Module Bank Rakyat (1)

AR-RAHNU:
PRACTICAL

AND
PRACTICE

DR NIK HADIYAN NIK AZMAN

SCHOOL OF MANAGEMENT
UNIVERSITI SAINS MALAYSIA

“and when you are on a journey and cannot
find a scribe, then let there be a pledge
taken (mortgaging), then if one of you
entrust the other, let the one who is

entrusted discharged his trust (faithfully),
and let him be afraid of Allah, his lord, and
conceal not the evidence for he, who hides
it, surely his heart is sinful and Allah is all

knower of what you do”

(Al-Baqarah: 283)

O1 AR-RAHNU OVERVIEW

DEFINITION OF AR-RAHNU
CONTRACT APPLICATION IN AR-RAHNU
UNIQUE PILLARS AND MECHANISM OF AR-RAHNU

O2 THEORETICAL FOUNDATION OF A-RAHNU
INFORMAL CREDIT MARKET THEORY WITH SHARIAH (2017)

O3 TREND IN AR-RAHNU

O4 ISSUES & CHALLENGES OF AR-RAHNU

O5 EFFECT OF AR-RAHNU CONTENTS

CONSUMERS (MICRO-ENTREPRENEURS)

O6 AR-RAHNU DIGITAL

FORECASTING OF FINTECH APPLICATION

O7 SUMMARY

Get to
Know Me

DR. NIK HADIYAN NIK AZMAN is the instructor for the subject, Ar Rahnu:
Principle and Practical. She is a Senior Lecturer at the School of Management,
Universiti Sains Malaysia. She was conferred Doctor of Philosophy in Islamic

Finance from the IIUM Kulliyah Economics and Management Sciences,
International Islamic University Malaysia. She is one of the Universiti Sains
Malaysia trainee staff under the Academic Scheme Training Scheme (ASTS).
Before attending IIUM, she completed one postgraduate programme, Master in
Islamic Economics (MA), specialise in Malaysian Exports to Middle Eastern
Asian Countries (MEACs): the role of Halal Development and Trade Agreement
(2011-2013) and she also received her Bachelor Degree in Management (2007-
2010), both from Universiti Sains Malaysia (USM). Her areas of interest include,

but not limited to, Islamic social finance, Islamic fintech, Islamic finance,
financial literacy, Islamic microfinance and entrepreneurship. She is currently

teaching Islamic finance-related subjects (Islamic Financial Management,
Islamic Accounting and Auditing, Fiqh Muamalat, Islamic Social Finance). She

also involves in teaching a cross-section subject which is Business
Communication. She has published in internationally refereed journals and being

a speaker internationally. She has also reviewed articles for international
journals. Due to that, she also being appointed as a co-researcher and collaborate

researching with industry such as Institut Koperasi Malaysia (IKM). As the
trending version (GIG educator), she actively doing her micro-credential and
collaborate with Ambank Bhd and spread knowledge as GIG Edutuber. Besides,

she is also a life member of the Malaysian Finance Association (MFA).

LEARNING
OBJECTIVES

01

AR-RAHNU
OVERVIEW

DEFINITION OF AR-RAHNU

Ar-Rahnu is permissible in Islam based From Aisyah R.A: the Prophet bought some food
on the injunctions found in the Quran, from a Jew, and he pawned his iron shield for a
Hadith and Ijma’ of Ulama’ (Haron, certain period of time in Madinah, and he took
1996). The concept of pledging and safe- from him some barley for his family”.
keeping which is the foundation of Ar-
Rahnu is clearly stated in the holy In another Hadith the Prophet Muhammad
Quran: (PBUH) said:

“and when you are on a journey and cannot find a “Pawned riding animals may be mounted in
scribe, then let there be a pledge taken exchange for their expenses and the milk of the

(mortgaging), then if one of you entrust the other, let pawned dairy animals in exchange for their
the one who is entrusted discharged his trust expenses, and the one who rides or drinks is thus

(faithfully), and let him be afraid of Allah, his lord, and responsible for the animal’s expenses”.
conceal not the evidence for he, who hides it, surely (Narrated by Abu Hurayrah)
his heart is sinful and Allah is all knower of what you
do”
(Al-Baqarah: 283)

The system of pledged items to get money instantly
was practised since the time of Prophet Muhammad
(PBUH) where he bought some food for his family by
pledging his iron shield as collateral.

DEFINITION OF AR-RAHNU

These textual provisions established that The permission to pledge a property in
Ar-Rahnu can be adopted as an
important tool to secure financing, order to secure a debt implies that Ar-
especially to those who face an urgent
financial shortage. In the current context Rahnu is also a method that could
and application of pawning, the main
objective of Ar-Rahnu is to secure the facilitate the public needs to have
repayment of the loan or settlement of the
debt. As the debtor’s property is transactions on credit such as interest-
deposited on trust with the creditor, this
serves as an incentive for the debtor to free loan (qardhul hassan), deferred
repay the loan or settle his debt so that
the property could be returned to him. In payment sale (bay muajjal), deferred
the event that the debtor fails to settle his
debt, the creditor reserves the right to delivery same (bay al-salaam) and
auction the pledged property and utilize
the sale price for the settlement of the future purchase contract (istisna’). In
debt. It is also a condition that any surplus
following settlement of the debt should be other words, it offers peace of mind to
returned to the debtor.
creditors who are assured that they

could possibly obtain the money due

from the pledged property should a

debtor default. Furthermore, as

highlighted by ijma’ of ulama’, Ar-Rahnu

is permissible in Islam and it is also

permissible to practice Al-Rahn with a

non-Muslim provided that there is no

element of riba involved. In short, Ar-

Rahnu can be defined as the Islamic

pawn broking for short-term

collateralized borrowing. The

development of Ar-Rahnu in Malaysia

provides an alternative pawnbroking

service for borrowers, which is in

accordance with shari’ah principles.

CONTRACT APPLICATION IN
AR-RAHNU

Al-Rahn

Al-Rahn is one of the most important shari’ah

compliant concepts being adopted to

operationalise Islamic pawnbroking or Ar-Rahnu.

Al-Rahn means a pledge or security related to a
loan or possessing a guarantee. The Quran

refers to the idea of mortgage as ‘mortgage with

possession’ (rihanun maqbudha). As mentioned in

the Quran, Surah Al-Muddassir, verse 38, every soul

is in pledge or ‘rahina’ for its deeds. To add,

Prophet Muhammad (s.a.w) said, the soul of a

believer is marhuma or pledged for the debt until it

is paid off. It is a contract of pledging security that

becomes binding when possession of the pledge

has taken place. More importantly, the concept of

pledging is mentioned in Surah Al-Baqarah, verse

283:

“And if you are on a journey and cannot find a
scribe, then a security deposit (should be) taken”

This verse validates the permissibility to secure a
loan or financing with collateral in Islam.
Furthermore, Khan and Nisar (2004) mentioned Al-
Rahn as an arrangement whereby a valuable asset
is placed as collateral for a debt. The collateral
may be auctioned in the events of default.

CONTRACT APPLICATION IN
AR-RAHNU

Qardhul Hassan

Another important concept in Ar-Rahnu process is Qardhul
Hassan. It comes from two Arabic words which are Qardh
(to cut) and Hassan (kindness). To add, there are several
verses in the Quran mentioned on Qardhul Hassan such as
Surah Al-Baqarah (verse 245), Surah At-Taghabun (verse
17), Surah Al-Maidah (verse 12), Surah Al-Hadid (verse 11
and 18) and Surah Muzammil (verse 20). Intrinsically,
Qardhul Hassan can be defined as a loan with the
stipulation to return the principal sum in future without any
increase (Abdul Razak, 2011). In short, it means that, if
today the borrower takes RM 1000, in future he or she has
to pay the same amount to the lender, which means RM
1000 is the principal amount only.

As demand by Islamic law, all loans have to be virtuous, as
any increment in loan or seeking benefits from loan
amounts is akin to ‘riba’ (usury). However, a token of
appreciation or in Arabic known as Hibah for the lender is
highly recommended as it helps those people in
need(Bashir Ahmad et al., 2012 and Hisham Sabri et al.,
2013). This type of financing is practised by all Ar-Rahnu
institutions. Fundamentally, Ar-Rahnu will grant a
benevolent or interest-free loan to the applicant who
wishes to pawn his valuable item. The loan issued under the
concept of Qardhul Hassan requires the borrower to pay
the same amount borrowed to redeem the valuable item
at the maturity of the agreed period. Service charges will
be imposed on the borrowers in order to cover the
administrative costs for safekeeping those pledged assets.
It is, therefore, the service charges that become the source
of income for the Islamic pawnbroker.

CONTRACT APPLICATION IN
AR-RAHNU

Al-Wadiah Yad Dhamamah

Another concept involved in the Ar-Rahnu process is
Al-Wadiah Yad Dhamamah (safekeeping). Under
this concept, the borrower is required to produce
returnable collateral to ensure repayment of the
loan. By this rule, the borrower entrusts the lender to
look after a belonging during the loan period. As
mentioned by Bhatt and Sinnakkannu (2008), the
lender has to take full responsibility for the collateral
such as providing security and insurance (takaful) to
ensure its safe return once the borrower redeems it.
If circumstances beyond the control and not due to
the lender’s negligence occur and damage the
collateral item, the lender is not required to replace
the item. This is in line with the Surah An-Nisa verse
58, which implies that a person needs to be honest
when one person hands over his or her assets to the
other person for the purpose of safekeeping.

“Indeed, Allah commands you to render trust to
whom they are due and when you judge

between people, to judge with justice”
(An- Nisa, 4: 58)

Nevertheless, the lender is responsible to replace
the damaged or stolen collateral to the borrower if
the lender fails to keep to the agreement due to self
negligence. The lender will bear the responsibility of
compensating the borrower the value of the asset
pledged in cash or in-kind (Cheong and
Sinnakkannu, 2012; Mokthar et al., 2012)

UNIQUE

PILLARS &
MECHANISM

AR-RAHNU

A pillar is an important element in an Islamic contract because it determines the
validity of a contract. Hence, in order to achieve the shari’ah objective of Ar-Rahnu,
several pillars are introduced so that its operation is in line with requirements and
conditions as any other contract permitted in shari’ah (Salleh, 2014; Abdul Razak,
2011). According to Islamic schools of thought or Mazhab of Shafie, Hambali dan

Maliki, in general, there are four pillars in a contract of Ar-Rahnu. The first and
second review the two responsible parties in the contract (Ar-Rahin and Al-Marhun
bih), the third is the pronouncement of contract which is known as Sighah (Ijab and

Qabul) and lastly, the marhun, which is the value that is involved in a transaction
(Ghazali and Rafi, 2012). The aforementioned pillars are clarified further in the next

section.

1 AR-RAHIN UNIQUE PILLARS
(BORROWER)

2 AL-MARHUM BIH
(LENDER)

3 SIGHAH
(AGREEMENT)

4 AL-MARHUN
(PAWNED ITEM)

AR-RAHIN (BORROWER)

Hisham Sabri et al. (2013) defined Ar-Rahin as a party that borrows money from another
party by placing valuable asset as collateral. Ar-Rahin may seek an extension of the
repayment period but has to pay additional storage fees (Othman et al., 2013). If Ar-Rahin
still fails to pay, Al-Marhun Bih has the right to auction off the pledged asset. Al-Marhun
Bih will claim what is due to the remaining to Ar-Rahin. If Ar-Rahin cannot be located,
the remainder will be given to the treasury. Ar-Rahin can claim their rights of the
treasury in the future (Sulaiman et al., 2014)

AL-MARHUM BIH (LENDER)

Al-Marhun Bih is a party that lends money to another party and responsible for the
safety of the valuable asset pledged by the borrower (Hisham Sabri et al., 2013; Othman
et al., 2013). In other words, the lender (Al-Marhun Bih) at any circumstances is
responsible FOR safeguarding an asset pledged by the borrower (Ar-Rahin). The lender
(Al-Marhun Bih) is deemed to be responsible in case the asset is missing or damaged
while it is in his or her custody (Mokthar et al., 2012). Furthermore, Sulaiman et al. (2014)
point that; Al-Marhun Bih cannot sell the asset for investment purposes. The Al-Marhun
Bih can earn revenue from an asset stored but not profit from the use of the asset. If this
happens without the knowledge or consent of Ar-Rahin and if it is a loss, Al-Marhun Bih
must take responsibility for the loss.

In the same context, indicated by Cheong and Sinnakkannu (2012), if the borrower (Ar-
Rahin) fails to redeem the collateral within the stipulated period, a notice auctioning the
assets will be given to the borrower (Ar-Rahin). If the lender (Al-Marhun Bih) still does
not receive any response, the assets will then be auctioned in order to recover the
amount of loan outstanding. Here, if there is any surplus derived from auctioning the
assets, it shall be returned to the borrower (Ar-Rahin). However, in case the borrower (Ar-
Rahin) cannot be detected, it should be the responsibility of any Islamic institutions to
handle it, such as to place the asset in the Baitulmal account for the benefits of both
borrower (Ar-Rahin) and his or her beneficiary (Mokthar et al., 2012).

10

SIGHAH (AGREEMENT)

Sighah is known as an agreement between the borrower and lender on loan related
issues (Hisham Sabri et al., 2013). The terms (sighah) of the Ar-Rahnu must satisfy general
conditions of terms of contract as required in other contracts. The phrases must be clear,
concise and free from any ambiguity. In addition, the offer (ijab) and acceptance (qabul)
must be consistent and should not be contradictory to the objectives of Ar-Rahnu, see
Othman et al. (2013) and Rafi et al. (2010). On the other hand, the parties must be eligible
to execute a contract by having attained the age of prudence and having full control
over the subject matter of the contract. By having satisfied these conditions, both parties
could reduce the risk of being cheated or excessively influenced that could possibly
violate their rights and consequently call off the contract (Uzaimah, 2006).

AL-MARHUN (PAWNED ITEMS)

Al-Marhun is the items pawned as collateral (Hisham Sabri et al., 2013). It must fulfil all
the conditions of a subject matter of a contract of sale (Ibrahim, 2006). Meaning, any
property that has value, preferably gold, can be pledged. This is because; the pledged
items may be return to the market to be sold as in case the Ar-Rahin defaults in
payment. Thus, as suggested by authors Kamarulzaman (2001), Ibrahim et al. (2012),
Bhatt et al. (2008) and Othman et al. (2013) the pledged item must be something that is
legal, permissible, valuable, existent and owned by the Ar-Rahin. Overall, these unique
pillars work together as a mechanism for Ar-Rahnu and the details on the Ar-Rahnu
mechanism are explained in the next section.

10

MECHANISMS OF AR-RAHNU

10

Ar-Rahnu mechanism has three stages. There is a lending process,
redeeming process and auctioning process. During the lending process, the
customer approaches the Ar-Rahnu to place their jewellery based on gold
under the principle of Al-Rahn contract. The Ar-Rahnu gives a loan to the
customers based on Qard contract. The maximum loan amount offered to
the customers is about 70 per cent of the gold value. The pledged gold was
known as ‘marhum’ which is kept by Ar-Rahnu under the principle of Wadiah
Yad Dhamamah. At this stage, the customers need to pay for service charges
based on the Al-Ujrah principle. The service charges were paid by customers
during the settlement of the loan. Usually, the service charges imposed by
Ar-Rahnu are lower than the 2 per cent imposed by conventional
pawnshops.

During the storage period, the Ar-Rahnu is liable to guarantee the pledged
asset in case of damage. The next stage is the redeeming process. In the
redemption process, based on the Pawnbroker Act 1972 (section 18), the
minimum period given is six months. The customer is required to bring the
pawn receipts and pay for the loan plus the safekeeping fees. If a customer is
unable to pay for the loan, the Ar-Rahnu allows the customer to do an
extension for another three months (Bhatt and Sinnakkannu, 2008).
However, if a customer fails to pay within the extension period, the Ar-Rahnu
has the authority to auction pledge asset to pay off the loan.

The auctioning process is the final stage in the Ar-Rahnu mechanism. The
auction method in Ar-Rahnu as stated in Pawnbrokers Act 1972 (Section 18):
‘Auction can only be done by a licensed auctioneer. The pawnbroker must
inform the pawner by post regarding the date, time and place of the auction.
An announcement that an auction will be held must be publicized. The
pawnbroker and borrower are allowed to buy the article that is being
auctioned. Auctioned articles become the property of the buyer.

Before the auctioning process, the Ar-Rahnu will send a letter to inform the
customer about the auctioning process, in specific, Ar-Rahnu informs the
customer about the time, date and also location of the auction. In the case of
surplus after the loan has been settled, the excess fund will be returned to
the customer. In contrast, in case of insufficient cash after the auction, the
customer needs to pay the balance (Basri et al., 2014).

02

THEORETICAL
FOUNDATION
OF AR-RAHNU

INFORMAL

CREDIT MARKET
THEORY (ICMT)

WHAT IS ICMT?

The informal credit market is The existence of informal credit theory
frequently related to the non-
bank lending rate, which is not was recognized by Mc Kinnon-Shaw
typically fixed by the
government or other authorities. (1973) who asserted that capital markets
As a result, the informal credit
market has become an essential in less developed countries (LDCs) are
part of the financial
intermediation process. The imperfect and fragmented in the sense
interest rates of these informal
credit markets are determined that there exists discrepancy among
by market forces of demand and
supply (Mc Kinnon, 1973). rates of return on capital and financial

assets. In this context, the availability of

a formal credit market such as banking is

not efficient to be used as a financial

intermediary. It is due to the

administratively imposed usury interest

rate on the loan interest rate and the

strict collateral requirement that

generally complicate the loan process.

WHAT IS ICMT?

The policies recommended by Mc The Neo-Structuralist school has a generally
Kinnon-Shaw (1973) were similar view with that of Mc Kinnon-Shaw. This
straightforward. Interest rates also includes the specifications of the formal
should be free from administrative financial sector as consisting of the banking
and restrictions on bank lending system, and the role of working capital in
that take the form of high reserve determining the supply side response of the
requirements or excessively economy to changes in monetary policy
stringent collateral requirements instruments. A key divergent between Mc
should be eased. According to Mc Kinnon-Shaw School and Neo-Structuralist
Kinnon-Shaw (1973), these school is the treatment of informal credit
policies would increase the total markets. Mc Kinnon-Shaw acknowledged
saving of the customers. However, existence and importance of the informal
the general equilibrium model credit market in their analysis, but it is
developed by Mc Kinnon-Shaw perceived as inefficient, limited in scope, and
has not integrated the mediating not central to the transmission of shocks from
effects of financial policies in the financial to the real sector.
repressed economies. Therefore, in
order to complement the Mc In contrast, Neo-Structuralist school reserves a
Kinnon-Shaw view, an alternative prominent place for informal credit market in
perspective on developing country its model. This is due to the two important roles
financial market is provided by played by the informal credit market. Firstly, in
the Neo-Structuralist school. the commodity market, the informal credit
market theory plays a role to determine the
marginal cost of funds relevant to private
spending and saving decisions. Secondly, the
informal credit market represented the
alternatives mode of financial intermediation
available to private savers. This means that the
Neo-Structulist framework is more
comprehensive as compared to the Mc-Kinnon
Shaw theory.

WHAT IS ICMT?

There were a few Neo-structuralist studies such In addition, the informal credit market does not
as the works done by Van Wijnbergen (1983), require complicated procedures and the
Tayloy (1983), Buffie (1984), Koshaka (1984) and decision of whether to accepted or rejected is
Liang (1988). The Neo-Structuralist was largely immediately known by customers, just after a
developed to examine the impact of short processing time. This was supported by
liberalisation policies and some stabilisation Bhatt (1986), Bouman (1989) and Ghate (1992),
measures on economic activities when informal who mentioned that informal credit markets
credit markets were incorporated into the responded quickly or remarkably well to short-
economic model. Most Neo-Structuralists views term financing services at a relatively lower
the informal credit market theory as rather cost. These valuable services were not
restrictive. Therefore, Neo-Structuralist refers to adequately met by the formal financial
the informal credit market as curb market. institutions (Timberg and Aiyar, 1984).
However, this conception is not rationale as the
bulk of evidence proposes that informal credit The relevance of informal credit market theory
markets are a far cry from the competitive, flex- is due to its ability in providing working capital
price curb market as the informal credit market to all sizes of business (Abdul Razak, 2011).
is usually fragmented, monopolistic and incline According to Chan and Owyong (2007), the
to be characterised by sluggish prices informal credit market served the financial
(Srivastava, 1992). needs of the community directly through
simplified application procedures, quickness in
The informal credit market theory has been extending credit, focus on the local market
gaining acceptance among researchers since and addressing the need of the poor clients.
the pioneering work done by Mc-Kinnon (1973) As stated by Plateau et al. (1994), the informal
and Shaw (1973). The informal credit market credit market theory also stresses the
theory is introduced due to the imperfection efficiency and resource mobilization aspects,
formal credit market or uncertainty in which can be used for modernization and
transaction cost. The informal credit market investment purpose.
theory plays a decisive role in channelling credit
to small and poor borrowers in both urban and
rural areas. Chua and Lianto (1996) affirmed
that convenient location, availability of credit at
any time and the flexible term structure are the
merits of informal credit market theory.

HOW DOES ICMT RELATE
TO

AR-RAHNU?

SPEEDY AND EFFICIENTLY

Attract customers by offering speedy and efficient transactions.
Usually customer just only need to wait for 5 to 10 minutes in
order to have their cash in hand.

COLLATERAL

Most of the informal credit market also requires collateral for
a loan to be disbursed which is used to minimize loss from
the loan default. Similarly, Ar-Rahnu also requires collateral
as a pledge item to secure the loan. Ar-Rahnu institutions
normally accept gold or gold jewellery as collateral, mainly
because gold has a sufficiently large secondary market, thus
having a stable value.

SIMPLE PROCEDURE

It enables a customer to have cash within
minutes without having to fill out numerous
application forms and enduring a long waiting
period required for the approval of a bank loan
(Nik Azman et al., 2020).

03

TREND

“From Aisyah R.A: the Prophet bought some
food from a Jew, and he pawned his iron

shield for certain period of time in Madinah,
and he took from him some barley for his
family"

- HADITH MUSLIM 

THE TREND OF
AR-RAHNU

AR-RAHNU

The pioneer of Ar-Rahnu in Malaysia is Muassasah Gadaian Islam
Terengganu (MGIT) in January 1992, followed by the Pemodalan
Kelantan Berhad (PKB) in March 1992. Both of these Islamic pawn
centres are among the earliest exponents of the Islamic pawn scheme in
Malaysia. Since the Ar-Rahnu is well-accepted by the community, it has
attracted Yayasan Pembangunan Ekonomi Islam Malaysia (Yapeim) to
broaden the scheme by cooperating with Bank Islam Malaysia Berhad
(BIMB), Bank Rakyat Malaysia Berhad, Bank Pertanian Malaysia
(AgroBank), and RHB Bank in Malaysia. Recently, Pos Malaysia Berhad
has also introduced Ar-Rahnu scheme as one of its new services. The
distribution of Ar-Rahnu by banks and non-banks are well scattered in
Malaysia.

Based on the next Table, Yayasan Pembangunan Ekonomi Islam Malaysia
(Yapeim), Pos Malaysia Berhad and Agrobank are dominant players in Ar-
Rahnu industry. Each of them has 109, 75 and 70 branches respectively.
In contrast, CIMB bank only has two branches and both of them are
located in Kelantan. This is due to the fact that Ar-Rahnu at CIMB has
just been introduced. The scattered location of Ar-Rahnu is important in
order to ease customers’ accessibility to deal with Ar-Rahnu rather than
conventional pawnbroking. Details on each Ar-Rahnu institutions are
elucidated in the next section.

DISTRIBUTION OF AR-
RAHNU BY BANKING
INSTITUTIONS

DISTRIBUTION OF
AR-RAHNU BY
NON-BANKING
INSTITUTIONS

SERVICE CHARGES IN
SELECTED
AR-RAHNU

04

ISSUES
&

CHALLENGES

Based on previous research, it was indicated that the Ar-Rahnu scheme is becoming one of the
most essential mechanisms to assist the financial crisis faced by the micro size entrepreneurs or
bottom line community (Yahaya, 2020). Even though it has an important role, there are still a
few issues and challenges faced by Ar-Rahnu.

CONFUSION ON SERVICE CHARGES

One of the challenges facing by Ar-Rahnu is to make the community
understand about service charges. Previously, Ar-Rahnu, which was managed
by the government, did not impose any service charges towards their customer,
but an early 2004, all items with a marhun’s value of more than RM 1,000, will
accrue service charges. These charges exist to cover all the costs including
insurance and security. Mohamed (2000) highlights that the Ar-Rahnu has a
distinct competitive advantage in dealing with their customers since it prohibits
usury by applying Qardhul Hassan's concept.

This Qardhul Hassan concept provides an interest-free loan. However, the
borrower is required to pay a certain amount to the pawnshop known as
service charges (Hisham Sabri et al., 2013). The challenge is that customers are
often confused between service charges and interest rate. Most customers
assume service charges are no different from the interest rate. It seems
customers do not thoroughly understand the differences between service
charges and interest rates (Sharif et al., 2013).

Thus, educating Ar-Rahnu staff with the necessary knowledge on shari’ah
compliance is important to ensure the correct application and implementation
of Islamic concepts such as Al-Wadiah Yad Dhamamah Al-Qardhul Hassan
and Al-Ujrah in Ar-Rahnu. The application of the right Islamic principles of Ar-
Rahnu will make Ar-Rahnu clearly different from the conventional pawnshop
and would be more appealing to customers who are very concern with shari’ah
compliance requirements (Ismail and Sanusi, 2005; Mohamed, 2010; Amin,
2011).

DEFAULT RATE

Another challenge of Ar-Rahnu is the default rate. According to one Ar-Rahnu
institution, the default rate is common among households. Usually, these
households have difficulties paying back their loan due to a change in family
earnings or irregular income. As a result, if a borrower defaults to redeem the
collateral by the maximum period allowed or does not extend the period, a
notice informing the borrower that the pawned item will be auctioned will be
sent. If there is no response, then the pawned item will be auctioned off to
recover the amount outstanding and any surplus will be given back to the
owner of the assets. Roughly in 2015, regarding the Ar-Rahnu institution, there
are 100 cases of default per year.

In case of loan default, Maamor and Ismail (2010) revealed that the collateral
becomes the property of the pawnshop after a loan is overdue by a specific
period of time, usually up to six months. The Ar-Rahnu regulations require any
surplus from the sale of the gold over the amount owed to the pawnbroker,
including accumulated deposit fee and any costs related to the sale, to be
returned to the customers. The default rate of 5 per cent to 10 per cent are
reported in the states for which there is data. Usually, the default rate is higher
on smaller loans.

According to Mydin Meera (2010), a higher default rate in Ar-Rahnu will
definitely increase the unredeemed item and indirectly forces pawnshop to
cover the amount given to borrowers by disposing of the items or gold at 20
per cent lower than market price to delight jewellers and collectors. To add, he
also suggested converting unredeemed gold item into dinars (melted into gold
dinars 4.25gm or 2K gold) and pushing it to the economy so that the gold can
be sold at the current market price.

PERCEPTION ON AR-RAHNU

The customers are an important asset to Ar-Rahnu institutions. In fact, the
customers’ satisfaction is always being preference by Ar-Rahnu staffs (Amin,
2011). However, the perception of customers towards Ar-Rahnu which
perceived Ar-Rahnu products meant for poor and needy people reluctant
customers to choose Ar-Rahnu as their alternative for the financial straddle.
Thus, educating customers on the benefits and advantages of using Ar-Rahnu
is important in order to change the negative perception among customers.

As suggested by Ismail and Sanusi (2005), it is important to develop a
communication campaign to shore up favourable feelings. To add, Mohd Husin
et al. (2016) also proposed a marketing mix strategy in order to attract more
customers to use Ar-Rahnu. Ar-Rahnu staffs should stress more on the security
of Ar-Rahnu borrowers against abusive lending and collection practices. In
fact, Ar-Rahnu provides borrowers with accurate, comparable and transparent
information about the cost of loans (Hisham et al., 2013).

GOLD'S SYNDICATE

Gold’s syndicate is another challenge to Ar-Rahnu institutions. There is a case
in 2010, in which Ar-Rahnu in Terengganu has tightened the policy. According
to the new policy, Ar-Rahnu in Terengganu only accepts the identity code
number 03 and 11 which are Kelantan and Terengganu. This is due to the
impact of the gold's syndicate case. The syndicate pledged the fake gold
which is the originality of it difficult to trace by the available equipment.

As a result, the percentage of the customers in Kemaman’s branch is
decreasing tremendously. This is because most of the community in Kemaman
born in Hospital Kuantan and automatically the identification card coded
according to Pahang’s code. This issue also being cited by Hisham et al. (2013),
mentioned Ar-Rahnu has been reportedly received gold that turns out to be
fake. According to Hisham et al. (2013), if the gold’s syndicate occurs
continuously, it will indirectly destroy the future of the Ar-Rahnu. So, the
available equipment at Ar-Rahnu needs to be upgraded so that it will not be
easily manipulated by the gold’s syndicate.

As suggested by Ismail and Sanusi (2005), it is important to develop a
communication campaign to shore up favourable feelings. To add, Mohd Husin
et al. (2016) also proposed a marketing mix strategy in order to attract more
customers to use Ar-Rahnu. Ar-Rahnu staffs should stress more on the security
of Ar-Rahnu borrowers against abusive lending and collection practices. In
fact, Ar-Rahnu provides borrowers with accurate, comparable and transparent
information about the cost of loans (Hisham et al., 2013).

05

EFFECT OF
AR-RAHNU

Ar-Rahnu is becoming a popular micro-credit
scheme among micro-entrepreneurs as it suits the
peculiar financing needs of micro-entrepreneurs
(Ismail and Ahmad, 1997; Mohammed et al., 2005;
Amin, 2011, Nik Azman et al., 2020). Micro-
entrepreneurs prefer to use Ar-Rahnu due to its
quick service and approval, lower service charges
and simple procedures required. Thus, Ar-Rahnu is
preferred from other financing facilities among
micro-entrepreneurs when they are faced with
difficulties in doing business. In short, Ar-Rahnu is
needed in order to lift micro-entrepreneurs from
business difficulties. It is undeniable that Ar-Rahnu
has helped MEs to empower their business and
improve their economic wellbeing (Nik Hadiyan et
al., 2020).

Ar-Rahnu provides micro-entrepreneurs with short
term financing by allowing customers to pawn
jewellery to Ar-Rahnu as security. Ar-Rahnu is
regarded as a tool for developing countries to
support entrepreneurship, particularly those micro-
entrepreneurs which are why Ar-Rahnu provides
financial assistance to meet entrepreneurs’ working
capital needs. In addition, Amin (2011) believed that
Ar-Rahnu has a significant impact on women
micro-entrepreneurs as it allows women to obtain
quick cash for emergency and transaction
purposes. Furthermore, Ar-Rahnu also avoids MEs
from involving in loan-shark and interest-based
loans. These advantages indirectly indicate that
Ar-Rahnu could be a promising segment of
microfinance (Amin, 2011).

06

AR-RAHNU
DIGITAL

FORECASTING OF
FINTECH APPLICATION

Technology is a wave of people to access for Besides, fintech has been widely

internet (Van Deursen and Van Dijk, 2010). As accepted as a medium for financial

the world revolution and dramatically alter transactions. Tapping into that, fintech

the way people live and doing business. approaches society by offering new

People transforming their way of life by products, services, technology that

embrace automation, digitalization and indirectly give impact towards monetary

engaging new technologies. Fintech is one stability, financial system stability,

of the digital tools being applied worldwide. efficiency, smoothness, security and

Fintech is providing new financial platforms payment system reliability (Hui et al,

which improving the existing financial 2019). Fintech is not just a bank yet play

services. In fact, the landscape of doing a vital role in the economic development

business is shifting due to advance in and system. The World Bank has been

technology. According to Bouwman et al. promoting fintech as a conduit for

(2005), technology is a manner of organizing financial development, which is

things, coordinating processes and attributable to strong economic growth

performing task easily. Dash and Bhusan, (Beck, Demirguc-Kunt and Levine 2004).

(2014) contend that the integration of Besides, a growing body of research

internet technologies and mobile networks reveals various potential development

has created new opportunities and from fintech such as providing new

applications. Besides, technology provides a sources of profits from the high volume

faster delivery mechanism for services due to of sales and lower cost of transactions

increased smartphone and tablet usage (Lee (Costa and Ehrbeck, 2015), accelerating

et al., 2015). Customers are no longer the implementation of risk-sharing

needed to visit physical outlets as they have (Alaabed and Mirakhor, 2017), as well as

the digital option available for them to use at receiving a positive perception of SME

any time. As Meuter et al. (2000) stated, and start-up towards fintech instruments

markets have become increasingly reliant on (Ghazali and Yasuoka, 2018).

technology to facilitate transactions.

FORECASTING OF
FINTECH APPLICATION

In addition, increasing numbers of companies and customers that interact using technology
will create long-term success for the business. In short, fintech bit by bit has changed the
landscape of the payment’s arena. Customers can make payment in the most innovative
methods using mobile apps (PayPal, smart pay etc) and internet of thing (IoT) transfer.

Looking at ar-rahnu which has received tremendous support in the market, it is time to
introduce digital payment innovation in ar-rahnu institutions. As currently, more than 26 million
connected devices, 24 billion will be IoT devices and 10 billion will be smartphones, tablets and
other traditional computing devices. Therefore, proposing Islamic digital payment innovation is
essential to enhance the applicability of the existing system. More importantly, this research
will highlight the potential of Islamic digital payment innovation in minimizing delay and
defaults among ar-rahnu clients. The government or the policymaker may take advantage to
standardise the payment method throughout all ar-rahnu institutions in Malaysia as a strategy
to avoid fraud and manipulation by a certain party.

07

SUMMARY