Architecting Hybrid Contract in al-Rahn : A Comparative Study between Malaysia and Indonesia

Nowadays, hybrid contracts are recognized as an adaptive form of contract in the implementation of Islamic business. However, the involvement of hybrid contracts in al-Rahn has risen numerous legal controversies in Islamic Sharia. Malaysia and Indonesia have diffferent approaches regarding the use of hybrid contracts in al-Rahn scheme. In the light of that, this article aims to lay out the two countries ’ sides in responding to the issue at hand. This qualitative study relies on secondary data and employs conceptual and comparative approach. It investigates the policies relating to hybrid contract in the implementation of al-Rahn both in Malaysia and Indonesia. This study indicates that academics in both countries tend to state that the hybrid contracts in al-Rahn are not in accordance with the Sharia. The non-compliance with the Sharia prompted Malaysia to create a new policy, namely by utilising the concept of Tawaruq. Meanwhile, Indonesia recently still associates Ij ārah contracts as part of the implementation of al-Rahn.


Introduction
Islam places a great attention to economic interactions in the form of business and entrepreneurship. 1 This economic interaction shows the social mutualism side of humans where benefit is the fundamental basis. 2 This relationship proves that humans socially need each other, hence it becomes natural as theorized by Ibn Khaldun as al-Insān al-Jamā'i. 3owever, the said interaction is not created without rules, especially in particular case when humans connect with others for economic purposes. 4This economic realm was then normalized into one of the objectives of Islamic Sharia, namely the preservation of assets (Ḥifẓ Fauzan Muhammadi, Nor Fahimah Mohd Razif, Rahimin Affandi Abdul Rahim (Architecting Hybrid Contract in Al-Rahn: A Comparative Study Between Malaysia and Indonesia) al-Māl) 5 and regulated in jurisprudence known as al-Mu'āmalah al-Māliyah. 6Through such arrangement, the economy becomes one of the integral parts that is promoted in the context of economic growth and social welfare. 7e of the mutualistic human interactions is the relationship of debts and receivables (hutang-piutang) and/or borrowings which in Islamic Sharia falls into the category of Qarḍ al-Ḥasan. 8This category is a reciprocal transaction between parties where one party lends an asset and the other party will return the said asset in its own kind or with the equal value of the asset. 9However, this economic transaction is not free from its own risks.Based on the possibility of risks, Islamic Sharia introduces guarantee contracts as a form of guarantee for, for example in the present case, debts granted by creditors to debtors. 10 One of the guarantee contracts that is applicable in Islamic Sharia is al-Rahn contract which is understood as one of the contracts that falls within the category of accessoir contracts 11 which is also known in Islamic Sharia as al-'Uqūd al-Tab'iyyah. 12-Rahn contracts are mechanized by objects (marhūn) which are pledged as a form of documentation (tauṭīq) which functions as a guarantor for the debt (marhūn bih) given by the creditor (murtahin) to the debtor (rāhin).This particular guarantee arrangement, as we all widely accepted, is part of another repayment route for the debtor when they cannot settle their debt to the creditor.This flow is certainly the standard of operation that needs to be followed.However, this mechanism has not escaped from the attention of academics regarding various legal issues that arise as a result of the dilemma of profit taking by Islamic Financial Institutions (IFI or in Indonesia known as Lembaga Keuangan Syariah, LKS).
One of the issues in regards to the al-Rahn contracts is the matter of application of the hybrid contract or al-'Uqūd al-Murakkabah.The issue of al-Rahn contract has attracted the attention of Islamic academics today.Studies on this matter can be started from the application of the said hybrid contract from the Islamic perspective, 13 through various sides such as fiqh 14 Fauzan Muhammadi, Nor Fahimah Mohd Razif, Rahimin Affandi Abdul Rahim (Architecting Hybrid Contract in Al-Rahn: A Comparative Study Between Malaysia and Indonesia) and hadith. 15Based on several perspectives in Islam, hybrid contracts become part of Islamic banking product innovation model which is applied in the financial services provided by IFI. 16owever, this implementation encourages further studies regarding its parameters 17 and scope of application 18 to adhere to.This is due to the fact that al-'Uqūd al-Murakkabah serves a slight possibility that it may touch upon the usury-based (riba') economic transactions. 19e of the sharia financial products that also involves hybrid contracts in its application is al-Rahn.Certainly, taking off from the parameters or standards for implementing the said hybrid contract, quite a few Islamic academics have observed the legal problems surrounding this practice in the Sharia guarantee scheme (al-Rahn).Studies in this topic have two sides of acceptance in regard to the application of al-'Uqūd al-Murakkabah in al-Rahn.Some Islamic academics view hybrid contracts as having the potential to give rise to legal problems when included in the al-Rahn scheme 20 , while others view that it is permissible to do so based on the conclusion that it does not lead to usury (riba') 21 or other conclusions drawn because the said practice so far is inevitable. 22If we are to narrow down the area of study geographically, Malaysia and Indonesia are included in the vortex of these two views.What is then interesting is that Bank Negara Malaysia forbids al-Rahn which involves hybrid contracts, 23 meanwhile Indonesia is yet to have a specific decision regarding hybrid practice in al-Rahn.So far, there is no study on hybrid contract application, especially within al-Rahn scheme that compares Malaysian and Indonsian position and this article attempts to fill the lacuna.

Method
This study uses qualitative method which relies on secondary data, mainly in the form of legal documents.The data was collected especially through library study.This study employs both conceptual and comparartive approaches.It investigates the policies relating to the use of hybride contract in al-Rahn scheme both in Malaysia and Indonesia.The collected data were analysed and arranged in a structured descriptive manner.

Brief Introduction on Hybrid Contract and Its Correlation to Islamic Mortgage
The issue of hybrid contracts in Islamic Sharia usually refers to three hadiths of the Prophet Muhammad, namely the hadith prohibiting two sales and purchase contracts in one sales and purchase contract (bai'atain fī bai'atin) 24 , hadith that prohibits two contractual agreements in one contractual agreement (ṣafqatain fī ṣafqatin, 25 and the hadith that prohibits combining sales and purchase contracts with loan contracts (bai' wa salaf). 26Through these hadiths, contemporary scholars began to emerge a specific term in Muamalah Fiqh called al-'Uqūd al-Murakkabah.The meaning of this term is a combination of various kinds of contracts in one particular contract, whether it is a combination of contracts itself or the binding of terms between one contract and another contract, which in turn has implications for fulfilling the rights and obligations in the intended contract. 27e hadiths mentioned above encouraged scholars of various schools of thought to issue legal statements regarding the meaning of such combination of contracts.This legal statement starts from two views regarding the legal origin of contracts.The Ḍāhirī school tends to state that the original law of a contract is al-Ḥaẓr (prohibition) and al-Buṭlān (void).Meanwhile, the Ḥanafī, Māliki, Syāfi'i and Ḥanbalī schools tend to state that the legal principles of a contract are al-Ibāḥah (permissible) and al-Ṣiḥḥah (lawful).). 28Those who prohibit hybrid contracts tend to believe that the combination of contracts created is feared to lead to elements of gharar and usury. 29On the other hand, scholars who allow the application of hybrid contracts in principle do not state that it is absolutely permissible, but there are limitations and parameters that need to be taken into account so that the combination of contracts in one contract can be legally implemented. 30e application limits on the combination of contracts put together in the present days are indicated in details by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).This can be referred to Standard No.The 25 AAOIFI, viz: 31 1.The contracts included are not contracts that have been expressly forbidden by Sharia, as indicated in the three main hadiths on this issue; 2. The combination of contracts is not an engineering practice of usury; 3. Combining contracts is not a reason for the implementation of usury; 4. Contracts that are combined do not have a main objective that is different or contradictory from one another.
However, the limitations of these standards have not received full attention in the implementation of combination of contracts by Islamic financial institutions.Al-Rahn contract, for example, has the potential to combine contracts in one implemented scheme.This potential can be seen from the mechanism or procedure for implementing al-Rahn contract between Rāhin (customer) and Murtahin (financial institution).It is known that the customer submitted a debt request (Marhūn Bih) to Murtahin by including a guarantee of objects (Marhūn).Through this procedure, it can be seen that the pillars of the al-Rahn contract are Rāhin (customer), Murtahin (financial institution), collateral for objects (Marhūn), and nominal of the debt (Marhūn Bih). 32Based on this flow, the customer ultimately obtains the debt and the collateral is then kept by Murtahin with a maintenance fee charged to the customer. 33The collateralized object will find its way out (sold, auctioned) as part of the repayment process when the customer cannot pay off their debt.The flow can generally be described as follows: The process in al-Rahn contract above shows how a debt application is followed by collateral as a guarantee of the risk of the debt given. 34It was through this material guarantee that the development of issues related to hybrid contracts in al-Rahn mechanism emerged.This issue arose through the handing over of objects from Rāhin to Murtahin which involved another contract, namely the ijārah contract. 35This ijārah contract arises based on, at least, the understanding that the customer bears the costs of maintaining the goods handed over as collateral.Meanwhile, Murtahin only kept and looked after it at a cost borne by Rāhin.This scheme for storing goods and maintaining them then gave birth to an ijārah contract in order to meet the costs of storing and maintaining goods.The emergence of the ijārah contract which was combined and tied into the al-Rahn contract which in fact has a qarḍ aspect underlies a legal controversy regarding whether or not the application of the two contracts can take place. 36Especially when compared with the prohibition on several specifications of combined contracts conveyed by the Prophet Muhammad in his hadiths mentioned before.In this context it could be related to the prohibition of bai' wa salaf (combining sales and purchase contracts with loan contracts).Additionally, the ijārah contract embedded in al-Rahn scheme is generating income fee of safekeeping (ujrah) and it contradict the hadith kullu qarḍ jarra naf'an fahuwa ribā (any loan contract that obtains/produces benefits, then the benefit is usury).Thus, the mechanism of al-Rahn through this procedure has its legal controversy that many of Islamic scholars are trying to find a way out.

The Hybrid Contract within Islamic Mortgage in Malaysia and Indonesia
Malaysia and Indonesia are two countries that share similarities, both in the sense of historical roots, multi-ethnic, multi-cultural and also religious diversity.Likewise, there are similarities in terms of the majority of the population being Muslim. 37This majority Muslim population has also become a factor in the development of the Islamic economy in these two neighboring countries. 38One report shows that Malaysia was appointed as the leading country in the Islamic Finance Best Performance category, while Indonesia was ranked 10th in the most improved performer category. 39Through these developments and achievements, Malaysia and Indonesia have their own legal policies regarding the implementation or implementation of Sharia economics, following developments in the implementation of Islamic economics in the two countries. 40One of the developments in Islamic economics in these two countries is the application of al-Rahn which has its own historicity and policy character. 41e implementation of al-Rahn contract, whether in Malaysia or Indonesia, is starting to become the object of criticism in Islamic legal studies. 42One of the academic criticisms of al-Rahn application problem is the involvement of hybrid contracts within it.Even though these two neighboring countries have the same largest Muslim population, Malaysia and Indonesia have their own contrasting views regarding the hybrid contract in al-Rahn contract.
The practice al-Rahn contracts in Malaysia as found in numerous academic literatures addresses the application of several mechanisms, namely al-qarḍ al-ḥasan (benevolent loan/interest-free loan), al-Rahn as material collateral, al-wadī'ah (storage, custody) , and ujrah (safekeeping fee). 43The combination of these contracts in al-Rahn in Malaysia has become a focal subject of critical study, especially in regards to its legal status.This critical study refers to the inclusion of two contract mechanisms, namely al-wadī'ah (storage, custody), and ujrah (safekeeping fee).Thus, referring to the flow of al-Rahn mechanism in Figure 1, the handover of marhūn to murtahin employs the concept of al-wadī'ah (storage, custody).Due to the fact that the said concept is being used, the customer (rāhin) will likewise be obliged to pay ujrah (safekeeping fee) as a guarantee of the integrity and safety of the goods entrusted/stored in addition to paying the initial debt. 44e implementation of these contracts has given rise to issues which then became factors in determining new policies regarding the implementation of al-Rahn in Malaysia.These issues are detailed as follows: 45 1.The issue of entanglement between one contract to another 2. The issue of impermissible combination of contracts 3. The issue of ujrah in value that is more than it actually is The bindingness of the contract to the issues above leads to the process of al-wadī'ah and ujrah custody being an element of the perfection of al-Rahn contract as a whole.With that being said, it can be understood that when the customer does not pay attention to the ujrah payment, al-Rahn contract becomes imperfect.This is similar as something that is required and is included in the two principles of prohibition, namely kullu qarḍ jarra naf'an fahuwa ribā (any loan contract that obtains/produces benefits, then the benefit is usury) and the prohibition of bai' wa salaf (combination of sales and purchase contracts with debt).This leads to an example of contractual dialogue, "I will give you a debt on the condition that you rent my house".Ujrah is a benefit based on the conditions imposed on customers.The issue of combined contracts that arise from the practice of al-Rahn above is also related to the basic principles of al-wadī'ah.
The concept of al-wadī'ah tends to have time flexibility, namely that the depositor can and may at any time ask for or take the items entrusted. 46Unlike the case with al-Rahn, goods guaranteed and handed over to the murtahin cannot be requested at any time, but only until the agreed repayment period.This leads to disputes over contractual objectives between one another which should not occur as per the parameters decided in AAOIFI. 47sed on the issues that emerged, The Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) held its 194th meeting on 25 June 2019 and its 195th meeting on 31 July 2019.The reviewed the implementation structure of al-Rahn in Malaysia which consists of several contracts that have been mentioned, namely al-qarḍ al-ḥasan (benevolent loan/interestfree loan), Al-Rahn as material guarantee, al-wadī'ah (storage, custody), and ujrah (safekeeping fee).The study by SAC-BNM determined that the intended al-Rahn structure was not Shariacompliant.This decision gave birth to an alternative solution to the implementation of al-Rahn in Malaysia, namely by using the Tawarruq concept. 48Thus, al-Rahn contract structure in Malaysia no longer consists of al-qarḍ al-ḥasan (interest-free loan), al-Rahn as material collateral, al-wadī'ah (storage, custody), and ujrah (safekeeping fee), but rather, it has shifted towards al-Rahn and Tawarruq.
AAOIFI defines Tawarruq as "...the process of purchasing a commodity for a deferred price determined through musāwamah (bargaining) or murābaḥah (mark-up sale), and selling it to a third party for a spot price so as to obtain cash". 49Through Tawarruq, a customer who needs financing shall come to IFI, then IFI shall buy a commodity and sell it to the customer at the purchase price plus the profit price (principal + profit) in credit scheme (deferred payment).This process has, in principle, transferred ownership of the commodity being transacted: from IFI to the customer.The commodities that are 'owned' by the customer are then sold by the customer to a third party at the current market price (spot price) to obtain financing, while they still bear the credit to IFI. 50sed on the above explanation, Tawarruq in al-Rahn scheme will act as a substitute for al-qarḍ al-ḥasan (benevolent loan/interest-free loan), al-wadī'ah (storage, custody), and ujrah (safekeeping fee) .With that, according to MPS-BNM, al-Rahn contract scheme in Malaysia only combines two items, namely Tawarruq and al-Rahn itself.The ujrah aspect as part of taking profits that are not permitted in the al-qarḍ al-ḥasan scheme which is then replaced by profits obtained from sale and purchase through the Tawarruq scheme.The description is as follows:

MPS-BNM designs
1.The Customer (Pelanggan) submits an application for al-Rahn financing by bringing along their collateral; 2. Islamic Financial Institution (IFI, written in the flow chart as IKI) will then estimate the value of the collateral provided in order to determine the appropriate financing amount; 3.These two processes are then continued with the Tawarruq scheme under the following procedure: a. IFI (IKI) purchases a commodity through a commodity trading service provider platform; b.IFI (IKI) then sells the commodity to the customer for the estimated value of the collateral plus profits from selling on credit base.In this situation, the customer legally owns the commodity; c.Because the customer is in need of financing, the customer will then sell the commodity through a service provider platform by appointing IFI (IKI) as the sales agent (representing the customer to sell).Customer shall receive cash financing of the estimated value of the collateral with payment to IFI based on letter b.
In contrast to Malaysia, the hybrid contract application in al-Rahn contract in Indonesia remains involving an ijārah contract.The application of the ijārah scheme in hybrid contract involvement is 35 fatwas (39.32%), one of which is regarding al-Rahn. 52oking at the context of these fatwas, it can be concluded that al-Rahn contract in Indonesia thus far does not involve the al-Wadī'ah contract as was implemented in Malaysia before the MPS-BNM decision.The mechanism for implementing al-Rahn contracts in the context of mortgage products in Indonesia only utilizes several schemes, namely al-qarḍ alḥasan (benevolent loan/interest-free loan), al-Rahn as material collateral, and ujrah (safekeeping fee). 53sed on such arrangement, a customer can come to IFI with their mortgaged goods/collateral to submit for a loan request (al-qarḍ).Through this application, IFI will assess the estimate of the collateral/mortgage items brought and provide a loan that has been adjusted to the estimated value.Next, the customer will hand over the collateral/mortgage item to IFI for safekeeping.Storage of goods by IFI then results in maintenance and guarding costs which are charged by IFI to customers.This is as shown in Figure 1 but by adding in the third stage the burden of maintenance costs (mu`nah) based on the Ijārah contract.
However, the involvement of hybrid contracts in the context of Al-Rahn in Indonesia, especially those implemented in Pegadaian Syariah (Sharia Mortgage), triggers pros and cons regarding its Sharia legality.Similar to the issue that occurred in Malaysia, the legal status of hybrid contracts in al-Rahn is being questioned because of the existence of ijārah contracts.This issue raises two views: either it is in compliance to Sharia 54 or not in compliance with Sharia. 55owever, the existence of legal issues regarding the existence of ijārah contracts in al-Rahn scheme has not directly resulted in a response.Thus far, DSN-MUI has not formulated a specific fatwa regarding hybrid contracts in muamalah activities in Indonesia, although fatwas regarding other muamalah contracts feature hybrid mechanisms.Therefore, the implementation structure of combined contract in al-Rahn contract still practically involves an ijārah contract as part of the income that can be generated by IFI in Indonesia.This will undoubtedly be problematic considering the IFI which accommodates the ijārah contract in al-Rahn scheme becomes a binding contract as if required.This is clearly visible when this appears in the clause of the agreement signed by the two parties. 56

Conclusion
Malaysia and Indonesia as neighboring countries share the similar character of Islamic economic development, especially in this case in terms of legal guidelines and/or even official regulations for its implementation.Al-Rahn contract as part of the contract which is aimed at the financial needs of the community and participates in the development of its implementation structure in the community.The existence of hybrid contracts is indeed a contemporary advancement in the field of Islamic economic law which is practically included in al-Rahn scheme.However, fundamental problems arose when the involvement of the hybrid contract in al-Rahn contract was allegedly not compliant with Sharia.Seeing these problems, Malaysia has carefully decided that al-Rahn contract whose structure involves al-wadī'ah and ujrah is a hybrid contract that is not in accordance with Sharia.This decision ultimately encouraged Malaysia to create a new mechanism for implementing al-Rahn that ceases to apply the said al-wadī'ah and ujrah but rather the concept of Tawaruq as a practical alternative.Meanwhile, Indonesia has not officially confirmed the status of the implementation of al-Rahn which remains adhered to ijārah contracts, although a good number Islamic legal scholars in Indonesia have stated in their studies that in which such practive is not in accordance with Sharia.In that regard, if the hybrid contract in al-Rahn is indeed problematic, this could become a special area for specific studies regarding what kind of alternative implementation of al-Rahn can remove the current al-Rahn application from legal problems.

Figure 1 .
Figure 1.The Mechanism of Al-Rahn Contract

Fauzan
Muhammadi, Nor Fahimah Mohd Razif, Rahimin Affandi Abdul Rahim (Architecting Hybrid Contract in Al-Rahn: A Comparative Study Between Malaysia and Indonesia) scheme as follows:51 al-Rahn contract refers to several fatwas issued by the National Sharia Council of the Indonesian Ulema Council (Dewan Syariah Nasional-Majelis Ulama Indonesia, DSN-MUI) related to al-Rahn.The first is DSN-MUI Fatwa Number 26/DSN-MUI/III/2002 on Gold Rahn which states that the cost of storing goods uses an ijārah contract.Second, DSN-MUI Fatwa Number 68/DSN-MUI/III/2008 on Rahn Tasjīly, that storage fees (with proof of ownership/certificate of ownership of goods) are charged based on an ijārah contract.Lastly is DSN-MUI Fatwa Number 92/DSN-MUI/IV/2014 on Financing Accompanied by Rahn, that rahn contracts occur because of al-qarḍ (loan), which then, IFI (as murtahin) obtains 'income' through maintenance service fees (mu`nah) by using an ijārah contract.The DSN-MUI fatwas are one of the fatwa categories in terms of involving hybrid contracts among other fatwas which only involve single contracts.In terms of percentage, it can be stated that the DSN-MUI Fatwa that addresses single contract involvement is 54 fatwas (60.68%) and the other category about 51 Bank Negara Malaysia.Fauzan Muhammadi, Nor Fahimah Mohd Razif, Rahimin Affandi Abdul Rahim (Architecting Hybrid Contract in Al-Rahn: A Comparative Study Between Malaysia and Indonesia)