Collecting Fees for Safekeeping of Collateral: Rules and Applications in the Contemporary Islamic Financial Institutions

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 50-53

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal web link: http://www.jett.dormaj.com

https://doi.org/10.47277/JETT/9(1)53

Collecting Fees for Safekeeping of Collateral: Rules

and Applications in the Contemporary Islamic

Financial Institutions

Abdul Rahman Al-Saadi

Department of Islamic Finance, University of Bahrain, Bahrain

Received: 06/06/2020

Accepted: 01/10/2020

Published: 10/10/2020

Abstract

The study aims to examine the Shari’ah legality of whether pledgor or pledgee should take care of collateral (marhun) during the period

of the loan. Moreover, the study seeks to provide possible applications for the pledge (rahn) and clarify Shari’ah rules for each application.

Malaysian Islamic banks apply pledge products by offering loans (qardh hasan) to the customers and requesting gold assets as collateral

against a loan. The banks charge safekeeping fees to keep the gold until the maturity date of the loan. This practice combines loan and sale

contracts in a single transaction. Accordingly, the study seeks to evaluate this practice from an Islamic point of view. Islamic law categorizes

loans under charity contracts while the sale is categorized under contracts of exchange (mu’awadhat). The nature of the two contracts is

different. Therefore, the study examines categories that combine loans and contracts of exchange in one transaction. The results reveal that

it is not permissible for the pledgee to charge fees higher than market fees for the keeping of collateral. Charging fees that are higher than the

market price is considered riba. According to Shari’ah rules, any kind of benefit derived from a loan is riba and thus it is prohibited. However,

charging fees that are comparable to the market price and cover the actual cost for safekeeping of collateral is permissible. According to

Islamic Fiqh Academy resolutions and AAOIFI standards, Islamic banks may charge fees for safekeeping of gold collateral considering that

fees should be to the market fees and should only cover actual expenses.

Keywords: Charitable Contracts, Contracts of Exchange, Pledgor, Pledgee, Rahn, Safekeeping Fees, Salaf wa Bai’

food keeps the animal itself alive. On the other hand, the pledgee

. Introduction

should assume other costs such as the place where the collateral

is kept" [15]. The view of the majority prevails because collateral

is owned by the pledgor. He is required, as a legal owner, to

assume any cost to save the collateral during the period of the

loan. Due to ownership, the pledgor is the only one can enjoy gain

from the collateral on one hand, and on the other hand, he/she

should bear losses that may occur.

Muslim scholars discussed the issue of collecting fees for

safekeeping of collateral under the concept of (salaf wa bai’)

which means to combine loan and sale contracts in a single

transaction. The creditor is willing to give a loan on the condition

that the debtor should purchase an asset from the creditor at a

price higher than the market price. The markup price is

compensation to cover the cost of lending money. Under the

concept of (salaf wa bai’), the present research will discuss the

issue of charging fees for safekeeping of collateral that is pledged

as a result of giving a loan. Although there is no sale contract is

combined with the loan, the fees charged by Islamic banks are

higher than fees charged by pawn shops. Therefore, the

researchers believe that high fees in rahn products are used to

Collecting fees for the safekeeping of collateral during the

period of the loan is a controversial issue in Islamic Fiqh. Most of

the Muslim scholars maintain that the pledgor (owner of

collateral) should assume the cost of safekeeping. For example, if

the pledgor provides an animal as collateral, he should maintain

the cost of feeding, a place where the animal is kept and the guard

who is protecting the animal. The majority based their opinion on

hadiths and reasoning. According to hadith narrated by Sa’id bin

Al-musayyeb, the prophet (Peace Be Upon Him) said that “the

pledgee does not have the right to own the collateral if the pledgor

does not fulfill his commitment. The pledgor has the right to enjoy

gain realized from the collateral and, at the same time, bear the

losses incurred” (reported by [3]; [5] and [17]). From a reasoning

perspective, the majority argued that the collateral is an asset

owned by the pledgor. As he is the owner, he should pay to keep

his asset safe [2]; [12] and [6]).

On the other hand, the Hanifi school maintained that “the

pledgor should assume expenses that keep the collateral itself in

good condition. For example, if the pledgor pledges an animal as

collateral, he/she should bear the expenses of feeding because

Corresponding author: Abdul Rahman Al-Saadi, Department of Islamic Finance, University of Bahrain, Bahrain. E-mail:

dralsaadi.bh@gmail.com

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 50-53

cover the cost of lending money as the case in (salaf wa bai’).

condition in the sale contract that the buyer should take a loan

from the seller is null and void. This view is of Imam Malik and

Shaf’i with no objection at all from followers of Maliki and Shaf’i

schools” [18]. Similarly, [10] argued that giving a loan with a

condition in the contract that the creditor can utilize the collateral

to derive tangible or intangible benefit makes the contract void.

. Combining Loan and Sale Contracts in a

Single Transaction

Before deliberating on the discussion, there are two prophetic

hadiths related to combine loan and sale in one transaction as

follows:

[19] took the same stand and argued that giving a loan with a

stipulation that the debtor should rent an asset from the creditor at

a price higher than the market price is unanimously not

permissible.

a. Abdul Allah bin Umar narrated that the prophet (PBUH)

said “it is not permissible to combine a loan with sale in one

contract, stipulate two conditions in one sale, make a profit on

something that for which you assume no liability and sell an

object that you do not possess (narrated by [1]).

b. Abdul Allah bin Umar requested permission from the

prophet to write his hadiths. The prophet allowed Abdul Allah to

do so. Then Abdul Allah said: the first thing I wrote was a letter

to Makkah people stating that “it is not permissible to stipulate

two conditions in one sale, combine loan and sale in one

transaction and sell something is not possessed by the seller” [9].

Muslim scholars agree that loan in hadiths refers to loan arises

from lending money. Loan in Shari’ah law is categorized under

charitable contracts such as hibah (gift) and wakalah (surety),

while the sale is categorized under contracts of exchange

b. A mere stipulation without favouritism: A gives loan to B

with a condition in the loan contract that B should rent a property

from A at a price equals the market price. Hanafi, Malaki, Shaf’i

and Hanbali scholars agreed this scenario is not permissible. [16]

claimed that all Muslim scholars unanimously declared such

scenario null and void. [18] maintained that “it is not permissible

to stipulate, in a loan contract, that debtor should rent creditor’s

house. It would be more sinful if the creditor stipulates that he/she

will rent the debtor's house at a price lower than the market price.

Overall, it is not permissible for the creditor to benefit from his

loan by anyway". However, some Muslim scholars opined that it

is permissible to combine loans and contracts of exchange in one

transaction. This opinion is said to be a view of Ibn Taimiyyah (as

mentioned in [11]). Al-Bilad bank in Saudi Arabia followed the

latter opinion based on the following arguments:

(

mu’awadhat) such as lease and salam. The Muslim scholars

maintain that the concept of combination is not limited to

combine loan and sale only but includes combining any charitable

contract with any contract of exchange. [8] argued that it is not

permissible to execute a contract of exchange with loan in one

transaction. [19] proclaimed that “the meaning of the above-

mentioned hadiths indicates that it is not permissible to combine

a charitable contract and contract of exchange in a single

transaction because the objective of combination is to derive

profit from contracts of exchange in return for giving charity. A

charitable contract is a unilateral contract that aimed at a given

charity (money or any kind of favour) without collecting

advantage from the recipient”.

1. The prohibition mentioned in the prophetic hadiths is

interpreted in case that there is a kind of favoritism to bring more

benefit for the creditor by imposing a condition to sell an asset to

the debtor with a price higher than market price. If that is the case,

then the creditor takes advantage of selling the asset at a higher

price to cover the cost of giving a loan. Therefore, if the

combining loan and sale bring no benefit to the creditor, the

transaction is valid. [20] tried to explain the behaviour of the

creditor who imposes a condition to combine loan and sale in one

transaction by saying that “it seems that the purpose of the

stipulation is to offset giving a loan by higher sale price to cover

the cost of lending money. Under Islamic law, any loan that

attracts any kind of benefit is considered as riba”.

. Categories of Combining Loan and Contracts of

Exchange in a Single transaction

2. The prophet (PBUH) allowed a pledgee (the creditor) to

There are three categories for combining loan and exchange

contracts in one transaction namely, combining loan and contract

of exchange with a stipulation in the documents to include both

contracts in one transaction, combining loan and contracts of

exchange in the favour of the creditor without stipulation in the

document to include the two contracts, and combining loan and

contract of exchange in one transaction without any stipulation in

the document or favouritism.

utilize the collateral during the period of the loan. However, this

utilization is strictly equal to the amount that creditor spends to

keep the collateral in good condition. Abu Hurairah narrated that

the prophet said: "It is permissible for pledgee (the debtor) to ride

and milk livestock collateral during the period of the loan and

he/she should bear expenses" [4]). According to the meaning of

hadith, the creditor can take advantage of the collateral although

the contract is a loan. It seems that taking advantage of the

collateral is meant to compensate the creditor for giving a loan.

The researchers believe that this view (combining loan and

contract of exchange in one transaction) is acceptable. However,

the derived benefit from the contract of exchange should not be

higher than the market price.

A. Combining Loan and Contract of Exchange with a

Stipulation in the documents to include both Contracts in One

Transaction

The essence of this category is to conclude one contract with

a stipulation to include either a loan in contract of exchange or

vice-versa. There are two possible scenarios for this category as

follows:

a. Favouritism: Two contracting parties, A and B, agree to

involve in a loan contract. A gives a loan to B with a condition in

the loan contract that B should rent a property from A at a price

higher than market price to enable A to gain a higher return to

offset lending money. This scenario, according to the consensus

of Muslim scholars, is prohibited. Selling an object with a

B. Combining Loan and Contracts of Exchange in the Favour

of the Creditor without Stipulation in the document to include

the Two Contracts in One Transaction

Muslim scholars have two views regarding this category.

First: Hanafi, Hanbali (including Ibn Taimiyyah) scholars

maintained that it is not permissible to combine loan and contract

of exchange for the favour of the creditor although it is not

stipulated in the document to combine the two contracts in one

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 50-53

transaction. The favour can be in the form of intangible or return.

They supported their opinion arguing that the benefit that the

creditor attains from the combination of the two contracts is riba.

The creditor will give loans only if he ensures that the debtor will

purchase an asset from him (the creditor) at a price higher than

the market price. In fact, additional return from the sale contract

is a compensation to cover the cost of lending the money. From

the debtor perspective, he/she agrees to pay a price higher than

the market price because he/she wants to fulfill the need for a

loan. If there is no loan, the debtor will not accept buying an asset

at a price higher than the market price. Therefore, even there is

no stipulation to include loan and sale contracts in one transaction,

the transaction is invalid because the creditor gains additional

return due to lending money. According to Shari’ah, any kind of

benefit derived from the loan is considered riba.

However, the creditor should not achieve any benefit from this

combination. They justified their position arguing that the basic

norm of the transaction is permissibility unless there is a clear and

valid justification that suggests otherwise. Islamic law forbids

such combining due to possible advantages that the creditor could

attain additional advantage or return. If the creditor cannot get an

advantage, the transaction is valid.

In the view of the above discussion, the second opinion is prevails

provided that: 1) contracting parties should not impose a

condition to include the loan and contract of exchange in one

transaction and 2) creditor should not obtain additional advantage

or return.

. Collecting Fees for Safekeeping of Collateral

In light of the above discussion, the relationship between

Second: Shaf’i scholars maintained that it is permissible to

mutually (without stipulation) combine the two contracts even it

is in the favour of the creditor [13]. The Shaf'i scholars founded

their opinion on the argument that actions cannot be affected by

intention which is hidden unless that intention is disclosed. [13]

maintained that “no contract is judged based on something

hidden. Every contract is valid unless contracting parties disclose

an intention that is not in line with Shari’ah requirements, which

nullifies the contract”. [7] argued that “stipulating to combine

loan and contract of exchange in one transaction invalidates the

transaction. However, if the contracting parties mutually agree to

execute the two contracts without stipulation, the transaction is

valid”. They based their opinion on the rule that “permissibility is

the basic norm for any transaction”. Furthermore, they

proclaimed that prohibition in the hadiths narrated by Abdul Allah

bin Umar is interpreted in the case that contracting parties write a

condition in the document to combine loan and contract of

exchange in one transaction. An intention is a hidden act that can

be disclosed by writing. Therefore, if the contracting parties do

not write a condition to combine loan and sale in the transaction’s

documents, the transaction is valid.

Having discussed the views of Muslim schools, the

researchers believe that the first view is more acceptable. Writing

a condition in the document of the transaction is not only the way

to acquire knowledge about the real and ultimate objective of the

contracting parties. Other understandable signs can be used to

acquire knowledge about the real intention of the contracting

parties. Oral and verbal actions also disclose the real intention.

Under Islamic law, matters are judged by intention. Considering

writing as the only way that can disclose intention may put people

in hardship. Therefore, the real intention should be considered

when examining the legality of such transactions to protect the

right of all parties.

pledgor (the debtor) and pledgee (the creditor) has two situations.

First, the creditor collects fees higher than a market fee. Second:

the creditor charges fees lower than market fees. In the first

situation, collecting high fees is a kind of favouritism because the

creditor gives loans and charge high safekeeping fees to cover the

cost of lending money. The additional fees that the pledgee

charges for safekeeping are riba because it is derived from money

given as a loan. In the second situation, charging a comparable

safekeeping fee is permissible in Islamic law. The fees will be

used to maintain and protect the collateral while in custody during

the period of the loan.

5. Case Study: The Practice of Collateral (Rahan)

in Malaysian Islamic Bank

This section will examine the practical application of rahn in

Malaysia. As one of the Islamic banking products used to provide

micro qardh to low income earners, it is imperative to study the

modus operandi to see if there is riba or not.

A. Actual Application of Rahn in Islamic Banks

The Islamic banks in Malaysia provide rahn products as one

of their banking products. The customers who need liquidity

approach the banks requesting for a loan (qardh hasan). Banks

seek to please the customers by providing loan facilities. After

acquiring approval, the customer is required to pledge gold as

collateral to ensure that he/she can meet his obligation. Broadly

speaking, all banks provide safekeeping services for customers

and non-customers. It is not necessary to deposit gold with the

bank as a result of taking a loan. The banks charge a standardized

fee rate for safekeeping services. However, the fees that charge

by Islamic banks are higher than fees charged by other pawn

shops.

B. Shari’ah Legality Basis for Rahn Product

The legality of rahn product as practiced by Malaysian

Islamic banks can be evaluated as follows:

C. Combining Loan and Contract of Exchange in One

Transaction without any Stipulation or Favouritism

The Fiqh debate over the validity of this category is obvious

where Muslim scholars have two views. First, Hanbali scholars

and some Maliki scholars declared that this category is forbidden.

They founded their opinion on the hadiths narrated by Abdul

Allah bin Umar as mentioned in section 3. They argued that these

hadiths proscribe to combine loan and contract of exchange

whether this combining emerged as a result of stipulation or

favouritism.

1. It is a loan transaction with collateral that should be a

pledge by the customer against the loan. From a Shariah

perspective, it is permissible for the creditor to give a loan and

request collateral to ensure that the debtor will settle the loan.

2. Shari’ah law does not allow the creditor to benefit from the

collateral unless assuming the cost of utilizing it. After careful

investigation, the banks receive the collateral (gold) to keep it

without taking advantage of it, which is in line with the Shari'ah

rule that required the creditor to avoid obtaining an advantage for

Second, Hanafi, Malaki, and Shaf'i scholars proclaimed that

combining loans and contracts of exchange is permissible.

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 50-53

the collateral.

Competing interests

3. The bank signs two contracts with the customer, loan

The authors declare that there is no conflict of interest that

would prejudice the impartiality of this scientific work.

contract and collateral safekeeping contract. In the practice, the

bank combines the two contracts in one transaction. This practice

can be categorized under category 1. The bank collects fees that

are comparable to fees collected from those who deposit gold

without taking a loan from the banks. Furthermore, fees are

standardized in the banking sector where all banks charge the

same fee rates. From this perspective, there is no favouritism that

arise as a result of collecting fees higher than market fees in the

banking sector. However, when comparing fees in the banking

sector and fees in the pawnshops, the banks charge fees higher

than pawn shops. In this case, the issue of favouritism may arise

because the banks collecting fees higher than market fees. After

careful examination of the issue of favouritism in Malaysian

Islamic banks, the researchers found that:

Authors’ contribution

All authors of this study have a complete contribution for data

collection, data analyses and manuscript writing.

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Author Profile

Ethical issue

Authors are aware of, and comply with, best practice in

publication ethics specifically with regard to authorship

Dr. Abdul Rahman Al Saadi

department of Islamic finance in the University

of Bahrain. He is senior consultant of

Accounting and Auditing Organization for

Islamic Financial Institutions (AAOIFI).

head of

(

avoidance of guest authorship), dual submission, manipulation

of figures, competing interests and compliance with policies on

research ethics. Authors adhere to publication requirements that

submitted work is original and has not been published elsewhere

in any language.