Shari'ah non-compliant assets as rahn (pledge) in Islamic banking products: a fiqhi perspective

Pages: 106
Year: 2017

This publication is part of the journal (2017-2)

Purpose – The purpose of this study is to present a framework regarding the use of Sharīʿah non-compliant
assets as rahn (pledge) and to provide the Sharīʿah analysis on the application of numerous collateral
instruments, including financial assets such as shares, unit trusts, current accounts and investment accounts
which are Sharīʿah non-compliant.
Design/methodology/approach – The study adopts a library-based approach to examine the concept
and requirements of rahn, deliberate the classification of Sharīʿah non-compliant assets and delineate the
Sharīʿah views on the use of Sharīʿah non-compliant assets as pledges. It also examines the various forms of
pledge available and offered in the market using document analysis as well as through discussion with
industry practitioners.
Findings – In general, the study concludes that Sharīʿah non-compliant assets, either due to their essence or
due to the means of acquisition where there is no ownership from Sharīʿah perspective, cannot be used as
rahn. This study also provides the Sharīʿah analysis on the use of modern instruments such as shares, unit
trusts, current accounts, investment accounts and insurance policy as pledges.
Originality/value – The paper provides a reference source for regulators in formulating an appropriate
policy and framework on Sharīʿah-compliant collateral; Sharīʿah committees of Islamic financial institutions
in arriving at Sharīʿah decisions on collateral; and industry practitioners in establishing internal policies and
procedures on collateral.
Keywords Collateral, pledge, rahn, Sharīʿah non-compliant asset
Paper type Research paper
Collateral is an important tool that banking institutions use to manage the risk of customer
default. In such an event, the bank may claim from the collateral to recover payment of the
customer’s outstanding obligation. Practically, collateral may be either in the form of
tangible assets, such as real estate and vehicles or financial assets such as bonds, sukūk and

shares. Collateral is normally charged to secure a financing facility. Over the past decade,
Islamic banking products have witnessed a remarkable development, shifting from plain
vanilla products to more sophisticated and exotic structures and features. This trend has
been accompanied by the introduction of numerous unprecedented collateral instruments,
including financial assets such as shares, unit trusts, current accounts and investment
accounts. These may raise issues, particularly if they involve Sharīʿah non-compliant
Against this background, there is a need for Sharīʿah investigation of the use of Sharīʿah
non-compliant assets as collateral in the modern banking arena. A cursory review of the
literature finds that there is lack of research on this aspect, perhaps due to the complexity of
the issue and the fact that it is a relatively new area.



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