The Justification of Shariah, Legal and Operational Improvement in Al-Rahnu Product Framework

Abstract

The significance of Al-Rahnu (pawnbroking) contract is undeniable. In Malaysia, Al-Rahnu has been widely used for quick financial assistance to those in need, but are not qualified to apply for financing from financial institutions due to nonexistent of collateral. Nevertheless, existing Al-Rahnu products have been criticized for its use of incompatible composite contracts, limited pawned assets, limited repayment period and high ujrah fee. Not only that, Al-Rahnu has also been condemned to contain some prohibited elements. This study is conducted with the aim of exploring ways and possibilities of improving the Al-Rahnu structure by embedding three areas of concern, namely Shariah, Legal and Operational. For such a purpose, the qualitative approach of interviewing professionals of the financial industry was adopted. Data collected from the results of the interviews were recorded and classified into those aspects pertaining to the Shariah, Legal and Operational. The study found that the proposed structure of shariah improvement allows profit generation to be placed in the right position as a trading contract while at the same time maintaining Al-Rahnu as a trust-based security contract, without trying to employ Al-Rahnu for a purpose that contravenes the nature of Al-Rahnu’s contract and its objectiveness. As a result, this structure is ultimately safe from the prohibited elements. The legal consideration suggests the establishment of a Sharīʿah Department consisting of the Sharīʿah Risk Management Control, Sharīʿah Review, Sharīʿah Research, and Sharīʿah Audit Function to ensure that their operations achieved a third-party Sharīʿah perspective so as to avoid a biased sentiment. Lastly, the operational part suggests the current rate of ujrah between 13–16% per annum over the total loans received shall be lessened by 2% or more, or 0.3% for each month. This is because the institution has gained the advantage over the loan margin and the margin of the loan shall increase to 80% or more from the marhūn value since the institution would gain through the ujrah charge.