CRITICAL APPRAISAL OF

RAHN-BASED ISLAMIC MICROCREDIT FACILITY

Prepared and Presented by:

Indrawan Imam Wahyudi – G1713233
Narruerong Wongsan – G1616169
Feisal Nadhirrahman – G1713571
Rendytyas Yuli Saputra – G1611027
Yuan Ge – G1515449
Xue ZiFeng – G1523567
 INTRODUCTION
(SECTION 1 AND 2)

R A H N - B A S E D M I C R O C R E D I T FAC I L I T Y
INTRODUCTION AND METHOD

• Rahn is merely a security contract (naqd altawthiq) that serves as a legitimate

guarantee of debt, whether the debt arises from a loan contract (qard) or a
deferred exchange contract (bay’ mu’ajjal).
• 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 MODUS
OPERANDI
OF RAHN-BASED
M I C R O C R E D I T FAC I L I T Y
UNIQUE FEATURES IN THE RAHN -BASED
ISLAMIC MICROCREDIT PRODUCT

(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

FINANCING MARGIN AND
SAFEKEEPING FEE
Financing Margin
Varied between 50% to 70%
from the value of marhun
(collateral)
For example, if the customer
pledges gold worth RM 10,000,
the financing given is RM 7,000
maximum
Safekeeping Fee
Calculated based on amount of
marhun, not based on
loan/financing given
The safekeeping fee is higher
than actual storage cost
(accrued profit)
Can be calculated on daily basis
(365 days a year) or monthly
basis (12 months a year)
REDEMPTION AND AUCTION PROCESS

Redemption Auction
If debtor cannot fulfill repayment at due
A debtor can redeem his jewelery if he date or does not request extension
can repay his debt and safekeeping fee without full settlement at due, the
due date. pawnshop or bank as creditor will
proceed the jewellery to auction list.

A debtor can also request extension

Any surpluses from auction process will
period for repayment up to 9 to 11
be returned to the debtor.
months after contract execution.
WADI’AH YAD DHAMANAH CONTRACT

1 Customer keeps
jewellery in the
bank and pays the
fee

customer Bank

2 Bank provide safekeeping service

and receive safekeeping fee
LOAN AND RAHN CONTRACT SCHEME

1 Jewellery as
Collateral
(marhun)

customer Bank

2 Loan (Qard) with conditions of

Rahn
 SECTION 3

SHARIA ISSUES ON RAHN-BASED

M I C RO C R E D I T FAC I L I T Y
SHARI'AH ISSUES
(EXISTENCE OF TWO CONTRACTS)

Loan (qard)
Contract

Wadi’ah Yad
Dhamanah
Contract

In current Islamic microcredit facility, there are two structures adopted. First structure begins
with a loan contract (qard) prior to the execution of the wadi’ah yad al-damanah contract,
while on second structure, wadi’ah yad al-damanah contract is executed before loan contract.
 SHARI'AH ISSUES
(BAY’ WA SALAF AND QARD JARRA MANFA’AH)

Pay •Wadi’ah yad

safekeeping dhamanah
fee contract

Indicates
Safekeeping Benefit for
customer
fee creditor
motive
•Qard
Loan is given contract • Higher than • To get loan • Qard jarra
storage cost from bank manfa’ah (loan
with additional
benefits)
Sale (of • Bay’ wa
service)
contract with salaf
loan contract

In the Islamic microcredit condition, the safekeeping fee is

This procedure involves a sale contract in a loan contract
higher than normal way, it indirectly indicates the actual
because banks only give a loan to applicant in the situation
motivation of customer that agrees to pay a bill of higher
that pays the safekeeping fee and this behavior is strictly
amount that storage cost which further substantiates the
forbidden by Shari’ah because of bay’wa salaf.
presence of the riba element embedded in this scheme.
 SHARI'AH ISSUES
(CONTRACT COMBINATION AND SAFEKEEPING FEE)
Wadi’ah Wadi’ah
contract contract

Muqtada
Invalid
Rahn Rahn
contract contract
al-’aqd

Wadi’ah
Same fee
object

Based on the opinion of the majority of Hanafi scholars that

After quoting some words of Al-San’ani and Ibn Hazm, we
whenever a fee is impose for custodianship to keep the
can conclude that it is unnecessarily include the wadi’ah in
wadiah items safe, the changing will be occurred, then the
rahn contract. It is a legal trick to materialize an illegal
issue of conflict between the nature and implication
motive or to acquire unjustified benefit. Also, this
(muqtada al-aqd) of the combined contracts (wadi’ah yad
combination has non-harmonious legal effect
damana and rahn) comes into the picture.
 SHARI'AH ISSUES
(BAY’ AL WAFA)

Bay’ Al Wafa
• Sale contract (Bay’) between two parties with an obligation for buyer to resell the
commodity in a certain date in the future to the seller
Jurists have different opinion about it
• Most of them hold view that this contract is impermissible on the premise that it resembles
the contract of rahn in which the buyer benefits from the sold asset.
• It is important that the current structure can be concerned worse than Bay’al-wafa in terms
of the ribawi element embedded it.

International Fiqh Academy in its 7th session has resolved Bay’al-wafa issue
• It is invalid contract on the premise that it is in fact a loan contract that draws benefit.
 SECTION 4

OT H E R S T R U C T U R E S F O R
R A H N - B A S E D I S L A M I C M I C R O C R E D I T FAC I L I T Y
THE MODUS
OPERANDI
O F OT H E R S T RU C T U R E S
STRUCTURE 2:
COMBINATION OF WADI’AH BI-AJR, QARD, AND RAHN-AL-WADIAH

1 Wadi’ah Bi-Ajr

customer Bank

2 Loan (Qard Hasan) with conditions

of Rahn
THE SHARIA ISSUE

1. Qard Contract

• Benevolent loan (Qard) can’t be stipulated with

another contract (that the customer must agree with
other rahn contract

2. Bank still seeks an income from the

combination of Qard and Wadi’ah Bi Ajr
• can be led to Qard Jarra Manfa’ah
STRUCTURE 3:
COMBINATION OF TAWARRUQ AND RAHN CONTRACT
1 Financing facilty

2 Buy a commodity
4 Pledge a gold
(rahn)

Appoint bank as a client to sell commodity to Broker A

5
third party

customer
Bank
Sell a commodity with
3 marked-up price (deferred
payment)
6 Sell a commodity
7 Cash
Broker B
THE ISSUE

1. Safe from Bai’ wa Salaf and Qard Jarra

Manfa’ah

2. Bank’s income from generated mark-up price

(tawarruq scheme)

3.Tawarruq

• Classical is allowed
• Munazzam is prohibited (can be led to bai’ Inah)
STRUCTURE 4:
COMBINATION OF QARD, RAHN, AND HIBAH

Rahn (without
2 safekeeping fee)

Customer gives a gift (can

3 be money) as hibah

customer Bank

1 Qard
THE FEATURE

1. Loan (Qard) is free from Qard Jarra manfa’ah

2. Free from sharia issue, as long as the hibah

has not become the ‘urf (customary act)

3. Hibah is not contractual (hasn’t been

stipulated with qard)

4. Not commercially viable

 SECTION
5
PROPOSED STRUCTURE FOR AN ISLAMIC
M I C R O C R E D I T FAC I L I T Y
THE MODUS
OPERANDI
O F B AY ’ A L - S A R F
( C O N T R AC T O F C U R R E N C Y )
Sarf contract 1
1

Gold bar/Jewellery

Bank
customer 2

Cash

Biding unilateral promise

(wa’d mulzim mi tarf wahid)
 During the sixth month –
Sarf contract 2 the end of the eighth month
1

Gold bar/Jewellery

Bank customer
2

Cash
IMPORTANT FEATURE

I. Both gold bar and jewellery are treated as currency.

II. Bank is liable to sell a similar sum, weight, and quality of gold
bar/gems only (not exactly the same but it can be).
III. Bank can sell gold bar/gems to another customer and The
customer is not bound to buy them back.
IV. Free from Qard contract
V. Unilateral binding promise is allowed by the majority of scholars.
POSSIBLE SHARIA ISSUES ON THE
SCHEME
(i) bay’ al wafa’
Answer: the bank is not obliged to resell the same physical gold, but similar value instead. Also, sarf is
designed for currency exchange, while bay’ al wafa is for commodity

(ii) second sarf transaction that bind to first sarf transaction

Answer: Second transaction is a unilateral promise by bank. Each party, either bank and customer
may dismiss this option.

(iii) existence of cancellation clause

Answer:This clause is not exist because once sarf transaction is settled, ownership of currencies will
be transferred to respective party (bank gets gold, customer gets fund)
POSSIBLE SHARIA ISSUES ON THE
SCHEME (CONT’)
(iv) contradiction on nature of sarf contract
Answer: the bank is not obliged to resell the same physical gold, but similar value instead.

(v) bay’ al inah

Answer: sarf transactions (both first and second) are exercised on spot basis. Also, the bank is not
obliged to resell the same physical gold, but similar value instead.

(vi) riba al-qard

Answer: sarf transactions (both first and second) are exercised on spot basis. Also, this is a currency
exchange that each party gives counter value to opposite party that differ this transaction from debt.
CONCLUDING
REMARKS
 POSSIBLE SHARIA ISSUES ON THE
SCHEME (CONT’)
Current schemes of rahn based microcredit facility has some issues
• Sharia compliance (riba, muqtada al-’aqd)
• Economically not feasible (hibah based scheme)

This paper provides a sharia compliant and economically feasible

• Sarf contract

Sarf contract can meet most (if not all) requirements of a sharia
compliant microcredit facility
• Further evaluation and investigation especially by sharia scholars are needed to ensure sharia
compliance issue in both form and substance