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’  
1
food keeps the animal itself alive. On the other hand, the pledgee  
1
. 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  
50  
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.  
2
. 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”.  
3
. 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