1.0 Introduction

Islamic commercial contracts play an important role in Islamic finance since they provide viable alternatives to interest-bearing instrument. These contracts can find ready applications and would not hinder the growth of corporate business in this country. Asset purchases can be made possible via murabahah and ai bai bithaman ajil financing.[1] For business expansion and start up, the al- ijarah, mudarabah and musyarakah products have good potential. But if someone needs cash to pay debts or settle a down payment, buy shares, house renovation or even to go on a vacation. The above instruments may not help us get the cash we want. A pawn broking operation is relatively straightforward. The borrower simply needs to place a pledge or security for the amount of debt needed.

Rahnu is a means of providing short term financing to the public by pawning his/her jewellery to banks or pawnshops as a security. It is one of the microcredit and financial instruments for low income earners seeking financial assistance to meet their fast working capital needs. [2]

The inclusion of syariah regulation in the banking system in 1983 has encouraged its implementation in other finance institutions such as insurance, trust unit and Islamic pawn broking (ar-rahnu). The main reason is to eliminate interest which was imposed by pawn brokers as payment from the cash being loaned. The effect can be seen by the emergence of two pawn broking systems in Malaysia, namely the conventional pawn broking system and the Islamic pawn broking system.

Rahnu principle is mainly used for Islamic pawn broking services in Malaysia. Under rahnu, valuable item is collateralized to a debt which may be utilized as payment if the debt is not repaid within the agreed period. In the event the debtor is not able to repay the debt, the pawned asset will be sold off to settle the outstanding debt and nay surplus will be given back to the owner of the asset. However, if the owner of the asset could not be traced, it is the responsibility of the Islamic pawn broker to place the fund in the Baitulmal account for future savings should any claims is made for the surplus by the owner of his heir.[3]

2.0 Objectives of Ar-Rahnu Scheme.
Rahnu is a quick and easy access to short-term financing for lower income group. The prime objectives of this scheme are as below:[4]

1) To provide a fast, hassle-free and riba-free (interest-free) microcredit financing facilities to the small traders to meet their working capital needs.

2) To provide an alternative source of financing from the conventional pawning scheme.

3) To allow individuals to fulfil their financing needs without having to resort to other more expensive means such as loan sharks, money lenders and interest-based loans.

4) To act as a means of fast and less cumbersome financing.

5) To develop the socio-economic well-being of the poor, by acting as a source of

a) Capital to the small business

b) Financing education needs

c) Development of agricultural and village Industries

6) To increase the number of financial instruments under Islamic banking and finance in line with the government aspiration for a complete and comprehensive Islamic financial system in Malaysia.

3.0 Implementation of Rahnu.

Rahnu is a new Islamic financial product with the potential of achieving social welfare objectives.[5] As a catalyst for further promoting the growth of Islamic pawn-broking in Malaysia, the following criteria should be taken into account:

1. The product should always comply with its mission and objective, that is, take it as a social obligation for the benefit of the needy;

2. The financing amount disbursed to customer shall be based on qardh Hassan at all time and the safe-keeping fee cannot be related to the qardh Hassan amount;

3. The safe-keeping fees should be much lower than conventional pawn-broking fees. Therefore, it is not advisable for Islamic pawn-broking entrepreneurs and financial institutions to impose high safe-keeping fee. It must be understood that by linking the safe-keeping fee to the marhun value by percentage, typically the fee would be higher. In the end, it will not be suitable for microcredit financing;

4. In case of failure to return the murtahin bih (financing amount) and the rahin (customer) cannot be contacted, the marhun can be sold and if there is any surplus, it shall be placed in a separate account should any claims be made by the owner or his heir. It is very important that the financial institution does not use that balance amount for any other purpose; and

5. If the customer (rahin) request for the extension of the maturity period, it must be negotiable and the rahnu company must not impose any extra charges except for the storage fee.

4.0 History of pawnshop

Well before the 1800s, though, pawnshops were already well established elsewhere in Asia. Most of these have a definite Chinese connection, with Chinese or ethnically Chinese merchants establishing or at least dominating the local business; a position that is still largely the case in Malaysia. The one exception was Japan, where a similar but somewhat differently based industry developed. Whelan found Japanese pawnshops date from the Kamakura period (1185-1333). Just as a farmer might rent some land and then cover the rental from the crops it produced, businessmen might also rent an exclusive franchise for a certain business within a specific town or area and then keep any profit that might result. This so called “farming” was profitably applied to a range of businesses to include gambling, opium, and liquor sales as well as pawnshops. In most cases, Chinese not only rented the “farm,” but were also its farmers; there seems little evidence of ethnic Malays or other indigenous people acting as pawnbrokers. It is not known when pawn “farming” began, but was certainly well established by Malay rulers long before the Europeans arrived, and the practice was seemingly followed in Indonesia, Thailand and probably the Philippines as well.[6] Pawn broking services had started since the 15th century which was introduced by the Chinese traders during the Malacca Sultanate. This business continued to flourish especially after the discovery of tin mining in Larut in the 19 century. In the beginning, this business does not conform to any specific regulation. Nevertheless during the British rule, a system of licensed pawn broking services was introduced with the establishment of Pawnshop Ordinance 1871.

Initially, the ordinance was only applicable to the Straits Settlements, later it was introduced in the Federated Malay States and finally the Un-federated Malay States. During that period, the Pawn Broking enactment was already practiced in certain states, such as the 1917 Pawn Broking Enactment which was the first Pawn Broking Law in the state of Johore. The effort to introduce a single uniform act was successful with the enforcement of the 1972 Pawn Broking Act in June 1973.

Malaysia pawnshop began before 1811 and the licensed ownership by private sector. At the end of year 2004, Malaysia has 242 licensed pawnshops regulated under Ministry of Local Government and Housing. These pawnshop charges interest rates to their customer.[7]

To cater for the demand of non-interest bearing pawn-broking services by the lower income group, a few Islamic pawn-broking institutions were established in the early 1990’s. In the effort to eliminate riba and gharar in the conventional pawn broking system, the Islamic pawn broking system was introduced. The first Islamic pawn broking service in Malaysia is the Terengganu’s Islamic Pawnshop Corporation (MGIT) which was formed by the Terengganu Religious and Malay Custom Council (MAIDAM) on the 23rd of January 1992. The formation of this pawn broking service has attracted the interest of the Permodalan Kelantan Berhad (PKB) to form ‘ar-rahnu shops” in Kelantan which started its operation in March 1992. In 1993, Bank Rakyat with co-operation from Bank Negara Malaysia and the Malaysian Islamic Economic Development Foundation (YPEIM) has introduced the Ar-Rahnu scheme to the people and it has successfully been accepted by the community. YPEIM has implemented the first phase of the ar-rahnu program with co-operation from Bank Islam Malaysia Berhad (BIMB) and Bank Pertanian. The methods of implementation of ar-rahnu at BIMB and Bank Pertanian are the same as the one implemented by Bank Rakyat. Other institutions involved are the co-operative outlets and the state government. As an example, in January 1997, Perlis formed the Islamic Pawnshop (PGI). Apart from the co-operative of Bank Rakyat, a few other co-operatives such as Pahang Consumer co-operative Limited and Statury Co-operative Limited (KOKANUN) in Terengganu have also implemented the ar rahnu scheme. [8]

4.1 The Development of the Pawn Broking Services in Malaysia It is a known fact that pawn broking businesses had started since the 15 century with the coming of the Chinese traders to this country. [9]It provided a speedy cash service to consumer who needed money without having to follow procedures which needed a long processing period.

Briefly, the number of conventional pawn broking licences approved between 1985 and 2006 had experienced an increase of 40 licences. In 1985, the number of conventional pawn broking licences had totalled 194 licences, while in 2006 the figure has increased to 234 licences. Among the states which have the most conventional pawn broking shops are Perak, Selangor, Johor, Kedah and Penang. The states with a high non Malay population have the tendency of having a larger number of conventional pawn broking service compared to states having a high Malay population.

The development of the Islamic Pawn Broking Ar-Rahnu scheme since 1992 started with the formation of the first Islamic pawn broking in Malaysia, MGIT, who has given an alternative to the people to make a choice in order to get a speedy cash and at the same time adhere to methods which are considered halal by sharia regulation. Business by MGIT has increased at a high rate since its first formation which started with 12,732 customers in 1992 to 26,632 customers in 2005. The value of pawned items has increase from RM9.85 million in 1992 to RM28.9 million in 2005. This situation created a stiff competition to the conventional pawn broking scheme because customers felt that the Islamic pawn broking scheme is proftable to them compared to the conventional pawn broking scheme. Based on the MGIT business analysis, the increase of transaction exceeding 150 percent during the duration of 13 years of operation. The market development is also showing the same trend that is, the increase of participation in Islamic pawn broking service. Nevertheless, it is difficult to estimate the real value of the increase of ar-rahnu services as there is no authoritative body keeping the data related to the business at every shop throughout Malaysia formally as the requirement to submit standard financial statement for companies and banks to the Security Commission and Malaysia Central Bank (Bank Negara Malaysia), respectively.[10]

The Malaysian Islamic Economic Development Foundation (YPEIM) continuously plays a vital role in the development of the Ar-Rahnu Islamic pawn broking services. YPEIM has collaborated with Bank Rakyat and Bank Islam Malaysia Berhad for the implementation of the Ar-Rahnu counter at every branch of each bank. Until 2003, the number of Ar-Rahnu branch/counter at Bank Rakyat was 106 whereas the number of branch/counter at Bank Islam Malaysia Berhad is 26. YPEIM has also opened 16 of its own Ar-Rahnu counter through YPEIM co-operatives. [11]

The number of transaction performed at Bank Rakyat, Bank Islam Malaysia Berhad and YPEIM co-operatives also showed a positive increase. Since the implementation of the Islamic pawn broking system by YPEIM at the above mentioned institutions, the number of transaction in general in 1999 was 204 thousand transactions involving total financing of RM191.58 million. In 2003, it has increased to 1.38 million transactions involving total financing of RM1.31 million. This development shows an increase in financing more than six times in 2003 as compared to 1999. This situation shows that the development of the pawn broking services with an Islamic concept has diversified and has become a great competitor to the conventional pawn broking system in Malaysia.

4.2 Concept

In Malaysia, pawnshop businesses operate as one-stop financial centres for their customers. These pawnshops are mostly privately owned and operated for profit. [12]However, in the early 1990s, the Islamic-based pawnshop owned by a charitable group (Yayasan Pembangunan Ekonomi Islam Malaysia), and state government, and operated by Bank Rakyat (co-operative bank), Permodalan Kelantan Bhd and Muasasah Gadaian Islam Terengganu were allowed to open branches throughout Malaysia, Kelantan and Terengganu, respectively. In addition to the above conventional motives, these Islamic-based pawnshops are established to fulfill social responsibilities. Both conventional and Islamic-based pawnshop, are separately regulated by Pawnshop Act (1972) and Pawnshop Act (1972) (with several amendments). Although, the acts vary, a general pattern could be discovered. First, when a customer pawns goods, terms of the loan contract must be specified in a receipt, a copy of which the customer receives. The receipt states the customer’s name and address, a description of the collateral, amount lent, maturity date and the amount that must be paid to redeem the assets. Detailed account of the assets, amount and maturity are provided in Table 1. The Islamic-based pawnshop only allows gold to be pawned and the amount lent depends on the value of the gold.[13] Second, the interest rate and other charges are determined by each pawnbroker. Normally, the interest rate is fixed at 2 per cent per month. This rate is expected to increase if the maturity of the loan is more than one month. In the Islamic-based pawnshop, the loan granted is based on three concepts. They are al-qardhul hassan (loan without interest, but the borrower pays service charge), wadiah yad dhammanah (keeping valuable goods by guarantee), al ujrah (storage fees). The deposit fee is based on the value of gold, as shown in Table 2. This fee is charged differently by each pawnbroker. In the conventional-based pawnshop, the value refers to the total loans. Lastly is ar rahn (collateral). In the case of a loan default, the collateral becomes the property of the pawnshop after the loan is overdue by a specific period of time, usually up to six months. The Islamic-based pawnshop 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 customer. Default rates of 5 per cent to 10 per cent are reported in the states for which there are data. Therefore, default rates as a percentage of the number of loans amount of loans, indicating higher default rates on smaller loans.[14] Ar rahn- pawnbroking business

Pledge

Table 1: Types of pledged assets, amount and maturity in pawnshop[15]
|Types of pawnshop |Pledge assets |Maximum borrowed(RM) |Maturity |
| | | |(months) |
|Conventional-based |Jewellery and electronic instruments |50% of the value of pledged assets |6 |
|Islamic-based |Gold |50% of the value of pledge assets |6 |

Table 2: The charge rates in pawnshops
| Islamic-based pawnshop |
|Value of |Bank Rakyat |Permodalan Kelantan Berhad |Muasassah |Conventional-based pawnshop |
|pledged asseta |(RM per month) |(RM per month) |Gadaian Islam Terengganu |(% per month) |
| | | |(RM per month) | |
|RM1-RM400 |– |0.60 |No charge |2 |
|RM1-RM1,000 |0.40 |– |No charge |2 |
|RM401-RM2,000 |– |0.80 |No charge |2 |
|RM1,001-RM5,000 |0.50 |- |No charge |2 |
|RM2,001-RM10,000 |- |0.95 |No charge |2 |
|RM5,001-RM10,000 |0.60 |- |No charge |2 |

4.3 Characteristics of a pawnshop loan Because pawnbrokers lend only on the basis of collateral left in the broker’s possession, brokers do not gather information to assess credit risk but, rather, focus on properly valuating the collateral. Once this procedure is determined, a cash loan is advanced immediately on the completion of the pawn receipt. A typical loan processing lasts less than one hour. Hence, it is normal to see a customer wishing to pledge a precious asset and completing the transaction within a few minutes provided that there is no suspicion that the assets may be stolen. [16] In most transactions, pawnbrokers make loans with maturities up to six months. However, it is commonly understood for customers to renew these loans by paying extra fees or interest on the loan extension. In certain circumstances, customers may redeem within a week or two. In fact, as mentioned by Bouman and Houtman (1988), there are cases where money is borrowed not once but repeatedly and loans are made piecemeal for extremely short periods. A pawnbroker lends a customer a percentage of the value which the pawnbroker believes the collateral would bring in compensation. The loan to the collateral ratio varies over time and across pawnshops, but a loan of about 50 per cent of the value of the collateral is common. Furthermore pawnbrokers offer twice the loan limit of the commercial banks while seldom imposing a maximum limit on loan size. This means that the pawnbroker almost always makes a one- time profit from a default. However, pawnbrokers prefer the customer to redeem the collateral. A customer who loses his/her collateral may feel uncomfortable towards the pawnshop. Therefore, pawnbrokers prefer to lend repeatedly to a customer rather than gain a one-time profit from a default. Normally pawned items include jewellery and electronic assets. These items maintain their value over a reasonable period of time and are easy to store, especially jewellery. However, in the Islamic-based pawnshop, gold is the only permitted item. Firstly, gold is easily resold and there is potentially relatively little delay in realizing the collateral, should the borrower not redeem the pledge. Gold also has an advantage in that its purity can be easily determined and, so the risk of mis-pricing the collateral is substantially less than with a camera or other item of value. Finally, gold jewellery typically takes up very little room and causes the pawnshop little storage costs.[17]

4.4 Differentiate between Conventional and Islamic Pawnbroking The important of helping the needy especially the poor has long been emphasized in much of Islamic faith. Therefore, lending to the needy should be the main focus in Islamic finance. In this context, the Islamic pawnshop (ar-rahnu scheme) is the most appropriate mechanism as it provides a financial product for the lower-income group and small businesses which usually have limited capital or have been excluded from the mainstream financial system. Prior studies have shown the importance of Islamic pawnshop to the Muslim societies.[18]

Before the implementation of the Islamic pawnshop system, the conventional pawnshops had charged high interest rates on the loans given. 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 conventional pawnshops had indeed oppressed and put a burden on the lower-income group. The purpose of the Pawnbrokers Act 1972 was to guarantee a healthy pawnshop industry, as well as safeguarding the interests of the consumers.

However, it failed to control the problems of the oppression of the lower income group and the pawnbrokers’ malpractices. In fact, it seemed to encourage the practice of usury, with high interest rates of 2 percent per month, or 24 percent per annum. The high interest rates make it difficult for the consumers to reclaim their goods or jewellery.[19] As for those who need the loan as a business capital, they find that their capital is rapidly diminishing. The conventional pawnshop system is more likely to put a burden on the lower-income group and this is against the Shari’ah practices. The concern over higher interest rates, usurious and exploitative activities imposed by the conventional pawnshop makes the customers choose to deal with the Islamic pawnshop.

4.5 Conventional Pawnshop in Malaysia

In Malaysia, the pawn broking business began since the 15th century and was introduced by the Chinese merchants during the sultanate of Malacca[20]. The business became more popular after the discovery of tin mining activity in Larut in the 19th century. In the initial stage of development, this business was not bounded to any laws. However, in the era of British administration, the licensing system of pawnshop was introduced and it is called as the Pawnbrokers Ordinance 1871. At first, the ordinance only applicable to pawnshops operated in the Straits Settlements (Penang, Malacca and Singapore), followed by Federal Malay States (Selangor, Perak, Negeri Sembilan and Pahang) and finally the Unfederated Malay States (Johor, Kedah, Kelantan, Perlis and Terengganu). At that time, several states have introduced their own enactment such as Pawnbrokers Enactment 1917 for pawnshop operated in Johor (supposed to be the first of regulation in pawnshop). Finally, the Pawnbrokers Act 1972 was introduced in June 1973 in order to standardize the regulation of pawnbroking in Malaysia. Currently, there are 276 licensed conventional pawnshops regulated under Ministry of Housing and Local Government throughout Malaysia.
4.5.1 Modus operandi of conventional pawnshop 1) The lending process The loan process of pawn broking transaction can be described according to this chronology. First of all, the customer must be 18 years of age and can show a valid identification card. Not like the banking system, the pawnbroker will not make any credit scoring and will not ask the purpose of the loan. Secondly, when a customer walks in a pawnshop with their pawned item, they will be entertained by a clerk or an officer that is expert as a valuer. The task of the valuer is to access the value of the pawn (used as a collateral) to make loan. Based on this, the valuer decides on the size of the loan. Commonly, in the case of conventional pawnshop in Malaysia, customers can negotiate the amount of loan with the pawnbrokers. [21] Thirdly, the customer will receive the loan immediately in cash. The pawnbroker will give a receipt to the person as a proof of transaction and record the particulars transaction in the pawnbroker’s book. The receipt states the customer’s name and address, a description of the collateral, amount lent, maturity date and the amount that must be paid to redeem the assets. In conventional pawnshop, the customer must repay the loan with interest, usually 2-2.5 percent of the loan per month. The entire transaction seldom takes more than a couple of minutes.[22] 2) The redeeming process In most transactions, pawnbrokers make loans with maturities up to six months. Every pawnbroker within this period from the pawning transaction date must deliver up the pledge to any person who present the pawn-ticket issued by him. However, if a customer is not able to repay the loan with interest within a predetermined of period, the loan can be extended within which the pledge may be redeemed for a further period of not less than three months by paying the interest that built up over time. A note of every such extension shall be made in the pawnbroker’s book and an endorsement made on the pawn-ticket. If the pledge shall not be redeemed within the six months period or the extension period agreed by both parties, there will be two possible outcomes. Firstly is if neither pawned for a sum nor exceeding two hundred ringgit, the pawn item shall become the property of pawnbroker and secondly if pawned for a sum exceeding two hundred ringgit, the pawnbroker can dispose the pledge by auction.[23] 3) The auctioning process The auction of the unredeemed pledge must be conducted by a licensed auctioneer.
The pawnbroker can bid for and purchase at a sale by auction and they shall be deemed the absolute owner of the pledge purchased. If the pawned item is sold with surplus in the auction, the customer is entitled to that surplus within the period of four months. On the other hand, if no claim for the surplus is made, the pawnbroker shall pay the surplus to the Accountant General within fourteen days after expiration of the period of four months. The Accountant General shall pay the amount paid to the Consolidated Trust Account.

4.6 Islamic Pawnshop as a Shari’ah Compliant Solution to Conventional Pawnshop The first Islamic pawnbroking institution, Muassasah Gadaian Islam Terengganu (MGIT), was set up by the Terengganu State Islamic Affairs and Malay Customs in January 1992. Following in March 1992, Ar-Rahn, a subsidiary of Permodalan Kelantan Berhad commenced its operations as a standalone Islamic pawnshop.[24] On 21 August 1993, the Minister of Finance announced the introduction of a scheme, known as ar-rahnu scheme through the collaboration of three institutions namely Bank Negara Malaysia (supply the expertise in financing field), Islamic Economic Development Foundation Malaysia or YPEIM as the funder, and Bank Kerjasama Rakyat Malaysia Berhad which supply the infrastructures and managing the transaction. Later, on 27 October 1993 the first phase of ar-rahnu scheme was launched at six branches of Bank Kerjasama Rakyat Malaysia Berhad. Now, the ar-rahnu scheme is available at all Bank Kerjasama Rakyat Malaysia Berhad branches throughout Malaysia. YPEIM had also taken the initiative to launch 17 counters of ar-rahnu scheme through YPEIM co-operatives. The next financial institution to enter the Islamic pawnbroking is Bank Islam, formerly commenced in 1997, followed by EON Bank (August 2002) and Bank Pertanian Malaysia in September 2002. In 2005, there are 209 outlets provide the ar-rahnu scheme throughout Malaysia with number of outlets under Bank Kerjasama Rakyat Malaysia Berhad (112), Bank Islam (24) and YPEIM’s co-operatives (18).
4.6.1 Modus operandi of Islamic pawnshop Generally, the modus operandi for conventional and Islamic pawnshop transaction is quite similar. Despite the similarities, the contract (aqad) in the Islamic pawnshop is different from the conventional pawnshop. The loan granted is based on three concepts. They are al-qardhul hassan (loan without interest), al-wadiah yad dhammanah (keeping valuable goods by guarantee) and al-ujrah (storage fees) and ar-rahn (collateral). The storage fee is based on the value of gold and not on the amount of the loan, as shown in Table 2. This fee is charged differently by each Islamic pawnbroker. In the Islamic-based pawnshop, gold is the only permitted item. Gold have several advantages as collateral over other items.[25] Firstly, gold is easily resold and so there is potentially auctioning the collateral should the borrower not redeem the pledge. Secondly, gold’s purity can be easily determined and so the risk of mispricing the collateral can be minimized. Thirdly, gold chains and rings typically require only a small flat envelop for storage and so can be kept securely in the bank safe at little, if any, additional cost. Finally, women often receive gold chains and bracelets as wedding gifts and generally retain personal ownership of these items especially in Malaysia. This practice is common across income levels and so provides a rich base of potential customers. The valuation is based also on the purity of the gold item. For example 85 carat gold carries a value of RM25 to RM26 per gm. The gold will be valued at the prevailing market price. The best method of assessing gold jewellery in Islamic pawnshop is by using acid test. The method is such as the piece of jewellery will be rubbed on a black stone. The quality of gold will depend on the friction; the rougher the feel of the gold, the better the quality. The action of rubbing will be done at corners of the jewellery as these parts are the easiest to determine if the gold is fake. In addition, a special density meter is used to value the gold. In order to make the valuation free from mispricing, the staffs in Islamic pawnshop will be sent to YPEIM institution for courses that relate to get training in such matters. In terms of legislation, the Islamic pawnbroking system is subject to certain laws but no specific acts. For example, ar-rahnu scheme in Bank Kerjasama Rakyat Malaysia Berhad is subject to three different acts, which are the Bank Kerjasama Rakyat (M) Berhad Act 1978, the Co-operative Societies Act (1993) and the Development Finance Institutions Act 2002. In addition, Bank Kerjasama Rakyat Malaysia Berhad has introduced separately the ar-rahnu manual guidelines. Other relevant acts are the Occupational Safety and Health Act for workers who are exposed to acid for the gold test and the Weight and Measurement Act, in which the gold weighing device has to be licensed every year. Principally, Islamic pawnbrokers would prefer the customer to redeem their collateral within six months. However, if there is no repayment, there is an extension period of three months after which the client is informed that the item will be sold by auction within a further of two months period. Based on the Manual of Islamic Pawnbroking of Bank Kerjasama Rakyat Malaysia Berhad, 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, has to be returned to the customer. In case the customer cannot be located, the surplus will be forwarded to the Baitulmal from which the customer is entitled to make future claims. [26]

5.0 The Example of Different Islamic Pawnbroking in Malaysia[27] 1. Muassasah Gadaian Islam Terengganu (MGIT) Muassasah Gadaian Islam Terengganu (MGIT) is given an honour by Bank Negara Malaysia as the first Islamic pawnbroking operating in January 1992 under the rule of the State Council for Religion and Malay Customs. The sole objective is to fulfill the needs and welfare of the less fortunate. The loans offered in the MGIT ar-rahnu scheme are free from interest (qardhulhassan). However, customers are encouraged to contribute a small sum to the Muassasah treasury account. A Muslim who has borrowed from his friend is encouraged to repay a little extra as a symbol of gratitude. This is known in Islamic banking as ‘hibah’ or gift. The collateral for the loans may be in the form of gold or diamond jewellery. The loans given should not be more than 75 percent of the jewellery’s value. Also, the customer is only eligible for loans up to RM1, 500 for each item. If the customer fails to pay in three months, they can apply for an extension for three months. If they fail to pay after the extension period, the collateral will be auctioned by MGIT to pay off the loan. If there is any surplus after the loan has been settled, it will be returned to the customer. This service is available for those 18 years old and above and it gives priority to the residents of Terengganu only. The customers need to show valid proof of ownership of the goods. Business of MGIT has been flourished since its first formation, as it started with 12,732 customers in 1992 which increased to 26,632 customers in 20059. The value of pawned items has increased from RM9.85 million in 1992 to RM28.9 million in 2005.

2. Permodalan Kelantan Berhad In March 1992, the Kelantan State Economic Development Corporation, through its subsidiary, Permodalan Kelantan Berhad had set up Ar-Rahn as the second Islamic pawnshop in Malaysia in order to fulfill the syariah needs. It is part of the Kelantan government’s effort to help those in need by giving out interest-free loans. The ar-rahnu system in Kelantan collects a certain fee for safekeeping of pawned goods. Table 2 shows the safekeeping fee charged by Permodalan Kelantan Berhad. Currently, there are about 13 outlets of Ar-Rahn operates in Kelantan. The collateral accepted is only in the form of gold jewellery. The loan given is 60 percent of the value of jewellery and not more than RM5, 000. The pawning period is six months. Those who are unable to pay back may extend the pawning period, subject to approval of both parties and the customers need to pay the safekeeping fees of the previous six months. If customers are still unable to pay back after the extension period, the ar-rahnu pawnshop will send an auction notice before the auction is held by licensed auctioneers. The customers are eligible to get any balance of the auction price after subtracting costs and any debts.

3. Bank Kerjasama Rakyat Malaysia Berhad[28] The Bank Kerjasama Rakyat Malaysia Berhad ar-rahnu scheme was introduced in 1993. It was first introduced in six branches but now there are 112 branches (including Kedai Ar-Rahnu) operating throughout Malaysia. Interestingly, the bank had also opened the first stand alone Kedai Ar-Rahnu in Kota Bharu, Kelantan in June 2000. These schemes are more of a social oriented to customers. It is not for profit and thus, the customers will benefit from it. A fee for safekeeping the goods is collected based on the value and the pawning period. Table 4 shows the rates of safekeeping fees charge by the ar-rahnu counters.

Table 4: The fees for Ar-rahnu Scheme in Bank Kerjasama Rakyat Malaysia

|Type of scheme |Amount of loan |Safekeeping fee for every RM100 of gold value |
| | |per month |
|Ar Rahnu |RM 1000 and below |RM0.65 |
| |RM1,001.00 - RM5,000,00 |RM0.75 |
|Az-zahab |RM5,001.00 - RM50,000.00 |RM0.75 |

Source: Bank Kerjasama Rakyat Malaysia.
The scheme is open to Malaysian residents aged 18 and above and not more than 65 years old. Only gold jewellery is accepted as collateral. Loans for the pawned goods will not be more than 50 percent of the goods value. Maximum loan is RM5, 000 for each time or a cumulative worth of RM25, 000 for each customer.[29] Pawning period is only six months, which may be extended for another three months. If the customer fails to claim the goods, the bank will send a notice to auction off the goods. The bank will subtract the loan amount, fees for safekeeping and other costs involved in the auction process from the auction profits. Then the balance will be given to the customer. A week before the six month period, the bank will send the first reminder. After six months, a second reminder will be issued. After the third reminder, if the customer is unable to claim the goods, the pawnbroker will disposed the goods by auction to the auctioneer. Suppose the value of the item pawned is worth RM1, 666.00, and the bank will only release a maximum loan of RM1, 000.00 with repayment period of six month. If the fee for safekeeping is 65 cent for every RM100, then the fees will be RM10.68 per month or RM64.08 for six months (Not surprisingly, with the same amount of loan, customer of conventional pawnshops will have to pay almost double which cost RM20). If the goods are auctioned at RM1, 666.00, the bank will subtract RM1, 000.00 for the loan, RM96.12 for safekeeping fees (9 months) and administration fees for the auction RM50, and then the balance of RM519.88 will be returned to the customer. To date, the Managing Director of Bank Rakyat, Datuk Kamaruzaman Che Mat points that through its fully owned subsidiary, Rakyat Management Services Sdn Bhd, is aiming to open 15 branches of the Islamic based pawn franchise outlets, which is called Ar-Rahnu X-Change, in the next three years11. The prototype branch of Ar-Rahnu XChange in Sentul which has been in operations in 2007 has shown good performance with an average loan payout of RM900, 000 a month. In future, Bank Rakyat planned to expand the Ar-Rahnu outlets to various locations such as Medan Tuanku, Kuala Lumpur (managed by Koperasi Pendidikan Islam Malaysia Bhd), Pokok Sena, Kedah (managed by Koperasi Kementerian Kesihatan Negeri Kedah Bhd), and Sri Gombak (managed by Koperasi Serbaguna Iman Malaysia Bhd).[30]

4. Ar-rahn scheme in Bank Pertanian Malaysia[31] Bank Pertanian Malaysia has introduced the ar-rahnu scheme in 12 of its 132 branches nationwide. The bank introduced the scheme to meet short-term financial needs of the rural people who are mainly farmers and fishermen to improve their business and modernize their methods. This scheme is open to Malaysian residents of 18 years above. All types of gold, jewellery such as necklace, earring, ring, bangle, brooch and others are accepted. A loan of not more than 60 percent of the market value of pawned goods will be issued. Maximum loan is RM50, 000 subject to RM5, 000 daily limits, while the pawning period is six months, and can be extended to three months with the final extension of another two months12.
Table 5: Storage Fee Imposed by Bank Pertanian Malaysia

|Margin of financing |Monthly Storage Fee per RM100 of jewelry value |
|50% |RM0.50 |
|60% |RM0.60 |
|70% |RM0.70 |

6.0 The Weaknesses of Conventional Pawnshop In his report, Adnan (2004)[32] has listed nine weaknesses faced by the conventional pawnshop. Firstly, the most number of complaints received from customers is related to the decreasing value of pawned goods. Many had reported that their gold jewellery had decreased in weight or length after the pawning period. According to the Federation of Consumers Association (FOMCA), this happened because under the Pawnbrokers Act 1972, it is not compulsory for the pawnbrokers to write down the weight, length or type of gold of the jewellery to be pawned. The customers who had complained suspected that the pawnbrokers had tampered with the jewellery. However, it could be difficult for the customer to prove this matter. The second weakness is that pawnbrokers are likely to offer a higher interest rate compared to the rate stated in the Pawnbrokers Act 1972. This often happens to illiterate customers or impoverished people and villagers from rural areas. Thirdly, pawnbrokers are likely to give a low collateral value during the valuation process. This usually happens because the Pawnbrokers Act 1972 does not state a certain value or criteria to determine the value of the collateral. Unscrupulous pawnbrokers will refuse to give out loans of more than RM200 for jewellery valued at RM400. As stated in the Pawnbrokers Act 1972, pawnbrokers are allowed to take possession of any collateral valued less than RM200 if the customer fails to redeem it in the specified period. The fourth weakness is that unscrupulous pawnbrokers would often issue an illegible pawn ticket. This happens when the pawnbroker offers a much higher interest rate or does not complete the information needed as stated in Pawnbrokers Act 1972. The pawnbroker tries to cover his misconduct by using a large rubber stamp so that the receipt could not be read. The pawnbroker also uses a language or technical jargons not usually understood by the customers. The receipts were also made of poor quality paper and could be easily torn. As for the fifth weakness, it has been reported that some unscrupulous pawnbrokers had asked for 50 cent for each replacement of pawn receipts and extension of the pawning period. According to Section 21, Pawnbrokers Act 1972, customers are allowed to get a free replacement for any torn, destroyed or lost pawn receipts. However, some pawnbrokers neglect to follow this guideline when customers ask for an extension for the pawning period. The sixth weakness is that some immoral pawnbrokers will auction pawned goods worth more than RM200 without the customer’s knowledge. Even worse, the pawnbroker does not auction the goods off and takes possession of the goods instead. This is against Section 23(1) (b) of the Pawnbrokers Act, in which any collateral worth more than RM200 should be auctioned off by a licensed auctioneer. As for the seventh weakness, it has been reported that pawnbrokers do not return the surplus after the goods have been auctioned off. This irresponsible act wills no doubt be a burden to the customers who need the money. As such, the customers should enquire to the pawnbroker the surplus that has been taken by the pawnbroker after the auction of the goods.[33] The eighth weakness of the conventional pawnshop system is that many customers do not know when their collateral will be auctioned off. The notices about the auction are only publicized in Chinese and English language papers. Usually, these notices will be overshadowed by other more interesting notices. This is a disadvantage to the pawnshop customers who are usually Malays from the villages or Indians from the estates. Only a handful of them read the English or Chinese papers, and some of them are illiterate. This will cause them to lose the opportunity to reclaim their goods. Lastly, some pawnbrokers will ask for advance payment from the pawnshop customers although this is against the Pawnbrokers Act 1972. This will add further burden to the customer’s misfortune.[34]

Advantages of Ar rahnu[35] The role ar rahnu in socio economic development are as a source of capital to the small business because it quick and easy system unlike normal banking procedures and also as a source of financing educational needs especially at the beginning of school term or prior to enrolment at tertiary level. While in the development of agricultural and village industries, ar rahnu may help people who run agricultural projects and small industries in the villages also need rolling capital. Besides that, ar rahnu is an instrument to encourage saving and investment. Money need to be save first before purchase any gold jewellery or items. Activities of buying and selling gold are a form of investment: double the profit out of gold price differences and proceeds from business using the loan under Ar-Rahnu scheme. Ar rahnu play main role as a source of capital. A dichotomy exists when the lower income earners are not entertained by the financial institutions even though they form the largest group of income earners. There are a lot of small traders exist inside our society and located at all places. The small traders’ need of fund/capital depends on the type of business they operate, starting from a very small capital up to even thousands of ringgit. Therefore, the Ar-Rahnu scheme can contribute to their business.[36]

7.0 The Challenges and Constraints of Ar rahnu[37]

The challenges is it is the only rival would be the conventional pawn brokers as they offers pawning to all kind of valuable items. Whereas, co-operatives at the moment only allows pawning for gold items.

The constraints if ar rahnu is to venture into Ar-Rahnu business requires high capital (RM2 million – RM4 million) in order to offer a truly secured and quality services. However, small co-ops may start small. The internal problem is the business is exposed to misconduct by personnel if precautionary measures are not well taken care of.

8.0 Conclusion

Pawn broking service is one of the instruments for getting easy cash, especially to consumers who are not from the formal finance service system. The emergence of the conventional and Islamic pawn broking services has given clients the choice to choose the best service provider in order to get fast and easy excess to cash compared to getting loans from commercial banks or finance companies. At the same time, the implementation of the Islamic pawn broking service has provided opportunity to Muslim consumers to choose transactions that do not involve riba’. Nevertheless questions arise such as what are the factors that influence consumer’s demand to pursue a different pawn broking service? How many percentage of Muslims who emphasize on ’halal’ trading without riba’?

The emergence of conventional pawnbroking operating side by side with the pawnbroking (dual system) provides an option to the customers to choose the best pawnbroking service based on the features offered. As for Muslims, this opportunity will enable them to reject monetary transactions which involved riba and gharar. Other than that, it is hoped that Islamic pawnbroking will be able to eliminate the informal lending activities such as ‘loan shark’ or ‘along’ which have clearly oppressed and victimized the lower-income group. As for Malaysia, the government has always been committed in developing the Islamic financial product. In order to enhance the growth of this product, the participation of mainstream financial institutions in the ar-rahnu scheme will complement the existing range of Islamic banking products offered by the financial institutions. Based on the role of pawnshop, it cannot be denied that pawnshop institution has a big impact to the society development and hence contribute to economic growth. Finally, the Malaysian experience of Islamic pawnbroking seems to offer a very useful model which other countries might wish to consider. The most beautiful part of the Ar-Rahnu scheme offered by the co-operatives in Malaysia is ar rahnu is gender sensitive. Women are the majority owners and wearers of gold accessories. They have assets that can be turned into cash quickly and easily at their co-operatives for whatever reasons they have in mind.

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[1] Saiful Azhar Rosly. 2nd edition 2007. Critical Issues on Islamic Banking and Financial Markets. Kuala Lumpur. Dinamas Publishing. pg 129

[2] Kamal Khir, Lokesh Gupta, Bala Shanmungam, Islamic Banking A Practical Perspective, Selangor, Pearson Malaysia. pg 188

[3] Ibid

[4] Ibid. pg 189

[5] Ibid. pg 188

[6] Selamah binti Maamor, Abdul Ghafar Ismail. Working Paper in Islamic Economics and Finance No 0609. UKM. pg 6

[7] Ibid. pg 7

[8] Ibid. pg 8

[9] Mohamad Shukri Johari, Nur Azura Sanusi, Mohamed Ishak Hj Badarudin Rais, 2006, Research the Demand of Pawnbroking Services. Terengganu. pg 3

[10] Ibid. pg 4

[11] Ibid. pg 5

[12] Ibid. pg 7

[13] Ibid. pg 8

[14] Ibid. pg 7

[15] Ibid. pg 8

[16] Ibid. pg 10

[17] Ibid. pg 10

[18] Ismail, A. G. and Maamor, S. (2007). Ar-rahn. Paper presented at the Workshop on Islamic Financial
Institutions and Market on 27th – 28th February 2007, Bangi; and Amin, H., Chong, R., Dahlan, H. and
Supinah, R. (2007). “An Ar-rahnu Shop Acceptance Model (ARSAM)”. Labuan e-Journal of Muamalat and Society, 1, 88 – 101.

[19] Ibid

[20] Azila Abdul Razak. Malaysian Practice of Ar rahnu Scheme. pg 1

[21] Ibid. pg 2

[22] Ibid. pg 2

[23] Refer Section 23(1) (a) dan (b), Pawnbrokers Act 1972.

[24]Azila Abdul Razak. Op.cit. pg 5

[25] Skully, M. S. (2005). Islamic Pawnbroking: The Malaysian Experience. Paper presented at the 3rd
International Islamic Banking and Finance Conference 2005.

[26] Ibid

[27] Azila Abdul Razak. Op.cit. pg 7

[28] Ibid. pg 8

[29] Ibid. pg 8

[30] Ibid.pg 9

[31] Bernama. (2008). Bank Rakyat Aims to Open up 15 Ar-Rahnu Branches in 3 Years. Kuala Lumpur. http://www.bernama.com/finance/news.php?id=333396 Access date: 16thMay, 2008.

[32] Adnan, M. H. (2004). Pajak Gadai dari Sudut Pengguna. Kompilasi Prosiding Konvensyen Ar-rahnu Serantau 2002/2004. Kuala Lumpur: YPEIM.

[33] Ibid

[34] Ibid

[35] www.zaharuddin.net. 2009

[36] Ibid

[37] “Mikro Kredit Dalam Koperasi”, Dr Mohd Ali Haji Baharum, PELANCAR magazine August 2005, ANGKASA, Malaysia.

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Borrower (rahin)

Qardhul hassan

Rahn

Islamic pawnbroking (murtahin)

Wadiah yad dhammanah

Al ujrah/ custodial fee