Modern Sharia Pawnshops: Substantive Islamic Finance or Symbolic Labelling?

The development of the Islamic economy in Indonesia has seen a significant increase in recent years. This is evident from the growing number of sharia-based financial institutions present in society, ranging from Islamic banks and Islamic insurance to sharia pawnshops. The presence of these institutions is considered an alternative for Muslim communities who wish to conduct economic activities in accordance with Islamic principles and avoid the practice of riba (usury). One institution that has developed quite rapidly is the Sharia Pawnshop. This system offers financing services using a rahn contract, or sharia pawning. In practice, the public can obtain funds by pledging valuable goods such as gold, vehicles, or electronic items without using an interest system like conventional pawnshops. The majority of the public views sharia pawnshops as a more just and sharia-compliant Islamic financial solution. However, amidst its development, various criticisms have emerged regarding modern sharia pawnshop practices. Some circles assess that the difference between sharia and conventional pawnshops sometimes lies only in the contract terminology, while the economic mechanisms still bear many similarities. This criticism raises a compelling question for study: Does the sharia pawnshop truly present a substantially different financial system, or is it merely a form of sharia labelling on a conventional system? This question is important because the main goal of Islamic economics is not simply to replace transaction terms, but to present an economic system that is just, transparent, and free from exploitation. Therefore, the discussion on sharia pawnshops needs to be viewed not only from the aspect of formal law, but also from the implementation of sharia values in modern economic practice. In fiqh muamalah (Islamic jurisprudence of transactions), sharia pawnshops use the rahn contract. Linguistically, rahn means to remain, detain, or make something as collateral. According to fiqh terminology, rahn is a contract of detaining an item belonging to the borrower as security for the debt received. The legal basis for rahn is found in the Qur’an, Surah Al-Baqarah verse 283. Additionally, there is a hadith explaining that the Prophet Muhammad once pawned his armour to a Jewish person as collateral for purchasing food. This hadith serves as evidence that the practice of pawning is permissible in Islam as long as it does not contain elements of riba, gharar (uncertainty), or injustice. Fundamentally, rahn has a social function. This contract aims to help the public obtain funds quickly in urgent conditions without having to be trapped in high-interest loan practices. Therefore, some scholars view that the rahn contract should prioritise the principle of mutual assistance over a mere profit orientation. However, in modern economic development, the rahn contract has begun to become part of a financial industry with a business and profit orientation. Herein lies a major challenge in maintaining a balance between sharia social values and the economic interests of financial institutions. Sharia pawnshops began to develop in Indonesia as part of the growth of the national Islamic finance industry. The presence of this system received a positive response from the public, especially because the majority of Indonesia’s population is Muslim and has a desire to use sharia-compliant financial services. In practice, sharia pawnshops offer various services such as gold pawning, gold instalments, micro-business financing, and gold savings. The institution’s profit is obtained through administrative fees and ujrah, or fees for the maintenance of the pledged goods. Unlike conventional pawnshops that use loan interest, sharia pawnshops emphasise that the fees charged do not originate from an addition to the debt, but from the service of safekeeping and maintaining the goods. The existence of sharia pawnshops provides great benefits for small communities and micro-business actors who need quick access to financing without complicated procedures. Many people choose sharia pawnshops because they are considered safer religiously and lighter compared to high-interest loans. Furthermore, the continuously rising price of gold has also made sharia gold pawning products increasingly popular among the public. Despite using a sharia contract, the practice of modern sharia pawnshops is not free from criticism. Some members of the public assess that the sharia system sometimes differs only in terminology, while the economic substance still resembles the conventional system. For example, in sharia pawning practice, there are still fees that the customer must pay. Although these fees are called ujrah or safekeeping fees, some people view that the nominal amount often bears a similarity to the interest in conventional pawnshops. In addition, some sharia financing products are also considered too oriented towards the institution’s profit compared to the social function of the rahn contract itself. Under certain conditions, the public even finds it difficult to distinguish between the sharia system and the conventional system because both result in additional payments. Criticism like this arises not only from the general public but also from a number of modern Islamic economics academics. Timur Kuran, for example, once criticised that some Islamic finance practices only perform a ‘symbolic Islamisation’ of the conventional system without presenting truly substantive economic change. This raises a rather sensitive question: What is most important in Islamic economics—changing the name of the contract, or changing its economic values and mechanisms? If the sharia system only replaces the term interest with margin, ujrah, or administrative fees without changing the substance of the economic relationship, then the fundamental goal of Islamic economics has not been achieved.