1. religion and spirituality
2. islam

ISLAMIC PAWNSHOPS: CASE STUDY OF AR RAHN IN KELANTAN
PREPARED BY:
RAHIMAH BTE HP SHAWKATALY
HATRIC NO: 6 9210945
ECON 6990: INDEPENDENT STUDY I
SUPERVISED BY: DR. OMAR HARASHDEH
Being a graduate seminar paper for presentation to the Department
Of Economics Kulliyyah Of Economics And Management
International
Islamic University, Malaysia as a partial fulfillment of the
requirement for the award of Master Degree In Economics.
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ABSTRACT
Pawnshops specialise
in the business of making
cash
advances to persons who pledge goods in security of payments.
The pledges which are mainly gold and jewelry are held as
collateral until the period of redemption expires.
The necessity of having pawnshops is magnified by the
fact that there is a very good response towards pawnbroking
business and the najority of pawners come from lower income
strata. The existing system of pawning has created a great
deal of
exploitation
in human life because it is biased
towards the pawnbrokers and creates injustice to the pawners.
The establishment of Ar Rahn at Kelantan and Unit Scheme
Ar Rahn of Bank Rakyat is expected to be a good alternative
for the existing system of pawning. The paper discusses the
operations of
Ar
Rahn
and
Unit
Scheme
Ar
Rahn.
Their
operation is based on Islamic principle of Ar Rahn and Qard
al Hasan. This analysis also finds out that:
(i)
Ar Rahn charges the same rate as the conventional
pawnbrokers
(ii) The formulas are not applied correctly but rather
based on the highest value of the pledged item.
These weaknesses could be improved so that Ar Rahn will
really serve the main purpose of its establishment to help
the poor and needy.
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ACKNOWLEDGMENTS
In the name of Allah, the most merciful, the beneficient.
All praise to Allah, the Almighty and salawat and salam for
Prophet Muhammad
(s.a.w) his family and companions (r.a).
Alhamdulillah by the will of Allah, I am able to complete this
research paper.
My sincere thanks and gratitude is extended to Dr. Omar
Marashdeh, Head Department of Economics, International Islamic
University, for his guidance and assistance throughout the
duration of this work.
Appreciation is also extended to members of my family and
friends. I am deeply grateful to extend my warm gratitude to
my father and mother for their prayers, encouragement and
love.
My greatest appreciation is also due to my beloved
husband, Abdul Rahman and my children Rahimin, Muhammad
Rushdan and Rawaidah for their patience and hardship throughout my study period. The success of the whole undertaking is
theirs as much as mine.
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TABLE
OF CONTENTS
TITLE
PAGE
1.0
INTRODUCTION
1-3
2.0
LITERATURE REVIEW
4-5
3.0
PAWNBROKERS ACT 1972
6-9
4.0
BASIS IN THE SHARIAH
10
5.0
THE CONCEPT OF AR RAHN
11-14
6.0
HISTORICAL PERSPECTIVE OF AR RAHN
14-21
7.0
ISLAMIC PAWNSHOP IN OPERATION: KELANTAN CASE
22-26
8.0
COMPARISON OF AR RAHN AND OTHER EXISTING
26-31
SYSTEM OF PAWNING
9.0
COMMENT
31-34
10.0
CONCLUSION AND SUGGESTION
35-36
REFERENCES
APPENDIX 1-8
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1.0
INTRODUCTION
1.1
Statement
Of
The Problem
In a developing country like Malaysia, the rate of poverty is
still very high especially among the Malay Muslim community for
example it constituted
in 1987
about 80 % of the total poor household
(See Appendix 1).
Most of the poor
occupy the rural
part of the country. Their immediate source of financing mostly
comes from the
traditional money lenders or by pledging their
jewellery to the pawnbrokers.
Pawning seems to be popular among them because unlike
organised financial institutions, they provide easy credit to
clients, especially those who come from the lower income strata.
This source seems to be easily available and does not require
long
procedures. Pawnshops specialise in the business of making
advances of ready cash to persons who pledge goods in security of
payments.
The pledges which are mainly gold and jewellery are held as
collateral until the period of redemption expires. On redeeming
the pledges, the pawner is required to pay a 2% monthly interest.
Maximum loan is limited to RM 5000. For loan exceeding RM 5000, a
money lender licence must be obtained
(Section 3(2): Pawnbrokers
Act 1972).
The existing system of pawning
has created a great deal of
exploitation in human life. The existing system is biased towards
the pawnbrokers and it creates exploitation and injustice to the
pawners.
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This has encouraged the writer to choose Ar Rahn as the major
topic of discussion because it involves a great number of the
lower income group which should be treated in a just way so that
both parties; the pawnbroker and the pawner, gain or lose
equitably.
1.2
Objective Of The Study
This study attempts to analyse the nature of Islamic
Pawnbroking business in Malaysia that has been practiced by the
state of Kelantan. It also aims at drawing specific "policy
recommendations which will help to foster the Islamic pawnbroking
business in Malaysia.
The following objectives are pursued in the course of the study
1.2.1
An analysis of the response towards pawnbroking business
in Malaysia.
1.2.2
A description of the operation of the Islamic
pawnbroking business as practiced by the state of
Kelantan and
1.2.3
Bank Rakyat.
A comparison between the existing system of pawning
and
Ar Rahn.
1.2.4
To evaluate the role played by Islamic pawnbrokers in
fulfilling immediate financial needs of the community.
1.2.5
Policy recommendations in giving better service in
the
pawnbroking business as to achieve justice between both
parties; the pawnbrokers and the pawners.
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1.3 METHODOLOGY
Secondary data are collected from both published and
unpublished material. The writer also visited
the location of
the study i.e Ar Rahn at Kelantan and Bank Rakyat. Most of the
information regarding the operation
and performance
of the
Islamic pawnbroking business was obtained from the interview
carried out with the manager of Ar Rahn and the officer in charge
of Unit Scheme Ar Rahn of Bank Rakyat.
1.4
OUTLINE OF STUDY
This paper is divided into eight sections. First is the
introduction. Next section is the literature review. The third
section
reviews the Pawnbrokers Act 1972 . The fourth section
focuses on the Shariah
perspective of Ar Rahn while the fifth
section explains the concept
and the tenets of Ar Rahn. The
sixth section tells the historical perspective. Then we focus on
the practical aspect of Ar Rahn that has been practiced by the
Kelantan state. Part eight of the paper explains the difference
between the existing system of pawning and the Islamic Pawn Shop.
This
section also incorporates the comparison between Ar Rahn
Shop in Kelantan and the similar one practiced by Bank Rakyat.
Part nine refers to the
comments
by the writer and finally the
conclusion and suggestions.
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2.0
LITERATURE REVIEW
An econometric study by Rugayah (1988) proved that those
persons who obtained loan facilities from pawnbrokers are
characterized
by low income, low level of education, lack of
savings as well as having large families to support. She further
added that control and licensing of the pawnbroking trade should
be carried out more stringently to prevent malpractice and
exploitation over the pawners by virtue of their ignorance.
Mohammad Muslehuddin (1988) analysed the arguments of
different jurist in regard to who should derive
the benefit of
the pledge. Based on the saying of the prophet, he derived an
analogy that the pawnbroker (for example, the Islamic bank) may
derive benefit by a pledge for its services in maintaining the
pledge. The
pawnbroker could also charge the pawner for its
services or even take it on lease or give it to someone for
something more.
Mohd Saufi (1990) analysed the importance of pawnbroking
business among the Malaysian community and proposed the idea of
establishing an Islamic Pawnshop. According to him, Islamic
Pawnshop should extend interest free loan to pawners as they have
already taken the marhun as collateral to the loan.
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Hamdan Adnan
(1993) critised the flaws in the Pawnbrokers Act
1972, which should be amended especially Act 17 (regarding
interest rate charged)
and Act 23
(regarding auction). He
proposed the idea that there must be a machinery for the
inspector of pawnbrokers to do random valuation of items pledged
to see whether the valuation by the pawnbrokers reflects the true
market values or are capricious and arbitrary.
He further added that there should be a federal department to
monitor its operation and officers of the Ministry of Domestic
Trade and Consumer Affairs can be appointed as the licensing
Officers.
Mahmud Saedon (1993)
Act 1972
critised some flaws in the
and analysed the operation of Islamic
Pawnbrokers
Pawnshop that
has been practiced by the state of Kelantan and Terengganu.
According to him, Ar Rahn in Kelantan could operate under the
regulation of Pawnbrokers Act 1972 with some amendments being
made in those articles that violate Islamic Shariah.
Aziz Nawi (1993) reported on the working and performance of Ar
Rahn shop in Kelantan. As the first operating manager of Ar Rahn,
he proposed that the sources of capital of Ar Rahn should be
diversified and not fully depend on Permodalan Kelantan Berhad.
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3.0
PAWNBROKERS ACT 1972
The Pawnbrokers Act 1972 governs all pawnbroking business in
Malaysia. The Pawnbrokers Act does not apply to loan over RM
5000. It also does not apply to loan where the interest rate is
less than 10% per annum.
3.1
LICENCE
Only people w i t h a licence are allowed to do pawnbroking
business under the Pawnbrokers Act 1972. They must be certified
by a police o f f i c e r whether they are fit to be given a licence.
Only police officer of the rank of
Assistant Superintendent and
upwards or an o f f i c e r in charge of the police district for the
area where the a p p l i c a n t lives can give the c e r t i f i c a t i o n
( Section 8 ( 1 ) } .
The pawnbrokers must comply w i t h all
the
regulations under the Pawnbrokers Act 1972, otherwise the licence
will be revoked ( Section 11 (2) ) .
3.2
RECORD BOOK and
PAWN TICKET
To protect the consumer, the Act requires the pawnbroker to
enter the d e t a i l s and conditions of a pawn t r a n s a c t i o n in a.
record book ( Section 14 ) . He must also give a pawn ticket to
the
p a w n e r . T h e P a w n b r o k e r s R e g u l a t i o n s 1972 s p e c i f y
the
information to be contained in the record book and the pawn
ticket.
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The record book and the pawn ticket must contain the
following information:
(a)
a serial number for the pledge.
(b)
the date of pawning
and the date on which the article
is redeemed.
(c)
a detailed description of every pledge.
(d)
the value of the loan made thereon.
(e)
the interest and other charges permitted by the
regulation.
(f)
the time within which such article may be redeemed.
(g)
the name, age, sex, nationality, national registration
identity card number of the pawner.
(h)
the name, age, sex, nationality, national registration
identity
card
number
of
the
person
redeeming
the
article.
(i)
the date and serial number of the receipt.
The language used in the pawn ticket must be the National
language, however, a translation either in Chinese, Tamil or
English may be provided at the request of the pawner.
If the original copy of the pawn ticket is lost, destroyed or
stolen, he can get a copy from the pawnbroker immediately. This
copy should be given free of charge ( Section 21 ).
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3.3
INTEREST RATE
To protect the borrower from excessive interest, the
Pawnbrokers Act 1972 fixed the maximum interest that can be
charged by the pawnbrokers at 2% per month. There is an
additional fee of 50 cent per article for loans exceeding
RM 10.00 ( Section 17 ).
3.4
PERIOD OF REDEMPTION
According to the Pawnbrokers Act 1972, the minimum period for
the redemption of the pawn is six month ( Section 18). However,
an extension can be made with the agreement of both parties after
the borrower has settled the interest
due for the first six
months. The extension must be for a period of not less than three
months. The
book and
3.5
pawnbroker must record every extension in his record
on the pawn ticket (Section 19 ).
EXPIRY OF REDEMPTION PERIOD
The pawnbrokers Act 1972 places certain conditions on articles
that are not redeemed within the agreed period. According to the
Act, after an expiry date,
articles pawned for RM 100 or less
become the property of the pawnbroker. Articles pawned for more
than RM 100 must be auctioned by a licensed auctioneer ( Section
23 (1)}. The pawner has a right to any remainder amount of money
from the auction {Section 25 (2) ) .
The pawnbroker must inform the borrower if the article has
been auctioned for more than the amount borrowed. The notice to
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the pawner must be sent by registered post and must be made
within a week from the time the article is to be displayed for
auction
( Section 25(1} ).
The borrower may claim the remainder
loan and the cost of auction.
after deduction of the
The pawnbroker is responsible to
show the records of the auction within four months of the date of
auction. If the pawner has not claimed the remainder
expiry period,the remainder
after the
must be sent to the accountant
general within 14 days after the four months period ( Section
26(1) ) . If this is not done an offense is committed and he can
be fined not more than RM 500 and thereafter subjected to a
further fine between
RM 25 to RM 50 for each day of delay
( Section 26 (4) ) .
After the four months period, the borrower can make a claim
from the Treasury
3.6
and not from
the pawnbroker
(Section 27(1)).
AUCTION
Auction can only be done by a licensed auctioneer. The
pawnbroker must inform the pawner by post regarding the date,
time and place of auction. An announcement that an auction will
be held must be publicised.
The pawnbroker and borrower are
allowed to buy the article that is being auctioned. Auctioned
articles become the property of the buyer.
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3.7
ENFORCEMENT
The Pawnbrokers Act 1972
is
e n f o r c e d by the M i n i s t r y of
Housing and Local Government. This Ministry appoints a licensing
officer
and
inspector
(Section 1 0 ( 2 } ) .
of
pawnbrokers
in
every
state
The state secretary is usually being appointed
as the licensing officer and other senior officers as inspectors
of the
pawnbrokers.
4.0 BASIS IN THE SHARIAH
Pawnbroking is permissible in Islam based on the injunctions
found in Al-Quran, Sunnah and Ijma" of Ulama.
4.1
Al-Quran
Allah says in the Holy Quran in Surah Al Baqarah verse 283:
"If ye are on a journey, and cannot find a scribe, rahn
maqbuda or pledge with possession (may serve the purpose) ."
4.2
Al-Sunnah
In a tradition narrated by Bukhari and Muslim, the Prophet
Muhammad
(s.a.w)
had pawned his
coat
of
mail to
a Jew,
(Abu al-Shahmi) as a collateral for a price of thirty gantang of
grain that he had borrowed for his family
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(Hughes 1982, pg. 3 2 ) .
4.3
Ijma" of Ulama"
Majority of Ulama have agreed that Ar Rahn is permissible in
Islam even not in a journey and it is also permissible to do rahn
with a non-Muslim provided that there is no element of riba
involved
(Ibid, pg. 32).
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5.0
THE CONCEPT OF AR RAHN
5.1
Definition of Ar Rahn
The word "rahn1 stands for a pledge or security. In its real
sense rahn means to last or to continue
pg. 110).
(Muslehuddin 1988,
In the language of law, Rahn means to make a property
a security in respect of a right of claim which may be answered
by means of that thing as in the case of debt
(Hamilton 1982,
pg.630).
5.2
Motive of Rahn
The motive of Rahn is to convince the creditor (pawnbroker)
that they will not lose their right if the debtor (pawner) cannot
settle their loan as the pledge or marhun will be sold and its
price is taken by the creditor (pawnbroker) to settle the debt
and the balance of it will be returned to the debtor (pawner).
5.3
Tenets of Ar Rahn
(i)
Rahin - is a person who gives a rahn while in the existing
system he is called the pawner.
(ii)
Murtahin - is a person who takes a rahn while in the
existing system he is called the pawnbroker,
(iii)
Marhun is the property that is made into a rahn.
(iv)
Marhun bih - loan extended to Murtahin by Rahin.
(v)
Sighah - How the offer and acceptance are made.
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5.4
Conditions for making the contract or pledge
5.4.1
The condition of offer and acceptance
The pledge becomes a concluded contract by the offer and
acceptance of the pawner and the pawnbroker. The offer and
acceptance of the pledge is by words being spoken which are
evidence of agreement, as by the pawner saying " I have made this
thing a pledge against my debt to you " and there is no condition
that the word Rahn be spoken. For the deaf person, the offer and
acceptance may be in the form of sign language. The contract
of
pledging is irrevocable and incomplete until the pledge is
received. Therefore the pawner before delivery can go back from
the pledge.
5.4.2
The conditions of the pawner and the pawnbroker
It is the condition that the pawner and pawnbroker be of sound
mind but
not
of age. So it is permitted for an infant who has
discretion (mumaiyyiz) to be either the pawner or the pawnbroker.
The pawnbroker can of his own accord annul the contract but
the pawner cannot annul the contract of pledge
until the pledge
has been given. After the contract is annulled, the pawnbroker
has the right
to hold and keep the thing pledged, until the
pawner has settled the debt.
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It is the responsibility of the pawnbroker to preserve the
thing pledged and the pawner is responsible for paying any
expenses
related to keeping the pledge.
The pledge does not become void by the death of the
pawner or the pawnbroker. On the death of the pawner, his heirs
if they are of age, stand in his place and it becomes necessary
for them to free the thing pledged by paying the debt from the
estate of the deceased person.
If the heir is an infant or he is absent from the place, his
guardian is responsible to sell the thing pledged with the
permission of the pawnbroker and pays the debt from price.
When the pawner has destroyed the thing or damaged the thing
pledged he must make compensation and if the damage is caused by
the pawnbroker, the amount of the value is struck off from the
debt.
5.4.3
*
Condition for a pledge.
It is the condition that the thing pledged be a thing that is
good
to
contract
be s o l d . ' I t
must
be
exist
at
the
time
of
the
(Hamilton 1 9 8 2 , p g . 6 3 8 ) .
Any increase or additional things are also included in a
pledge. For example when a building site is pledged, all
on it,
the fruit
that is
and the trees, other thing planted or sown,
although they are not clearly mentioned, are also included.
The exchange of a pledge for another pledge is allowed. For
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example if someone has placed his watch for his debt and if he
takes a ring in place of the watch, and the pawnbroker returns
the watch and takes the ring, the ring now becomes a pledge for
his debt.
It is also permitted to increase the loan against the thing
pledged by the pawnbroker after the completion of the contract.
For example if someone has pledged his watch worth RM 2,000 to
secure RM 1,000, if he again takes RM 500 more from his creditor,
on the condition that it is to be secured by that pledge, the
watch now becomes a pledge for RM 1,500.
6.0
HISTORICAL PERSPECTIVE OF AR-RAHN
6.1
Pre Islamic Era
Pawning has been a popular practice since pre-Islamic era.
Among the most popular and monopolised pawnbroker is Abdullah bin
Judan. He used to receive pledges from the poor and needy to whom
he charged a high rate of interest. Through this system of
pawning he seemed to accumulate a lot of wealth by exploiting the
poor and needy group of the community.
6.2
During the prophet~s time
Since the earliest period of Islam, the Muslims had practiced
Ar Rahn for fulfilling their immediate financial need. They
placed their jewellery as collateral in getting smaller amount of
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money to fulfill their need, especially during emergency
purposes, with the intention of taking it back upon paying the
debt for some important purposes.
The prophet himself has practiced Ar Rahn. In a tradition
narrated
by
Aishah (r.a), the Prophet Muhammad
(s.a.w.)
in
a
bargain with a Jew for grain gave his coat of mail in pledge for
the payment
(Mohd Saufi 1990,pg. 6).
Pawning in pre-Islamic era is based on riba while during the
Prophet time their main motive is to help the needy Muslims
rather than to gain a lot of profit.
During pre-Islam, any pawner who is unable to claim back his
pledge in the specified period, the pledge will be taken by the
pawnbroker as payment to the debt. This practice seems to
exploit the needy people.
In the Islamic perspective, Ar Rahn is a part of trade which
is based on the principle quoted from Al- Quran, Hadith and
the
Opinion of Ulama. The concept and principle have been properly
quoted by Muslim jurist so that it will not involve the element
of riba, injustice and exploitation over the needy Muslims.
6.3
Historical Perspective Of Pawning In Malaysia
Pawnshops in Malaysia started to flourish since the advent of
tin mining in Larut during the mid 19th century. The Chinese who
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were
successful
in
tin
m i n i n g r e i n v e s t e d some
accumulated savings by money lending through the
of
their
pawnbroking
trade whereby the sole right of running the business were given
to the
heads of Kangchu S e t t l e m e n t s
(Rugayah Muhammad 1988,
pg.l) .
The pawnbrokers who are of Chinese origin are believed to be
from the Tai Poh Khik or Hakka clan.
In 1993 there are 188 pawnshops in the country as shown in
Table 1.
Perak w i t h a t o t a l number of
38 pawnshops has the
highest concentration of Pawnbrokers in the country.
TABLE 1
STATE
NUMBER
WILAYAH PERSEKUTUAN
6
NEGERI SEMBILAN
10
JOHORE
24
SARAWAK
5
TERENGGANU
2
PERAK
38
PAHANG
12
KELANTAN
10
SABAH
7
PERLIS
1
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KEDAH
22
PENANG
22
SELANGOR
16
13
3 (1988) and Bank Negara (1993
The fundamental attraction of pawning as a means of
borrowing
apart from the informality of it, is that immediate cash could be
raised
on
security
in
personal
other
effects which might be
forms of borrowing. As
less
such
suitable
borrowers
as
who
frequently visit the pawnshops most often have nowhere else to go
for immediate financial help.
6.3.1
From
Regular customers
table 2 below it could be clearly analysed that Malays
are
the majority group in regard of visiting the pawnbrokers in
of
the
Indian.
states except in Selangor where the
majority
Among
with
the
selected
five
states,
most
group
high
Malay
concentration who often visit the pawnbrokers are in Kelantan.
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is
TABLE 2
PERCENTAGE OF CUSTOMER ACCORDING TO RACE
STATE
MALAY
CHINESE
INDIAN
16.4
OTHERS
JOHORE
75.6
8.0
KELANTAN
98.8
0.6
0.6
0
PERAK
53.8
8.3
35.3
2.6
SELANGOR
40.9
9.4
48.7
1.0
W. PERSEKUTUAN
53.2
4.3
38.3
4.3
0
Source: Rugayah Muhammad (1988)
6.3.2
Income Level Of Fawners
The persons who are the backbone of profitability in
the
pawnbroking business are customers whose earnings fall below
RM 500
(Table 3) (Rugayah Muhammad,1988}.
A large percentage of pawners, however are in the income range
of RM 251-500. This accounts for the fact that although pawners
are generally poor, their income must be sufficient enough to
enable them to redeem their pledges, which may be the only few
tangible assets
the family keeps for future unforeseen financial
difficulties.
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Apart from the relatively low level of income, the majority of
pawners, especially those from rural areas, have large families
to support
(Wells, 1980).
Table 3
INCOME LEVEL OF PAWNERS
Monthly Income
JOHOR
KELANTAN
PERAK
SELANGOR
W . PERSEKUTUAN
< 250
33. 9
33 .8
32.8 15.1
5 .2
251-500
51. 5
56 .4
46.9 67.2
48 .1
501-750
11. 1
8 .3
15.9 12.4
32 .5
751-1000
1, 3
0 .6
3.2
3.5
6 .5
1000-1500
1. 0
0 .6
2.2
2.9
5 .3
1. 3
0.
0
0
2 .6
>1500
Source:
6.3.3
3
Rugayah Muhammad (1988)
Level Of Education Of Pawners
The low level of education of pawnshop customers is quite
evident from the data.
customers
Table 4
indicates that
many of these
receive only primary education. Consequently this
brings strong implications on their ability to safeguard their
right as customers of the pawnbroking business
be full of exploitation and injustice.
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which is found to