THE CHALLENGES OF AR-RAHN PRACTICES AS A MICRO FINANCING FACILITY: A STUDY OF BANKING AND NON-BANKING INSTITUTIONS

Abstract

Ar-Rahn, or Islamic pawn broking, is an alternative to conventional pawn broking based on Islamic principles. It provides a form of micro financing that adheres to ethical conduct, ensuring that no interest is charged. Through Ar-Rahn, individuals can access quick liquidity by pledging collateral. In a modern economy, there is no doubt that banks are a key contributor to the financial and economic prosperity. People, communities, and organizations depend on banks for the fulfillment of their financial resources and financial needs. Now, Ar-Rahn has been recognized and integrated to complement Islamic financial product offered by banking institutions. Simply put, Ar-Rahn is offered by banking institutions, in addition to Ar-Rahn institutions. Commonly, people access financing from banks. However, when it comes to accessing micro financing through Ar-Rahn, people tend to choose Ar-Rahn institutions over banks, even though the banks also offer Ar-Rahn services. This paper aims to critically review the challenges faced by Ar-Rahn providers (bank and non-bank institutions), and the solutions to Ar-Rahn to counter those challenges faced. This presence study held within northern states of Malaysia which is Perlis and Kedah. The study employed a qualitative approach by conducting in-depth interviews and was restricted to a sample of four different Ar-Rahn providers. The data were analyzed using thematic analysis. All informants interviewed revealed different challenges, such as gold price volatility, fake gold pledged, and competition. These findings highlight the need for stronger positioning and trust in Ar-Rahn institutions. Based on the results, several recommendations are proposed to sustain Ar-Rahn practices in the future, including active promotion by banks as an accessible microfinance option and strengthened outreach, transparency, and financial literacy by non-bank institutions in line with Shariah compliance.