Pawn-broking is a source of short-term financing generally used by the lower income group to alleviate their cash flow problems. It is also employed by petty traders as a mean to obtain working capital for their business. To cater for the demand of non-interest bearing pawn-broking services by the lower income group, a few Islamic pawn-broking institutions were established in the early 1990’s. The first Islamic pawn-broking institution, Mu'assasah Gadaian Islam Terengganu (MGIT), was set up by the Majlis Agama Islam dan Adat Istiadat Terengganu in January 1992. In March 1992, Kedai Al-Rahn (KAR), a subsidiary of Permodalan Kelantan Berhad commenced its operations. On 21 August 1993, the Minister of Finance announced the introduction of a scheme, known as Skim Al-Rahnu (SAR) through the collaboration of three institutions namely Bank Negara Malaysia, Yayasan Pembangunan Ekonomi Islam Malaysia and Bank Kerjasama Rakyat Malaysia Berhad. Later, on 27 October 1993 the first phase of SAR was launched at six branches of Bank Rakyat.
Al-Rahnu or pawn-broking is an activity whereby a valuable item is collateralised to a debt which may be utilised as payment should the debt is not repaid within the agreed period. In the event the debtor is not able to repay the debt, the pawned asset will be sold off to settle the outstanding debt and any surplus will be given back to the owner of the asset. However, if the owner of the asset could not be traced, it is the responsibility of the Islamic pawn-broker to place the fund in the Baitulmal account for future savings should any claims be made for the surplus by the owner or his heir.
A combination of three concepts is applied for the short-term financing under Islamic pawn-broking, i.e. Qardhul Hasan (benevolent loan), Al-Rahnu and Al-Wadiah (custodian).
(a) Qardhul Hasan
A bank will grant a benevolent loan to the applicant who wishes to pawn his valuable item. The loan will be issued under the concept of Qardhul Hasan, whereby the customer is only required to pay the amount borrowed;
Prior to disbursment of cash to the applicant, the applicant is required to place a valuable asset as collateral for the loan extended by the bank;
The bank accepts custody of the valuable asset on a Wadiah concept whereby the bank promises to keep the valuable asset in a safe place. The bank will need to take precautionary measure such as providing security and insurance to ensure its safe returns once the customer pays his debt. Under the Wadiah concept, the bank will charge the customer for the services rendered in keeping the valuable asset.
Islamic Hire Purchase
The concept used for Islamic hire purchase is Al-Ijarah Thumma Al-Bai' (AITAB). The concept consists of a contract of leasing or hiring followed by the purchase of the leased or hired asset. The concept is widely used for the purchase of passenger vehicle by finance companies. In this concept, the finance companies will purchase the passenger vehicle and lease it for a specified period of time. Subsequently the finance company and lessee agrees to enter into a contract for the lessee to purchase the passenger vehicle at the end of the lease period. The criteria for AITAB contract commonly used in Malaysia is as follows:
AITAB consists of two separate contracts, i.e. leasing or hiring contract and sales contract at the end of the leasing/hiring period or at an agreed time;
The AITAB contract contains the clause to apply the provisions of the Hire Purchase Act 1967 that does not contradict Syari'ah;
Deposits paid by the customer to the vehicle dealer will be construed as the advanced payment by the finance company and will be taken into consideration in determining the monthly rental;
The AITAB documents must include the clause “to sell the vehicle” by the finance company and the clause “to purchase the vehicle” by the lessee or hirer at the end of the leasing and hiring period as well as the redemption clause by the hirer for early settlement;
The AITAB contract may also contain the repossession clause and the storage of vehicle cost clause for cases of delinquent customers;
The Ijarah principle underlines that the finance company as the rightful owner of the asset will bear a reasonable risk. Nevertheless, the finance company is entitled to compensation as a result of negligence by the hirer in maintaining the vehicle;
In cases where the customer no longer desires to continue with the lease arrangement, he may surrender or sell his rights to another customer to continue with the lease and subsequently purchase the vehicle.