Whether rich or poor, the need of urgent cash is always there. The poor would not be able to qualify for credit cards or personal loans from the various banks in Malaysia.
If they go to illegal money lenders, the interest rates would be absurdly high with a possibility of being trapped for long periods of time. This might lead to repayment of more than 2 or 3 times the borrowed amount.
So, the poor who have gold jewelry with them patronize the nearby pawn shop, which would keep the jewelry as security for the amount borrowed by the poor. The amount borrowed would normally be around 60% of the market price of the gold jewelry.
The interest charged by the Pawn Shop is usually a flat two percent per month, amounting to a whopping 24 percent per annum.
This rate was introduced several decades ago by the government when the base lending rate (BLR) was higher than it is now.
Mind you, this loan is a secured loan. Meaning, the pawn shop has every right to auction off the gold jewelry if the borrower defaulted and retain the amount due to them (any amount in excess is supposedly to be given back to the borrower).
As if pawn shops make pittance in profit, the borrower is compelled to pay for the cost of the pawn certificate, about 50 sen per certificate (such certificates should even cost 10 sen).
Credit cards (given only to those who financially qualify) are charge a flat rate of 1.5 percent per month. This that the means the yearly rate is only 18 percent as compared to that of pawn shops, which charge 24% per annum. Bear in mind that the credit card is an unsecured financial support.
What about the personal loans given by banks (again, given only to those who financially qualify)? The interest rate for this unsecured loan is around 10% per annum.
The above senario seems very unfair to the poor who are forced to borrow from pawn shops. Not only do they provide security for their loans, unlike the others, but end up charging nearly double in interest.
It was a relief when Ar-Rahnus (Islamic pawn shops) were established. These institutions do not charge interest, but were charging storage charges for the jewelry, charges that are slightly lesser than the Pawn Shops. The charges of Ar-Rahnu services are nearly half the interest charged by pawn shops.
Alas, there are not enough Ar-Rahnu shops for the poor. For this reason, the poor must be made more aware of Ar-Rahnus and the number of Ar-Rahnu shops must be increased.