Al-Rahn Islamic Mortgage System

1. Al-RahnIslamic Mortgage System Chapter 7

2. Content • 1.1Introduction • 1.2Background of mortgage in Malaysia • 1.3The concepts of al-Rahn • 1.4The Operation of al-Rahn in Malaysia • 1.5The difference between al-Rahn and mortgage • 1.6Conclusion

3. Introduction • During recent years Muslims all over the world, particularly in Malaysia, showed their concern to practice Islam in all aspects of their life, governing economics activities, social and political functioning and legal regulation of these spheres from the perspective of Shari’ah. • The establishment of Islamic bank, Insurance through Takaful, the scheme of banking without interest (Skim Perbankan Tanpa Faedah) and the Islamic system of Rahn are examples of regulating economic activities on Islamic lines by the Muslims in Malaysia.

4. Normally, customers for Islamic banking activities are from the middle class of society and above, while customers for al-Rahn are from the middle class of society and lower. • Without Islamic mortgage system, lower income group of Islamic society, will be pushed to engage with interest practiced by Pawnbroker shops and “Along” in fulfilling their needs.

5. Background of mortgage in Malaysia • The history of pawnbroking in Malaysia can be divided into four stages, • its history in the early traditional Malaysia society, • After emergence of the British Colonial and Chinese immigrants, • after independence of Malaysia • the era of Islamic resurgence.

6. The Pledge in the traditional Malay society. • Pledge which was applied by the traditional Malay society can be divided into two kinds: • Pledge with interest • Pledge without interest followed the concept of al-Rahn. • There are three ways the Malays society get the credit in which they give their property as a security for the debt: • Gadaian tanah (charge the land) • Gadaian barang (pledge the thing) • Jual-janji.

7. Gadaian tanah (charge the land) • The aim of the gadaian tanah is to get the money through the giving permission to the money lender to usufruct his land. • Usufructing the land is assuming as interest of the loan. • Usually, the contract of the gadaian is made orally, recently, written contract is made by two parties witnessed by the Penghulu Mukim. • No deadline of when the repayment should be made. It depends on the pledgor’s ability to complete the repayment. • Sometimes, it happens where pledgee wants his money back. He will go to the pledgor and claim it back. If the pledgor has no money to repay, the pledged land will be evaluated for the current price. The balance of the land’s price, if any will be returned to the pledgor, and the ownership of the land will be transferred to the pledgee.

8. Gadaian barang (pledge of thing) • In this kind of gadaian, people pledge their valuable property such as gold rings, necklace, earrings, watch and other things to their relatives or friends to get cash. • Normally, verbal agreement is made in which the creditor will give their permission to the debtor to use their property. • No limitation deals with this practice. In many cases, the pledge will end with the contract of sale between the two parties and the proprietary transfers to the debtors.

9. Jual-janji • Under jual-janji transaction, a person who is in need of money will sell his proprietary right in the land to a purchaser, to whom the land will be transferred. • The transferred is executed subject to the condition that, • if the seller is able to repay within a specified time, • or any time thereafter to repay the sum advanced by the purchaser, the land will be transferred back to the seller.

10. The pledge after emergence of the British Colonial and Chinese Immigrants. • British came in Malaysia in 1876, when they succeeded in their trial to govern Penang from the Sultan of Kedah. • Because of shortage of manpower and labour to support their them in the activities of trading and mining, British encouraged Chinese immigrants from China to come to this country. • Later, the Chinese introduced the pawnshop as an institution to reinvest their capital which they had got from mining and other activities of mining. • In the light to control this activity, British enacted ordinances and enactments relating to pawn broking system. There were nine separate legislation to this matter.

11. The pledge after Independence of Malaysia. • There was not much change occurred to the legislation of pawnbroker until 1972 when the Pawnbrokers Act 1972 was passed to repeal all nine existing legislation and to bring the pawnbrokers under one uniform act. • This Act was amended in 1982 inserting the regulation of procedure in auction.

12. Flaws and weaknesses of implementation of the act: • This act does not direct pawnbrokers to display the charges fixed clearly and openly, or to have it read to consumers who are illiterate. • The act lays down no criteria for appraising the value of the articles pawned. Thus, the articles are often undervalued. • The act does not require pawnbroker to give a receipt for payments that have been made. • It has always happened that the necklace pawned becomes shorter after redeeming compared to the original one. • There are provisions in the Act that give too much profit to the Pawnbrokers and simultaneously, too heavy on the pawnor.

13. In the Era of Islamic Resurgence • Terengganu • In Terengganu Peraturan Muassasah Gadaian Islam 1991 (Regulation of Foundation of Islamic Pledge 1991), was passed under the Enekmen Pentadbiran Hal Ehwal Agama Islam Terengganu 1986. • This enactment gives the power to Majlis Agama Islam dan Adat Melayu Terengganu set up the Islamic pledge through the Muassasah Gadaian Islam Terengganu (MGIT). • This MGIT was launched on January 23, 1992 at Kuala Terengganu.

14. In Kelantan…. • In Kelantan the scheme of Al-Rahn is set up on March 12, 1993. • The main feature that distinguish it from conventional pawnshops is, it does not allow the forfeiture of valuables. • Apart from that the system also does away with interest charges and only levy certain fees for the safe

15. The concepts of al-Rahn • Al-rahn, translated into English means pledge. • Al-rahn literally means thing given to a person as security for fulfillment of a contract; payment of debt; etc; thing put in pawn. • Al-rahn in Islamic law means to pledge or lodge real or corporeal property or material value, in accordance with the law, as a security for debt or pecuniary obligation, so as to make it possible for the creditor to regain the debt or some portion of the goods or property.

16. The basis of al-Rahn in Shari’ah • All Islamic jurists agree that the practice of al-rahn is lawful and permitted by Islam. • It is based on the Quranic verse in Surah al-Baqarah, verse 283, in which Allah says: If you are on a journey, and cannot find a scribe, a pledge with possession (may serve the purpose). And if one of you deposits a thing on trust with another, let the trustee (faithfully) discharge his trust, and let him fear His Lord. Conceal no evidence; for whoever conceals it – his heart is tainted with sin. And Allah Knows all that you do.

17. The basis of al-Rahn in Shari’ah………………… • The meaning of the word al-rahn and journey (safar) does not give a meaning that journey is to be a condition for al-rahn. • But, it just shows that security by al-rahn can replace the security by writing which is hard to be found in the journey. • There is a consensus among the jurists that the contract of pledge is legal and everything which can be bought can be pledged.

18. Pillars (al-Arkan) of Al-Rahn • Rukun or arkan means essential element of any act. • The following pillars should exist as essential element: • Pledgor (al-Rahin) • Pledgee (al-Murtahin) • Pledged thing (al-Marhun) • Debt (al-marhun bih) • Sighah I.e. ijab and qabul (Offer and acceptance).

19. Conditions Relating To Pledged Thing (al-Marhun) • Anything which can be bought in Islamic law can be pledge. • The pledged property must be possessed by pledgor (al-rahin) or debtor.

20. Conditions Relating To Debt • Debt should exist at the time of ‘aqd (contract). • The object (‘ain), amount and kind should be known to the both parties contracting al-Rahn.

21. Who should keep the pledge thing (al-marhun bih) • Pledgee has the right to keep the pledged thing as evident from the Quranic injunction: “with possession (may serve the purpose)”. • However, the parties to the contract of al-Rahn may agree to entrust the pledged thing to a third person known as the ‘adl or amin.

22. The Operation of al-Rahnu in Malaysia • Operation of Muassasah Gadaian Islam Terengganu (1991). • Operation of Kedai al-Rahn, Kelantan • Operation of Skim al-Rahn at Bank Rakyak.

23. Operation of Muassasah Gadaian Islam Terengganu • Terengganu became first state in Malaysia to introduce al-Rahn in 1991. • The Muassasah is fully sponsored by State Government of Terengganu. • Its operations is conducted by Majlis Agama Islam and Adat Istiadat Melayu Terengganu. • The main objective of the Muassasah is to help the needy people of Terengganu through the giving of a loan with a security. The loan given is free from interest. • However pledgor is encouraged to make a donation to Muassasah as a administration cost.

24. Procedure of Pawning in Muassasah • When receive any article to be pawned, Muassasah should record it in a book with all the details which are fixed in the regulation, and later gives a pawned letter in its standard form, to a pawnor. • When pawnor deposits his property (jewellery) for pawning, he must give the true informations or declarations needed by Muassasah. • The amount of loan must not be over than 75% of value of pawned article and not more than RM1500.00. • No service charge is obliged on the pawnor. • This service is opened to the people of Terengganu who domicile are in the state or those whose domocile are in Terengganu and in addition, they must be a muslim.

25. Procedure….. • The minimum period of redemption is three months. • However, the pawnor can apply for extending the period of redemption, and Muassasah can give permission for extending it not more than three months. • If the pawned article is not redeemed after six months, a notice of fourteen days should be issued to the pawnor to choose either to buy that article or to find out any buyer on behalf of him. • The balance of the amount can be claimed by the pawnor within four months. If there is no claim within four months, Muassasah must send the amount to the Yang Di Pertua of the Majlis who, later, will put it into the Akaun Amanah Kumpulan Wang Majlis, whereby the owner can request his share.

26. Operation of Kedai Rahn, Kelantan • Al-Rahn in Kelantan is set up in March 12, 1993. • It is owned by Permodalan Kelantan Berhad. • Al-Rahn in Kelantan is governed by Pawnbrokers Act 1972 except for Section 17 and 23. • To ensure that Kedai al-Rahn will not involve in riba, it has alternatives for section 17 that are Qard hasan, Bai’ biThaman Ajil, bai al-wafa’, service charge (upah) and wadiah or safe-keeping fee. • As for licensing, Kedai al-Rahn follows the Section 7 and 10 of Pawnbroker Act 1972 : No person shall act as a pawnbroker except under a license granted under this Act.

27. Procedure and Principle of the operation • A loan is given without interest based on Qard Hasan. • The security or the item pledged is restricted to gold item only. • After paying the debt, the pledgor can redeem the item provided that he pays the expanses for safe-keeping as required. • The fee of safe-keeping is based on the value of the valuable and is adjusted for the value of the loan given. • The pledge is redeemed is not later than six months.

28. Procedure…… Kedai al-Rahn, Kelantan • The maximum amount of loan is RM5,000.00 or 60% of the value of marhun. • The rate of safe-keeping fee is based on the value of the item and not the total amount of loan. Item worthCost of safe-keeping (Every RM100.00) RM1 – RM400 RM0.75 per month RM401- 2000 RM0.90 per month RM2001-10000 RM1.00 per month

29. Example of the calculation of fee • Pawn items (value): RM5000 • Total loan: RM2500 • Pawn period: 3 months • The Pawnor has to pay for fee: RM5000 is (50 x RM100) The fee is: 50 x RM1 (cost per month for every RM 100) x 3 months = RM150.00

30. Operation of Skim al-Rahn Bank Rakyat • Bank Rakyat has established a project Skim al-Rahn at its counter which launched on October 27, 1993. • The project was implemented as a joint venture between Bank Rakyat and Yayasan Pembangunan Ekonomi Islam Malaysia (YPEIM). • Bank Negara provides the expertise to ensure its success. • The operation of pawnshops is governed by the Pawnbrokers Act 1972. According to Section 46(c) of the act, Bank Rakyat is exempted from the provisions of the Act in the sense that it does not need any licence to operate Al-Rahn services. • Section 46(c) states that: The following person shall be exempted from provision of this act: (c) any cooperative society registered under any written law force in the Federation relating to cooperative society”.

31. Procedure • A loan is given without interest based on Qard Hasan. • The security or the item pledged is restricted to gold item only. • The customers are required to pay the loan and the fee for safe-keeping which is calculated monthly. • The fee of safe-keeping is based on the value of the valuable and is adjusted for the value of the loan given. • The period permitted is six months, which starts from the date of pawning. • Upon expiration of redeemable period, a pawnor is given three months grace period which starts from the expiration of redeem period.

32. Procedure…. Bank Rakyat • However, the pawnor is required to pay the safe-keeping fee before three months grace period is granted. • The rate of safe-keeping fee is based on the value of the item and not the total amount of loan. Item worthCost of safe-keeping (Every RM100.00) RM1 – RM1000 RM0.40 per month RM1001- 5000 RM0.50 per month RM5001-10000 RM0.60 per month

33. Example of the calculation of fee • Pawn items (value): RM5000 • Total loan: RM2500 • Pawn period: 6 months • The Pawnor has to pay for fee: RM5000 is (50 x RM0.50) The fee is: 50 x RM0.50 (cost per month for every RM 100) x 6 (month) = RM150.00

34. Analysis of the operations of al-Rahn in Malaysia. • The application that practiced by Muassasah is strongly Islamic. • The safe-keping in Kedai al-Rahn and Bank Rakyat cannot be considered as wadiah, because wadiah is charitable contract which is a ‘free of charge’ contract. However the safe-keeping fee can be considered as al-ujr contract, but not as a wadiah contract. • The application that practiced by Kedai al-Rahn and Bank Rakyat is weakly Islamic. Although the pledgor has to bear the safe-keeping cost in Islamic law, but the pledgee is prohibited to take more than the real cost of safe-keeping. But in practice, they earned their profits from the fees of safe-keeping.

35. The difference between al-Rahnu and mortgage • The conventional mortgage system is based on interest, while the al-rahn scheme is based on Qard Hasan. • The value of pledge thing of conventional mortgage, which is be pledged is not stated in the receipt of pledge, while it is stated in al-rahn. • The concept of justice and transparence is not be practiced in conventional mortgage, while it is be implemented in al-Rahn.

36. Conclution • Al-Rahn is an alternative to conventional mortgage system for Malaysian. • Islamic mortgage system is important to middle class and lower of the Malaysian society. Without al-Rahn they will be pushed to engage with interest that practiced by Pawnbroker shops and “Along” in fulfilling their needs. • The concept of justice is implemented in the concept of al-Rahn.

37. References: • Mohamed Nor Yackop dalam Sistem Kewangan Islam di Malaysia. • Wan Ab Rahman Khudzri Wan Abdullah. 1995. The Law Relating To al-Rahn in Islam. Masters thesis for MCL IIUM. Kuala Lumpur: IIUM. • Asmadi Mohamed Naim. 1999. Ahkam al-Rahn Fi al-Fiqh al-Islami (Al-Rahn Rules in Islamic Law). Masters thesis for M.IRKH IIUM. Kuala Lumpur: IIUM.