03 Critical Appraisal of Rahn-Based Islamic Microcredit Facility

RESEARCH PAPER (No: 45/2012)
CRITICAL APPRAISAL OF
THE RAHN-BASED ISLAMIC
MICROCREDIT FACILITY
DR. MOHAMED FAIROOZ ABDUL KHIR

MOHD BAHRODDIN BADRI
LOKMANULHAKIM HUSSAIN
CRITICAL APPRAISAL OF THE RAHN-BASED ISLAMIC
Dr. Mohamed Fairooz Abdul Khir

Mohd Bahroddin Badri
Lokmanulhakim Hussain*
ABSTRACT
The rahn-based Islamic microcredit facility is currently popular among Islamic

financial institutions in Malaysia, essentially because of its commercial features,
which make it attractive and competitive with conventional pawnbroking. However,
the substance of this product triggers some Sharah issues, which are mainly centred
on the safekeeping fee the bank charges the customer under the principle of ijrah al-
if (safekeeping fee) and wadah yad al-amnah (guaranteed safe custody). This
research is primarily intended to examine the key Sharah issues associated with
the structure that is widely accepted at present. Other potential structures are also
examined and compared with the current structure. This research undertakes a case
study of two selected Islamic banks that offer a rahn-based Islamic microcredit facility
to their clients. The product manual of each bank has been examined to understand
the structure flow of the product, payment of the safekeeping fee and other relevant
operational aspects of the product. Interviews have also been employed to gather data
related to the operation of this product that was not available in the product manuals
of the two selected Islamic banks. Taking into account all the Sharah issues relevant
to the current structure, this research proposes a new structure as a viable alternative
to the current structure of rahn-based Islamic microcredit facility. It is found that the
proposed structure, based on arf, can serve as an alternative to the current structure
because it complies with the Sharah and meets most of the distinctive features of the
Islamic microcredit facility.
Keywords: wadah yad al-amnah, arf, safekeeping fee, microcredit facility
*
The authors are all researchers at the International Sharah Research Academy for Islamic Finance (ISRA).
They can be contacted at fairooz@isra.my, bahroddin@isra.my, and lokman@isra.my respectively.
ISRA RESEARCH PAPER (NO. 45/2012)
2
Mohamed Fairooz Abdul Khir, Mohd Bahroddin Badri &Lokmanulhakim Hussain
1. INTRODUCTION
The rahn-based Islamic microcredit facility is an increasingly popular financing

option among micro-entrepreneurs, lower income groups and gold traders. However,
its Sharah structure has been sharply criticised by some Islamic scholars despite its
popularity among Islamic financial institutions and Islamic pawnshops. Hence, it is
undeniable that there are some debatable Sharah issues that need further examination
and immediate solution. This situation is most likely a result of using the contract
of rahn (pledge) in an income-generating product, which obviously contravenes the
fundamental purpose of rahn. In fact, rahn is merely a security contract (aqd al-
tawthq) that serves as a legitimate guarantee of debt, whether the debt arises from a
loan contract (qar) or a deferred exchange contract (bay muajjal). Usually, when a
loan contract is entered into, the most common Sharah issue raised is rib (interest)
in the form of bay wa salaf (combination of a sale and loan) or qar jarra manfaah (a
loan with added benefit to the lender). In the case of the rahn-based Islamic microcredit
product, the imposition of a safekeeping fee that exceeds the actual storage cost is
considered the most crucial Sharah issue that requires scrutiny. This research seeks to
achieve the following objectives:
(1) To examine the Sharah issues related to the current structure of the Islamic
microcredit facility.
(2) To jurisprudentially analyze various structures of Islamic microcredit facility

with emphasis on the Sharah issues related to them.
(3) To propose a new structure of Islamic microcredit facility as an alternative to

the current structure.
This paper is divided into five (5) sections. Section 1 sets out the research methods
employed in this paper for data collection and data analysis. Section 2 embraces
discussion on the operational aspects of the current Islamic microcredit facility offered
by two selected Islamic banks. This is inclusive of the modus operandi of the current
structure, its unique features, formula for calculation of the safekeeping fee, the
financing margin, and the redemption mechanism. Section 3 highlights in detail the key
Sharah issues associated with the current structure of Islamic microcredit that require
further deliberation. The issues examined in this paper are i) the safekeeping fee; ii)
the combination of rahn contract and wadah contract on the same maqd alayh
(subject matter); iii) guarantee in a wadah contract; and iv) bay al-waf. Section
CRITICAL APPRAISAL OF THE RAHN-BASED ISLAMIC MICROCREDIT FACILITY 3
4 delineates various structures of Islamic microcredit facility, including the widely

accepted structure at present. This section also encompasses extensive analytical and
critical jurisprudential (fiqhi) discussion on the abovementioned Sharah issues related
to the current structure as well as other structures. Section 5 explicates a new structure
of Islamic microcredit facility proposed by the research team as a viable alternative
to the current structure. Concluding thoughts and relevant suggestions are briefly
presented in the final section.
2. SECTION 1: RESEARCH METHODOLOGY
This research is generally of a qualitative nature, relying on both primary and secondary
sources of data. To understand the structure flow and operational aspects of the rahn-
based Islamic microcredit facility, a case study approach was adopted whereby the
product offered by two Islamic banks in Malaysia was examined. Secondary sources of
data include the relevant documents available at the two banks, notably their product
manuals and product concept documents (PCD).
The interview method was also adopted as a primary source of data to gather additional
information relating to the current operation of the Islamic microcredit facility that
was not spelled out in the product manuals and PCD of these two banks. In particular,
the additional information sought through the interviews included the essential factors
considered by the banks when offering the product, justification for adopting their
current product structure and operational and Sharah issues related to the current
structure. The interview questions also sought elucidation of the formula for calculating
the safekeeping fee, the rollover function and process flow of the product. Structured
interviews were specifically carried out with officers from the Product Development
Department and Sharah Department of the two Islamic banks.
The information gathered from the interviews were also essential for outlining the
unique features of the rahn-based product, which included some particuliarities that
are important for the commercial viability of the product. These details were taken into
consideration by this research when proposing an alternative structure for the Islamic
microcredit facility in Section 5.
The research also focused on the Sharah issues associated with the current structures
of the Islamic microcredit facility. To examine these issues, the library method
was employed to gather the scholars opinions on key Sharah issues such as the
4
safekeeping charge and conflict in muqta al-aqd (nature and implications of the
contract) arising from a combination of contracts. The classical books of fiqh from
various schools of thought, such as Kitb al-Mughn, Takmilat Radd al-Mutr, Tufat
al-Mutj and Kitb al-Furq, were examined to explore the classical scholars views
on the abovementioned issues.
Overall, the data collected through the above methods was critically analysed using
deductive and inductive approaches, particularly on the Sharah and operational
aspects of the product. Based on the data collected and analysis made, the research also
proposed an alternative structure that accommodates most of the unique features of the
Islamic microcredit product and is in compliance with the Sharah principles.
3. SECTION 2: OPERATION OF THE RAHN-BASED ISLAMIC

The current rahn-based Islamic microcredit facility provided by Islamic pawnbroking

and Islamic financial institutions is structured based on a combination of various
Sharah contracts, namely wadah yad amnah (savings with a protection
guarantee), ujrah (fee), qar (loan) and rahn (pledge). A customer delivers his gold to
an Islamic pawnbroking institution for safekeeping based on the principle of wadah
yad amnah which requires the institution to be liable for the safety of the gold in its
custody. Thus, in the event of any damage or loss of the gold during the storage period,
the Islamic pawnbroking institution is liable to replace it or compensate for the damage.
The Islamic pawnbroking institution then grants a benevolent loan to the client based
on the principle of qar, which is interest-free. Subsequently, the customer pledges the
gold to the Islamic pawnbroking institution as collateral (rahn) for a certain period of
time agreed upon in the contract. The structure flow of the product is depicted in the
following diagram.
(1) The customer keeps his/her gold with the bank under the principle of wadah
yad amnah and pays ujrah.
Customer Bank
(2) In return, the bank provides custody service with a risk-protection guarantee.
(3) The bank grants qar (loan) to the customer.
Customer Bank
(4) The customer pledges the gold under the principle of rahn al-wadah.
6
3.1 Unique Features of the Rahn-Based Islamic Microcredit Product
The rahn-based Islamic microcredit facility is currently gaining popularity among

Islamic financial institutions, lower income groups and gold investors because of its
attractive features that make it competitive with its conventional counterpart. As a
result, the preferred structure for this product should accommodate all the peculiar
features of this product to retain its competitive and attractive elements. The unique
features of this financing facility can be simplified as follows:
(i) Security and surety against credit

This financing facility is significantly secured because the pledged gold bar/
jewellery is used as surety against credit. In case the customer fails to meet
his/her debt obligation, the bank as pledgee can dispose of the gold bar/
jewellery at market value to recoup the customers outstanding debt. Hence,
this product has a low risk profile.
(ii) Lucrative business

This financing facility is very lucrative as the storage fee charged to the
customer is relatively high. The storage fee has a few different modes: 1)
daily storage charge; 2) monthly storage charge; and 3) yearly storage charge.
The charge is even higher than the profit the bank earns through its personal
financing facility. Personal financing actually serves as one of the main
sources of income for Islamic banks in Malaysia instead of products like
home financing, motor vehicle financing, etc. However, the profit rate in the
rahn-based microcredit facility is higher than that of the personal financing
facility. For instance, the profit rate for personal financing facility offered by
some Islamic banks for government customers is between 3.25% to 5% per
annum (e.g., Bank Rakyat and KFH)1 while for non-government customers,
the profit rate is up to 11% (e.g., Maybank Islamic).2 In the rahn-based Islamic
microcredit facility, the average storage fee is 1% per month or 12% per year.
(iii) Quick approval

This facility will provide an immediate loan facility for lower income groups
to overcome cash-flow needs. It enables them to obtain financing facility
within a few hours. This is because the bank does not have to undergo the
1
http://www.bankrakyat.com.my/web/guest/aslah: 25 Oct 2012, and Product Disclosure Sheet of KFH
Murbaah Personal Financing-i Government Personnel.
2
http://maybankislamic.com.my/c_personal-financing-i.html: 25 Oct. 2012.
normal risk assessment on the customer, which is time consuming, since the
financing is secured by the pledged gold bar/jewellery. However, the bank
usually applies the procedure of KYC (Know Your Customer) to mitigate
credit risk.3
(iv) Rollover functionality

This facility will also enable the customer to opt for roll-over functionality
by extending the payment term, particularly in the event of failure to settle
the debt within the agreed time. The spread of the gold price will be used by
the customer to top up the outstanding safekeeping charge. Under certain
circumstances, this mechanism can also generate profit for the customer if
there is a surplus from the spread.4
(v) Cheaper safekeeping fee

The safekeeping fee in this product is much cheaper compared to the interest
charge in conventional pawnbroking, which makes it attractive not only to
Muslims but also non-Muslims clients. For instance, the interest charge under
a conventional pawnbroking facility is up to 2% per month5 while under
Islamic pawnbroking the safekeeping charge is approximately 1% per month.
(vi) Guarantee of getting back the pledged jewellery

In a non-default case, the customer is assured of getting back his/her pledged
jewellery. This feature is important because, in many cases, the jewellery has
sentimental value to customers. Thus, they usually prefer to repossess it upon
settlement of the debt.
3.2 Quality of Gold and Assay Procedures
In general, an Islamic pawnbroking institution accepts jewellery made of gold (that

meets a definite standard) to be used as a collateral. In the event that the jewellery
contains non-gold components such as diamonds and emeralds, it will also be accepted,
but these non-gold components are excluded from the value of the marhn (collateral).
3
This information is derived from an interview with officers at the selected Islamic banks.
4
This information is derived from an interview with officers at the selected Islamic banks.
5
http://www.nccc.org.my/v2/index.php/pajak-gadai: 11 Nov. 2012.
8
The quality and the fineness of the gold are measured as follows:
Table 1.1
Fineness of Gold Carat
999 (99.9%) 24k
950 (95%) 22.8k
916 (91.6%) 22k
860 (86%) 21k
835 (83.5%) 20k
750 (75%) 18k
Note: Pure gold is designated 24 karats; therefore, each karat is equal to 4.167 percent
gold content, so that, for example, 18 karats equals 18 X 4.167, or 75 percent gold.
Fineness refers to parts per thousand of gold in an alloy;e.g.,three-nines fine would
correspond to gold of 99.9 percent purity.6
The Islamic pawnbroking institution assays the quality and purity of the gold by
using several methods and techniques. A common technique used for this purpose
is a chemical test by means of nitric acid and hydrochloric acid. The process starts
by lightly rubbing the gold on a black stone, followed by pouring an amount of acid
over the rubbing mark. The golden tone colour that appears determines the fineness
and the quality of the gold. Another instrument that is popularly used by al-rahnu
institutions is densimeter such as MD-200S/GK300. Other than its reasonable price,
this tool is also easy to handle and its measurement accuracy is well recognised. Some
Islamic pawnbroking institutions use a more sophisticated equipment of high-powered
X-ray technology called X-Ray Fluorescence Spectrometer.7 However, the number of
institutions that use this technology is few because the price is fairly expensive.
3.3 The Safekeeping Fee and Margin of Financing
The margin of financing granted varies from 50% to 70% of the marhn value. For
instance, a customer who pledges gold worth RM10,000 is eligible for a qar (loan) up
to RM7,000. Subsequently, the bank charges the customer for the safekeeping service,
based on the principle of wadah yad amnah. The safekeeping fee is calculated
on the amount of the marhn (collateral) and not the amount of the loan. The total
amount of the safekeeping fee is related linearly to the value of the marhn: the higher
6
http://www.britannica.com/EBchecked/topic/207276/fineness: 30 Sept.2012
7
This data was collected through an observation during a visit to an Islamic pawnbroking institution in Kuala
Lumpur.
the marhn, the higher the safekeeping fee. Due to this proportionality, the service
charge does not reflect the actual cost of safekeeping but, rather, creates an accrued
profit. Table 1.2 below shows that the banks differ in fixing the fee rate and margin of
financing.
Table 1.2
Safekeeping Fee for Every Financing Margin of Marhn
Institutions
RM100 Marhn Value Value
Bank Rakyat* RM0.65-0.75 65%-70%
RHB Islamic Bank** RM0.70-0.80 70%-75%
Agro Bank*** RM0.50-0.75 50%-70%
Banks tend to use one of two approaches in calculating the safekeeping fee: either on
a daily or a monthly basis. Furthermore, the rates also vary subject to the margin of
financing and method of calculation, i.e., on a monthly or daily basis. The details are
illustrated in the Tables 1.3 and 1.4:8
Table 1.3 Daily Basis
Margin of Financing Safekeeping Fee for Every RM100 Marhn Value
< RM1000 RM0.65 per RM100 of marhn value
> RM1000 RM0.75 per RM100 of marhn value
Table 1.4: Monthly Basis
Margin of Financing Safekeeping Fee on Monthly Basis
0% (No financing) RM0.10 per RM100 of marhn value
50% and below RM0.75 per RM100 of marhn value
>50% up to 60% RM0.60 per RM100 of marhn value
>60% up to 70% RM0.75 per RM100 of marhn value
Note: The margin of financing and the rate offered differ for each bank.
8
The details of the information are based on a product manual of one of the selected Islamic banks that
provides a rahn-based microcredit facility.
*
http://www.bankrakyat.com.my/web/guest/arrahnu: 25th Oct.2012.
**
http://www.rhb.com.my/islamic_banking/Ar-Rahnu-i/main.html: 25th Oct.2012.
***
http://www.agrobank.com.my/ar-rahnu: 25th Oct.2012.
10
The one-month calendar is counted on a point-to-point basis from the date of execution
of the contract. For instance, if the date of contract execution is 1st January, 2012,
the one-month calendar is fixed at 1st February, 2012. Should the customer opt for a
monthly basis calculation during the execution of the contract but later redeems the
pledged gold earlier than the particular month; the bank has the right to claim a full
month of safekeeping fee. Therefore, in this situation, the daily basis calculation gives
more advantage to the customer should he redeem the pledged gold/jewellery earlier
than the maturity period because the safekeeping fee will be calculated at the daily rate.
3.3.1 Calculation of the Safekeeping Fee on a Monthly Basis9

Computation of the safekeeping fee on a monthly basis is illustrated as follows:
Quantity of marhn : 50 gm
Market price : RM200 per gram
Value of marhn : RM10, 000
Margin of loan : 70%
Total loan amount : RM7,000 (70% of the marhn value)
Safekeeping fee : RM0.70/100 monthly
Charge date : Jan 1st, 2012
Maturity period : 6 months
The maturity date : July 1st, 2012
Scenario A
Assuming that a customer pledges 50 gm jewelery (24 carat/999 grade) for the current
price of RM200/gram, the marhn value is RM10,000. Therefore, he/she is eligible for
70% financing margin, which is equivalent to RM7,000. Given that RM0.70 is charged
for every RM100 marhn value, the safekeeping fee charged to the customer is RM70
per month. Hence, the total charge for the 6-month period from Jan 1st to July 1st, 2012
is RM420 as computed in the following formula:
Safekeeping fee = RM0.70 x RM10,000 x 6 months
RM100
= RM420 @ RM70 per month

Note: In substance, the bank indirectly charges RM70/month for RM7000 loan given,
which is equivalent to 1% per month or 12% per year of the loan amount.
9
The details of calculation are derived from a product manual of one of the selected Islamic banks that
provide a rahn-based microcredit facility, with a few modifications on certain figures.
On the maturity date of July 1st, 2012, the customer should redeem the pledged gold. To
exercise this, he/she has to repay the full amount of the loan and the safekeeping fee,
i.e., a total amount of RM7420:
Total redemption = Total amount of loan + Safekeeping fee
= RM7,000 + RM420
= RM7,420
Scenario B
In the event that the customer redeems a few days earlier than the maturity date (e.g.,
June 15th, 2012), the customer still has to pay the 6-month safekeeping fee, which
is equivalent to RM420. However, in the event that customer redeems his/her gold
after the maturity date (e.g., July 14th, 2012), he/she has to pay an additional 1-month
safekeeping fee on top of the 6-month fee, as shown below:
Safekeeping fee = RM0.70 x RM10,000 x 7 months

RM100
= RM490
3.3.2 Calculation of the Safekeeping Fee on a Daily Basis
Computation of the safekeeping fee on a daily basis is illustrated as follows:
Quantity of marhn : 50 gm
Market price : RM200 per gram
Value of marhn : RM10, 000
Margin of loan : 70%
Total loan amount : RM7,000 (70% of the marhn value)
Safekeeping fee : RM0.75/100 (the monthly rate when calculated on a
daily basis)
Charge date : Jan 1st, 2012
Maturity period : 6 months
The maturity date : July 1st, 2012
12
Scenario C
Assuming that the customer performs the redemption on July 1st 2012, the safekeeping
fee is calculated as follows:
Safekeeping fee = RM0.75 x RM10,000 x 12 x 181days

RM100 x 365 days
= RM446.30
Note: The actual number of days from Jan 1st to July 1st 2012 is 181 days.
Scenario D
In the event that the customer redeems his/her gold earlier than the maturity date (e.g.,
June 15th), the safekeeping fee is calculated as follows:

Safekeeping fee = RM0.75 x RM10,000 x 12 x 165 days
RM100 x 365 days
= RM406.85
Note: The actual number of days from Jan 1st to June 15th 2012 is 165 days.
Scenario E
Similarly, should the customer redeem the gold on July 15th, which is later than the
maturity date, the safekeeping fee is RM480.82 as follows:
Safekeeping fee = RM0.75 x RM10,000 x 12 x 195 days

RM100 x 365 days
= RM480.82
In this scenario, though the daily basis rate is higher, the safekeeping fee is still lower
than the monthly basis rate, which is RM490 as illustrated in the Scenario B.
3.4 The Redemption and Auction Process10
A customer may redeem his/her gold/jewellery at any time before, during or after the
maturity date, provided that they are not yet registered in the auctioning list. If the
customer requests to re-pledge (rollover) the same gold/jewellery for an additional six
10
The data was gathered from interviews with a non-Islamic financial institution and the two selected Islamic
banks that offer the rahn-based microcredit facility.
months, the bank may approve the application provided that all safekeeping fees of the
previous six months are paid. Even though payment in cash is preferable, some banks
allow any other mode of payment such as credit card, bank draft or personal cheque.
When a personal cheque is the mode of payment, the pledged gold will only be released
after the cheque has cleared. The redemption can only be performed at the branch
where the rahn contract was originally executed.
In normal practice, the bank will issue a reminder notice weeks before the maturity
informing the customer of the expiry date. At the maturity date, the customer has
to repay the entire loan in addition to the safekeeping service charge to redeem the
pledged gold. The maturity might be extended by some banks for up to three months. If
the customer fails to turn up for redemption of his/her gold/jewellery, an extension of
two to three months is granted. If he/she still fails to redeem the pledged items after the
three-month extension, an additional period of two months may be granted by the bank
provided that the customer appeals for the extension and pays the entire outstanding
safekeeping fees. In case the customer doesnt submit any application for extension, the
bank will take action to claim for the loan granted to the customer.
If the customer does not turn up for the full settlement of the loan during the extension
period (9 to 11 months after the execution of the contract), the bank will proceed to
auction off the pledged gold for cash. Cash raised will be used to fully settle the loan
and the safekeeping fee as well as covering the actual administrative costs borne by
the bank. In case of a surplus (if there is any), the bank will return the balance to the
customer.
4. SECTION 3: SHARAH ISSUES RELATED TO THE CURRENT

STRUCTURE OF THE ISLAMIC MICROCREDIT FACILITY
This section highlights the key Sharah issues facing the current structure of the Islamic
microcredit product. There are two structures currently adopted by the two Islamic
banks that were interviewed. The difference lies mainly in the contract sequence of
the structures. The first structure begins with a loan contract prior to the execution
of the wadah yad al-amnah contract while the second structure begins with the
execution of wadah yad al-amnah before the loan contract is entered into. Despite
the abovementioned difference, both structures are the same in actual practice because
the second structure is practiced based on the process flow of the first structure where
14
the customer delivers his gold to the bank under wadah yad al-amnah principle
prior to the debt arrangement. The first structure (Structure 1) is illustrated in the
following diagram for the purpose of exploring the key Sharah issues related to it
while Structure 2 is discussed in Section 4.
Structure 1: Combination of qar, rahn and wadah yad al-amnah.
Pawn Broker Customer
(1) The bank gives a loan to the customer based on a qar contract. The
maximum loan amount offered to the customer is 70% of the market value of
the pledged gold.
(2) The customer then places his/her gold at the bank under the principle of al-
rahn. At this stage, the gold assumes the status of marhn (pledged gold)
which is kept in the banks custody under the principle of wadah yad al-
amnah. On this premise, the customer is required to pay a safekeeping fee.
The fee will be paid by the customer during settlement of the loan, which is
usually done after six months. During the storage period, the bank is liable
to guarantee the pledged gold in case of damage, etc. (interview with the
Islamic financial institution).
(3) On the maturity date, the customer makes full settlement of his/her loan plus
the safekeeping fee to the bank.
(4) The bank then returns the pledged gold to the customer.11
This information is derived from product concept document of one of the selected Islamic banks that offers
11
Islamic microcredit facility.

Practically, the above modus operandi of the Islamic microcredit facility scheme
involves the following steps:
(a) The customer executes a loan transaction at the Islamic pawnbroking
institution as per the normal method.
(b) The Islamic pawnbroking institution provides financing to the customer.
(c) The financing amount will be credited into the customers saving account.
The customer will then be provided with an ATM card.
(d) The customer can withdraw the total financing from his/her saving account
by using the ATM card.
(e) The customer must pay the safekeeping fee during the financing period.
Payments can be done by deduction from their saving account or by cash
deposit.
(f) At the end of the financing period, the customer is required to pay the total
amount of financing as well as the safekeeping fee.
The above modus operandi of the current structure gives rise to three (3) key Sharah
issues that require scrutiny and extensive deliberation. They are as follows:
4.1 The Issue of the Safekeeping Fee (Storage Charge)
This is the most debatable Sharah issue associated with the current structure because
the safekeeping charge is directly linked to the value of the pledged gold. Although
this direct linkage is established to escape from the prohibited linkage between the
safekeeping fee and the financing amount, this mechanism is not safe from the above
prohibition because the storage fee will not be imposed without the execution of the
rahn contract. Furthermore, it is acknowledged that the rahn contract is executed
merely to secure the debt arising from the qar contract. In fact, the whole chain of the
arrangement is solely derived from the execution of the qar contract, which indicates
that the qar is given on the condition that the customer agrees to pay the safekeeping
fee, which exceeds the actual storage cost incurred by the bank. It is argued that if the
actual safekeeping cost for the pledged gold in this structure is equal to that of all other
pledged goods, then the inflated fee is a legal trick (lah) to circumvent the prohibition
of rib (Asmadi, 2004, 50). Therefore, it is important to thoroughly examine the Sharah
16
issues arising from imposition of the safekeeping fee in the Islamic microcredit facility
scheme. The Sharah issues related to the safekeeping fee are as follows:
4.1.1 The Issue of Bay Wa Salaf (Sale Contract with Loan)
In this scheme, cash disbursement will be done by the Islamic pawnbroking institution to
the applicant while the applicant is required to place his/her valuable good as collateral
for the loan. As mentioned earlier, the current structure entails that the safekeeping fee,
which is labelled ujrah, is charged to the customer based on the principle of wadah
yad amnah (interview with Islamic bank). However, it is argued that the term ujrah
signifies that the contract of ijrah is embedded in this arrangement as enabler for
profit generating while the contract of wadah yad amnah has no relation at all with
the storage charge (interview with Islamic bank). It should be noted that in Islamic
jurisprudence, the ijrah contract is considered a form of sale contract that is known
as bay al-manfaah (sale of usufruct). In reality, this procedure involves stipulation
of a sale contract in a loan contract because the Islamic pawnbroking institution will
only give the applicant the loan on the condition that he pays the safekeeping fee. This
deal is strictly banned by the Sharah because it comes under the prohibition of bay
wa salaf (a sale contract combined with a loan). Al-Bj asserts that there is scholarly
consensus regarding the prohibition of sale contract combined with a loan (al-Bj, n.d.,
5:29). Al-Qarf also transmitted the same legal consensus. He says:

By the consensus of the Ummah, it is permissible to conduct a sale and a
loan separately, but it is forbidden to conduct them in combination because
that is a means to rib (al-Qarf, n.d., 3:266).
The prohibition of combining a sale contract with a loan is inferred from many items of
revealed evidence such as the following adth:

It is not permissible to execute a loan contract (in combination) with a
sale contract (Ab Dwd, n.d., 3:283; al-Tirmidh, 1395 AH, 3:527; al-
Nas, 1406 AH, 7:288).
The above adth explains clearly that it is illicit to combine a loan contract and sale
contract in a single transaction. This is generally understood to mean that it is illegal to
stipulate a sale contract in a qar contract.
4.1.2 The Issue of Qar Jarra Manfaah (a Loan with Added Benefit to the
Creditor)
It is absolutely acknowledged that any debt arrangement that grants additional benefit
unjustifiably to the creditor is forbidden. This in fact has become a notable fiqh principle
which is generally known in Islamic jurisprudence as it has been transmitted by many
scholars using various wordings; for example:

Every loan which gives benefit (to the creditors) is considered rib (al-
Zayla, 1418 AH, 4:60; Ibn al-Mulaqqin, n.d., 6:621; Ibn ajar, 1416 AH,
3:79).
Although the statement above is not considered authentic as a adth, its meaning
constitutes a widely accepted fiqh principle derived from the consensus of all Muslims
(al-Shrz, 1428 AH, 5:452).
In the Islamic microcredit scheme, the safekeeping fee is much higher than the service
charge imposed on the customer for a normal safe deposit box. This indicates that the
customer should use the normal safe deposit box service if he really intends to keep his/
her gold or valuable items safe rather than paying more for a higher service charge in
the Islamic microcredit facility. This situation reveals the actual motive of the customer,
that he subscribes to the Islamic microcredit facility merely for the purpose of obtaining
the financing facility, and in return, he agrees to pay more than the financing amount
and the actual storage cost. This is because the amount charged for the safe-keeping
service is more than the actual cost incurred by the Islamic pawnbroking institution,
which further substantiates the presence of the rib element embedded in this scheme.
18
4.2 The Issue of Combining a Rahn Contract and Wadah Contract on the
Same Subject Matter
In this structure, the rahn contract is executed in combination with a wadah yad
amnah contract on the same item. This form of contract combination is invalid and
impermissible because the legal effects of the two contracts are not harmonious; some
of them are contrary to one another.
One of the most significant differences is the time in which the pledged/custodial
good must be handed back to its owner. For instance, the original ruling of wadah
requires that the good must be returned back to its owner whenever he requests it. In
contrast, the original ruling of the rahn contract is that the pledged good (marhn) must
be handed back to its owner after the pledger (rhin) has fulfilled his/her entire debt
obligation. This is because the holder of the pledge (murtahin) in a rahn contract is
authorized by the Sharah to hold the marhn as long as the rhin has not settled his/
her debt, as the rahn contract is primarily intended to secure the debt (istthq). If the
marhn must be returned to its owner upon his/her request, as in the case of wadah,
the purpose for which the rahn contract was legislated is defeated. Al-ann mentions
these differences in the following statement:

[The pledgee] is permitted to retain the pledged item until he gets his
money back, even if the owner (of the marhn) dislikes it or asks for it
back (al-ann, n.d., 3:234).
Conversely, in a wadah contract, if the consignor wants to take back his/her good, the
custodian is obliged to return the consigned good to him. Ibn azm says:

It is obligatory upon the consignee who was entrusted with a wadah to
keep it safe and to return it to its owner when he asks for it (Ibn azm,
n.d., 7:137).
Ibn al-Arab elaborated on the same point as follows:

...

In wadah, it is not compulsory to return it (to the owner) until it is asked
forwhile in rahn it is not compulsory to return it until the owner has
settled his debts (Ibn al-Arab, n.d., 1:571).
The reason is that the wadah contract is a non-binding contract which can be terminated
by either party to the contract at any time. This is mentioned by Ibn Qudmah:

It is a non-binding contract executed by both parties. Whenever the
consignor (mdi) wants to take back the consigned goods, it is compulsory
for the guardian to return it (Ibn Qudmah, 1388, 6:436).
The above arguments indicate that the current practice of combining a rahn contract
and wadah contract on the same item violates one of the essential features of wadah.
The owner (mdi) cannot claim his/her good on consignment because the good is at
the same time pledged, which grants the pledgee the right of retention. Thus, the owner
can only claim the good after repaying his/her debts to the creditor/trustee (muqri/
mustawda).
In essence, inclusion of the wadah contract in the rahn contract in this procedure is
unnecessary. This is because the purpose of the wadah contract is to safeguard the
consigned goods, and this purpose is already served in the rahn contract. Thus, it is
obvious that the unnecessary inclusion of wadah contract in rahn contract is actually
a legal trick (hlah) to materialize an illegal motive or to acquire an unjustified benefit.
A study shows that the unnecessary inclusion of a contract in a deal is an indicator of
the presence of a lah element (Mohamed Fairooz et. al, 2010), as was mentioned by
Ibn Taymiyyah:
20
:

.
iyal, in toto, are of two types: they either include in the subject matter
what is not intended, or they include in the contract another contract that
is not intended (Ibn Taymiyyah, 1416 AH, 29:27).
4.3 The Issue of Guarantee (Yad amn) in a Wadah Contract.
As indicated in the previous discussion, this structure is a combination of a rahn

contract and wadah yad al-amnah (guaranteed custody) contract. Interestingly, the
combined contracts in this structure give rise to the issue of conflict in muqta al-
aqd:
Trusteeship (yad amnah) constitutes one of the original principles of the wadah
contract. It entails that the custodian is not liable to guarantee the consigned item in
his/her custody in case of damage or loss of the item as long as that is not due to
his/her negligence (taqr) or transgression (taadd). Therefore, the question raised in
this regard concerns the justification for changing the original feature of wadah from
being a trust-based contract to being a guarantee-based contract.
It is found that in the current practice of the Islamic microcredit facility, the trust
(amnah) element in a wadah contract changes to a guarantee element (amn) on
account of the service charge imposed by the bank for safekeeping the goods for its
customer. This is based on the opinion of the majority of anaf scholars that whenever
a fee is imposed for custodianship to keep the wadah items safe, the original status of
wadah as a trust contract (amnah) is changed to a guarantee-based contract (amn).
Al-Sarakhs explains the above situation by saying:
:

.
:- -

. -

Its meaning is that the custodian (mda) volunteers to keep the owners
good. The voluntary act (tabarru) does not oblige its doer to guarantee
(the item). Hence, its damage when it is with the custodian is treated similar
to its damage when it is in the owners custody. This is the meaning of the
jurists saying, The hand of the custodian is like the hand of the owner.
The ruling is the same whether the damage is due to an avoidable or
unavoidable cause. This is because the damage that is due to an avoidable
cause is similar to a defect in safekeeping, but freedom from defect is
required only in an exchange contract, not in a charitable contract (al-
Sarakhs, 1414 AH, 11:109).
The above text implies that if an exchange element is incorporated in the wadah
contract, the custodian would be held liable to guarantee. Ibn bidn explicitly states
the rule:

This entails that the fee charged changes the original status of wadah
from being trust- based (amnah) to being guarantee-based (amn) (Ibn
bidn, 1306, 8:470).
As mentioned above, the opinion of the anaf School is that the imposition of a
safekeeping fee in a wadah contract changes its essential character to yad amn. If
this opinion is accepted in this structure, then the issue of conflict between the nature
and implications (muqta al-aqd) of the combined contracts (wadah yad amn
and rahn) in one deal comes into the picture. This is because the muqta al-aqd of the
rahn contract is that it is primarily based on amnah, which definitely does not admit
any form of guarantee (amn), while the muqta al-aqd of wadah yad amnah
obliges the custodian to guarantee the consigned item kept in his/her custody as a
counter-value for the fee paid by the customer for keeping his/her valuable item safe.
22
4.4 The Issue of Bay al-Waf
The substance of the current structures (Structures 1 and 2) can also be legally
characterized as bay al-waf even though it is externally structured on a combination
of various financial contracts. The sale price in bay al-waf can be characterized as
an amount loaned to the customer on the condition that the jewellery must be returned
when the customer reclaims it by paying the price (loan amount) of the jewellery to
the bank. According to al-Mawsah al-Fiqhiyyah al-Kuwaytiyyah, bay al-waf is
defined as a sale contract executed on the condition that the buyer must return the
purchased item if the seller pays the price on the ground that the buyer must fulfil his/
her promise (waf) (Wizrah al-Awqf wa al-Shun al-Islmiyyah, 1427 AH, 9:48)
and meet the contractual obligation arising from the stipulated condition. Jurists are
not unanimous on the legitimacy of bay al-waf. Most of them hold the view that
bay al-waf is impermissible on the premise that it resembles the contract of rahn in
which the buyer (murtahin) benefits from the sold asset. A rahn contract is similar to
bay al-waf with regard to its objective and legal implications. In terms of objective,
both rahn contract and bay al-waf are executed by the contracting parties to meet
their liquidity needs. The seller who is characterized as rhin (pledgee) in bay al-
waf pledges his/her asset with the buyer as surety against a financing (loan) facility
obtained from the buyer. The buyer is characterized as a murtahin and lender (muqri)
who benefits from the pledged asset. The added benefit that he enjoys from the pledged
asset (marhn) is considered rib in the form of a loan that draws benefit. In addition,
the contractual effects of both structures are also similar because the sold item (in bay
al-waf) and the pledged item in (a rahn contract) are returned back to the original
owner upon repayment of the price of the sold item (in bay al-waf) and return of the
pledged item (in the rahn contract). Similarities between both contractual arrangements
in objective and contractual impact are shown in the following table:
Contract Objective Contractual Impact
The pledged item will be returned

Rahn Giving a loan with collateral to the pledger (rhin) if he repays
the debt.
Giving a sum of money in exchange The sold item will be returned to
Bay al-Waf for a temporary transfer of ownership the seller if he repays the price of
of a commodity. the sold item.
However, it is important to note that the current structure can be considered worse than
bay al-waf in terms of the ribaw element embedded in it. This is because in bay
al-waf the sold asset is returned to its owner if he pays the same purchase price to the
first buyer. In contrast, in the current structure, the customer pays a financing amount
with an increment, i.e., the safekeeping charge.
The International Fiqh Academy in its seventh session has resolved that bay al-waf
is not a valid sale contract on the premise that it is in fact a loan contract that draws
benefit. Hence, this arrangement serves as a back door to rib as argued by the majority
of scholars. The selling price of the sold jewellery comprises the marhns value plus
profit, which is equivalent to the safekeeping fee. However, it is important to note that
the above arrangement is only applicable in case the subject matter is jewellery. In
contrast, if the subject matter is a gold bar, the contractual arrangement is automatically
characterized as a currency sale (bay al-arf) and, hence, the rules of currency sales
shall apply to the transaction. The International Fiqh Academy, in the same session,
ruled that this contract is impermissible (Resolution No. 68/4/7, Majma al-Fiqh al-
Islm, 7th session, 1992).
5. SECTION 4: OTHER STRUCTURES FOR RAHN-BASED

ISLAMIC MICROCREDIT FACILITY
Three structures of Islamic microcredit facility are discussed in this section. The
Sharah-compliance aspects of the structures are analysed, with special emphasis on
Sharah issues related to the safekeeping fee and other profit-generating elements
embedded in each structure.
5.1 Structure 2: Combination of Wadah bi Ajr, Qar and Rahn al-Wadah
This structure is currently adopted by one of the two Islamic banks whose employees
were interviewed. Its modus operandi is illustrated in the following diagram:12
This information is based the product manual of the rahn-based microcredit facility of the selected Islamic
12
bank.
24
Bank Customer
(1) The customer keeps his/her gold bar with the bank based on the principle of
wadah bi ajr, which enables the bank to impose a safekeeping fee on the
customer based on an agreed profit margin.
(2) The bank offers a loan (qar asan) to the customer on the condition that he
must pledge his/her wadah (gold bar) to the bank based on the principle of
rahn al-wadah.
(3) The bank gives qar asan to the customer upon the customers acceptance
of the banks offer out of his/her consent and free will.
(4) The customer then pledges his/her wadah (gold bar) to the bank.
The above structure implies a combination of three different financial contracts:

wadah bi ajr, qar asan and rahn al-wadah. It entails that the customer keeps his/
her gold bar with the bank based on the principle of wadah bi ajr, which requires him
to pay a service charge. In return for the service charge, the bank is liable to guarantee
the pledged gold. This is a controversial point. Scholars disagree about the banks
liability to guarantee because they hold different views concerning the substance of
this contract: Is it in essence characterized as al-ijrah al al-ifz (hiring in return
for safekeeping) or al-ijrah al al-amal (hiring in return for a service rendered) or
ijrah mushtarakah (combined hiring). However, the current industry practice is that
the bank is liable to guarantee the pledged gold bar/jewellery in case of loss or damage
of the pledged gold. The banks liability to guarantee the gold based on wadah bi ajr
is explained in Takmilat Radd al-Mutr as follows:

:

...

.

.
Al-Khayr al-Raml said that al-Zayla explicitly stated, in the Book of
Ijrah, in the chapter on the liability of a custodian to guarantee when the
wadah is kept in exchange for a fee, that the custodian is indeed liable to
guarantee the wadah....They justify it by saying that safekeeping (if) in
this regard is an obligation upon the fee charger, as we presented earlier.
This entails that the fee changes the nature of wadah from being trust-
based to being guarantee-based (Al al-Dn, n.d., 8:470).
It is further argued that safekeeping (if) in this case is the primary objective (maqd)
of the contracting party and is not merely labour (amal) that the consignor pays for as
in the case of ajr mushtarak (a provider of a service to anyone willing to pay his fee):

( )
:
.

[In] his statement (which he attributes to al-Zayla), he justifies imposition
of a guarantee upon the fee charger in that safekeeping is obligatory on
him [because the consignor] seeks it in exchange for a counter-value
(Al al-Dn, n.d., 8:471).
However, according to Ab anfah, the ajr is not liable to guarantee because the
safekeeping fee is imposed in exchange for labour (amal), not for safekeeping of the
item (if), and that renders the contract similar to safekeeping without a fee (wadah
bi l ajr). His opinion is explained as follows:

:
.

Ab Hanfah says: The fee is in exchange for the service rendered and not
for the safekeeping and is hence similar to safekeeping (wadah) without
a fee (Al al-Dn, n.d., 8:470).
26
5.1.1 Analysis
In this structure, the bank offers a benevolent loan to the customer on the condition
that he pledges his/her gold bar, which is in the banks custody (wadah), based on
the principle of rahn al-wadah. However, the nature of a benevolent loan dictates
that the bank should not stipulate any condition that the customer will only receive
the qar asan upon agreeing to keep the gold bar with the bank under the wadah bi
ajr principle. Direct linkage between the wadah bi ajr contract and the qar asan
contract gives rise to the issue of qar jarra manfaah. This signifies that the bank can
only offer qar asan to the customer without stipulating a link to another contract.
Also, the percentage of profit rate should not be linked directly to the financing amount
or the value of the marhn in order to avoid the suspicion of rib in the form of a
loan that draws benefit (qar jarra manfaah). This structure is slightly different from
Structure 1 in terms of contract sequence. It does not begin with a loan contract because
the customer initially enters into the contract of wadah bi ajr and subsequently engages
in the contract of qar asan. As a result, the safekeeping fee can be imposed at any
profit margin without any linkage to the qar asan contract because the wadah bi ajr
contract is entered into prior to the execution of loan contract.
Another problem with this arrangement is the issue of conflict between the nature and
implications (muqta al-aqd) of rahn al-wadah and wadah bi ajr on the same
subject matter, i.e., the pledged gold bar. It is known that the rahn contract is a trust-
based contract in which the pledgee (murtahin) is a trustee (yad amnah) whereas,
according to some scholars, the contract of wadah bi ajr is a guarantee-based contract
(yad al-amnah). This is, in fact, the opinion used currently by the banks that adopt
this structure. Therefore, in case the marhn is missing or damaged, the bank as
murtahin is liable to guarantee. However, according the rahn contract, the bank is not
liable to guarantee. This problem can be resolved by preferring the juristic view that the
custodian as ajr is not held liable to guarantee even if it is stipulated in the contract.
In terms of income-generating capability, it is argued that this structure carries the
advantage that it starts with the contract of wadah bi ajr prior to execution of the qar
arrangement. This enables the bank to freely charge the safekeeping fee at any profit
rate it deems appropriate. However, this situation raises two Sharah issues:
(1) The safekeeping fee in this product is much higher than that for a safe deposit
box. This indicates that the real motive of the customer is to get a loan and
that of the bank is to generate income out of the loan given.
(2) Acceptance of an optional loan by the customer becomes a customary

practice that renders the loan conditional rather than optional. This reflects
that the substance of the whole arrangement is again a loan that draws benefit
because the contract of wadah bi ajr and qar become interlinked.
5.2 Structure 3: Combination of a Tawarruq Contract (through Commodity

Murbaah) and a Rahn Contract
In this structure, the financing facility is based on sale and purchase through a
commodity murbaah (tawarruq) arrangement. The modus operandi of this structure,
in which the debt contract is executed, requires the customer to collateralize his/her
gold as surety against his/her debt. The process flow of this structure begins with the
customer approaching an Islamic bank for financing. Subsequently, the bank enters
into a tawarruq transaction through a commodity murbaah arrangement. The bank
then requires the customer to pledge his/her gold as collateral (rahn). In the event of the
customers failure to meet his/her debt obligation, the bank will sell the gold at market
price and refund the surplus if the market price exceeds the financing amount. The
modus operandi of this structure is illustrated as follows:
3
Broker A 2 Bank Client
4
6 5
Broker B
28
(1) The client approaches the Islamic bank for cash financing.
(2) The bank buys a commodity from Broker A.
(3) The bank sells the commodity to the client at a mark-up price and the
customer pays the price on a deferred payment basis.
(4) The clients gold is pledged to the bank based on a rahn contract.
(5) The client appoints the bank as his/her agent to sell the commodity to a third
party.
(6) As an agent, the bank sells the commodity to Broker B.
(7) The cash will be credited into the clients account.
5.2.1 Analysis
This structure has noticeable advantages over the structures previously discussed. First,
the use of rahn in this structure is consistent with the purpose for which the rahn
contract was legislated by the Sharah, i.e., as a security contract. In this structure, the
rahn contract is not treated as profit-generating contract for the pledgee (murtahin);
rather, it remains a trust-based security contract. Thus, this structure does not try to
employ rahn for a purpose that contravenes the very nature of the rahn contract. As a
result, this structure is ultimately safe from the prohibited elements of bay wa salaf
or qar jarra manfaah that usually arise from effecting additional exchange contracts
like ijrah in combination with a rahn contract. In addition, there is no conflict between
the muqtaa al-aqd of the combined contracts.
This structure significantly enables the bank to generate a legetimate profit because it
does not involve qar as underlying contract for profit generating. In fact, the profit
is purely generated from a mark-up sale via the tawarruq arrangement that the parties
enter into. However, this structure is associated with the issue of organised tawarruq
(tawarruq munaam) which is controversial in terms of its legitemacy.
In principle, the majority of Sharah scholars approve the permissibility of the

classical tawarruq contract. However, they far from unanimous regarding the legality
of organised tawarruq (tawarruq munaam) as practiced in contemporary Islamic
finance. Those who allow it stipulate specific conditions to avoid prohibited elements
such as three-way nah. Contemporary jurists who disapprove the current practice of
organised tawarruq argue that it is a legal trick to circumvent the prohibition of rib.
The International Council of the Islamic FiqhAcademy of the OIC in its 19th session,
held in 2009, resolved:
( )

.

It isnot permissibleto execute either tawarruq (organised tawarruq and
reverse tawarruq) because in both of them there is collusion between the
financier and the customer, explicitly or implicitly, or based on customary
practice, to use a legal ruse to get immediate cash in exchange for a greater
amount of cash for which [the customer] is liable. It is, thus,rib (Majma
Fiqh, Resolution 179 (19/5).
5.3 Structure 4: Combination of Qar, Rahn and Hibah
The Islamic microcredit financing scheme offered by Muassasah Gadaian Islam

Terengganu (MGIT) is unique among other Islamic microcredit schemes available in
the current market. The MGIT offers the facility without charging its customer for the
safekeeping service. However, the customer may at his/her sole discretion give a gift
(hibah) to this institution as a token of appreciation for offering him the microcredit
financing. Hence, this structure is comprised of the contracts of qar asan, rahn and
hibah. On the maturity date, the customer has to repay only the financing amount
loaned to him without any stipulated excess. Since the giving of hibah is not stipulated
in the qard contract, the customer is not bound to pay any extra amount. Thus, in this
structure the customer is encouraged to give hibah to the Muassasah as a financial
contribution to increase the fund so that it can help other individuals in need.
5.3.1 Analysis
This structure is evidently free from any form of usury because the Muassasah does not
take any benefit from the loan given. In the event that the Muassasah receives a hibah
from its customer, the hibah is definitely not contractual because it is not stipulated in
30
the contract since its inception. Therefore, this kind of non-contractual benefit from a
benevolent loan is allowed and not deemed as qar jarra manfaah. However, looking
from the macro-perspective, the giving of hibah in this scheme should not become
commonly practiced to the extent that it is established as urf (customary practice).
That would make the hibah tantamount to a condition of the loan contract, which would
turn it into qar jarra manfaah, which is rib. This is based on the legal maxim:

A matter recognized by custom is like what is stipulated by
agreement.
From a business perspective, this structure is not commercially viable because of the
uncertainty in its income-generating capability. This is owing to the status of hibah as
a charitable contract. As a result, the return is not certain as the customer may or may
not give hibah to the institution. Due to the lack of commercial viability, the Islamic
microcredit facility based on this structure is not popular among commercial financial
institutions like Islamic banks and Islamic pawnshops. Thus, this structure is practical
and best suited to government agencies and government-linked companies as well as
non-profit organizations and social institutions whose duty is mainly to fulfil social
responsibility. MGIT is an example of such an institution established with the objective
of safeguarding the welfare of the needy and the poor.
6. SECTION 5: PROPOSED STRUCTURE FOR AN ISLAMIC

This section highlights the structure proposed by the research team as an alternative
to the current structure. This structure is proposed by taking into account the Sharah
issues arising from the current structure, particularly the issue of the safekeeping
charge. As this structure is primarily intended to resolve Sharah issues in the current
structure, it may not be able to accommodate all the unique features of the current
structure. The proposed structure involves the use of bay al-arf (contract of currency
exchange) as the underlying Sharah contract for the facility. Two currency sales are
executed separately and independently by the transacting parties. The modus operandi
of this structure is illustrated in the following diagram:
arf Contract 1
Customer Bank
(1) The customer enters into a arf contract with the bank whereby he/she sells
50 gm (RM200/1gm) of gold bar/jewellery worth RM 10,000 at RM 7,000 to
the bank on a spot basis. Both parties take possession of the transacted subject
matter in the contract session before leaving each other. In this structure, both
counter-values 1) the gold bar/jewellery and 2) the moneyare treated as
currency and, hence, the rules of currency sale shall take effect accordingly.
The purpose for which the bank purchases the gold bar/jewellery at RM7,000,
which is 30% lower than its market price, is to mitigate the risk of gold
price fluctuation, particularly when the gold price decreases. Furthermore,
assuming that there is no significant change in the golds market price, the
bank can still sell the gold to a jewellery shop at RM8,000, which is still
higher than the purchase price. This is because it is a common practice of
most jewellery shops in Malaysia to buy gold/jewellery from customers at
15-25% lower than the market price of the gold.13
(2) The bank pays RM7,000 to the customer in cash during the execution of the
arf contract and takes possession of the purchased gold bar/jewellery.
(3) The bank, based on the principle of a binding unilateral promise (wad mulzim
min arf wid), undertakes:
(a) to sell the same weight of gold/jewellery (up to a maximum of 50 gm) to the
customer during a period starting from the sixth (6) month until the end of the
eighth (8) month. However, the bank is not obliged to sell the same physical
gold/jewellery bought in the first arf contract. As the gold/jewellery is
This information is based on conversations with a few goldsmiths and jewellers in the Klang Valley.
13
32
completely owned by the bank, the bank assumes free disposal of the gold/
jewellery.
(b) to sell the gold/jewellery at 75% of the current market price (25% discount)
at the time of the sale. To realize this, the bank will enter into another arf
contract with the customer that is totally separate and independent from the
first arf contract executed earlier.
The execution of the second arf contractual arrangement is illustrated in the following
diagram:
arf Contract 2:
Customer Bank
(1) The Bank sells the gold bar/jewellery to the customer between the sixth (6)
month and the eighth (8) month at 75% of the market price. Assuming, for
purposes of calculation, that there is no change in golds current market price
(RM200/1gm), the bank sells 50 gm of gold to the customer at RM7,500.
In this case, the bank generates RM500 (7.14%) profit in 6 to 8 months, as
demonstrated in the following calculation:
Banks selling price (x) = 75% x current gold price x gold weight
x = 75% x RM200 x 50 gm = RM7,500
Bank's profit(y) = Selling price - purchase price

y = RM7,500 RM7,000 = RM500
Note: x is the banks selling price and y is the banks profit.

(2) The customer pays the price of the gold bar/jewellery (RM7,500) on a spot
basis in the contract session. However, the price concluded in the contract
could be lower than RM7,500, which is subject to the agreement of both
parties. If the period of 8 months has elapsed and the customer does not
undertake the purchase of the gold bar within that period, the bank may offer
the gold bar/jewellery for purchase to other customers at the market price.
In a situation where the value of the 50 gm gold increases to RM10,500
(RM205/1gm), the highest selling price at which the bank can sell the gold to
the customer is RM7,875. However, the bank at its sole discretion may sell it
at lower price. This can be calculated as follows:
x = 75% x RM205 x 50 gm
= RM 7,875
y = RM 7,875-RM 7000
= RM 875
Note: x is the banks selling price and y is the profit generated by the bank.
These scenarios seem to give an advantage to the bank by easily generating

profit out of the transaction. However, in actual fact, the profit is not guaranteed
because the gold price fluctuates, thus the bank is inevitably exposed to currency
risk. Assuming that the gold price decreases to RM180/1gm during the sixth
(6) month to the eighth (8) month, the new current market value of 50 gm gold
would be RM9,000, the highest price that the bank can sell to the customer is
RM6,750. Instead of generating profit, the bank suffers a loss of RM250 while
the customer gains the surplus.
x = 75% x RM185 x 50 gm
= RM 6,750
y = RM 6,750 RM 7000
= RM 250
Note: x is the selling price while y is the amount of loss that the bank suffers.
34
6.1 Important Features of the Structure
(1) The underlying principle used in this structure is the contract of currency
exchange (bay al-arf).
(2) Both gold bars and jewellery are treated as currency. Hence, both are subject
to the rules of currency exchange.
(3) The bank undertakes to sell the gold/jewellery at 75% of the market price
during a period starting from the sixth (6) month until the end of the eighth
(8) month.
(4) The bank is only liable to sell the amount of gold of the same weight and
quality. In other words, the bank is not obligated to sell the exact same
physical gold/jewellery.
(5) Despite that, the bank may sell back the same physical gold/jewellery at its
sole discretion.
(6) The bank has full right and freedom to use the gold/jewellery.
(7) The customer is not bound to purchase the gold/jewellery from the bank.
(8) This model is free from the qar concept because it is a straightforward arf
contract.
(9) There is no issue regarding the wad as it is a unilateral binding promise,

which is allowed by the majority of scholars.
6.2 Analysis
This structure meets most of the unique features of the current structure of rahn-based
Islamic microcredit facility, which include its capability for income generation, easy
access by the customer and fast approval. However, some Sharah issues may be raised
about the modus operandi of this structure. These Sharah issues will be discussed
extensively to ensure that this structure is totally Sharah compliant and free from
prohibited elements.
6.2.1 Bay al-Waf
Some may argue that the substance of bay al-waf is embedded in this structure
despite its being structured as bay al-arf. This is because the gold bar/jewellery that
was sold will be repurchased by the seller (customer) within a specified period of
time (8 months), after which the bank may sell it to other parties or dispose of it. The
question raised is whether or not these paired contracts of currency exchange comprise
bay al-waf. This study establishes that bay al-waf differs from this structure in
many ways and, hence, is free from the prohibited elements contained in bay al-waf.
For instance, bay al-waf can only be effected on a subject matter other than a debt or
currency. The subject matter of bay al-arf, on the other hand, is confined to currency
such as gold, silver, paper money, etc. In essence, the pledged/sold item in bay al-
waf is a commodity and not a monetary item or currency like gold and silver. This can
be understood from the scholars interpretation of bay al-waf as follows:
(a) Ibn ajar al-Haytam says:

) :(
.

Regarding bay al-uhdah [i.e., bay al-waf]: its form is that the debtor
says to the creditor: I sellfor examplethis house to you for the debt
I owe you, and once I settle the debt that I owe you, the house will be
transferred back to me (Ibn ajar al-aytam, 1983, 4:296).
(b) Al-Zayla says:

.

Its form is that the seller says to the buyer, I sell this commodity to you
for the debt I owe you, and the commodity will be mine once I pay the
debt (al-Zayla 1313H, 5:183).
The above definitions characterize bay al-waf as a debt arrangement because the
price of the repurchased item is as good as a debt established as the liability of the
36
seller (repurchaser). It is generally known that debt (dayn) in financial transactions

must be something that admits deferment in delivery like currency. However, the issue
at hand is that the gold bar/jewellery is currency, not a commodity, and cannot thus be
transacted using bay al-waf because the price in bay al-waf, which is also currency,
is deferred to a specified time in the future. This is clearly impermissible because the
exchange of a gold bar for a sum of money must be executed on a spot basis, i.e., both
counter-values must be delivered in the contract session. This is the essential rule of
a arf contract, and that makes it completely different from the substance of bay al-
waf; thus, each contract has its own separate rulings. Al-Zaylas definition of bay
al-waf emphasizes that the transacted commodity is ayn and not dayn. Ayn must be
something that admits tayn (particularisation) while dayn is something that does not
admit tayn. Scholars say about dayn :

It does not become particularized by specification.
Al-Ksn explains:

.
To clarify: the capital can be either ayn, which admits specification,
or dayn, which does not admit specification (al-Ksn, 1406 AH,
5:204).
In essence, it can be said that a gold bar or jewellery is treated as dayn since they are
currency, while in bay al-waf, the transacted asset is a commodity that falls under
the category of ayn as opposed to dayn. Hence, what is intended in bay al-waf
is the repurchase of the same ayn (commodity), which is not the case in a currency
exchange because currency is not intended for its corpus but, rather, for its value, i.e.,
its purchasing power. However, this situation is different from the contract of arf
muayyan bi mawf in which tayn is allowed, but its essential requirement is not
fulfilled in bay al-waf because its price is deferred.
(c) Ibn bidn says:

.

[Bay al-waf] is an obedient sale in the sense that the creditor orders
the debtor to sell his housefor examplefor the debt [he owes], and
[the debtor] obeys him, therefore the meaning is a sale of compliance
(Ibn bidn, 1412 AH, 5:276).
The above definition indicates that bay al-waf begins with debt creation through the
principle of qar whereby the seller is characterized as the borrower and the buyer is
characterized as the lender. Then the lender requires the borrower to sell his house to
him, with the payment being clearance of the debt (dayn) established in his liability.
It is important to note that this arrangement also involves bay wa shar and bay wa
salaf, which are prohibited by the Sharah, because the loan is given on the condition
that the debtor (seller) must sell his asset to the creditor (buyer).
The house in this case is sold on a deferred-payment basis because its price will be paid
later when the seller intends to repurchase his house. However, if the sold item is not
a house but a currency worth, say, USD10,000 with the price deferred to a specified
future time, the substance of this arrangement is actually a pure arf contract and, thus,
both counter-values must be delivered on the spot. Therefore, bay al-waf cannot be
executed on currency because the exchange of a currency for another currency must
take the ruling of bay al-arf. Ibn bidn also says:

.

[Bay al-waf] is that the seller says to the buyer: I sell this corpus to
you for the debt that I owe you on the condition that I will repossess it as
soon as I pay the debt(Ibn Abidn, 1412 AH, 5:276).
The word ayn in the above statement connotes something that is existent and present
(ir), which is the opposite of dayn (debt or something which is deferred). This
signifies that if the word ayn in the above interpretation can refer to currency, as in the
38
case of arf al-muayyan, its price should be paid on the spot if it is to be exchanged
for another currency because this transaction is a pure arf contract that is specifically
called arf al-muayyan bi mawf. Hence, it requires spot delivery of both currencies
in the contract session. However, this is not the case of bay al-waf because the
phrase indicates that the price of the purchased currency is delayed. Jurists
stipulate that currency as dayn does not admit tayn (particularisation), which means
that the contract should not specify that it be paid with particular coins or notes (for
example, to specify the serial numbers on the notes) except in the case of arf muayyan
bi muayyan. They argue that specification of the corpus of a currency disallows its
deferment. Al-Sarakhs states:

.

Money can only be legally possessed in an exchange contract as the
price [of the subject matter], and the price is what is established in ones
liability, as al-Farr says. If tayn is acceptable, then the nominal price
established in ones liability is impossible. This contradicts the very
essence of the contract and, hence, renders the contract void (al-Sarakhs,
1993, 14:16).
This text signifies that anything, like gold or silver, that does not admit tayn is not
considered the subject of a normal sale because what is sold in a normal sale must be
something that can be specified, as mentioned by al-Ksn:

What is sold in a normal sale is something that can be particularised while
silver and gold are not particularised in exchange contracts; therefore,
they are not what is sold in a normal sale (al-Ksn, 1986, 5:212).
In conclusion, the previous discussion maintains that what is sold in bay al-waf is a
commodity and not a currency. In this structure, the bank stipulates a condition that it
will not necessarily sell the same physical gold bar/jewellery to the customer. In fact,
the bank assumes the absolute right to sell any gold bar/jewellery of the same weight to
the customer in the second arf contract. However, the bank, at its sole discretion, may
sell the same physical gold bar/jewellery. This is to comply with the rule of currency
sales that does not admit any particularisation (tayn) of the subject matter. As a result,
the substance of bay al-waf is totally absent because the corpus of the transacted
subject matter in bay al-waf is specified, which implies that both the weight of the
asset and its corpus are intended by the buyer.
The above arguments indicate that this structure is free from the substance of bay al-
waf. However, it is also worthwhile to discuss the prohibited elements (mart)
embedded in bay al-waf and determine whether they are present or absent in this
structure. This will further prove that this structure is not similar to bay al-waf in its
substance and form.
6.2.1.1 A Loan That Draws Benefit (Qar Jarra Manfaah)
In bay al-waf, the price the seller pays to repurchase his asset is characterized as
a loan payable during the repurchase of the asset. This loan draws benefit because
the buyer can use the asset before it is repurchased by the seller. However, this is
not the case with the proposed structure because it is a pure arf contract in which a
counter-value is exchanged for another counter-value. Since this arrangement cannot
be characterized as a loan, it cannot be a loan that benefits the lender. Moreover, it
comprises no benefit except for a counter-value.
6.2.1.2 Two Sales in One Deal (Bayatayn f Bayah)
The classical scholars put forward various interpretations for what is meant by two
sales in one deal. However, what matters most is the ultimate Sharah objective in
prohibiting this arrangement. This objective can be traceable to the end result of the
deal itself, such as rib and gharar. Jurists assert that this deal is primarily prohibited
for two essential reasons; 1) blocking the means to rib; and 2) avoiding excessive
gharar in the price. These two end results of the above deal are absent in this structure
because there is no unjustified increment or excess without counter-value that can be
considered rib. In addition, the price of the transacted currencies in both arf contracts
is fixed and mutually agreed by the contracting parties during the contract session and,
hence, the element of gharar is totally absent.
40
6.2.2 Making a Contract of Currency Exchange Conditional on another Contract

of Currency Exchange (Ishtir Aqd arf f Aqd arf)
This study maintains that the proposed structure is free from the above element because
the second arf contract is not conditional on the first arf contract. What is prohibited
is stipulation of a condition in the first sale contract that binds both contracting parties
to execute another sale contract. In contrast, this structure adopts a binding unilateral
promise that binds only the promisor to sell something. Moreover, the obligation is
not to sell the same physical gold bar/jewellery but, rather, to sell a gold bar or
jewellery equivalent to a certain percentage of the first golds market price. However,
it may be argued that consistent fulfilment of such a promise by the bank amounts to
customary execution of the second arf contract on account of the first arf contract,
which indicates that the effect of the binding promise is equivalent to stipulation. This
argument can be refuted on the following basis:
(1) It may happen that the customer will not repurchase it after the maturity period
of eight months, after which the bank may dispose of it. If that happens, there
will be no second arf contract. This signifies that the binding effect of the
wad mulzim may not necessarily become a customary practice. Moreover,
the actual price of the transacted currency for the second arf contract is not
finalised in the first arf contract because the price is totally dependent on the
market price during the execution of the second arf contract. What is agreed
in the promise is only a certain percentage of the market price of gold at the
time of the second arf contract.
(2) Some jurists assert that in a arf contract between a moneychanger and his
customer, the custom of buying and reselling the currency is considered a
specific custom (dah khah), which cannot be treated like a stipulated
condition (mashr). Al-Nawaw says:
.

The renowned scholars of the Shfi School hold the view that specific
custom is not considered similar to a stipulated condition (al-Nawaw,
n.d., 10:149).
Al-Mward says:

:

.

Al-Shfi (may Allah have mercy upon him) says: There is nothing wrong
in a person buying dirhams from a moneychanger and selling them to him
after having possessed them, at a lower or higher price, whether or not this
is a customary practice (al-Mward, 1419 AH, 5:145).
However, the question raised is whether or not the practice of this structure can be
considered a specific custom.
6.2.3 Selling with a Condition of Cancellation (al-Bay bi Shar al-Faskh)
This element is also absent in the proposed structure because the first arf contract
is completely concluded, enforceable and binding. Hence, both parties are bound to
its legal effects such as full ownership of the transacted gold and currency and free
disposal of them without restriction. The execution of the second arf contract is not
pending on the cancellation of the first arf contract.
6.2.4 Conflict in Muqta al-Aqd
Some may argue that this structure contradicts the nature of the arf contract because the
banks right to dispose of the gold bar/jewellery is restricted by the binding unilateral
promise incorporated in this arrangement. However, it is important to note that what
the bank promises to do is sell any gold bar/jewellery at 75% of the golds market price
during the second arf transaction. The bank is not obliged to sell the same gold bar/
jewellery; it is free to sell any gold bar/jewellery at the price of the same weight of
gold. Therefore, it is obvious that the banks right to dispose of the gold bar/jewellery
is not restricted because the bank can freely dispose of the purchased gold in any way.
However, the bank, at its sole discretion, may sell the same gold bar/jewellery to the
customer. It is also worth noting that in this case, the sale price in the wad is not final
because the price is 75% of the market price. The market price for 1gm of gold may
fluctuate over time and, hence, the sale price of the gold when the wad is given may
be different from its price in the second arf contract. Thus, the actual sale price is only
42
fixed and considered final during the execution of the second arf contract since it is
marked to market.
6.2.5 Bay al-nah
This structure is free from the substance of nah because it is distinct from nah in the
following aspects:
(1) Increment (iydah): In an nah contract, the increment is purely a counter-

value for deferment (al-ajal) whereas the increment of 5% in the arf
arrangement is not an independent counter-value for deferment; rather, it is
an integral part of the price of the transacted currency. Hence, increment in
this case is considered permissible.
(2) Two transactions in one deal: The buyback of the same commodity in an
nah contract takes place immediately after the execution of the first sale
contract. The first sale contract is usually a spot sale contract after which
the deferred sale contract is executed. The proposed structure is free from
this element because the second arf contract is executed independently
in a different contract session. Its enforceability is not pending on the first
arf contract because the customer may or may not buy back the gold or its
equivalent value.
(3) The parties intent to acquire the commodity/currency: In an nah

contract, the transacted commodity is not really intended by the transacting
parties. In fact, what is primarily intended is cash now for more cash later,
which renders the contract fictitious. In contrast, the arf arrangement is real
and not fictitious because both counter-values are solely intended by the
contracting parties.
6.2.6 Rib al-Qar
The proposed structure is free from the substance of rib al-qar, based on the following
arguments:
(1) In rib al-qar, the increment is purely transacted for deferment and is not
exchanged for any counter-value. The borrower is obliged to pay the principle
loan plus increment without receiving any counter-value. In this case, it is

known that time cannot be transacted for money directly and independently.
It can only be exchanged for money when it is an integral part of the price of
the contracted subject matter, as in this arf arrangement.
(2) The increment in the arf arrangement is a counter-value for another currency
transacted in the arf contract. When that is the case, it is not necessary to
exchange the counter-values at par. Hence, time or deferment in this case is
not exchanged for money directly or independently. In fact, it is transacted as
an integral part of the price of the currency.
The above arguments maintain that this structure has nothing to do with bay al-waf
because it is a pure arf transaction in both its form and substance. The end result of this
structure is also different from that of bay al-waf in many ways. Hence, this structure
should take the same rulings as a arf contract, including its fundamental requirements
and essential conditions, such as spot delivery of both counter-values in the contract
session. Moreover, this structure is also free from other prohibited elements such as the
element of making a sale contract conditional on another sale contract, two sales in one
deal and rib. However, it is worth noting that in the current structure of the Islamic
microcredit scheme, the client pledges his/her gold/jewellery on the premise that the
item is treated as collateral while its full ownership legally remains with him/her. Thus,
this proposed structure may not be attractive from the consumers point of view if
the pledged item is jewellery having sentimental value. This is because the ownership
of jewellery is completely transferred to the bank via the execution of the currency
exchange contract, which allows the bank to freely dispose of it. In spite of the lack of
guarantee of repossession of the same corpus of the gold/jewellery, this product still has
unique features that make it commercially viable.
This is based on the fact that there is no clause in any way that the bank will not sell
the same jewellery to the client. Thus, there is a possibility that the bank (at its absolute
discretion) may sell it back to the original owner. It is also argued that the customer
may repossess his gold/jewellery at a higher price in case the gold price increases
significantly, in which case the bank makes a lucrative profit. It can be counter-argued
that the proposed structure is a sale-based contract in which both parties have to take
some risk. In the proposed arf structure, the customer and the bank are exposed to
the risk of price fluctuation; the bank may suffer loss in case the gold price drops. In
contrast, the current structure of microcredit facility enables the bank to enjoy a fixed
44
profit rate which is secured and guaranteed without taking risk. For example, the bank
can dispose of the gold at market value in the event of customers failure to meet his/
her debt obligation. Thus, the new proposed structure is better and fairer as it fulfils
the spirit of risk bearing that justifies profit. Even though the bank attempts to mitigate
the risk, it may happen that the customer can also gain advantage when the gold price
decreases significantly during the repurchase of the gold.
In addition, the arf structure offers a better option for an individual to get cash with the
possibility of repossessing his/her jewellery. Conversely, the customer has no chance of
repossessing his jewellery when selling his/her gold to jewellers or goldsmiths. Firstly,
the customers chances of buying back his/her gold after a few months is very low
because the jeweller definitely sells the gold as quickly as possible to any other clients
who are interested to purchase it. Secondly, the customer will suffer loss when the
jewellers buy his/her gold at 25%-15% lower than the market price (75%-85% of the
market price). Should the customer change his/her mind on the following day and want
the same gold back, he/she will have to pay 100% of the market price to repurchase
it, which technically signifies that he loses 15%-25%. However, this scenario does not
happen in the arf structure. Even though the customer sells the gold to the bank at 70%
of the market price, the bank has given wad to sell the gold/jewellery to the customer
at 75% of the market price between the 6th and the 8th month. Thus, assuming that there
is no significant change in the current gold price, the bank enjoys only 5% profit, which
is much lower than what would be enjoyed by goldsmiths and jewellers (15%-25%). In
other words, the customer who opts for the arf structure enjoys a cheaper cost than
he would from selling his gold to goldsmiths or jewellers.
7. CONCLUSION
In conclusion, it is acknowledged that the current structures of rahn-based Islamic

microcredit facility (Structure 1 and Structure 2) require immediate enhancement,
particularly with regard to Sharah compliance. The current procedures need to
be legally restructured in accordance with Sharah principles in both their form
and substance. This is because there are a few Sharah issues related to the current
structures and their implementation, such as the issues of rib and muqta al-aqd.
This study resolves that the proposed structure for the Islamic microcredit scheme
should have two essential features namely; 1) Sharah compliance and 2) commercial
viability. Since most of the structures presented in this study involve a combination of
different financial contracts, the specific parameters for contract combining must be
totally complied with to avoid the illegal consequences of combined contracts such as
rib and injustice. This study comes to the conclusion that the proposed structure based
on a arf contract meets most, though not all, of the unique features of the rahn-based
microcredit facility. Thus, it is recommended as a viable alternative to the existing
structure. However, it is undeniable that the proposed structure needs to be further
evaluated by Sharah scholars and practitioners to ensure that it does not violate
any Sharah principle in both its forms and substance and that it is marketable and
commercially viable.
46
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Ar-Rahn Serantau 2002/2004. YPEIM: Kuala Lumpur.
Abibullah Shamsuddin. (2005). Skim al-Rahn: Satu Model Mikro Kredit di Malaysia.
Kompilasi Prosiding Konvensyen Ar-Rahn Serantau 2002/2004. YPEIM: Kuala
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Abu Dwd. (n.d.). Sunan Ab Dwd. Beirut: Al-Maktabah al-Ariyyah.
Al-Bayhaq. (1424 AH). Al-Sunan al-Kubr. Beirut: Dr al-Kutub al-Ilmiyyah.
Al-Bj. (n.d.). Al-Muntaq: Shar al-Muwatta. Cairo: Dr al-Kitb al-Islm.
Al-Bujayrm. (1369 AH). shiyah al-Bujayrm al Shar al-Manhaj. Mabaah al-

alabi.
Al-Mward. (1419 AH). Al-w al-Kabr. Beirut: Dr al-Kutub al-Ilmiyyah.
Al-Nas. (1406 AH). Sunan al-Nas. Allepo: Maktab al-Mabt al-Islmiyyah.
Al-Nawaw. (n.d.). Al-Majm Shar al-Muhadhdhab. Beirut: Dr al-Marifah.
Al-Qarf. (n.d.). Al-Furq. Beirut: lam al-Kutub.
Al-ann. (n.d.). Al-Tj al-Mudhhab. Maktabah al-Yaman.
Al-Sarakhs, Ab Bakr Muammad ibn Amad. (1414 AH). Al-Mabst. Beirut: Dr

al- Marifah.
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Al-Tirmidh, Ab s. (1395 AH). Sunan al-Tirmidh. Egypt: Maktabah wa Matbaah
Mustafa al-Halabi.
Al-Zayla. (1313 AH). Tabyn al-aqiq Shar Kanz al-Daqiq. Cairo: al-Mabaah
al-Kubr al-Amriyyah.
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Asmadi Mohamed Naim. (2004). Sistem Gadaian Islam. Islmiyyt 26 (2).
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al-Turth al-Arab.
Ibn ajar al-Asqaln. (1379 AH). Fat al-Br: Shar a al-Bukhr. Beirut: Dr
al-Marifah.
Ibn ajar al-Asqaln. (1416 AH). Talkh al-abr. Cairo: Muassasat Qurubah.
Ibn azm. (n.d.). Al-Muall. Beirut: Dr al-Fikr.
Ibn al-Arab. (1424 AH). Akm al-Qurn. Beirut: Dr al-Kutub al-Ilmiyyah.
Ibn al-Mulaqqin. (1425 AH). Al-Badr al-Munr. Riyadh: Dr al-Hijrah.
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Ibn Taymiyyah. (1416 AH). Majm al-Fatw. Saudi Arabia: Majma al-Malik Fahd
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al-Rahnu: Satu Penilaian Semula, Jurnal Fiqh No. 5.
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Websites
http://www.agrobank.com.my
http:// www.bankrakyat.com.my
http://www.britannica.com
http://www.kfh.com.my
http://www.maybankislamic.com.my
http://www.nccc.org.my
http://www.rhb.com.my
http://www.yapeim.net.my/
www.isra.my
International Shariah Research Academy for Islamic Finance

ISRA @ INCEIF (718736-K)
Lorong Universiti A
59100 Kuala Lumpur
Tel : + 603 7651 4200

Fax : + 603 7651 4242
Email : info@isra.my

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03 Critical Appraisal of Rahn-Based Islamic Microcredit Facility

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RESEARCH PAPER (No: 45/2012)

DR. MOHAMED FAIROOZ ABDUL KHIR

Dr. Mohamed Fairooz Abdul Khir

The rahn-based Islamic microcredit facility is currently popular among Islamic

Keywords: wadah yad al-amnah, arf, safekeeping fee, microcredit facility

The rahn-based Islamic microcredit facility is an increasingly popular financing

(2) To jurisprudentially analyze various structures of Islamic microcredit facility

(3) To propose a new structure of Islamic microcredit facility as an alternative to

4 delineates various structures of Islamic microcredit facility, including the widely

2. SECTION 1: RESEARCH METHODOLOGY

3. SECTION 2: OPERATION OF THE RAHN-BASED ISLAMIC

The current rahn-based Islamic microcredit facility provided by Islamic pawnbroking

(3) The bank grants qar (loan) to the customer.

3.1 Unique Features of the Rahn-Based Islamic Microcredit Product

The rahn-based Islamic microcredit facility is currently gaining popularity among

(i) Security and surety against credit

(ii) Lucrative business

(iii) Quick approval

(iv) Rollover functionality

(v) Cheaper safekeeping fee

(vi) Guarantee of getting back the pledged jewellery

3.2 Quality of Gold and Assay Procedures

In general, an Islamic pawnbroking institution accepts jewellery made of gold (that

3.3 The Safekeeping Fee and Margin of Financing

RHB Islamic Bank** RM0.70-0.80 70%-75%

Agro Bank*** RM0.50-0.75 50%-70%

Margin of Financing Safekeeping Fee for Every RM100 Marhn Value

< RM1000 RM0.65 per RM100 of marhn value

> RM1000 RM0.75 per RM100 of marhn value

Table 1.4: Monthly Basis

Margin of Financing Safekeeping Fee on Monthly Basis

0% (No financing) RM0.10 per RM100 of marhn value

50% and below RM0.75 per RM100 of marhn value

>50% up to 60% RM0.60 per RM100 of marhn value

>60% up to 70% RM0.75 per RM100 of marhn value

3.3.1 Calculation of the Safekeeping Fee on a Monthly Basis9

= RM420 @ RM70 per month

Safekeeping fee = RM0.70 x RM10,000 x 7 months

3.3.2 Calculation of the Safekeeping Fee on a Daily Basis

Computation of the safekeeping fee on a daily basis is illustrated as follows:

Safekeeping fee = RM0.75 x RM10,000 x 12 x 181days

Safekeeping fee = RM0.75 x RM10,000 x 12 x 195 days

3.4 The Redemption and Auction Process10

4. SECTION 3: SHARAH ISSUES RELATED TO THE CURRENT

Structure 1: Combination of qar, rahn and wadah yad al-amnah.

Pawn Broker Customer

Islamic microcredit facility.

(b) The Islamic pawnbroking institution provides financing to the customer.

4.1 The Issue of the Safekeeping Fee (Storage Charge)

4.1.1 The Issue of Bay Wa Salaf (Sale Contract with Loan)

Ibn al-Arab elaborated on the same point as follows:

4.3 The Issue of Guarantee (Yad amn) in a Wadah Contract.

As indicated in the previous discussion, this structure is a combination of a rahn

Al-Sarakhs explains the above situation by saying:

4.4 The Issue of Bay al-Waf

Contract Objective Contractual Impact

The pledged item will be returned

5. SECTION 4: OTHER STRUCTURES FOR RAHN-BASED

5.1 Structure 2: Combination of Wadah bi Ajr, Qar and Rahn al-Wadah

The above structure implies a combination of three different financial contracts:

(2) Acceptance of an optional loan by the customer becomes a customary

5.2 Structure 3: Combination of a Tawarruq Contract (through Commodity

(2) The bank buys a commodity from Broker A.