Table of Contents

1.0 Concept of Ar-Rahn..................................................... 1

2.0 Concept of Sri Lankas Economic and ArRahn........................................................................................... 3
3.0 Differences Between The Operation of
Ar-Rahn and Traditional Pawnshops.............4
4.0 Advantages of ar-Rahn to the people of
Sri Lanka................................................................................ 9
5.0 Appendix........................................................................... 11
6.0 References...................................................................... 12

1.0 Concept of Ar-Rahn

Ar-Rahn is also known as Ar-Rahnu, or mortgage or collateral. In the Islamic
jurisprudence, the concept of Ar-Rahn is defined as a security for a debt, when the
debt is failed to pay back in term of money, the collateral will be taken. Ar-Rahn can
accepted in Shariah contract. It is because when Prophet of Allah, Muhammad
(SAW) passed away , his shield as a collateral in Medina with a Jewish man. It is
known from Sunnah. Ar Rahnu, also known as Ar Rahn, is islamic pawn broking for
short-term collateralized borrowing. The development of Ar Rahnu in Sri Lanka
provides an alternative pawn broking service for borrowers, which is in accordance to
Shariah principles.
Traditional pawnshop is also known as conventional pawnshop. Pawnshops is
a type of business to offer the personal loan to the other people and the borrower need
to put some personal property as collateral. When the borrower pawned a property for
a loan, then borrower and lender will discuss a certain date and sign the agreement.
The borrower must pay back the loans (amount of loans plus interest) in the certain
time that agree by borrower and lender. So, if borrower cant pay back the loan in
certain time, the lender will take the property to sales and didnt give back to
borrower. Pawnshops specialise in the business of making cash advances to persons
who pledge goods in security of payments. The pledges which are mainly gold and
jewellery are held as collateral until the period of redemption expires.
Ar Rahn can be classified into four concepts: Qardhul Hasan (Interest free loan)
A financial institution will grant a interest-free loan to the applicant who
wishes to pawn his valuable item. The loan issued under the concept of
Qardhul Hasan requires the borrower to pay the same amount borrowed to
redeem the valuable item at the maturity of the agreed period.

Wadiah Yad-Amanah(Trustworthiness)

The borrower is required to produce returnable collateral to ensure repayment

of the loan. The borrower entrusted the lender to look after the belongings
during the loan period. If an unthinkable event happens to the collateral item
not due to the lenders negligence, the lender is not required to replace the
item.
Al- Ujrah (Safe keeping)
Al- Ujrah concept states that lender is allowed to charge a reasonable fee for
the services rendered in keeping the pawned items safe and in good condition.
The financial institution accepts custody of the valuable asset on a Wadiah
concept whereby the bank promises to keep the valuable asset in a safe place
and return when the time comes. The lending institution takes the
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.
Wadiah Yadhomanah (Safekeeping with guarantee)
The lender will be responsible to replace the missing or stolen items to the
owner if lender fails to keep the agreement due to own negligence. The
benefits of Islamic Pawn broking system:

Based on Syariah principles which are an interest free form of loan.

Easier to apply, faster approval, and guaranteed safety of the jewellery.
Cheaper fee than conventional pawn broking.
Fixed storage fee.

2.0 Concept of Sri Lankas Economic and Ar-Rahn

In Sri Lanka, pawnbroking activity is governed under the Pawnbrokers Ordinance.
Licenses are issued by the regulatory authority to undertake a pawnbroking business
in Sri Lanka with certain rules and regulations. Licensed commercial banks, finance
companies and specialized pawnbroking agents are involved in this business.
Sri Lanka is focusing on long-term strategic and structural development
challenges as it strives to transition to an upper middle-income country. Key
challenges include boosting investment, including in human capital, realigning public
spending and policy with the needs of a middle-income country, enhancing the role of
the private sector, including the provision of an appropriate environment for
increasing productivity and exports, and ensuring that growth is inclusive. Customer
demand for pawnbroking services in Sri Lanka is greater than the demand for loans.
This may be explained by the simplicity of procedures involved in pawnbroking,
allowing immediate access to funds, and the fact that most customers own the
required collateral. However, the gold jewelry pawnbroking sector in Sri Lanka has
been affected following the drop in gold prices in the world market.
In conclusion, Sri Lanka need the Ar-Rahn service to survive. Many peoples
are interested with the Ar Rahn, this is because Sri Lanka economic is consider as
lower middle income country. Their income is low, so they need for short term
borrowing.
In addition, Amana Bank was lauched the Ar Rahn service to cater the demand
of non interest bearing service for lower income group. And because of this rahn
service are highly accepting by Sri Lanka peoples, the market share is increasing but
the gold price is decreasing.

3.0 Differences Between The Operation of Ar-Rahn

and Traditional Pawnshops
Amana Bank is the first Islamic bank in Sri Lanka, start operation at year 2011. As
marketing executives for Amana Bank, we plan to use the Ar-Rahn to replace the
traditional pawnshops. Amana Bank recently launched Ar-Rahn services to cater to
the demand of non-interest-bearing pawnbroking services for the lower income group.
Some people in Sri Lanka still cannot accept the Ar-Rahn because there are several
differences between the operation of Ar-Rahn and traditional pawnshops. The
followings discuss about difference under both Ar-Rahn and traditional pawnshops.
Firstly, the difference between Ar-Rahn and traditional pawnshops is the
pawned items. Ar-Rahn allows its customers to pledge their valuable assets as a form
security to obtain financing. However, it is noted that only gold and gold jewellery
can be allowable pledged item in the Ar-Rahn transactions and the amount of
borrowing is dependent on the value of that gold (Appannan & Doris, 2011); (Ismail
& Ahmad, 1997). Here, gold is used as collateral over other items due to its
advantages such as it can be conveniently traded, its purity can be ascertained easily
and its value is relatively stable. Along the same line, another principle governing ArRahn scheme is related to Wadiah Yad-Amanah (trustworthiness). In relation to this
principle, wadiah is one of the main concepts in Islamic banking that agree on the
custody of another persons valuable assets (Mansor, 2009). In Ar-Rahn scheme, the
borrower (ar rahim) who has pledged their assets for the purpose of obtaining the loan
has trusted the lender (al murtahin) to take care of their wealth or assets within the
loan period. The lender (al murtahin) is not bound to be responsible to the collateral
in case if there is anything happens to it provided that it is not due to the his
negligence. At the maturity of the stipulated period, the borrower (ar rahim) needs to
pay equal amount borrowed in order to redeem the collateral (ar rahn) pledged. In
Islamic banking institutions which offer Ar-Rahn, customers only can use the gold as
a pawn item. Comparatively the conventional pawnshops not only accept gold and
gold jewellery and it accepts any valuable items such as Rolex watches, diamond and
other valuable electronic items. Other than that, the common items always pawned by
customers include jewellery, electronics, collectibles, musical instruments and tools.
Secondly, the difference between the operation of Ar-Rahn and traditional
pawnshops is the interest charges. The interest charges involved in borrowing from
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Ar-Rahn is calculated based on the safekeeping charges. This principle of storage fee
used by the Ar-Rahn scheme is called as Al ujrah (safekeeping fee). In explaining this
principle, the reasonable service fee payable is allowed to be charged by the lender (al
murtahin) in safeguarding the wealth or assets of the borrower (ar rahim). This
service fee is given to the lender (al murtahin) may be to compensate him for taking
some precautionary measures in looking after the wealth or assets. The borrowers
only need to pay the principal plus a safekeeping fee as agreed in the agreement
during the maturity date. However, the traditional pawnshops have the high interest
charges. The interest charges charge by traditional pawnshops is calculated based on
the monthly interest charges, which is the 2% per month or 24 % per year, well above
the market rate. Therefore, the interest charges impose by Ar-Rahn is cheaper than
traditional pawnshops.
Besides that, the pawning value between Ar-Rahn and traditional pawnshops
also different. Usually, the valuation is based on the purity of the gold item. In ArRahn, the borrowers can receive a loan of up to 60% to 70% of the value of the item
pledged and based on current market value. The borrowers will be charged a
minimum safekeeping fee depending on the value of the pawned item. For example,
the fees ranging from free to RM0.75 for every RM100 of gold value depending on
institutions. However, unlike the traditional pawnshops, the loan amount receive by
the borrower is much lower than Ar-Rahn, which is average 30.5% of the value of the
pawned item. The borrowers also need to pay the high interest for the pawned item.
Therefore, the pawning value of the same item in Ar-Rahn is higher than traditional
pawnshops.
Furthermore, the other difference between Ar-Rahn and traditional pawnshops
is repayment period. The repayment period in Ar-Rahn is reasonable whereby the
borrowers may request to extend the repayment period. The borrowers will be given a
duration of six months to make repayment. If the borrowers fails to pay within the six
months, they can request to extend the period for another three month and lastly for
another two months. It means that the duration given for repayment is almost 11
months. If the borrowers fail to pay within the extension period, the collateral has
authority to auction pledge good to pay off the loan. If there is any surplus after the
loan has been settled, the pawned item will be returned to the borrower. On the other
hand, the repayment period in traditional pawnshops is unreasonable whereby they

will charge the additional payment from the borrower if the borrower is unable to pay
back the loan within the period.
The payment method in Ar-Rahn and traditional pawnshops is different. For
the payment method on Ar-Rahn, borrower (ar rahim) can pay this loan in
installments or 6 months or reclaim the goods pawned jewellery in a lump sum on or
before the maturity date together with wage savings. Payment also can accept in term
of cash or cheque. But for the traditional pawnshop, it does not accept payment in
instalments. The borrower must pay the full amount plus the interest within a
specified period that agreed. Failure to pay back means loss of collateral.
The other difference between Ar-Rahn and traditional pawnshops is insurance
on the pawned items. For the Ar-Rahn scheme is conducted based on the concept of
Wadiah Yad-Dhamanah (guaranteed storage). In Ar-Rahn scheme, the lender (al
murtahin) is bound to be responsible at any circumstances in safeguarding the assets
pledged by the borrower (ar rahim). The lender (al murtahin) is deemed to be
responsible in case if the assets are missing or damaged while it is in his or her
custody. Item for Ar-Rahn are protected and insured by Takaful insurance scheme
throughout the financing scheme. For the traditional pawnshops, in the event of theft,
fire or disaster to the pawnshop to pawn cause missing or damaged items, pawn
dealers only pay for the amount of collateral that added 25 % to the lender as
compensation. The security of pawn stuff is not guaranteed. This is certainly unfair
and unjustly to the borrower but this is not provided in the existing Act.
In addition, there are the different default between Ar-Rahn and pawnshops. In
Ar-Rahn, in the event of default and if the institution has to sell the jewellery or
pawned items, advance notice on bidding will be given to the public and the jewellery
or pawned items are disposed or sold via open tender system which reflects the
fairness and non-exploitative system of Islamic finance. So, this is transparent at the
public. Unlike the conventional pawn broking, the pawn gold such as rings, bracelets
or necklaces, usually are not weighed or measured properly. There are many cases
occur in which the pawned jewellery lighter or a little short when redeemed. Perhaps
the pawn dealer is a little scrape gold of the goods. Due to the weight and length of
the pawn gold are not recorded clearly and properly on the receipt, the borrower has a
difficulty in caught the shopkeepers malpractice activities and many customers do
not know when their collateral will be auctioned off. The notices about the auction are
only publicised in Chinese and English language papers. Usually, these notices will be
overshadowed by other more interesting notices. This is disadvantage for the to the
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traditional pawnshop customers who are usually not understand English and Chinese.
So, traditional pawnshop is not transparent to the public.
Besides that, the balance returned to the borrowers between both is different.
If the Ar-Rahn borrower (ar rahim) fails to redeem the collateral within the stipulated
period, a notice auctioning the assets will be given to the borrower (ar rahim). If the
lender (al murtahin) still does not receive any response, the assets will then be
auctioned in order to recover the amount of loan outstanding. Here, if there is any
surplus derived from auctioning the assets, it shall be returned back to the borrower
(ar rahim). However, in case if the borrower (ar rahim) cannot be detected therefore
it should be the responsibility of the Islamic institutions to handle it, such as it should
be put in the Baitulmal account for the benefits of both borrower (ar rahim) and his or
her beneficiary (Cheong & Sinnakkannu, 2012). In the traditional pawnshops, when
the borrower fails to redeem within the prescribed period, the traditional pawn dealer
has the right to auction the pawned jewellery below RM100. For items valued at more
than RM100, pawn dealer must elect the licensed auctioneer to act on behalf of them.
They need to follow certain rules and regulation as being stated in the Act.
Unfortunately, in many cases, the pawn dealers collaborate with licensed auctioneer.
They inform the future buyer about the auction pawned item at the lowest price, thus
make the pawner earn nothing after the auction taken place. Many pawn dealers also
do not return the extra money after the auction surplus and net debt. This is a
persecution against the borrower.
Moreover, the other difference is the operator of ar-Rahn and traditional
pawnshops. Borrowers can get the Ar-Rahn through many ways which by the bank or
non-bank institution. Borrower can get the Ar-Rahn facility by banks, companyoperations, state government agencies and else. While the traditional pawnshop
always run privately and sole proprietor based individual based. So, there are many
style of traditional pawnshop in the world. Every country has their own style and
different style on traditional pawnshop. For example, in Hong Kongs pawnshop is
following the Chinese traditional style. For make sure the pawnshop is secure, the
counter of shop will be higher than the persons height, so the customer can only hold
up their hand to offer their belongings. There have a wooden screen between the door
and a privacy counter to protect the customers privacy. A bat holding a coin is the
symbol of pawnshop in Hong Kong. For Japan, normally pawnshop is symbol by
number seven(7), also known as shichi, this is because seven is sound similar with
8

the word of pawn in Japanese language. In Malaysia, the pawnshop must hang a
signboard with Pajak Gadai. Normally the pawnshop in Malaysia is managed by
Malaysian Chinese. So, traditional pawnshops have their own style in different
country.
The last difference between Ar-Rahn and traditional pawnshops is ownership
of pawn stuff. The ownership of pawn stuff in Ar-Rahn will be proof by the lender.
When the lender sells the pawn stuff, the lender need the letter of consent if
belongings to others. So, the borrower must know the situation of the pawn stuff.
Unlike the traditional pawnshop, it always did not approve the ownership of the pawn
stuff. It is because if the borrower is unable to pay back in the short repayment period,
the pawn broker considers the pawn stuff is belonging to broker. So, they will sell the
pawn stuff without inform borrower.

4.0 Advantages of ar-Rahn to the people of Sri

Lanka.
Amana Bank was taking initiatives in develop their products and services by using
shariah principle as the guidelines. Therefore we plans to launch the Ar-Rahnu Islamic
pawn broking business in Sri Lanka because Sri Lankas market size is large and we
believe there are ample opportunities for us despite being a late starter. We also
believe there is huge potential upside in Sri Lanka and hope to grow its contribution
towards people of Sri Lanka. There are larger contributions to communities of Sri
Lanka:
9

a. Source of Capital
With Ar Rahnu scheme it can be as one of the sources of capital for the
small and medium companies such as a source of start-up capital, capital
injections and working capital. There are a lot of small business owners exist
inside our society and they located at all places. They need fund starting from
small amount up to thousands of ringgit. Therefore Ar Rahnu scheme can
contribute to their business. The problem of getting loan from financial
institution is normally due to the collateral issue and complicated procedures.
Generally the small business owners do not have large possession of
assets and bank does not accept gold in their normal practice. Besides,
bank also request for guarantor and a list of information about the
business. With the Ar Rahnu scheme all these difficulties had been overcome.
The contribution of the funds from Islamic pawning also can increasing the
standard living of the people in Sri Lanka.
b. Lower fee than conventional pawn broking
The main purpose of Islamic pawn broking is to help the middle class people
that need funds for emergencies cases. Nowadays, Islamic pawning become
too popular among middle class peoples who have some difficulties to
obtain the funds from formal institutions for emergencies uses.

c. Short-term loan
If Ar-Rahnu launched in Sri Lanka, it is a best way and option for getting
short-term loan easily, quickly, and safely. We know that there are several
significant weaknesses found in conventional pawn broking system; among
them are decrease in quality of jewels after the pawning period, higher interest
rate, low collateral value, illegible pawn ticket, and no return of surplus after
the goods have been auctioned off, just to name a few. Thus, it is believed that
Ar-Rahnu can be regarded as a better choice than conventional pawn broking.
Ar-Rahnu is not only suitable for the Muslims but it also appears to be a good

10

system which provides benefits to all of society regardless of religion and

ethnicity.
d. Micro credit facilities
The main objective of this scheme is to provide micro credit facility to
the

members

of

the

public such as indirectly for socioeconomic

development of the target groups. The use of Ar Rahnu services were to solve
unexpected problems childrens school expenses and daily expenses among
people of Sri Lanka.

5.0 Appendix
To summarise the differences between Ar-Rahn and traditional pawnshop, we have
comes out with this comparison table.
Principles
Pawned items
Interest charges
Pawning value
Repayment period

Ar-Rahn
Only pure gold
Low rate safe keeping charges
Up to 60% - 70% of the value
Reasonable

Payment method

Accept instalment or lump sum

Insurance
Default

Item kept are protected and

insured by takaful
Transparent to the public

Traditional pawnshops
Any valuable item
High interest charges
Average 30.5% of the value
Unreasonable
Not accept instalment , only
accept lump sum
Security of pawn stuff are
not guaranteed only 25%
compensation offered
Not transparent
11

Balance
Operator
Ownership

Returned to the borrower

Not returned
Bank, co-operative, YAPIEM, Sole proprietor based
Individual based
state government agencies
Provide proof of ownership
Letter of consent if belonging Not required
to others

6.0 References

12