QUESTION 1 1.1 Briefly describe the concept of Al conventional pawn broking Rahn

Question

QUESTION 1 1.1 Briefly describe the concept of Al conventional pawn broking Rahn Financing and how the concept differs from (5 marks) Value of Gold Margin of Advance Per Month RM 100 RM 100 RM 0.69 RM 0. 71 RM 0.87 RM 100 1 76% 87 % 1.2 Puan Saodah is a petty trader at a wet market in Kuala Teregganu. She applies RM2,500 financing for 8 months period to keep her stock. The Gold value that she has in possession amounted to RM 7,750 and the bank grants 76% margin of advance. Compute the following:- (i) How much is the fees payable? (ii) Total redemption that she has to pay at the end of seven months (10 marks) Total 15 marks)

Explanation / Answer

1.1

Under Al Rahn financing, the borrower / debtor undertakes the act of pledging a real or corporeal property as security for a debt (dayn/dain) or financial obligation, so that the creditor is assured of regaining the debt either through repayment or indirectly from the proceeds of sale of the pledged property. Possession of the pledged property does not hinder the creditor from demanding repayment on the due date. This form of financing may be adopted for long term capital heavy assets but it is generally undertaken for the short term, it is an easy and hassle free method to meet immediate business liquidity needs or personal finance needs. There is no rate of interest chargeable on the amount lent, but instead a fee is charged for holding the collateral which is like a safekeeping fee. It is a popular and fair means of finance, especially among the comparatively lower income groups.  

The notable differences between Al Rahn Financing and Conventional Pawn Broking are as follows:

1. Conventional Pawn Broking generally includes very high rates of interest, sometimes going up to 2% per month' while Al Rahn includes payment of a more fair and affordable fixed fee during the period of financing, generally based upon the margin approved for the collateral

2. Conventional Pawn Broking bypasses detailed documentation often. also, many a a times pledged items are auctioned at low prices without following a formal process of the pawn broker taking necessary steps to receive payment from the debtor. in Al Rahn, there is a greater emphasis on accurate valuation and pledged items are not auctioned off promptly.  

1.2

Since the bank grants Puan Saodah 76% margin of advance on the gold value pledged, tha applicable rate will be RM 0.71 per RM 100 per month. The fee is payable on the value of the asset pledged (Marhun); in this case gold valued at RM 7,750

i. Fees Payable = (RM 7,750 x RM 0.71 x 8 months) / RM 100 = RM 440.20

ii. If she takes the financing facility for 7 Months for RM 2,500 based on her requirement (event though she is eligible for a larger amount based on the bank's terms of 76% margin), amount payable on redemption =

Fees of (RM 7,750 x RM 0.71 x 7 months) / RM 100 = RM 385.175 + Principal of RM 2,500 = RM 2885.175

For 8 months it would have been RM 440.20 + RM 2,500 = 2,940.20

(At Margin of 76%, she could borrow upto RM 5,890. She would still have to pay the same fees. However, borrowers may opt to continue with a lower principal depending on their repayment power)

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