At its 194th meeting on 25 June 2019 and its 195th meeting on 31 July 2019, the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) resolved that the ar-rahnu product structure through the combination of qard (loan), rahn (pledge), wadi`ah (safekeeping) and ujrah (fee) offered by Islamic financial institutions (IFIs) in Malaysia does not fulfil the Shariah requirements in Rahn Policy Document.
Ar-Rahnu in Qard Product Structure
Qard refers to a contract of lending money by a lender to a borrower where later it is bound to repay an equivalent replacement amount to the lender. While, rahn refers to a contract where one party, as rahin (pledgor) pledges an asset as marhun (collateral) to another party, a murtahin (pledgee) to fulfil the marhun bih (an obligation or obligor's liability) owing to the pledgee in the event of default of such obligor. Ar-rahnu in qard is the combination of these two contracts including wadi`ah and ujrah.
Process of Ar-Rahnu in Qard
Firstly, the customer will bring an asset, such as his gold, as collateral to the IFI for evaluation. Next, the IFI will offer a loan (qard) to the customer at 70% of the deposited assets based on the market value and the condition of the collateralized gold. The loan will be provided upon the customer signing the document. The loan amount and the safekeeping fee charged are specified in the document. Lastly, the customer will pay the loan amount together with the gold safekeeping fee based on the agreed terms and conditions.
Ar-Rahnu in Qard Rises Shariah Prohibited Issues
The interdependence and interconditionality of the loan contract and the elements of pledge, safekeeping, and fee in the product structure rises the issues of qard jarra naf'an (a loan that benefits the lender) and bai' wa salaf (combination of a sales contract with a loan) which are prohibited in Shariah.
Each contract in the ar-rahnu structure will not take effect without the other contracts. For example, the loan will only be granted if customers store their gold with the IFIs and the safekeeping fee charged is based on the gold value. Such structure, in which the safekeeping fee charged is indirectly linked to the loan provided, raises the issue of qard jarra naf'an.
Moreover, the combination of the pledge and the loan contract in the ar-rahnu structure for the purpose of profit generation is not in line with the objective of both contracts (muqtada 'aqd), where the former is for pledging and the latter is for charity.
The SAC New Ruling
However, at its 198th and 199th meetings on 29 October 2019 and 26 November 2019, the Shariah Advisory Council (SAC) of Bank Negara Malaysia has made a new ruling that the structuring of ar-rahnu product based on tawarruq and rahn is permissible and subject to a few conditions.
Why Tawarruq?
Tawwaruq refers to a financial instrument in which it involves two stages of transactions. At the first, a purchase occurs between the buyer and the original seller of an asset on a deferred basis. Then, the buyer of the first sale will sell the same asset to a third party on a cash and spot basis.
Following the non-permissibility of the existing ar-rahnu product structure based on qard and rahn, BNM has received proposals from several IFIs to offer ar-rahnu products based on tawarruq and rahn. Tawarruq is used as the underlying contract in the proposed structure to create indebtedness between the customer and the IFI. Then, the customer will pledge gold to the IFI as collateral similar to the existing ar-rahnu structure. However, the customer will not be charged a safekeeping fee as IFIs will generate income from the murabahah transaction in the tawarruq arrangement.
Murabahah is a sale in which the mark up price is disclosed to the purchaser and tawwaruq is the best instrument to generate cash on spot basis. The combination of these contracts is the suitable option for application on ar-rahnu product structure as there are only buy and sale contracts involved.
The SAC also has discussed whether the profit generated in the ar-rahnu structure based on tawarruq and rahn is in line with the Shariah principles, and the SAC rule concluded that combining both contracts does not result in Shariah violations such as riba, as it does not raise an issue on a loan that benefits the lender (qard jarra naf'an) and the issue of the combination of loan and sale contracts (bai' wa salaf) which are prohibited in Shariah.
As a result, the SAC ruled that the use of tawarruq and rahn contracts for ar-rahnu is in accordance with Shariah requirements, and the use of collateral in a financing contract is permissible to protect the financier's interest in the event of default.
Conclusion
In conclusion, ar-rahnu in tawarruq is the best option and applicable to replace the existing ar-rahnu product, which is based on the underlying contracts qard and rahn. This is because ar-rahnu in tawwaruq has the best practices mechanism structure which is more constructive and transparent and is in accordance with the Shariah requirements in the Rahn Policy Document.