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Opportunity in Microfinancing - Pawnbroking (i.e. Ar Rahnu)

21 June 2022 - Best review in desktop

Pawnbroking in microfinancing

Microfinancing is small business loan provided by lenders to borrower without collateral requirement. There are 5 types of microfinance instruments namely from saving, insurance, microcredit, money transfer, and other financial products. Microcredit also known as (a.k.a.) refers to small loans for borrower with collateral or uncollateralised provisioned by financial institution (FI) such as the banks or non-financial institution (NFI) namely money lenders or pawnbrokers. The uncollateralised microcredit encompasses micro loan and personal loan. Micro loan is a small loan between RM1,000 and RM50,000, and personal loan provides up to RM200,000. One of the microcredit instrument with collateral is pawnbroking. Pawnbroking is a legal business operated by bank or non-bank that offers loans to borrower, usually to lower income group, by pledging valuable assets as collateral (i.e. gold, property, jewellery, etc.) for a short term period.

Pawnbroking in microfinancing

Pawnbroking in microfinancing

The conventional pawnbroking, and the emerging Shariah Principle or Islamic pawnbroking

In Malaysia, the business structure of pawnbroking are categorised into conventional and Shariah Principle or Islamic pawnbroking a.k.a. Ar Rahnu. Conventional pawnbroking usually operated by non bank is registered under Pawnbrokers Act 1972 are based on interest rate as the service fee.

Ar Rahnu can be operated by bank or cooperatives where service fee for safekeeping the collateral as security, known as Marhun are based on 2 product structures. These structures are Qard based and Tawarruq based charges Ujrah or storage fee, and Murabahah based or profit rate fee respectively. Refer to Type of pawnbroking in Malaysia.

Type of pawnbroking in Malaysia

Type of pawnbroking in Malaysia

Malaysia moving away from Qard to Tawarruq since 1 February 2020

The reason to move from Qard to Tawarruq was the result of 195th meeting on 31 July 2019, Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) resolved the Qard, Rahn, Wadi’ah, and Ujrah offered by Islamic Financial Institutions (IFIs) did not fulfil the Shariah requirement in Rahn Policy Document. However, 198th and 199th meetings on 29 October 2019 and 26 November 2019, SAC of BNM had made a new ruling in structuring of Ar-Rahnu product based on Tawarruq and Rahn are permissible and subject to a few conditions. This ruling came into effect from 1 February 2020.

Qard is borrowing money by pledgee (lender) to a pledger (borrower) directly bounded to repay with a fee (i.e. Ujrah or storage fee). Tawarruq is a purchase of product or asset based on deferred payment basis by way of cost-plus.

Typically, the fee charged by conventional pawnbroking is based on interest fee (ranges from 1% to 2%) however Ar Rahn fee based on Qard known as storage fee (0.65% storage fee), and Tawarruq known as profit rate (fix fee based on the gold value charged). Refer to Product structure of pawnbroking in Malaysia.

Product structure of pawnbroking in Malaysia

Product Structure





Interest rate

Bound to repay (Ujrah or storage fee)

Based on a deferred payment basis by way of cost-plus (Murabahah)


1 contract

  • Borrower and lender

1 contract

  • Pledger and lender

2-stage contract

  • Borrower and lender

  • Lender and third party


1% to 2% per month

Storage fee based on pledge value per month (i.e. RM0.65 per RM100 or 0.65%)

  • Fix fee based on the gold value (i.e. profit from sold gold)

  • Lender provides loan and fixed fee customer to pay on an agreed instalment

Fee Structure

Interest rate based on per month

Qard raises the issues of qard jarra naf'an (a loan that benefits the lender - safekeeping fee charged is indirectly linked to the loan) and bai'wa salaf (combination of a sales contract with a loan) which are prohibited in Shariah

Profit generated in the Ar-Rahnu structure based on tawarruq and rahn is in line with the Shariah principles

Pawnbroking market size of RM1.1 billion in 2019 and CAGR growth of 18.3% in last two years

The revenue of pawnbroking in Malaysia grew from RM930 million in 2017 to RM1.11 billion in 2019 even though there was a slight decline of revenue to RM840 million in 2020. Refer to pawnbroking growth and market size in Malaysia.

The Compound Annual Growth Rate (CAGR) pawnbroking revenue grew at 18.3% from 2017 to 2019. The annual report 2021 published by Pos Malaysia mentioned the revenue of Pos Ar-Rahnu increased from RM64 million in 2020 to RM69.3 million in 2021. On the other hand, annual report from Bank Rakyat where the revenue of Ar Rahnu X’Change slightly declined from RM246,317,000 in 2019 to RM160,194,000 in 2020.

Pawnbroking growth and market size in Malaysia

Pawnbroking growth and market size in Malaysia

Opportunity of pawnbroking in microfinancing is observed from the growth of physical pawn shops, the market size of pawnbroking, gold reserves, etc. In 2020, there are approximately 1,500 pawnbrokers where are 738 conventional and about 700 Ar Rahnu. Refer to Pawnbroking growth and market size in Malaysia.

A typical pawnshop has an average of 500 clients per month pledging their collateral value between RM500 to RM1,000. There works out to total 750,000 clients per month based on 1,500 pawn shops to pledge their collateral resulting a RM4.5 billion per year of collateral value based on an average pledge value of RM500 per customer.

According to the statistics published by Kementerian Perumahan dan Kerajaan Tempatan (KPKT), there are 738 conventional pawn shops in Malaysia in 2020. Refer to Growth of conventional pawnbroking in Malaysia.

In 2010, there were 261 conventional pawnbrokers in Malaysia and increased to 738 pawnbrokers in 2021 with a CAGR of 8.54% over last 10 years (2012-2021). Selangor has the largest number of conventional pawn shops at 215 followed by Johor (106) and Kuala Lumpur (77). The growth of Ar Rahnu is not available in the public domain.

Growth of conventional pawnbroking in Malaysia

Consumer gold demand remain strong at 5.1 tonnes and year-on-year growth 22%

Consumer gold demand in Malaysia remained strong with a year-on-year growth 22% from 4.1 tonnes in Q1 2021 to 5.1 tonnes in Q1 2022.

Based on the daily gold price of 999 gold (24 carat) at RM268 per gram in Jun 15, 2022, the new gold reserve in Q1 2022 in Malaysia is value at RM1.37 billion.

Consumer gold demand and growth in Malaysia

Consumer gold demand and growth in Malaysia

The CAGR of consumer gold demand was -3.9% from 2012 to 2021 in Malaysia may have been caused by crude oil price, currency exchange rate, real Gross Domestic Product (GDP), and inflation rate. Refer to Consumer gold demand and growth in Malaysia.

GDP has decreased from +5.5% in 2012 to -5.6% in 2020. However, Q1 2022 year-on-year growth 22% because the gold market recovery in 2021 growth 10% year-on-year and economic recovery by vaccination coverage increased in 2021. As a result, consumer gold demand slightly increased from 2020 (13.1 tonnes) to 2021 (14.4 tonnes). Refer to Consumer gold demand and GDP in Malaysia.

Consumer gold demand and GDP in Malaysia

Although the CAGR of consumer gold demand was negative and downward trend over last 10 years, the year-on-year (YOY) growth was 22% in Q1 2022 may suggest the supply of consumer gold (i.e. jewellery, and bar and coins) will increase and this can be the indicator that pawnbroking is promising sector beyond 2022. Refer to Consumer gold demand and growth in Malaysia.

Coming up: The next article will be "Cost of Microfinancing in Pawnbroking"

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