Webinar on “Drivers of Ar-Rahnu (Pawn) Acceptance: Malaysian Evidence”

In this webinar, Dr Hassanudin Mohd Thas Thaker shared on his research paper on Ar-Rahnu or pawn financing as a form of personal borrowing in Malaysia.

Webinar Series 2020-2021: Financial Transformation, Credit Markets and Household Debt in Southeast Asia

Thursday, 1 April 2021 – ISEAS – Yusof Ishak Institute hosted a webinar on “Drivers of Ar-Rahnu (Pawn) Acceptance: Malaysian Evidence”, delivered by Professor Hassanudin Mohd Thas Thaker, Associate Professor of Finance in the Department of Economics and Finance, Sunway University, Malaysia and Professor Muhammad Rizky Prima Sakti, Assistant Professor in Islamic finance at the Department of Business Administration, University College of Bahrain.

Professor Hassanudin Mohd Thas Thaker
Professor Hassanudin Mohd Thas Thaker shared that Ar-Rahnu presents a cheaper alternative to obtain financing. Unlike in the formal credit market. Dr Muhammad Rizky Prima Sakti is discussant at this webinar, while Dr Nicolas Lainez moderated the session. (Credit: ISEAS – Yusof Ishak Institute)

Professor Thaker started the webinar off with an overview of Ar-Rahnu which is a form of Islamic pawn broking that has objectives similar to a personal loan. However, it differs in terms of the deposits of valuable items required in exchange for a loan. The pledged items, usually gold or jewellery, are placed securely with the scheme provider and returned to the owner once the loan has been fully compensated. Professor Thaker shared that Ar-Rahnu presents a cheaper alternative to obtain financing. Unlike in the formal credit market where borrowers many procedures are required for a short-term loan, Ar-Rahnu is more straightforward. The loan can be obtained upon the completion of an application form and exchange of the pledged item. In addition, Ar-Rahnu is interest-free, a prominent characteristic of an Islamic finance transaction.

Professor Thaker also noted that formal credit markets are reluctant to provide credit facilities to certain segments in the economy due to the high credit risks involved. This could disadvantage those who require financial assistance in the short-run and create disparity between credit demand and supply. As such, more borrowers may turn towards informal credit markets which are popular. These informal markets play a significant, complementary role in providing credit and in improving the socio-economy of the society. This is even more pertinent in view of the COVID-19 pandemic where the demand for credit in pawn institutions has increased greatly in Malaysia, especially amongst the poor and middle-income individuals who may be rejected by formal credit institutions.

Delving more into the differences between the conventional and Ar-Rahnu pawn financing, Professor Thaker highlighted that the former is sole proprietor based while the latter is institution-based in the form of Islamic banks. In addition, the interest rates borrowers are charged under conventional pawn financing depend on the loan time horizon. These rates could be much higher compared to Ar-Rahnu which does not charge any interest aside from a monthly safe keeping fee. Furthermore, no insurance is provided for the pledged items in conventional pawn financing. If misplaced, only 25% of its value will be recompensated. In comparison, the pledged items under Ar-Rahnu are covered by “Takaful” which provides an equivalent value of the pledged items. However, the pledged items accepted under Ar-Rahnu are limited to pure gold or jewellery while conventional pawn financing accept any valuable assets.

Professor Thaker also pointed out that the weaknesses of conventional pawnshops in Malaysia, namely: high interest rates, low collateral value, depreciation of the jewel’s quality, illegal pawn tickets and no return of surplus after the auctioning of goods. Thus, Ar-Rahnu has been emerging as a complementary role in short-term financing, amongst both the Muslims and non-Muslims, due to its flexibility.

Next, Professor Thaker laid the theoretical foundation of the study which was based on a combination of the previously modified Ar-Rahnu Acceptance Model and the Decomposed Theory of Planned Behaviour. For the research methodology, a self-administered questionnaire which included questions on participants’ demography and factors that influenced their acceptance of Ar-Rahnu was employed. Factors included: “Affect”, “Social Factors”, “Facilitating Conditions”, “Perceived Financial Benefits” and “Perceived Risk”, of which “Affect” encompassed the emotional attachment to Ar-Rahnu. The study was restricted to respondents in the area of Klang Valley (Selangor and Kuala Lumpur).

The results showed that there was a statistically significant positive relationship between “Affect” and acceptance of Ar-Rahnu financing. This meant that participants would turn to Ar-Rahnu when they needed short-term financing due to its simple application process. Such a relationship also existed between “Social Factors” and acceptance of Ar-Rahnu financing as its popularity increased during the COVID-19 pandemic. However, the relationship between “Facilitating Conditions” and the acceptance of Ar-Rahnu was not statistically significant which could be because Ar-Rahnu is a simple process whereby a successful transaction does not require much facilitating conditions such as advanced technology. In addition, the relationship between “Perceived Financial Benefits” and acceptance of Ar-Rahnu was also not statistically significant. This could be because the system may not be equally suitable for everyone; individuals in the middle and lower-income brackets and borrowers in need of short-term financing may find it more suitable. On the other hand, there was a statistically significant positive relationship between “Perceived Risk” and acceptance of Ar-Rahnu financing due to the higher certainty for borrowers.

Professor Thaker reflected that Ar-Rahnu has transformed the Malaysian financial landscape due to its simple financial structure, regulation, flexibility and suitability for middle and lower-income earners, particularly in the midst of the COVID-19 pandemic. It could also serve as an alternative to conventional pawn broking which may possess the prohibited element of interest (Riba), gambling (Gharar) and uncertainty (Maysir). Furthermore, the cost of borrowing in this scheme is the lowest compared to the conventional pawn broking scheme in terms of insurance coverage and charges. By using different modes of financing, socio-economic and gender equality in financial accessibility could be promoted.

The webinar was then handed over to Professor Sakti who emphasised that Ar-Rahnu is not exclusive to Muslims and posited that it would be an interesting alternative to personal financing in other countries. Going back to the study which was conducted during the COVID-19 pandemic, Professor Sakti opined that the difficulty in obtaining a loan during the pandemic, the social factors and low cost of borrowing may have contributed to Ar-Rahnu’s popularity. This could be an alternative considered in other countries such as Indonesia and Singapore, particularly for people in the middle and lower-income brackets.

Professor Sakti also commented on a resolution in 2019 by the Shariah Advisory Council where Ar-Rahnu products under Islamic financial institutions was found to not fulfil the Shariah requirement as benefits should not be reaped from borrowing activity. Such a motion may affect the decision of whether an item is rendered permissible or non-permissible. Thus, there is a need to gain a more thorough understanding of this issue.

The webinar concluded with Professor Thaker and Professor Sakti engaging in a question-and-answer session. Questions answered included the further discussion of the type of valuables that can serve as pledged items, the class divide with Ar-Rahnu financing as well as the digitalisation of Ar-Rahnu.

(Credit: ISEAS – Yusof Ishak Institute)