One of the products offered by an Islamic bank is Rahn. The agreements used are Qard Hassan and Ijarah. In Rahn, the customer pawns their asset to the Islamic bank to obtain funds. The asset which is pawned can be gold or diamond but to be more secure, the Islamic bank only accepts gold. Hence, in an Islamic bank a pawn product is usually called ‘gold pawn’.
Fortunately, the regulator has given the green light and supports Islamic banking for the innovation of these gold products. The fatwa authority in Indonesia, Majelis Ulama Indonesia, has launched Fatwa No. 26/DSN/III/2002 regarding the gold Rahn. In 2008, Bank Indonesia allowed Islamic banks to conduct gold-based business such as gold pawn and gold saving.
Over time, Islamic banks have released other gold products: such as gold saving, ownership of gold and gold investment. In an ownership of gold, gold products can be facilitated by the Islamic banks to pay in installments over a period of time. For example, if a customer wants to have 1kg of gold, but only has money equivalent to 100g of gold, the Islamic bank will offer a bail fund to facilitate that 1kg of gold.
The benefits of gold products
Gold products in Indonesian Islamic banks are very popular. In the first quarter of 2011, the growth of Islamic banks’ gold pawning in Indonesia reached 15%. In some Islamic banks, the growth of the gold products has peaked above the overall banking industry growth. For example, in Bank BRI Syariah, the gold pawn industry in 2009 reached an outstanding amount of IDR30 billion (US$3.3 million). Because of BRI Syariah’s growth in gold products, other Islamic banks such as Bank Syariah Mandiri, BNI Syariah and Bank Danamon Syariah are also joining the race to try and match the gold growth experienced by BRI Syariah.
There are several reasons why these gold products are popular:
1) The products are not available in conventional banks. The only financial institution that sells gold products besides Islamic banks are pawn institutions called Pegadaian (state-owned pawnshops). However, research conducted by Bank Indonesia suggests that people are more confident conducting their pawn business in an Islamic bank. This could become a competitive advantage for Islamic banks enabling them to compete with conventional banks and Pegadaian.
2) The gold price always increases. The average increase of the price of gold in Indonesia is about 40% per year. For example, in 1997, the gold price in Indonesia was IDR75,000 (US$8.30) per gram. In 2001, it reached IDR120,000 (US$13.30) per gram and 10 years later, the price reached IDR550,000 (US$61.60) per gram.
The gold price increased in 2011 due to the global financial crisis, which has caused the prices of stocks to collapse and some have resorted to investing in gold, thereby causing the price of gold to increase due to the high demand. Although the price of gold fluctuates daily and sometimes declines, and if it is compared on a year-on-year basis, the price always increases. The increase in gold price is beneficial for the customer and the banks. The market value of the gold, which can be the bank’s collateral, also increases.
3) The gold product is universal.
4) The default risk of a gold product is very low.
5) An Islamic bank can generate a fee-based income. The fee-based income is generated from the administration fee and the Ijarah fee. The Ijarah fee is charged from the rental of the Islamic banks’ safe deposit box during the periods of gold product facility.
The future of gold products
In 2012, gold products offered by Islamic banks will be more popular. Moreover, the asset class could become the corporate image of Indonesia’s Islamic banking sector. As Islamic banks offer more innovative gold products, the price of gold could increase by 40% next year. The reasons are:
1) The global financial crisis, especially the Eurozone financial debt crisis, will still be ongoing next year.
2) Gold will always be scarce and in demand as an asset because the stock of gold only increases about 1.3% yearly.
3) The re-usable factor of gold.
Although gold products in Islamic banking have only recently been introduced, the growth has been significant.
Tony Hidayat is a financing analyst at Bank BRI Syariah. He can be contacted at
[email protected]
.