- Rahnu financing in Bank Rakyat has show and ascended , where the amount that Bank Rakyat has finance for Ar-Rahnu is more than 1 Million or RM 1 126,893. Compare to others product which has shown inconsistent demand on it such as Bai al-Inah, al-Tarkhis, Bai’ Bithaman Ajil, al- Qard Hassan and other else, Ar-Rahnu has shown an increasing result from 2007 until 2010. By analyzing the graph above we can conclude that, the performance of Ar-Rahnu was increasing year by year from 2007 until 2010.
In another words, Ar-rahnu financing has been popular among people in Malaysia. The increasing demand of Ar-Rahnu especially in Bank Rakyat maybe because of interest that charge from the conventional bank is relatively higher than the Islamic pawnshops, by the increasing demand from the customers towards Ar-Rahnu its directly leads to higher profit of Ar-Rahnu especially in Bank Rakyat. Approximately, the demand for Ar-Rahnu will still continue year by year because most of people especially the poor and small entrepreneurs are now realize the benefits that they will get if using Ar-Rahnu collateral compare to conventional pawn broking.
Analysis on Ar-Rahnu collateral security structure The difference between Islamic pawn broking and conventional pawn broking is that conventional pawnbrokers make profit in the way of interest. However, it is prohibited to implicate interest in any transaction according to Islam. Then how would Islamic pawnbrokers make money by applying Ar-Rahnu pawn broking business? The answer is profits taking by a way of storage fee which charging from the pledged property. The storage fees charged by Islamic pawnshops usually based on the value of collaterals.
As we know that under Ar-Rahnu contract, the borrowers need to provide pledge or collateral in the form of gold so that to get money from pawnshop. The aim of pledging the gold items is to ensure repayment of the loan, and guarantee the collaterals will be redeemed at the maturity date. The collateral will be auctioned if the borrowers default to pay the loan and storage fees. The application of collateral can reduce the lenders risk and increase the borrowers cost in case of default. Thus, collateral is an important instrument to protect the security of the loan by providing a guarantee to pawnbrokers.
Against the collateral item under Islamic pawn broking, only gold and jewelry made of gold was accepted in Islamic pawn broking system (Sanusi and Johari, 2006).
However, conventional pawnshops accept items not only gold jewelry, but also Rolex watches, diamond and other valuable electronic items. Recently, the Islamic pawn broking institutions in Malaysia who offer Ar-Rahnu schemes such as Bank Rakyat, customers can only use gold as a pledge or collateral item. According to Azila Abdul Razak, gold has several advantages as a collateral item compared with other items. Firstly, gold is easy to resell.
In case of the default of the borrowers, pawnshop can resell their pledged gold to others instead of auction. Secondly, the purity of gold can be determined easily so that the happening of mispricing will be reduced. Thirdly, jewelries made of gold such gold rings usually only need small space to store and can be kept safely. Finally, in Malaysia, women always receive gold chains and bracelets as wedding gifts which provides rich potential customers. Table 1: Percentage of Available Loan to Collateral Value and Maximum Allowable loan amount offered by Islamic Pawn Broking Institutions Source: Bhatt, P and Sinnakkannu, J. (2008).
Ar-Rahnu (Islamic Pawning Broking) Opportunities and Challenges in Malaysia. The above Table 1 clarifies the maximum amount of the loan which is on the base of a percentage of the total collateral value. Generally, the available loan amount provided by Malaysian Islamic pawn broking institutions is not more 75% of the total collateral value. Mostly, there are three companies promised the maximum loan amount is RM 5,000. 00 per day or not more than RM 25,000. 00 of accumulated loan amount. Table 2: Loan Period and Extended Period by Islamic Pawn Broking Institutions in Malaysia Source: Bhatt, P and Sinnakkannu, J. (2008).
Ar-Rahnu (Islamic Pawning Broking) Opportunities and Challenges in Malaysia. Table 2 illustrates the period of the loan and also the extended period which adapt by Islamic pawn broking institutions in Malaysia. In general, the lenders will give 6 months loan period to borrowers to redeem their collaterals. If the borrowers cannot repay the sum, the lenders will allow the borrowers to extend normally 3 months to cover the loan and also the storage fees. In addition, the periodic loan extension will make an additional storage fee which is compulsory for the lenders to pay. Table 3: The safekeeping fees charge in Islamic pawnshops
Safekeeping fee for every RM100. 00 of gold value per month| Bank Rakyat| Permodalan KelantanBerhad| Muassasah Gadaian IslamTerengganu| RM0. 65(RM100. 00-RM1,000. 00)| RM 0. 60(RM1. 00 – RM 400. 00)| No Charge(RM 1,000. 00 and below)| RM0. 75 (RM1,001. 00-RM10,000,00)| RM 0. 85(RM 401- RM2,000. 00)| RM0. 50 (RM1,001. 00-RM3,000. 00)| | RM 0. 95(RM 2,001. 00 and above)| RM0. 60 (RM3,001. 00-RM5,000. 00)| | | RM 0. 70(RM 5,001. 00- RM10,000. 00)| | | RM 0. 75 (RM 10,001. 00 and above)| Source: Appannan, S. and Doris, G. , (2011).
A Study on Islamic Pawn Broking Awareness and Factors Influencing the Scheme in Sungai Petani, Kedah.
Table 4: Monthly Safekeeping Rate Charged by Bank Islam Malaysia Berhad Source: Bhatt, P and Sinnakkannu, J. (2008).
Ar-Rahnu (Islamic Pawning Broking) Opportunities and Challenges in Malaysia. Table 5: Monthly Safekeeping Rate Charged by Kedai Ai-Rahnu Kelantan Bhatt, P and Sinnakkannu, J. 2008).
Ar-Rahnu (Islamic Pawning Broking) Opportunities and Challenges in Malaysia. Table 3, Table 4 and Table 5 clarify the safekeeping fees or storage fees that charged by different Islamic pawnshops. It can be observed that different companies have different charging method towards safekeeping fees of collateral.
And also the storage fees vary according to the value of pledged item. The safekeeping fees are charged based on the value of collateral items or pledged items rather than the amount of the loan. In order to have a better understanding for the calculation method of safekeeping fees, considering a case of pledge gold valued at RM 1,000. 00. According to Bank Rakayat, a pledge valued at RM100. 00 to RM1, 000. 00 will be charged RM0. 65 (see Table 3) for every RM100. 00 gold value per month. A 60% (see Table 1) of the total collateral value is given to the borrower as a non-interest loan.
Thus, an RM600. 00 (60% RM1, 000. 00) loan which needs to be paid in 6 months (see Table 2) will incur a safekeeping fee of RM0. 65 6 RM3. 9 per month. At the maturity date, the borrower needs to pay RM623. 40 (RM600 RM3. 96) to the lender. If he cannot pay, he can ask for a loan extension of 4 months with additional safekeeping fee. In the event of he is still failed to pay the loan after extension, mostly, his collateral will be auctioned. The company will deduct the loan and safekeeping fees from the auction price, and the remaining amount will be return to the borrower.
In this situation, if the collateral is auctioned at RM1, 000. 00, the pawnbroker will deduct RM600. 00 for the loan, RM39. 00 (RM3. 910) for storage fees and administration fees for the auction RM50 (for Bank Rakayat).
After subtract RM689. 00 (RM600+RM39+RM50), the balance of RM311. 00 will be returned to the customer. Can it really help the small business proprietor? Since Islam faith encouraged Islam followers to help the needy especially people who have been suffered the poorness for a long time, offering to the needy and the poor should be emphasized to the main focus in Islamic finance.
For this reason, the introduction of Islamic pawnshop which is usually noted as Ar-Rahnu is an alternative of conventional pawnshop, to provide financing facilities to the lower-income group and small business proprietors who have limited capital and seek financial assistance (Amin and Chong, 2011).
As Bhatt and Sinnakkannu, (2008) stated that, Ar-Rahnu is suitable for the needs of lower income group as it offered non-interest pawn broking service to cover short term borrowing in case of emergency.
Besides the lower income group, small business proprietors are also the beneficial group, since they can gather money from Islamic pawnshop by pawning their valuable property as collateral to pawnshop. Especially when a small business proprietor less of working capital to continue his business, but he cannot get money in a short time, it will be a good choice he choose Islamic pawnshop to lend money. Islamic pawn broking system has many benefits compared to conventional pawn broking system which are (Bhatt, P and Sinnakkannu, J, 2008): * Based on Syariah principles which are an interest free form of loan. Easier to apply, faster approval, and guaranteed safety of the jewelry. * Cheaper fee than conventional pawn broking. * Fixed storage fee. * Longer financing term. * No penalties. * Surplus auction receipts are returned to the customer. The discussion about the security structure of Ar-Rahnu shows the rationality of the operation of Islamic pawn broking, in which is good choice for small business proprietors to borrow money for their short term financing as a result of they have been excluded from the mainstream financial system.
Since only little safekeeping fees are charged, it won’t be a burden for small business proprietors to pay the interest compared with the high interest asked by conventional pawnshops. As Appannan, S. and Doris, G. (2011) stated that the high interest rates which charged by conventional pawn broking make it difficult for the lenders to redeem their collaterals. Especially people who make the loan for business capital purpose, they recognized that their capital is diminishing quickly when they borrow from conventional pawnshops.
Actually the conventional pawnshops had charged high interest rates on the loan they provided, before the formation of Islamic pawn broking. The conventional Pawnshops were more active on making profit from the poor and needy group, and until the laws of Pawnbrokers Act 1972 was issued, this activity was just restricted. The purpose of Pawnbrokers Act 1972 was to safeguard the interests of customers, at the same time guarantee a healthy pawn broking industry. However, it failed to solve the oppression problems of the poor and lower income group, as well as the pawnbrokers’ dereliction.
For this reason, the introduction of Islamic pawn broking is an alternative for conventional pawn broking system, in order to control the high interest rates and avoid loan sharks and interest-based loans. The high charging of interest indicated that conventional pawn broking is more likely to put a burden on the poor and lower-income group which is against the Shari’ah practices. The usurious and exploitative activities which is due to the high interest rates charging by the conventional pawnshop, makes the customers choose to deal with the Islamic pawnshop, which is concern about interest ree and Shari’ah compliant activities. An issue related to Ar-Rahnu According to Meera (2004), the present interest-based fiat monetary system is designed for default. In other word, the loan existed in the economy cannot be paid totally as a result of the interest of the loan does not exist in the form of money. And also most of the customers who were involved in Ar-Rahnu contracts are poor or lower income group, which arise higher probability of default. All of these mean that many of the collaterals which were pledged in Ar-Rahnu transactions would not be redeemed because of the high amount of defaults.
A preliminary survey made by Meera showed that almost 40 to 50 percent of Ar-Rahnu transactions were defaulted at the end of maturity date. A concern for most of Islamic pawnbrokers is the increasing stock of unredeemed gold items which cause by the high default of Ar-Rahnu contracts, or even worse, some pawnbrokers sell the gold at the price which is below market price to jewelers and collectors. This is very unfair to the borrowers who are poor and not have money since they are unwilling to default due to the monetary system itself.
And still the balance received from pawnbrokers is less than the actual amount they get due to the auction made by pawnbrokers is below the market price. A solution provided by Meera for this issue is to convert the unredeemed gold items into gold dinars and sell back to public at the market price. By applying this way, a model of Ar-Rahnu- gold dinar system was introduced. In this model, when the default happened (take Kedai al-Rahn Kelantan (KRK) as an example), the borrower still has a chance to redeem his collateral.
If he failed to redeem, a priority would be given to the borrower’s family or friends to purchase the pledged item at the price of the loan. If he still cannot undertake it, the lender will put the gold item into auction. To avoid the excess of gold items, the model suggests melting the gold item into gold dinars (4. 25 gm of 22K gold) and sells it back to the public to cover the loan. By doing this, the gold item can be disposed at a market price instead of below market price. The pawnbroker will take the amount of the loan plus the storage fee and other fees, and return the outstanding balance to the lender.
In this situation, the borrower won’t be very disadvantaged compared with auction his collateral below the market price. Another advantage of gold dinar system is that gold dinars can also be made to circulate as complementary money supplement the scarce national currency. This action would also encourage production, trade and employment in the economy industry (Meera).
Meera also argued that the central bank or bait al-mal should stand behind the gold dinar system to make it more confident. For example, the bait al-mal should communicate with some international gold leaders in case of the selling and buying of gold.
The kedai al-Rahnu also needs to cooperate with bait al-mal in order to operate a complete gold payment system. Such as by providing gold-accounts which gives a chance to individuals and businesses to invest in gold, and also allowing the transfer of gold between individuals and businesses. The cooperation between bait al-mal, kedai al-Rahnu and international gold leader was shown on the Appendix of this project paper. Besides that, Meera also advised the kedai al-Rahnu to combine the modern IT infrastructure with gold dinar by issuing gold dinar debit cards, charge cards and cash cards to improve the efficiency of gold payment system.
Conclusion After conceptually analyzing on the previous paper works and researches, this paper found that the collateral security structure of Ar-Rahnu can really help the small business proprietors by combined analyzing of the operation model and collateral structure. To sum up the findings, the small business proprietors can borrow money from Islamic pawnshops by pledged gold items as collaterals. The amount of the loan is based on the value of the pledged item. A small amount of storage fees or safekeeping fees will be charged by pawn brokers.
The loan amount offered, loan period and storage fees are different from different Islamic pawn broking institutions, and also there are many alternatives for small business proprietors to choose to contract with. The borrowers promised to redeem their collaterals at the maturity date, in case of defaults, the borrowers will face with the auction of their pledged items. The remaining amount after auction will be return back to the Rahin. The significance for the existence of Islamic pawn broking is not to compete with conventional pawn broking, but to accomplish the willing of Allah which is to help the people in poor and needy.
It already been a long time for Muslims to perform this mission, the emergence of Islamic pawn broking doubtlessly is a boost to encourage Muslims to help each other. Until now, Islamic pawn broking already grew and developed rapidly due to the continuously increasing demand. Customers prefer Islamic pawn broking system compared with conventional pawn broking system, not only because it is based on Syariah principles, but also due to the fast approval, safety guarantee, cheaper, fixed storage fees and also the surplus auction will be returned back to customers.
These advantages of Islamic pawn broking provide a better choose for the poor and small business when they need money for emergency or business capital. Against the strength of Islamic pawn broking, weakness also existed in the application of Ar-Rahnu. One of the issues related to Ar-Rahnu is the increasing stock of unredeemed gold items which cause by the high default of Ar-Rahnu contracts. In order to solve this problem, a model of Ar-Rahnu- gold dinar system was introduced to against it. To avoid the excess of gold items, the model suggests melting the gold item into gold dinars and sells it back to the public at a market price.
By doing this, the borrower won’t loss much compared with auction his collateral below the market price. In order to implement this Ar-Rahnu- gold dinar model, bait al-mal, kedai al-Rahnu and international gold leader need to cooperate with each other to promote the implement of this model. Since Malaysia is a Muslim country, it has great opportunities and expertise to develop Islamic pawn broking industry. So the government should take action to encourage the development of Islamic pawn broking in Malaysia.
