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The comparison between ar-rahnu and conventional pawn broking

Article · January 2014

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 Global Business and Economics Research Journal
ISSN: 2302-4593
Vol. 3 (5): 57 - 65

The comparison between ar-rahnu and conventional

pawn broking
Nor Surilawana Hj Sulaiman
Universiti Sains Islam Malaysia, Malaysia
[email protected]

Siti Fatimah Kassim

Universiti Sains Islam Malaysia, Malaysia

Ibrahim Alzoubi
Universiti Sains Islam Malaysia, Malaysia

Khaled Ashaboul
Universiti Sains Islam Malaysia, Malaysia

Mashitah Zainol Abidin

Universiti Sains Islam Malaysia, Malaysia

Abstract
This article discuss about the comparison between Islamic mortgage (Ar-Rahnu) and
conventional pawn broking. The researchers had collected all the secondary data in order to
find the differences between these two elements. The general findings of the article shows
that there are obvious differences between the Islamic and conventional pawn broking.
Keywords: Ar-Rahnu; conventional pawn broking

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Page

Citation:
Hj Sulaiman, N. S., et al. (2014). The comparison between ar-rahnu and conventional pawn broking. Global Business and Economics
Research Journal, 3(5): 57-65.

© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

1. INTRODUCTION
Malaysia country is a growing economy. However, despite the economic boom achieved,
a reality that cannot be denied is that not all people in this country made up of people live.
Some are difficult and require assistance, some of which are too poor but need cash at any
given time to meet their individual needs (Mahmud Saedon, 1993). Therefore, the choice of
pawn services often used by most parties, especially by those who are desperate to earn cash
quickly and easily (Ab. Mumin, 1999). Hence, this paper aims to discuss Ar-Rahnu and
conventional pawnshops in Malaysia.
1.1 History of islamic pawn shops in Malaysia
Pawn loan is a form of service that is easy and fast to require collateral only. If the loan is
not repaid when the term of the securities will be auctioned to settle debts (Mohd. Sharif,
2002).
Practice pawn in Malaya said to have existed since the 15th century and was introduced by
Chinese traders in Malacca Sultanate (Burhanuddin, 1994). Nowadays we can see many
pawn shops in Malaysia is dominated by the operators of the Chinese. They monopolize the
pawn shops everywhere, including in small towns across the country. Conventional pawn
conducted high interest rate for each loan made. Conventional systems are more non-profit
than helping those who have to borrow from the insistence of life (Mustafa, 2005).
Realizing various parties against fraud and oppression done by the conventional pawn,
then many studies have been conducted that led to the introduction of Islamic pawnshops in
the early 1990s (Mohd Sharif, 2002). As result, Government of Terengganu established the
Islamic pawn shops which practiced the concept of Ar-Rahnu and al-qard al-hassan. The first
Islamic pawn shop in Malaysia was established by the Terengganu State Government and
known as Muassasah Gadaian Islam Terengganu (MGIT) in 1992 (Hisham et.al, 2013).
Islamic pawn broking scheme had a very positive feedback from the community since this
scheme is fair and transparent, emphasizing the concept of the welfare of the community in
need of money.
Therefore, through these efforts the bank expand its banking services dimension to the
poor and low income less comfortable with conventional bank loans from banks, but more
comfortable with conventional pawn loans. Apparently, Ar-Rahnu scheme is so popular
because business loans easily without requiring the customer to fill a variety of forms or
submit various types of documents as being eligible to apply for a loan (Mohd. Sharif, 2002).
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© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

2. LITERATURE REVIEW
Muhammad Saiful Islami (2010) in his article discussed about the principles of Ar-Rahnu
which underlying the Islamic pawn broking scheme in Malaysia. The findings of this study
indicated that the combination of the principle of Ar-Rahnu together with other muamalat
principle like al-qard al-hasan, a-wadi’ah yad damanah and al-ujrah are needed to create a
product of Islamic pawn broking.
S. Hisham et al. (2013) in his article reviews on Ar-Rahnu’s concept and challenges faced
by Islamic pawn shops in Malaysia. The Islamic pawn broking have several advantages over
conventional pawn broking because it provides a cheaper way to obtain financing and is free
from interest. The study also found that assets pawned are guaranteed to be kept safely and
there is a fair practice in auctioning and bidding.
While, Ahmad Saufi (2007) in his article had summarized the latest amendments in the
consumer credit laws in Malaysia and highlights its significance. The article also discussed
the pawn broking laws, one of important laws of consumer credit in Malaysia.
Appannan, S. and Doris, G. (2011) had conducted research about the level of public
awareness towards Islamic pawn broking Ar-Rahnu Scheme in Sungai Petani, Kedah. The
findings indicated that Sungai Petani’s community is aware of the term Islamic pawn broking
but the awareness is at a different level among the races. The majority of Chinese and Malays
were aware of this scheme. The main factor influencing public to pursue Islamic pawn
broking was its cheap cost of loan.
While, a survey conducted by Prof. Diraja Ungku Aziz, found that the conventional pawn
activities carried out for this really suppress the lower-income groups. Service pawn is an
oppression because the rate of interest charged on borrowing too high at between 2 to 4% per
month (Dinsman, 1994).
2.1 Ar-rahnu
Ar-Rahnu is a means of providing short term financing to the public by pawning his or her
jewelry to banks or pawn shops as a security (Muhammad Ridhwan, 2012). Ar-Rahnu is a
contract or Muamalat contracts permitted by law. According to the dictionary Kamus Dewan
New Edition, the word mortgage means borrowing money by delivering the goods as
collateral for a specified period. If the goods are not redeemed within the prescribed period,
the goods will be retained by the lender (Sheikh Othman, 1991). Ar-Rahnu is an Islamic
based pawn broking business which offers interest free loan, with a minimum fee charges for
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the safekeeping of the valuables, together with a high mortgage value and a flexible pawn
Page

period (Muhammad Ridhwan, 2012).

© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

2.2 Importance of pawn services

Pawnbrokers are microcredit institutions that getting good response from the public to
obtain liquidity services. Usually, the pawn is the main channel for the lower-income groups
to get money (Che Mohd Yusri, 1995).
There is a clear distinction between those who paid regularly and has property to pledge at
the banks when making loans compared to those with low income and do not have any
guarantor to the bank. As result, the bank will feel hesitant to give financial loans especially
to lower income groups due to no security for the loan repayment.
The borrowed money is used for whether personal needs, business or finance the cost of
education. Therefore, people tend to choose of pawnshops due to difficult to obtain loans
from financial institutions. As result, they pawned their jewelry for the purpose of get money.
While, according to Mohd Ali, there are five main roles of Ar-Rahnu in socie-economic
development. First, Ar-Rahnu is a source of capital to the small business. It provides quick
and easy system.
2.3 Conventional pawn broking
Abdullah (2008) in his article mentioned that not only a person but many small merchant,
traders and farmers borrow money for many reason such as poor, renovate house and buy
new clothes for eid celebration, to start new job and many others go for conventional pawn
broking.
In Malaysia, leasing has become an institution. It is a popular micro-credit system in our
society. Royal Prof Ungku Aziz, in his study, found that pawn shops have been in business
for decades is an oppression of the poor borrowers. The interest rate is high. Muslims also
know the conventional practice of pawn broking activities and illegal usury. However, in
practice, it remains a top choice those who want to get a small loan quickly.
According to him, currently, there are 307 registered pawnshops nationwide and the
number is increasing. The existence of pawn shops, loan sharks and sharks all over the place
is a manifestation of its role in our economic system. While some banks and other financial
institutions, for those who do not qualify or do not qualify for credit cards, personal loans or
overdraft facilities, they are more susceptible to the pawn shop. Some people do not prefer to
go to a bank or credit company because too many forms to fill. The borrowed amount
perhaps as small as Malaysian Ringgit Five Hundred (RM500) or one thousand (RM1,000)
but they need to face a difficult task such as to fill in many forms, long queues or provides
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many personal documents. The pawnshop is not much hassle. Just park security for the
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amount to be borrowed.

© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

In Malaysia, the conventional pawnshops were more motivated on making profit from the
needy individuals and this activity was only restricted by the laws in the Pawnbrokers Act
1972. The purpose of the Pawnbrokers Act 1972 was to guarantee a healthy pawnshops
industry, as well as safeguarding the interest of the consumers. However, it failed to control
the problems of the oppression of the lower income group and the pawnbrokers’ malpractices
(Muhammad Ridhwan, 2012).
2.4 Islamic versus conventional pawn broking
Abdullah (2008) in his article highlighted the main features of conventional pawn broking
which in the other words make them differ from Islamic pawn broking inter-alia in practice, it
remains a top choice those who want to get a small loan quickly. The process to get the loan
is very fast and the requirement to pledge the jewelry is simple. Hassle free loan application.
High interest charged, in conventional pawn broking system, there are several instances of
bias and unfair to the borrower high interest from 2% per month or 24 % per year, well above
the market rate.
The pawn gold such as rings, bracelets or necklaces, usually are not weighed or measured
properly. There are many cases occur in which the pawned jewelry lighter or a little short
when redeemed. Perhaps the pawn dealer is a little scrape gold of the goods. Due to the
weight and length of the pawn gold are not recorded clearly and properly on the receipt, the
borrower has a difficulty in caught the shopkeepers malpractice activities.
If the borrower fails to redeem within the prescribed period, the pawn dealer has the right
to auction the pawned jewelry below RM100. For items valued at more than RM100, pawn
dealer must elect the licensed auctioneer to act on behalf of them. They need to follow certain
rules and regulation as being stated in the Act.
Unfortunately, in many cases, the pawn dealers collaborate with licensed auctioneer. They
inform the future buyer about the auction pawned item at the lowest price, thus make the
pawner earn nothing after the auction taken place.
Many pawn dealers also do not return the extra money after the auction surplus and net
debt. This is a persecution against the borrower. This can be avoided if the conventional
pawn broker use the proper documentation and genuine to the borrower and the borrower also
must know they right before engage in those transaction.
In the event of theft, fire or disaster to the pawn shop to pawn cause missing or damaged
items, pawn dealers only pay for the amount of collateral that added 25 % to the lender as
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compensation. This is certainly unfair and unjustly to the borrower but this is not provided in
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the existing Act.

© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

Prof. Dr. Abdullah Hassan, Head of Department of Shariah and Economics, Academy of
Islamic Studies, University of Malaya, explain some of the other things that oppress and harm
the borrower. According to him, the pawn dealers charge on receipt of charges. Actually, the
mortgagee may be the receipt for free when applying for a deferment. However, there are
bold traders take advantage of pawn charge 50 cents for each copy of the receipt of the next
charge (Abdullah, 2008).
The Act does not require the provision of receipts for pawned goods unless the holder
want to surrender the pawn ticket. It also does not require the dealer to show clearly on the
receipts the interest rates charged or explain to the borrowers who are illiterate. Simply
because the pawn business is not closely monitor. In fact the Act does not set the controls or
regulations on the auction event for unredeemed pledge or pawned item .Furthermore, the
pamned item to be auctioned is not displayed for public review.
Furthermore, according to Abdullah (2008) six months is a very short period to redeem the
pledge item if the amount borrowed is huge. The Act also limits the pawn dealer to provide
the maximum loan to borrower to RM5,000. Any amount above that, the pawn dealer need to
be a licensed moneylender.
He said the contract does not expire or become invalid mortgage even if the borrower dies.
Successors will replace them. If the heirs are still young or going abroad, the beneficiary can
sell the property with the consent of the mortgagee charge. It can be used to settle debts of the
deceased.
In addition, the lenders also exposed to other risks. In Klang recently, a pawn shop was
raided and jewelry worth RM50,000 were seized by the local authorities due to illegal pawn
shop operation. The syndicate was believed to have bought at a higher rate than the market
but also impose a higher interest rate that is 5 % instead of 2 % per month. The borrowers
will receive a receipt that says his name and date of the transaction, without other important
information such as the identity card number and phone number. The redemption period is
only 3 months. Failure to redeem, the items will be auction without the owners' knowledge.
This activity is definitely illegal. Unfortunately, the local authorities cannot take action since
there are not many information about this type of pawnshop owners.
Other than that, the pawnshops do not accept payment in installments. The borrower must
pay the full amount of RM1,000 plus interest within a specified period. Failure to pay means
loss of collateral. How do pawnshops make a profit? Assuming the actual charge is RM1,500
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but valued RM800, pawnshops may give loans RM300. If the borrower fails to redeem, the
Page

© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

loss of RM1,500 - RM336 = RM1,164 . Pawnshops profit from high interest rates and extra
fees charged on transactions with borrowers.
Fortunately, under the Islamic system, Islamic pawn broking business (murtahin) do not
charge interest (usury/riba). The gain obtained is of the fees keep the assets pledged. For
example, if the charge is RM1,000 or less, the fee charged is safe (RM1,000 / 100 ) x 40
cents, or RM4 per month. Typically, about half of the value of the security given to the
borrower (rahin) as a loan without interest. Thus, a loan of RM500 payable within 6 months
will be charged a fee of RM4 x 6 = RM24.
To redeem, murtahin rahin have to pay RM524. Rahin may seek an extension of the
repayment period but have to pay additional storage fees. If rahin still fails to pay, the right to
auction off murtahin pledged assets. Murtahin will claim what is due to the remaining ceded
to rahin. If rahin cannot be located, the remainder will be given to the treasury. Rahin can
claim their rights of the treasury in the future.
Murtahin rahin cannot sell assets for investment purposes and profit alone. Murtahin can
earn revenue from asset store not profit from the use of the asset. If this happens without the
knowledge or consent of rahin and if it is a loss, murtahin must take responsibility for the
loss.
2.5 The challenges of islamic pawn broking in Malaysia
Since its establishment, Islamic pawnshops have faced several challenges in their daily
operations. First, customers prefer to take conventional pawnshops or lend some money from
illegal source such as ‘Ah Long’. They prefer to borrow from the conventional pawnshop
since its offer higher margin to value of collateral an unlimited time to redeem. This is due to
conventional offer higher margin up to 90 percent of the value of the asset pledged, whereas
customers are only able to borrow up to 65 percent of the value of collateral.
In addition, consumers are reluctant to choose Islamic pawn broking because it was
perceived by the society as products for poor and needy people. Due of that, providers of Ar-
Rahnu scheme have to educate the consumers on the benefits of Islamic pawn broking in
order to increase the acceptance of Islamic pawn broking.
Furthermore, Islamic pawnbrokers also had been reportedly that they received gold which
are turn out to be fake. This will destroy the future of Islamic pawn broking as a source of
financing if this situation continuously occurs.
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© Global Business and Economics Research Journal. Available online at http://www.journal.globejournal.org

Hj Sulaiman et al. Global Business and Economics Research Journal
Vol 3 (5): 57-65 ISSN: 2302-4593

3. CONCLUSION
As a financial instrument, Ar-Rahnu has immense potential not only in Malaysia but also
in other developing countries, especially in Southeast Asia. Government and institutions
involved need to be more assertive in an effort to highlight the scheme to all levels. A move
that is sure to speed up this process is through the enactment of the Islamic pawn that will
help management improve the efficiency and effectiveness of the industry and realize its
potential. The application to all types of gold product such as gold bar, gold coin, gold with
stone and many type of gold item instead of ordinary gold jewelry. Currently people not only
invest in jewelry. They also put a lot on other types of gold investment. The Ar-Rahnu
operators must from time to time bring innovation to the Ar-Rahnu product they provide.
Time changes thus the method collecting the wealth also differs from time to time.

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