The Shariah Advisory Council (SAC) of Bank Negara Malaysia at its 198th and 199th meetings on 29 October 2019 and 26 November 2019 has made a ruling that the structuring of ar-rahnu product based on tawarruq and rahn is permissible subject to the following conditions:

1. For ar-rahnu product involving the purchase of commodity in bulk at the beginning of the business day, the fiqh adaptation (takyif fiqhi) must be clear in relation to the cancellation of the commodity purchased from the commodity trading platform provider at the end of the business day;
2. In the event of default, the customer’s consent shall be obtained prior to the liquidation of the collateral;
3. The terms and conditions of the ar-rahnu product shall clearly specify the following treatment in cases where a default by the customer leads to the liquidation of the underlying collateral:
   • where the proceeds from the liquidation of the underlying collateral exceed the liability of the customer, the excess amount shall be returned to the customer; and
   • where the proceeds from the liquidation of the collateral are insufficient to meet the liability of the customer, the Islamic financial institution (IFI) has the right to claim the balance from the customer;
4. The customer shall be informed on the specification and features of the transacted commodity including its location, type, quality and quantity as well as the calculation mechanism to avoid the element of uncertainty (gharar) and any dispute by the contracting parties; and
5. All requirements set out in Bank Negara Malaysia’s (the Bank) policy documents on Tawarruq and Rahn shall be complied with.

This ruling shall be read together with the SAC ruling on the execution of tawarruq arrangement via straight-through processing (STP) dated 26 November 2019.

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