Rahn is aimed at strengthening the practice among Islamic financial institutions to offer services that are end-to-end Shariah-compliant

By FARA AISYAH / Pic By AFIF ABD HALIM

BANK Negara Malaysia (BNM) has issued the Rahn policy document which is aimed at strengthening the practice among Islamic financial institutions to offer services that are end-to-end Shariah-compliant.

According to a BNM statement, the guideline, which sets out the Shariah and operational requirements in relation to the operationalisation of Rahn contract, will take effect on Aug 1, 2019.

It is applicable to licensed Islamic banks, licensed takaful operators and professional retakaful operators, licensed banks and licensed investment banks approved to carry on Islamic banking business as well as prescribed institutions approved to carry on Islamic financial business.

BNM said Rahn refers to a contract where a party, as pledgor (rahin), pledges an asset as collateral (marhun) to another party, a pledgee (murtahin), to fulfil an obligor’s liability or obligation (marhun bih) owing to the pledgee in the event of default of such obligor.

As such, a Rahn contract shall consist of the pledgor and pledgee (collectively referred to as contracting parties), the offer (ijab) and acceptance (qabul) to enter into the Rahn contract, as well as the subject matter of the Rahn contract.

“The subject matter of the Rahn contract shall be collateral that is recognised by Shariah and Shariah-compliant liability or obligation owing to the pledgee.

“The subject matter of the Rahn contract must be determined upfront, made known to and accepted by the contracting parties,” BNM stated.

It added that the collateral must be owned either by the obligor, a third party, or the obligor and a third party.

BNM said the collateral shall be immediately possessed by the pledgee upon entering into the Rahn contract unless a pledgee approves a delay in possession.

Possession of collateral by the pledgee shall be in the form of physical possession (qabd haqiqi) or constructive possession (qabd hukmi).

The pledgee or third party, as the case may be, shall return the collateral upon the obligor’s fulfilment or discharge of his obligations unless the contracting parties agree to enter into a new Rahn contract using the same collateral.

The central bank added that the pledgee shall only utilise the collateral if the consent has been obtained from the owner, the liability or obligation owed by the obligor to the pledgee does not arise from a loan contract (qard), the terms of utilisation by the pledgee are stipulated in the contract, and the period of utilisation by the pledgee is specified.

Meanwhile, expenses in Rahn are categorised into expenses incurred directly related to the maintenance of collateral, and all other expenses that are directly related to the Rahn contract, including safekeeping, documentation, liquidation and discharging of collateral.

“The owner of the collateral shall bear all expenses mentioned, except otherwise agreed by the contracting parties,” BNM stated.

In the event the owner or pledgor fails to fulfil its expenses obligations, BNM said the pledgee may provide cash advance to pay the expenses on behalf of the owner or pledgor.

The Rahn contract shall dissolve under a destruction of collateral caused by force majeure or by actions other than misconduct, negligence or breach of specified terms; termination of the Rahn contract by the pledgee; termination or mutual cancellation (iqalah) of the contract that the collateral is pledged to; or disposal of collateral by the owner with the consent of the pledgee, resulting in the transfer of ownership of the collateral through contracts such as sale, hibah and waqf.

BNM added that the Rahn contract is complete when settlement of the liability or obligation owed to the pledgee by the obligor, his guarantor or through the transfer of such liability or obligation to a third party (hiwalah al-dayn); set-off (muqassah) of full debt obligations between the obligor and the pledgee; liquidation of collateral to discharge the liability or obligation of the obligor; or waiving of right (ibra’) by pledgee to claim the whole liability or obligation from the obligor is done.

A Rahn contract is also applicable with other contracts including qard, murabahah, tawarruq, bai“inah, istisna`, ijarah, kafalah, mudarabah, musyarakah, wakalah bi al-istithmar, and wa`d as well as takaful coverage.