BNM’s Shariah Advisory Council rules that ar-rahnu product does not fulfil Shariah requirements

24 December 2019

• The interconditionality and interdependency between the loan contract and the elements of pledge, safekeeping and fee in the product structure gives rise to the issues of qard jarra naf`an (loan that benefits the lender) and bai` wa salaf (combination of sales contract with a loan) which are prohibited in Shariah. In the ar-rahnu structure, each contract will not take effect without the other contracts. For instance, the loan will only be provided with the condition that customers safekeep their gold with the Islamic financial institution where a safekeeping fee is charged. Such structure where the safekeeping fee charged is connected to the loan provided indirectly raises the issue of qard jarra naf`an; and

• The combination between 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) in which the former is for pledging while the latter is for charity.

• To prohibit ar-rahnu based on the above structure will effect from 1 February 2020;

• Islamic financial institutions are temporarily allowed to apply the views of their respective Shariah Committee on the ar-rahnu product structure up until the date of the SAC ruling comes into effect; and

• Any new and outstanding ar-rahnu financing including the income generated before the above SAC ruling takes effect is allowed to continue until the maturity of the financing, based on the previous decision of the respective Shariah Committee of IFIs.