PRINCIPLE AND PRACTICES OF AR RAHNU (ISB511)

GROUP ASSIGNMENT – AR RAHNU PROVIDERS IN MALAYSIA

‘AR-RAHNU X'CHANGE AND AR-RAHNU BANK ISLAM’

PREPARED BY:

FACULTY AND PROGRAMME : FACULTY BUSINESS AND MANAGEMENT (BA241)

SEMESTER : 5
CLASS : BAE6E

NAME MATRIX NUMBER

1. NUR ADIB ASHRAAF BIN NOR AZIDIN 2020985077
2. MUHAMMAD SYAHMI BIN MOHD AMI 2020971941
3. AINUN DANISYAH BINTI AZIZI 2020976641
4. NUR ALIS NARISHA BINTI CHE RAHIM 2020971175
5. NUR SHAHIRA BINTI SUHAIMI 2020597261

PREPARED FOR:
DR MUHAMMAD RIDZUAN ABDUL AZIZ

SUBMISSION DATE:
19 NOVEMBER 2021

TABLE OF CONTENT

Content Pages
 1.0 Introduction

2.0 History and Background of the Ar Rahnu Providers

2.1 Ar Rahnu X’Change

2.2. Ar Rahnu Bank Islam

3.0 Product Features & Modus Operandi

3.1 Ar Rahnu X’Change

3.2 Ar Rahnu Bank Islam

4.0 Comparison between the Ar Rahnu Providers

4.1 Eligibility

4.2 Loan Features

4.3 Shariah Concept Applicable

4.4 Takaful Coverage

4.5 Fees and Charges

5.0 Conclusion

6.0 References

7.0 Declaration Form

1.0 INTRODUCTION
Islamic banking has been widely used all over the world. Ar-rahnu is one of the components of
Islamic micro-financial tool. Ar-Rahnu is known as pledge or charge. It is known as Islamic
pawnbroking that provides short term financing to those who pawn their pure gold to the Islamic
banks or any Islamic pawnshop as a security. It is one of the microfinance options provided to
those in the middle- and lower-income groups who are looking for financial assistance for two
reasons, which is first, as a precautionary measure and second, to meet the individual or
family's needs. It is also a quick and easy money to their customers. This Ar-Rahnu follows the
shariah requirement where it does not have the element of Riba, meaning that it is interest free.
This principle is one of the characteristics that distinguishes Islamic banking from conventional
banking, despite the fact that both provide similar functions and services.

The nature of Ar-Rahnu is that if the pledgor fails to repay the pledgee, the pledged property will
be sold and the proceeds will be taken by the creditor to compensate the loss. If the value of the
goods mortgaged is more than the debt, the creditor is only entitled to the amount owed to him
by the debtor, and the balance will be returned to the owner. There are a few concepts that have
been used previously by Ar-Rahnu products, which are Qard (loan), Rahn (pledge), Wadiah Yad
Dhamanah (safekeeping with guarantee) and Ujrah (fee). But since 2020, the new Ar-Rahnu
products that apply with shariah concepts are Tawarruq (commodity Murabahah-cost plus profit
sale of commodity) and Rahn (pledge).

Islamic finance is becoming not only a phenomenon in the Muslim world, but also a global
phenomenon with international interest. It has also shown that it can compete with traditional
banks' services. In reality, many Islamic institutions around the world now have conventional
banks as partners. As Islamic financial products expand in popularity and adapt, customers
belief and trust grow as well, putting Islamic products in the spotlight right now. For us Muslims,
it’s better if we choose Ar-Rahnu as it is shariah compliance and it is free from Riba because we
are sure that pawnbroking in the commercial banks have interest. We should not violate God's
commandments.

2.0 History and Background of the Ar Rahnu Providers

2.1 Ar-Rahnu X’Change
Ar-Rahnu X'Change is a Bank Rakyat-affiliated franchise that provides Islamic pawnbroking
services (Ar-Rahnu). It first opened its doors on December 7, 2006, and now has 114 locations
across the country. Through the Ar-Rahnu, Az-Zahab, or Az-Zahab Premium schemes, Ar-
Rahnu X'Change (ARX Change) provides a quick cash micro credit facility collateralized by gold
or gold jewellery for up to RM650,000. Az-Zahab is a premium scheme compared to Ar-Rahnu.
The total maximum for pawning limit for Az-Zahab is up to RM100, 000 per day while Ar-Rahnu
is only RM 10,000 per day.

Apart from financing options, Ar-Rahnu X'Change also provides ARX Storage, a jewellery
storage service with the highest level of insurance protection, as well as jewellery cleaning
service. ARX Storage has some of the conditions which is only accepted types of jewellery and
gold from 18 karat to 24 karats. The storage fee is RM0.65 for every RM100 worth of pledged
jewellery and gold. Jewellery cleaning service is depending on the weight of the jewellery. The
charge will be RM3.00 for 6 grams and belows and additional RM0.50 for every additional gram.
This service is only available at only 68 outlets out of 114 locations.

Since 1993, Ar-Rahnu X'Change has operated on the basis of Bank Rakyat's experience and
skill in the Ar-Rahnu industry. Bank Rakyat provides cooperatives with the power and rights to
run commercial operations of its Ar-Rahnu business through its franchise structure. Rakyat
Management Services Sdn Bhd, a Bank Rakyat affiliate, is the franchisor of the Ar-Rahnu
X'Change franchise and manages all business activities.

3.0 Product Features & Modus Operandi

3.1.1 Product Features of Ar-Rahnu X’Change
Qualification  Malaysian citizen or a Malaysian Permanent Resident
 Non-citizen with a legal passport documentation
 Age 18 years old and above

Pawning Margin  65% of pledged value (for new client)

 80% of pledged value (for recurring client)

Pawning Limit  Ar-Rahnu: Minimum total amount RM100.00 and maximum

RM50,000.00 (RM10,000.00 per day)
 Az-Zahab: Minimum total amount RM10,001.00/day or total
maximum RM100,000.00

Mortgage Duration  Ar-Rahnu: Maximum up to 6 months

 Az-Zahab: Maximum up to 3 years (installment repayment plan)

Storage Fee Rate  Pawning Margin: 65%

 Financing < 1000: RM 0.65
 Financing > 1000: RM 0.75
 Pawning Margin: 80%
 Financing < 1000: RM 0.75
 Financing > 1000: RM 0.85
 * These rates are subject to the pledged value for every RM100
(monthly)
 Shari’ah Concept:

Shari’ah Concept:  Qard (interest-free financing)

 Wadi’ah Yad Dhamanah (stored with a guarantee of security
upon the pawned item)
 Ujrah (storage fee)

Benefits  Riba’ free

 No processing fees
 Storage fee are calculated daily (maximum 15 days)
 Extensive mortgage duration
 Pawned item is secured with Takaful coverage
  Flexible repayment scheme

3.1.2 Modus Operandi of Ar-Rahnu X’Change

In this modus operandi used by Ar-Rahnu X’Change, there are three applicable Shariah
concepts that they use. The concept of this financing loan is Rahn where the customers charge
the pledge asset to Ar-Rahnu Bank Rakyat as collateral for the loan. Next is the Shariah
concept of Qard refers to an interest-free financing is applicable here as Ar-Rahnu Bank Rakyat
provides short-term loan to customers. The holding of the pledge asset is based on the second
Shariah concept use by Ar-Rahnu Bank Rakyat which is Wadi’ah Yad Dhamanah where the
bank is responsible for the pledge asset and will return to the customer after full settlement of
loan or the redemption made on the pledge. The last one is the is Ujrah which is the
safekeeping fee imposed on the customer according to the value of pledge asset and the
duration of storage.

4.0 Comparison Between Ar - Rahnu X’Change and Ar - Rahnu Bank Islam

Table 4.0: Comparison Between Ar - Rahn X’Change and Ar - Rahn Bank Islam
Ar - Rahnu X’Change Features Ar - Rahnu Bank Islam
Malaysian citizen Eligibility Malaysian citizen
18 years old and above Foreign status with working
permit
Not bankrupt

Margin: 65% (new client) Loan Features Margin: 70 % of the gold value
80% (recurring clients)

Qard Shariah Concept Qard

Wadiah Yad Dhamanah Rahn
Ujrah Waadiah Yad Dhamanah
Ujrah

Yes Takaful Coverage NIL

No fees upon opening account Fees and Charges Balance of the loan,
safekeeping fee and other
administrative charges shall
be payable in full on the
maturity.

4.1 Eligibility
The qualification that are eligible for those who want to apply Ar - Rahn X’Change at Bank
Rakyat is that person must qualified as Malaysian citizen or Malaysia Permanent Resident. If a
person is non-citizen, he or she must qualify as non – citizen with a legal passport
documentation and the most important things is that person must have reach the age of 18
years old and above. As for Ar - Rahnu Bank Islam, the requirements need is an individuals
aged 18 years old and above should be a Malaysian citizen or permanent resident status or
foreigners with working permit. The individual is also required to have identity card or passport,
contact number and local correspondence address. Lastly, the individual must not be a bankrupt
which means that a person must free from their debts.
4.2 Loan Features
There are differences between the loan features of Ar - Rahnu X’Change and Ar - Rahnu Bank
Islam. If we look into the margin apply by Ar - Rahnu X’Change, the margin is 65% of the pledge
value for a new client and 80% of the pledge value for the recurring clients. As for Ar - Rahnu
Bank Islam, the margin apply is up to 70% of the gold value. However, the minimum amount for
mortgage limit is similar which is amounted up to RM100.00 for both Ar - Rahnu providers. But
for Ar - Rahnu X’Change there is a maximum pawning limit which is total amount up to
RM50,000. Next, the maximum total loan amount for Ar - Rahnu X’Change is up to RM160,000
or RM10,000 per day. For Ar - Rahnu Bank Islam, customer is allowed to apply more than one
loan application per day but the total daily loan amount must not exceed RM20,000.

4.3 Shariah Concept Applicable

Previously, there are three applicable concepts used in Ar-Rahnu X’Change which are Qard
(interest-free financing), Wadi’ah Yad Dhamanah (safekeeping with guarantee of security upon
the pawned item) and Ujrah the safekeeping fees). However, since January 2020, Ar - Rahnu
X’Change has applied the concept of Dual Wakalah Tawarruq where the bank is authorized as
an agent to complete Tawarruq transaction via the commodity platform. The Bank will purchase
the commodities on customer’s behalf based on pre- agreed Wakalah Bil Ujrah. Then, the bank
will subsequently purchase the commodities from customer on deferred Murabahah sale at cost
plus basis. Next, Ar - Rahnu products provide by Bank Islam are using four types of shariah
applicable concept which is Qardh, Rahn, Wadiah Yad Dhamanah and Ujrah. However, Bank
Islam has applied the Tawarruq concept in its Ar-Rahnu product since 19 July 2020.

4.4 Takaful Coverage

Other special thing about Ar - Rahnu X’Change is that they are providing takaful coverage. The
Bank will provide free takaful coverage to the customers with the minimum deposit of RM10,000
and minimum tenure of 12 months per certificate. However, the takaful coverage is only
applicable to the customer aged 18 until 65 years. The scopes of the coverage are including
deceased and permanent disability within the 12 months from the specified injuries declared
upon the opening of the Ar Rahnu account. The takaful coverage is valid as long as the account
is active and the value of coverage is RM10,000 on one-off basis. However, for Ar- Rahn Bank
Islam, they do not provide any takaful coverage to the customers. If customers have difficulties
in making payments, the customers have to contact Ar Rahnu outlets for assistance to discuss
other payments alternatives.
4.5 Fees and Charges
There is no fee have to be paid upon the opening of the account of Ar - Rahnu X’Change. The
bank also will not take any fees for wakalah fee and stamp duty fee. The rebate which also
known as Ibra’ will be given on the deferred profit for early settlement fee. As for the commodity
trading fee, RM 15 will be charge for every RM1 Million. If there is late payment during the
financing period, 1% will be charged per anum on top of the outstanding. As for Ar - Rahnu Bank
Islam, during the period of charge, pledge asset will be retained by Bank Islam with safekeeping
fee imposed on the fee rate set out by Bank Islam until the date of the redemption or the auction
of the pledge asset whichever is later. If customers want to take Ar Rahn product provide by
Bank Islam, the balance of the loan, safekeeping fee and other administrative charges shall be
payable in full on the maturity or the new maturity date if the redemption period is extended.

5.0 Conclusion

In summary, we have discussed on the topic of Ar-Rahnu or also known as an informal financial
institution, pawnshops that play an important role in providing funds especially for those who
struggle to obtain funds from the formal financial institutions. Ar-Rahnu or Islamic pawnbroking
is another alternative for people who is in need to borrow money immediately and with ease. As
interest is prohibited in Islamic pawnbroking, Ar-Rahnu can be considered as acceptable choice
for all Muslims in the country to borrow quick cash money.

The previous studies focus on the two different providers of Ar Rahnu in Malaysia which include
Ar-Rahnu X’Change and Ar Rahnu Bank Islam. Ar-Rahnu X’Change is a franchise which offers
Islamic pawnbroking services under Bank Rakyat that provide quick cash micro credit facility
collateralized by gold. Meanwhile, Ar Rahnu Bank Islam is a short-term financing where the
customer is required to pledge their gold as pawning asset against the financing that will be
given. Both of this organization offers the same function of offering quick and short-term
financing to their customers.

This study also conducted with the aim to examine specifically on what types of products were
provided by both Ar Rahnu providers. Despite having the same function on providing quick cash
to the customers, however both of these organizations offered various kind and different types
of products from each other. One of the products feature that differentiate between the two Ar
Rahnu providers are their pawning margin in which Ar Rahnu X’Change give their customers up
to 65% of the pledged value and up to 80% for regular clients. Meanwhile, Ar Rahnu Bank Islam
only margin up to 70% from the pawning asset value.

The findings generated from this study are expected to enrich the knowledge, broaden the
understanding, and increase the level of acceptance of Ar-Rahnu among Malaysian citizens.
Moreover, this study will be very helpful for customers to find the best Ar Rahnu providers that
could offer quick financing for them. This study also hopes to bring lights on the role of Ar Rahnu
in providing comprehensive financing to the low-income group. This study also will contribute
towards the better growth of Ar Rahnu industry and to sustain the Islamic finance industry in
Malaysia.

6.0 REFERENCES

1. Bank Rakyat. (2021). Business Financing-I: Working capitals for Ar- Rahnu X’Change.
Retrieved November 14, 2021, from
 https://www.bankrakyat.com.my/c/business/business_financing_i/working_capital_for_ar_ra
hnu_xchange-15
2. Bank Rakyat. (2020, January 2). Product Disclosure Sheet. Retrieved November 6, 2021,
from https://www.bankrakyat.com.my/d/personal/savings/term_deposit_i_account-
18/dwpds/PDS%20TD%20english%202%20January%202020.pdf
3. Bank Islam. (2021). Ar- Rahnu Tawarruq. Retrieved November 14, 2021, from
https://www.bankislam.com/personal-banking/ar-rahnu-tawarruq/
4. Bank Islam. (2015, July 15). Product Disclosure Sheet. Retrieved November 6, 2021, from
http://www.bankislam.com.my/home/assets/uploads/PDS-Ar-Rahnu-Jul2015-eng13.pdf
5. Nur Hayati Rasmin & Ruzian Markom. (2014). An Overview on Implementation of Ar-Rahnu
in Malaysia. Retrieved November 7, 2021 from
https://www.ukm.my/fep/perkem/pdf/perkem2014/PERKEM_2014_4A5.pdf
6. The AR-rahnu efficiency and its determinants. (n.d.). Retrieved November 14, 2021, from
https://ibtra.com/pdf/journal/v6_n1_article4.pdf.
7. Loanstreet. (2019, November 19). Ar Rahnu – Islamic pawnbroking in Malaysia. Loanstreet.
Retrieved November 14, 2021, from https://loanstreet.com.my/learning-centre/ar-rahnu-
islamic-pawn-broking-in-malaysia.
8.