Essay: Islamic finance

Introduction:
Islamic financial activity has become global, Islamic finance is one of the most promising models, after years without significant advances in this area. The financing needs, the weakness of the current system, will encourage most countries to introduce this type of financing.
Islamic finance aims at solidarity and cooperation between economic agents by putting capital and work on an equal footing. It is based on the sharing of profits and losses between the lender and the lessee, in other words, an economic justice in the contributions and the rewards of each of the two parties, conversely, in the classic banking system, the creditor derives an amount pre-established that represent the interest. In this case, by the loan agreement, the capital and labour belong to only one person who is the taker who handles them at his own risk, one can therefore wonder if there really is a justice from the economic point of view in this kind of proceeds. Because if the capital comes to deteriorate, it is the taker who will assume full responsibility for it. Beyond this constellation, Islamic finance prevents the repercussions of interest rates on the structure of society, Riba is challenged as it promotes social disparities by channelling wealth in one direction. In addition to the absence of Riba in the financial system, it is possible to establish justice between the holders of funds and those who intervene through their work. The disadvantage of recognizing a capital surplus in relation to work is not only of a moral nature. In fact, this kind of consideration leads us to belittle the values of man and to enhance the value of matter.
In Islam only work and human effort deserve a material reward, money must not only produce money, but primarily create real wealth unless it is the product of actual work and effort. The Islamic bank is also committed to achieving a fair distribution of resources and wealth, so that the poor can have access to financing channels. Today, a lot of thought is being given to how to stimulate business creation. Countries are trying to find ways of financing to make sure that entrepreneurs are less indebted. In this case, the Islamic banking will be a powerful and an ideal solution to motivate entrepreneurs. Since the credits granted translate into real physical assets, the problem of inflationary money creation will no longer arise. Indeed, the intervention of Islamic banks cannot be inflationary because they are based on participation. Also the redistribution of wealth through Zakat will allow households to be less willing to own the means of spending, which will increase their purchasing power, which results in increasing demand and generating economic development.
Islamic banks have a special nature in all their financing and investment activities. This nature is based on the principles and principles of Islamic Sharia, which are based on an integrated and harmonized set of methods, methods and rules that are consistent with the provisions of the supreme legislation.
Islamic finance intervenes on two levels: the participatory equity contribution, invested directly in production channels, and banking facilities to consolidate its tools. Thus, these financing techniques, considered more solidary, combined with the skills, capacities and know-how of credit institutions, allows companies to finance themselves with stable complementary resources, mobilized directly and exclusively to support the growth of the economy. Companies can benefit from this momentum of dynamic partnership and the liquidity generated by the support put in place. The mobilization of funds is essential to obtain recurring profitability and profits. This can help further develop a wide range of sectors, including, for example, the economies of knowledge and technologies needed to develop qualified and apt human capital.
A real assertion is that this dynamic does consolidate and accelerate the pace of growth of the productive economy. To do this, Islamic products, in addition to deposit accounts, can adapt to the needs of the economy and investors given the developments in the financial engineering of products like: Mudaraba (profit sharing or trust financing), Murabaha (mark up financing), Ijara (leasing), Istisna, Qard Hassan (benevolent loans), Ar Rahnu (Pawn broking) and many more. As Islamic finance products raise and evolve more, customer believe and trust also grow together which make Islamic products in the limelight right now.
Currently, Islamic finance is no longer realm in the Muslim world but it is an international phenomenon with international interest. It has also demonstrated that it can match the offerings of conventional banks. In fact, conventional banks presently have emerge as partners to many Islamic institution worldwide.
Fundamentals & Principles of Islamic Finance
IFIs/IBs/Markets must ensure all their operation & business transactions are Shariah Compliant.
The principles of “halal ” (permissible) and “haram” (prohibited) provide as a moral filter for actions taken by an individual, organization & society.
Prohibiting usury (riba’), excessive ambiguity (gharar) and gambling (maysir) & promotes maslahah by protecting the interest and benefits of all parties in the market.
Why Shariah Compliance?
Because…
It is the foundation & fundamental basis and requirement for Islamic Financial System.
It distinguishes Islamic financial system from Conventional financial system.
It ensures acceptance, validity and enforceability of banking operation contracts according to Shariah principles and Shariah point of view.
It creates confidence to the general public and the financial markets on the credibility of Islamic banking & finance operation.
The importance of Maqasid Al-Shariah:
It is the ultimate goal of the Islamic financial system
It should be taken into consideration in structuring any financial product
To promote public benefit and to prevent social evils or corruption.
It is the reason behind deriving new rulings from the Shariah, in order to meet society’s changing needs and solve contemporary problems related to business endeavors
Literatures defining Maqasid Al-Shariah:
According to Ibn Ashur, Maqasid are used to preserve the social order of the community and to ensure its healthy progress by promoting the well-being and virtue of the human being.
Maqasid al shariah means the purpose of Islamic ruling or the wisdom behind shariah’s command. Every single command contains an objective. (Mashhad al allaf, 2003)
The utmost objectives of Shariah is to establish justice, eliminate prejudice and alleviate hardship.
According to Al-Ghazali the concept of Maqasid Al-Shariah is to serve the interests of all humankind and to save them from harm. He emphasized the necessity of safeguarding the 5 objectives:
Being the vicegerent of Allah on this earth, a Muslim is supposed to roam in the land, explore its resources, and use them for his benefit. This is a responsibility mentioned several times in Quran, even immediately after mentioning the obligation of the prayer.
Classification of Maqasid:
Maqasid can be divided into 3 categories:
The necessities or essentials (daruriyyat).
The needs (hajiyyat).
The complementary (tahsiniyyat).
Maqasid Can be classified into two classes:
Macro Maqasid:
The interest or benefits related to the overall well-being and benefit of the economic system, which has always been the prime objective of Islamic economics for long. (Al-Mubarak & Osmani, 2010)
Micro Maqasid:
The interest or benefit related to a specific small case relating to certain individual financial transactions. (Al-Mubarak & Osmani, 2010)
Noted that the objectives of the Shari’ah in financial transactions refer to the overall goals and meaning that the Shari’ah aims at achieving from its rulings.
These objectives are not confined to one type of financial transaction but include all aspects of financial activities and human life in general. (Monjur E Elahi, 2000)
The major objectives (Maqasid) of shariah in Islamic deposit and investment account are clear through the following:
The prohibition of Interest and uncertainty in these accounts
The Underlying contracts are in compliance with the principles of shariah
Deposit account (Ex: Qard or Wadia)
Investment account (Ex: Musharakah, Mudarabah and Wakalah)
Maqasid Al-Shariah
The Islamic banks must play an important role in providing the Islamic based products and services in order towards the achievement of Maqasid-al-Shariah in the economic system.
Maqasid al-Shariah, or the objectives of Islamic Law, is an important and yet somewhat neglected science of the Shariah. According to Imam al-Ghazzali:
“The objective of the Shari`ah is to promote the well-being of all mankind, which lies in safeguarding their faith (din), their human self (nafs), their intellect (`aql), their posterity (nasl) and their wealth (mal). Whatever ensures the safeguard of these five serves public interest and is desirable. Jurisprudence scholars such as al-Shāṭibī further divide the general objectives or sometimes denote as maṣlaḥah into three sub-categories: al-Shāṭibī calls these the Daruriyyat (essentials), Hajiyyat (complementary) and the Tahsiniyyat (embellishments) (Dusuki & Bouheraoua, 2011). The categories are briefly discussed below:
Ḍarūriyyah (necessities or essentials) is defined as interests of lives which people essentially depend upon, comprising the five aforementioned objectives of the sharīʿah:
Protection of al-din (religion),
Protection of life (al-nafs),
Protection of dignity or lineage (al-‘ird),
Protection of intellect (al-‘aql), and
Protection of property (al-mal).
These are essentials serving as bases for the establishment of welfare in this world and the hereafter. If they are ignored then coherence and order cannot be established and fasād (chaos and disorder) shall prevail in this world, and there will be obvious loss in the hereafter.
Hajiyyat (complementary). This category is a complementary to the five essential interests that had been highlighted earlier above and It refers to interests which neglect leads to hardship.
The third category is Tahsiniyyat. It comes next to the hajiyyat and refers to the aspects of Islamic law that bring comfort and ease human life. The neglect will not interrupt the normal life, however, it leads to lack of comfort in life.
The Five Elements of Darūriyyah (necessities or essentials):
1: Protection of al-Din
Protection of al-din (Religion) at a personal level is achieved through the observance of the different kind of ‘ibadah. At the society level by practice and respect the religion. Protection of al-din at government level by enforcement of the shariah ruling in all aspect of life, and make it a reference to all kind of dispute and arbitrations. Protection of al-din has a wider scope involves defending Islamic faith particularly, if it is being attacked by the enemy of Islam.
2: Protection of Life (Al-Nafs)
The Shariah has enacted harsh punishment for those who kill others in order to protect life. Shariah as well implement various rules and regulation to protect life from abuse, harm. In the light of the above shariah provide the criminal law to ensure the protection of life.
3: Protection of (Nasl) human being (Al-‘Ird) Family
Protection of dignity includes the protection of individual rights and privacy and not exposing or accusing others of misbehaviours. Islam has regulated the relationship between men and women in order to protect their dignity. One of the ways of protecting the dignity is the prohibition of adultery. Punishments for those involved in false accusation and adultery are meant to protect dignity.
4: Protection of Intellect or Mind (Al-‘Aql)
Al-‘aql or the intellect is a great gift from Allah s.w.t. to mankind. This is one of the capacities that differentiate man from animals. Islam has given the right to freedom of expression to protect the intellect. Islam encourages the acquisition of knowledge and forbids any activities detrimental to the mind. Shariah punish those who are involved in activities which detrimental the mind. Shariah forbid any food or drink which can affect the mind such as alcohol.
5: Protection of Property (Al-Mal)
Property is one of the necessities of mankind. It should be acquired in a legitimate way.
Allah (s.w.t) said: “And do not eat up your property among yourselves for vanities” (Al Baqarah 2: 188)
Allah has revealed severe punishment for those who obtain property illegally in order to protect them. Islam gave the right to human being to own and have growing wealth and Islam emphasize on the halal transaction in order to get income and grow wealth. Islam has provided the guidelines in financial activities to inquire ownership. Shariah provide various financial contracts to conduct business in lawful manner.
As mentioned earlier protection of the property (al-Mal) is one of the important elements of the Daruriyat in Maqasid Shariah. Islam gave the right to human being to own and have growing wealth and emphasize on the halal transaction in order to get income and grow wealth.
The product Ar-Rahnu would achieve the objective of the Shariah through several ways:
The transparency of Ar- Rahnu in its business conducts, Ar- rahnu follows closely the Islamic code of conducts in their transactions, therefore, it can be said that it does not involves the imposition of riba or Gharar in its dealings. It is clear that every step involved in the process is made known to the customer.
What is Ar-Rahn?
It is a Contract of Security.
Conceptually, Rahn means requiring a particular asset to be made as a security/collateral for a financing or loan, of which in the event of default by the customer/debtor, the loan may be satisfied out of the value of the security/collateral.
In normal practice, credit/financing facilities granted by a bank, will be secured by an appropriate collateral/asset with adequate value.
Al-rahn in Arabic has several meanings. Literally, al-rahn derives from the word rahana, which means either constancy, continuity, holding or binding. Technically, al-rahn term refer to pawning, mortgage, collateral, charge, lien and pledge whereby taking a property a security against debt, which secured property can be utilized to repay the debt in the case of non-payment (Dusuki, 2012). From scholar point of view such as Shafi’i defined al-rahn as “taking a non-fungible property as insurance against a fungible debt, whereby the debt may be extracted from the held property if it is not repaid”. Meanwhile, Hanbali defined it as “property to ensure the payment of a debt in case of default”.
Other scholars, Maliki defined as “act of taking valuable property from it owner as a mean of ensuring payment of loan that has matured or about to mature”. On the other hand, Hanafi submitted al-rahn terms as “holding something right because the taking of debt” (al-Zuhaily, 2007). The legality of al-rahn is based on the following evidence.
“And if you are on a journey (and you owe or provide that the term debt), and you do not find a scribe, there shall be a pledge taken (by person suffice)”.
(Surah al-Baqarah: verse 283)
“Aisha narrated that the Prophet had bought some food from a Jew and He (SAW) pledged to him His Steel armors”.
(Narrated by Bukhari, Muslim and Ibnu Majah)
What is the Financing Facility about?
It is a short-term loan (Qard), whereby customer will pledge gold as collateral for the loan granted.
The related transactions are supported by the following Shariah contracts:
Wadiah Yad Dhamanah (guaranteed safe keeping)
Ujrah (fee)
Ar-Rahn (Pledge/Collateral)
CONCEPT AND PRINCIPLES OF AR-RAHNU
Islamic pawn broking system is also known as Ar-Rahnu scheme, is one of the islamic product that introducing in islamic finance institution in Malaysia as one of alternative to get fund quickly and easily based on shariah principles. To begin with, the pawn broking had been operating since 19th century in Malaysia. In 2002, there were 276 brokers registered, in order to make them more accessible, and their objective is to maximizing profit. The private pawn broking is fast and efficient, flexible in term of valuation and loan approval and exercise simple producer. However they charge interest to customer to get high profit, it opposite to islamic perspective where the interest assummed as Riba, and its prohibited in islam.
Ar-Rahnu was introduced by The Malaysian Islamic Economic Development Foundation ( YPEIM). In 1992, the first Ar-Rahnu was established by Kelantan State government, and in 1993 it was cooperative with Bank Rakyat. In 2004, Ar-Rahnu pawn broking has been growing into 125 center troughtout the country where 22 cooperative involved in the business. Furthermore, Ar-Rahnu also giving the larger contribution to community’s development in Malaysia, where the scheme can be one of the source to get capital to start small and medium business. According to Abdul Ghafar and Nur Azura ( 2005), islamic pawn broking become popular among middle class people who have some difficulties to obtain the fund from formal financial institutions for emergencies uses. In Ar-Rahnu, the contracts are free from any interest, and it ensure there is no riba or gharar involved. Normally, the customers just pay the safe keeping of the collateral ( gold), based on the current value not the amount of the loan.
The Islamic pawn broking scheme in Malaysia underlying the principle of Islamic Shariah and combining the source of al-Rahnu collected into other transaction in Muamalat Islamic such as al-Wadiah yad Damanah, Al-Ujrah and Al-Qard-hasan are necessary to made of Islamic pown broking products.as stated by Hisham, S. et. al (2013).
However, Appannan and Doris (2011) their study show awareness of people living in Kedah State in Malaysia particularly in Sungai Patani resident the finding show is mindful of the duration of Islamic pown broking while the alert of variety races in the city are different level. The Bumiputra and Chinese were inform ar-Rahnu sheme and the most foctor affecting the communict to remained Islamic pawn broking was better the cost of loan of pawn broking conventional and cheaper its cost.
In addition to that, Islamic pawn broking system might be considered as the best alternative of conventional pawn broking based on interest rate. Baht and Sinnakkannu had observed the subsequently benefit of Islamic pawn broking; the first point is ar-Rahnu based on Islamic Shariah and free from Riba loan, second thing is easy to applications, quick responses, lower fee than the conventional pawn broking scheme, fixed storage fee, no punishments after delaying the term, guaranteed protection of the gold, long financing maturity, and surplus auction income backed to the customer. Bhatt, P., Sinnakkannu, J. (2008).
What do we mean by Supporting Contracts?
“They are called supporting contracts because they don’t usually standalone by themselves. Rather, they will be offered together with other types of contracts, although in recent years, we have seen products offered solely and exclusively adopting some of them as a standalone package. In most commercial banking practice, these products will be offered by the bankers as a service contract and thus some amount of payment is charged for the rendering of it.” (Mohd Johan Lee, 2017)
The Rationale on the Application
Most of Islamic-based law (shariah) would not talk much regarding the identification of the cause/ rationale of the hukm.
To make further identification of the reasoning behind a product of a hukm, Most of Muslim Jurist would depend on epistemology of Maqasid al-shariah or Maslahah.
“Time and time again, the Qur’an invites the believers to rational enquiry, as opposed to blind imitation, in the acceptance of its messages”. (Ahmad Ahsan)
“A rational approach to the discovery and identification of the objectives and intentions of the Lawgiver necessitates recourse to human intellect and judgment in the evaluation of the ahkam.” (M. H. Khamali)
Purpose: Islamic Bank acts as guardianship of funds.
Function: Safeguard in the Face of Security, Safeguard means there might be 2 conditions: protection in general & in specific (rewarding punishment)
Rahn’ “The Application”
The term Rahn literally means constancy or holding and binding.
Synonymous Terms: Collateral, Pledge, Pawn, Mortgages,
Shariah View
In the Quran, Allah says: If you are on a journey and cannot find a scribe, then use the receipt of pawned object. (Al-Baqarah-283).
In a hadith Anas (r.a) said: “The Holy Prophet (pbuh) pawned a shield with a Jew in Madinah and he took from him some barley for his family.’’
In terms of Equity-based, the presence of rahn is not to secure the capital & or profit, but loss due to negligence.
Rahn as a security means the ownership will remain with the pledgor.
Rahn’ “Benefits to Customers & Islamic Bank vis-à-vis Securing Risk”
Mohd. Johan Lee alluded as regard of the Rahn whereby:
It is an obligation of a debtor to pay the debt even without
any collateral. Thus, having an asset as a collateral even in
the form uncertainty is better than not having one.
The owner of the asset will own all the benefits, usufruct,
income generated or growth of the capital until any events
of default happens.
The specifc nature of Rahn is to provide assurance that a
pledgor shall fullfil the obligation to meet the pledgor’s liability to the pledgee.
Put it Simply, the existing of Collateral could secure uncertainty events such as default risk, breach of contracts, and possibility of inability to pay either deliberately or unintentionally in the future after the financing facility given to the customers. Hence, the stance of both parties secured by the rahn per se.
It important to note:
Since it is as a security, it means there is no Transfer of ownership to the pledgee.
In other words, all benefits and profit which might be generated from
The security would be retained in the hands of the pledgor. Similar to loss situation.
Shariah Maxim: “entitlement to profit depends upon liability for loss”
Rahn’ “Issues, Concerns, Challenges”
Overdependence on the Security Pledged:
It is undeniable fact that the potential risk of NPF either in IFIs could be mitigated by providing a security of consumer’s. However, it should be borne in mind that IB should have awareness as regard of root of the sub-prime mortgage crisis whereby it is initially originated from unqualified borrowers.
Potential of Riba:
Shariah Maxim: “Every loan that entails benefit is riba”
The maxim highlights chiefly that the proceeding of appraising over the loss and customer’s arrears should be fair, transparent, and free from misappropriation. Meaning that, any excess or insufficiency would bring disparate consequences.
Motion of Recommendation:
Prudential end-to-end Stages must be taken by every single of end-to-end related division.
Appraiser is necessity
Third Party (Auction, Arbitration, Court)
Legal Documentation as Certainty of legal resolution.
Issues/Concerns
Even though the name of product is ar-rahn but the main contract is qard.
Conflicting contract, at one angle, it is qard but you are charged for safe keeping that makes it look as if you are charging for the qard. Charge is quoted as RM/gram.
Loan is not 100% based on the value of marhun to avoid obvious linkage to the loan, but ujrah fee for safe keeping is based on value of marhun. It would look more obvious that bank is charging for the loan.
Recommendation
Reveal to customers the rate in percentage – ease in comparison
Do commodity murabahah (takes in gold as collateral)
Safe keeping is based on volume, not on weight/value of the marhun.
ISSUES OF AR RAHNU
Calculation of safe keeping (Ujrah) fee is based on value of pledged item:
If we look at the formula for calculating the safe keeping fee, it is based on the value of the pledged item. The simple formula below shows the formula to calculate the safe keeping fee based on PDS by Bank Rakyat.
Pledged value x (Safe keeping rate/100) x 12 x (Pledge tenure/365)
This contradicts with the term safe keeping fee itself. By right, the fee should be based on the actual cost of keeping the pledged item such as the storage and the management costs. It is also worth noting that the safe keeping rate for each bank varies.
For conventional pawn broking companies, they follow what is stipulated in the Pawn Brokers Act 1972 on imposing the interest rate. A fixed rate of 2% is imposed per month and the rate could increase if the loan has maturity more than one month. Ar Rahnu operators, on the other hand, impose differing rates from one to another.
If the safe keeping rate is calculated as a function of the loan value, this could mimic the conventional loan especially if the rate is close to that. The whole contract is based on safe keeping rate. Therefore, it is important to ensure that extreme deliberation and measures are taken to avoid possible riba in its operation.
Calculation on Extension of Safe Keeping (Ujrah) Rate
Generally, there are three methods of ujrah calculation. Different banks opt for different ways to calculate and the three methods are daily basis, half monthly basis and monthly basis. In conclusion, based on the research done by (Sharif et al, 2015), the first method yields the lowest fee compared to the other two methods.
The following calculation shows example of daily basis calculation.
Quantity of marhun/pledged item : 100 grams
Market price : RM100/grams
Value of marhun/pledged item : RM10,000
Margin of loan : 70%
Total loan amount : RM7,000
Safekeeping fee : RM0.75/RM100
Charge date : 1st January 2016
Maturity period : 6 months (182 days)
Maturity date : 1st July 2016
If the customer pays on the 1st July 2016, the fee he has to pay is as shown below
RM0.75xRM10,000x12x182days/RM100x365days=RM448.77
If, for example, the customer pays on the 1st June 2016, the fee will become
RM0.75xRM10,000x12x152days/RM100x365days=RM374.79
The fee is directly related to actual number of days.
The following calculation shows example of monthly basis calculation.
Quantity of marhun/pledged item : 100 grams
Market price : RM100/grams
Value of marhun/pledged item : RM10,000
Margin of loan : 70%
Total loan amount : RM7,000
Safekeeping fee : RM0.75/RM100
Charge date : 1st January 2016
Maturity period : 6 months
Maturity date : 1st July 2016
The monthly basis is calculated from the first day of the month to the first day of the following month. For example, if the date of the contract starts on the 1st of January 2016, the one month calendar is counted on the 1st of February 2016.
In this example, we are considering a contract of 6 months. The fee is calculated as follows
RM0.75xRM10,000x6months/RM100=RM450
If the customer pays on the middle of June 2016, he still has to pay the full 6 months safe keeping fee. On the other hand, if he delays the payment by two weeks, ie he pays in the middle of July 2016, he will have to pay for another one full month. The new fee for the extra one month is as follows
RM0.75xRM10,000x7months/RM100=RM525
By comparing the two calculations above which are based on daily and monthly basis, customers are advised to search for institutions that employs the former method of calculation.
Another sample calculation is based on half monthly basis. In this calculation, there is a significant difference if the payment is made, for example, on the 12th of the month and on the 18th of the month. It is similar to the monthly calculation but now instead of one month, the interval adopted is 2 weeks or half of a month. This method is also inferior compared to daily basis in terms of favouring the customers.
Now, the next example tries to look at effect of extending the tenure of the loan on the rate of the safe keeping fee. The example chosen is the 6-month initial tenure extended by another 6 months. A study has been done by a group of researchers on Bank Rakyat and it is illustrated here.
If the customer defaults on the fee payment, the tenure can be extended for another 6 months. A sample calculation on the new fee payment for the defaulter is illustrated below (Sharif et al, 2013).
Sample calculation of monthly basis
Collateral or marhun value : RM10,000
Safe keeping (ujrah) fee : RM0.75 for each RM100
Tenure : 6 months
Ujrah fee in 6 months: 10,000/100×0.75 x 6 = RM450
If a new agreement is made for another 6 months (extension period), the ujrah will be doubled, RM450x2=RM900.
This new calculation is done based on the assumption that the ujrah rate does not change for the extension period.
If the Ar Rahnu financing rate is 70% of the collateral value, in monetary value it is RM7000. Hence, the rate of ujrah is equivalent to RM900/RM7000x100=12.86%.
From our observation on the PDS, there is no mention on the yearly rate of the fee. It is in our opinion that this rate is included so that customers are better informed in making their decision in view that other products normally have the annual rate stated.
Calculation of fee on daily basis is the fairer method than the other two and it favours the customers more.
Rate of financing
Rate of financing varies from one institution to another. According to Shari’ah law, a pledgor can be loaned with a value higher than the value of the pledged item. Since this loan is collateralized, the rate of financing could be increased so that customers can benefit more on their collateral, hence, could improve the benefit of their intended purpose of going into Ar Rahnu. The banks are fully shielded from default payment because the collateral is made of gold which has a very stable value. Financiers are fully protected under Ar Rahnu scheme and there is no reason why they should restrict the financing if they adopt the understanding of fulfilling Maqasid Shari’ah for the society.
CCRIS
Credit Bureau is established by Bank Negara Malaysia and operates under the Central Bank of Malaysia Act 2009 (CBA). It collects credit-related information of the borrowers from the lending institutions. The information collected is returned to the institutions as reports through an online system knows as Central Credit Reference Information System (CCRIS). This data is crucial to financial institutions in assessing the customers’ creditworthiness and in processing applications. It is important that this database is updated as well.
For customers engaged in Ar Rahnu, their names will be listed in CCRIS if they default on the loan. The issue here is that, their jewelries will be auctioned off to pay the debt and this makes it as good as paying. The banks lose nothing and will get back their money along with all the related expenses such as auction costs and legal fees. The customer will lose the jewelry and might get some money after all the loan and expenses are accounted for. This is different from personal financing which needs no collateral. Social financing considerations could be given to Ar Rahnu default customers for exemptions in view of them losing the jewellery to settle the debt. Once blacklisted, this would restrict their future loan application for possible business activities or personal needs.
Fake Gold and the Ownership of gold
1)- Lack of Guideline on determining the Originality of Marhun
Development of gold purity test equipment are needed by every Ar-Rahnu institution
For example, many fraud cases about gold coating or lead gold being recorded
Lead which has included in pure gold structural cannot be detected by some of gold equipment
Many of Ar- Rahnu only receive few type of gold to avoid from receiving golf which has been faked with lead.
2)- Lack of Monitoring on the Original Ownership of Marhun
Pledge property used in Ar-Rahnu transaction must belong to chargor or with the owner permission before it can be used as a pledge property.
Receipt of purchase will become an evidence as property ownership
The presence of purchase receipt is in order to prevent fake gold property and to avoid from receiving gold from robbery.
Combination of Ar-Rahn and other contracts
Conclusion:
Table 1: Islamic Banking Products and Key Regional
Product Middle East North Africa Malaysia Indonesia
Pawn broking Ar-rahn
Prohibited
Prohibited Popular as a form of personal financing with gold as collateral
Popular as form of financing with gold as collateral
Source: Oracle Financial Services (2012)