JOURNAL ENGLISH

Chapter  one

     Introduction

                 

Generally, the modus operandi for conventional and Islamic pawnshop

transaction

is quite similar. Despite the similarities, the contract (aqad) in the Islamic

pawnshop is different from the conventional pawnshop. The loan granted

is based on four concepts, i.e.al-qardhul hassan (loan without interest), alwadiah

yad dhammanah (keeping valuable goods by guarantee), al-ujrah

(storage fees) and ar-rahn (collateral). The storage fee is based on the

value of gold and not on the amount of the loan, as shown in Table 2. This

fee is charged differently by each Islamic pawnbroker.

In the Islamic-based pawnshop, gold is the only permitted item. Gold have

several

advantages as collateral over other items6. Firstly, gold is easily resold

and so there is potentially auctioning the collateral should the borrower

not redeem the pledge. Secondly, gold’s purity can be easily determined

and so the risk of mispricing the collateral can be minimized. Thirdly, gold

chains and rings typically require only a small flat envelop for storage

and so can be kept securely in the bank safe at little, if any, additional

cost.6 Skully, M. S. (2005). Islamic Pawnbroking: The Malaysian

Experience. Paper presented at the 3rd

International Islamic Banking and Finance Conference 2005.6

Finally, women often receive gold chains and bracelets as wedding gifts

and generally retain personal ownership of these items especially in

Malaysia. This practice is common across income levels and so provides a

rich base of potential customers.

Table 2: The safekeeping fees charge in Islamic pawnshops

Value of pledged Bank

The valuation is based also on the purity of the gold item. For example 85

carat

gold carries a value of RM25 to RM26 per gm. The gold will be valued at

the prevailing market price. The best method of assessing gold jewellery in

Islamic pawnshop is by using acid test. The method is such as the piece of

jewellery will be rubbed on a black stone. The quality of gold will depend

on the friction; the rougher the feel of the gold, the better the quality. The

action of rubbing will be done at corners of the jewellery as these parts

are the easiest to determine if the gold is fake. In addition, a special

density meter is used to value the gold. In order to make the valuation free

from mispricing, the staffs in Islamic pawnshop will be sent to YPEIM

institution for courses that relate to get training in such matters. In terms

of legislation, the Islamic pawnbroking system is subject to certain laws

but no specific acts. For example, ar-rahnu scheme in Bank Kerjasama

Rakyat Malaysia Berhad is subject to three different acts, which are the

Bank Kerjasama Rakyat (M)

Berhad Act 1978, the Co-operative Societies Act (1993) and the

Development Finance Institutions Act 2002. In addition, Bank Kerjasama

Rakyat Malaysia Berhad has introduced separately the ar-rahnu manual

guidelines 7 . Other relevant acts are the Occupational Safety and Health

Act for workers who are exposed to acid for the gold test and the Weight

and Measurement Act, in which the gold weighing device has to be

licensed every year.8

Principally, Islamic pawnbrokers would prefer the customer to redeem

their

collateral within six months. However, if there is no repayment, there is an

extension period of three months after which the client is informed that the

item will be sold by auction within a further of two months period. Based

on the Manual of Islamic Pawnbroking of Bank Kerjasama Rakyat

Malaysia Berhad, any surplus from the sale of 7 Refer Bank Kerjasama

Rakyat (M) Berhad (2000, 2002 dan 2003). Manual Pinjaman Pajakgadai

Islam. Not published. 8 Sehan, M. A. (2004). Isu-isu dalam Perlaksanaan

Pajak Gadai Islam di Negara Serantau. Paper presented at the

“Konvensyen Ar-rahnu Serantau” on 12th – 13th October: Kuala Lumpur.

7 the gold over the amount owed to the pawnbroker, including

accumulated deposit fee and any costs related to the sale, has to be

returned to the customer. In case the customer cannot be located, the

lxxi

surplus will be forwarded to the Baitulmal from which the customer is

entitled to make future claims. As a whole, the mechanism of Islamic

pawnbroking can be illustrated as below.

Figure 3: Ar-rahn Pawnbroking Business.