Ar-Rahnu, as a form of pawnbroking business in Islamic finance, has been justified and accepted based on certain principles within Shariah (Islamic law). Here are some key justifications for the permissibility of ar-Rahnu:
- Collateral-Based Financing: Ar-Rahnu operates on the principle of providing financing against collateral (pledged items). This is permissible in Islam as it resembles the concept of Qard al-Hasan (benevolent loan) where the lender provides a loan without charging any interest, and the collateral is taken to ensure the borrower’s commitment to repay.
- Asset-Backed Financing: Ar-Rahnu transactions are asset-backed, meaning that the loan is secured by tangible assets (e.g., gold, jewelry). Islamic finance encourages transactions that are backed by real assets, minimizing speculative or uncertain elements.
- Avoidance of Riba (Usury/Interest): One of the fundamental principles in Islamic finance is the prohibition of Riba. Ar-Rahnu adheres to this principle by not charging interest on the loans provided. The borrower is required to repay the principal amount only.
- Risk-Sharing: Ar-Rahnu incorporates an element of risk-sharing between the borrower and the lender. If the borrower fails to repay the loan, the lender can sell the pledged item to recover the principal amount. This aligns with the Islamic finance principle of shared risk and profit.
- Social Welfare: Ar-Rahnu can be seen as a mechanism to provide financial assistance to individuals in need. By accepting valuables as collateral, it allows people to access funds without resorting to conventional interest-based loans.
- Facilitating Liquidity: Ar-Rahnu serves as a means to provide short-term liquidity for individuals facing financial constraints. This is particularly beneficial for those who may not have access to traditional banking facilities.
It’s important to note that while ar-Rahnu is generally accepted in Islamic finance, the specific practices and terms can vary. To ensure compliance with Shariah, financial institutions offering ar-Rahnu services often seek guidance from Islamic scholars and authorities who issue fatwas (religious rulings) to validate the permissibility of their practices.
- Prohibition of Riba (Usury/Interest):
The prohibition of Riba is a fundamental principle in Islamic finance. Prophet Muhammad (peace be upon him) strongly condemned usury, emphasizing the importance of avoiding interest-based transactions. The Quran mentions the prohibition of Riba in several verses, including in Surah Al-Baqarah (2:275-279).
- Asset-Backed Financing:
Islamic finance encourages transactions that are backed by tangible assets. While ar-Rahnu is not explicitly mentioned, the general concept of trading in assets and avoiding speculative transactions is in line with Islamic financial principles.
- Prohibition of Exploitation:
Islam encourages fair and just transactions and prohibits any form of exploitation. The Hadith and Quranic verses emphasize honesty and integrity in financial dealings, principles that can be applied to ar-Rahnu transactions.
- Kindness in Loans and Transactions:
The concept of Qard al-Hasan (benevolent loan) is encouraged in Islam. Prophet Muhammad (peace be upon him) encouraged providing loans without expecting anything in return or without imposing burdensome terms on the borrower.
Evidences for the legality
Quran : Surah Albaqarah (283)
Surah Al-Baqarah (2:283) is a verse from the Quran, and it can be translated as follows:
“إِن تَكُونُوا عَلَىٰ سَفَرٍ وَلَمْ تَجِدُوا كَاتِبًا فَرِهَانٌ مَّقْبُوضَةٌ ۖ فَإِنْ أَمِنَ بَعْضُكُم بَعْضًا فَلْيُؤَدِّ الَّذِي اؤْتُمِنَ أَمَانَتَهُ وَلْيَتَّقِ اللَّهَ رَبَّهُ ۗ وَلَا تَكْتُمُوا الشَّهَادَةَ ۚ وَمَن يَكْتُمْهَا فَإِنَّهُ آثِمٌ قَلْبُهُ ۗ وَاللَّهُ بِمَا تَعْمَلُونَ عَلِيمٌ”
Translation: “When you are on a journey and cannot find a scribe, a security may be taken. And if one of you entrusts the other, let him who is trusted deliver his trust, and let him be mindful of Allah, his Lord. Do not conceal testimony, and whoever conceals it, his heart is certainly sinful. Allah is Well-Aware of what you do.”
This verse emphasizes the importance of honesty, trustworthiness, and fulfilling commitments, especially in financial transactions. It encourages people to uphold their responsibilities even in situations where formal documentation may not be readily available, and it warns against concealing truthful testimony.
- Sahih al Bukhari 2068
The Prophet (ﷺ) purchased food grains from a Jew on credit and mortgaged his iron armor to him.
باب شِرَاءِ النَّبِيِّ صلى الله عليه وسلم بِالنَّسِيئَةِ
حَدَّثَنَا مُعَلَّى بْنُ أَسَدٍ، حَدَّثَنَا عَبْدُ الْوَاحِدِ، حَدَّثَنَا الأَعْمَشُ، قَالَ ذَكَرْنَا عِنْدَ إِبْرَاهِيمَ الرَّهْنَ فِي السَّلَمِ فَقَالَ حَدَّثَنِي الأَسْوَدُ عَنْ عَائِشَةَ ـ رضى الله عنها ـ أَنَّ النَّبِيَّ صلى الله عليه وسلم اشْتَرَى طَعَامًا مِنْ يَهُودِيٍّ إِلَى أَجَلٍ، وَرَهَنَهُ دِرْعًا مِنْ حَدِيدٍ.
The Position of Al-rahn
Ḥanafī, Shafi’i and Ḥanbalī jurists viewed al-rahn as a charitable contract regardless of either the conditions is stipulated during the contract or after the right2 is confirmed and the contract is bonded by the offer and acceptance (al-Zailaʿī 1414H). Al-Rāfiʿī of Shāfiʿī viewed that there is a slight difference between a sale and a pawn-broking contract. Unlike the sale contract that required the contracting parties to have risk and responsibility, al-rahn is not burdened by it. In fact, al-rahn is a voluntary contract conducted by the debtor for the debt he owes (al-Rāfiʿī, 1997). According to al-Buhūtī of Ḥanbalī, al-rahn contract is valid as long as the contracting parties do not stipulate the fulfillment of certain condition (alBuhūtī, 1947). Meanwhile, the Mālikī jurists view that al-rahn bonded with certain required condition is no longer a form of charity. The contract of al-rahn should be applied after the debt contract in order to remain the position of charity. Al-Dāsūqī of Mālikī allows al-rahn to be stipulated in the sale or loan contract as long as it is engaged by the eligible person, otherwise the position of tabarruʿ is invalid (al-Dāsūqī, n.d.).
Business Structure of Ar Rahnu
Tawarruq refers to a financial transaction in Islamic finance where an individual purchases a commodity or item at a certain price in cash, then sells it back with deferred payments. The practice of tawarruq is commonly employed in Islamic financial systems to obtain cash or financing.
The process of tawarruq involves three parties:
Borrower (Mustawriq): The individual in need of cash or financing.
Bank or Financial Institution (Mudarib): The entity that buys the commodity or item from the borrower and resells it with deferred payments.
Original Seller (Muwarrif): The party that sells the commodity or item to the bank or financial institution.
An example scenario of tawarruq:
The borrower buys a commodity from the original seller with cash.
The borrower then sells the commodity to the bank or financial institution at a higher price with deferred payments.
The borrower receives payments in installments from the bank or financial institution.
While tawarruq is considered permissible in certain interpretations of Islamic law, it has drawn critical attention from some quarters due to practices that may involve complexity or potential exploitation. Therefore, ongoing discussions among financial institutions and Islamic finance scholars continue to address the ethical and just aspects of various forms of tawarruq.
The term “Tawarruq” refers to a specific form of Islamic financing or business structure that involves the purchase and sale of commodities or assets for the purpose of obtaining cash. This concept is also known as commodity murabahah or reverse murabahah. Here’s an overview of the Tawarruq business structure:
- Client’s Need for Cash:
Tawarruq often arises when an individual or business needs immediate cash but wants to avoid conventional interest-based loans due to Islamic principles that prohibit usury (riba).
- Engagement of a Financial Institution:
The client approaches an Islamic financial institution to engage in a Tawarruq transaction. The financial institution acts as an intermediary in the process.
- Commodity Purchase Agreement:
The financial institution purchases a tangible commodity (such as metals, agricultural products, etc.) on behalf of the client. The purchase is usually made on a deferred payment basis.
- Immediate Sale to a Third Party:
After acquiring the commodity, the financial institution sells it to a third party (usually in the open market) for immediate cash. This step effectively converts the commodity into cash.
- Client’s Repayment:
The client agrees to repay the financial institution the original purchase price of the commodity over an agreed-upon period. The repayment may include a profit margin for the financial institution, but it is not structured as interest.
- Deferred Payment Structure:
The client repays the financial institution in installments over time, based on a deferred payment structure. The repayment amount is predetermined and agreed upon at the outset of the transaction.
- Legal Ownership:
The client gains legal ownership of the commodity from the outset, even before the full repayment is completed. This ownership allows the client to sell the commodity if needed.
Tawarruq is a controversial topic within Islamic finance, and scholars have varying opinions on its permissibility. Some scholars view it as a valid form of trade, while others express concerns about potential deviations from genuine trade practices and the risk of resembling interest-based transactions. As with any financial structure in Islamic finance, it’s essential for individuals and institutions involved in Tawarruq to seek guidance from knowledgeable Islamic scholars to ensure compliance with Shariah principles.
CONCEPT AND PRINCIPLES OF AR-RAHNU
Today, Ar-Rahnu is one of the Islamic financial products that are getting many customers’ attention. It is defined as repayment guarantee of debtor by creditor which allows the creditor to hold an asset in respect with the debt. Ar-Rahnu is in charge as a relief if payment cannot be paid or there be default
occurred. This means that the creditor is permitted to take any actions right on the asset by selling it off or put it on auction because the charger’s failure to obey the term and condition that is set during the contract.
In Islamic jurisprudence, Ar-Rahnu is an arrangement where a valuable asset is placed as collateral for debt. It also means readiness or immutability and durability (Abdullah Alwi Hj Hassan: 2007). The practise of Ar-Rahnu is probable in Shariah perspective. It is because this product is already used in and well accepted in Islam during Prophet Muhammad’s time. It has been proven and verified through most reliable resources in Islam which are Quran and Sunah. Evidences for the legality of Ar Rahnu are as followed:
In Quran: If ye are on a journey and cannot find a scribe, a pledge with possession (may serve the purpose). And if one of you deposits a things on trust with another, let the trustee (faithfully) discharge his trust and let him fear his lord. (2:283)
In Sunah: The prophet was reported to have bought some foodstuff on credit for a limited period and to have given his armour as a security for it.
Before Ar-Rahnu transaction can be proceed, there are several conditions or tenets that must be followed, such as:
1) There must be rahin (Chargor)
2) There must be a murtahin (Chargee)
3) There must be a marhun bih (Debt)
4) There must be marhum (Valuable Asset)
5) There must be sighah (Agreement in contract)
Features of Ar-Rahnu
As a micro-credit instrument, Ar-Rahnu secured and facilitates safe-keeping guarantee by providing insurance coverage for the pawned item. In actual fact, Ar-Rahnu scheme is created with aims to help members of society, poor people and small traders when they are dreadfully in need of cash for certain reason. There are few features of Ar-Rahnu Scheme, such as:
Usually, the amount offered by banks and financial institution for Ar-Rahnu loan is between USD100 till USD150, 000.