Rahn Financing as an Islamic Alternative to Conventional Loans

With the rapid growth of Islamic finance across various institutions, the importance of Rahn has also increased.

Rahn allows people to borrow money when they are in need by pledging their property as security to the lender. Islam permits Rahn as a means of supporting those facing financial difficulty and in need of quick access to funds.

From an Islamic perspective, Rahn serves as a guarantee for the creditor when providing a loan or financing to the debtor.

It also benefits individuals who may be asset-rich but cash-poor; instead of selling their assets, they can pledge them as Rahn to obtain the required funds conveniently.

Read more about: Hawalah in Islamic financial institutions

What is Rahn Financing & How it works?

Rahn is defined as making a financial asset tied to a debt, so that in case of default the asset or its value is used for the repayment of the debt.

Its mechanism is that it acts as a guarantee for the taken debt and assures the creditor that, in case of default, the creditor will be able to recover the debt owed by the debtor from the pledged asset. 

When the debtor approaches the creditor for a loan, the creditor worries about the repayment. Therefore, the debtor provides a guarantee in the form of Rahn, so that the creditor is satisfied in lending the amount.

References for the permissibility of the rahn from Quran Hadith:

The basis for the permissibility of the Rahn from the Holy Quran and Sunnah are:

- In Al-Baqarah (The Cow): 283
ﵟوَإِن كُنتُمۡ عَلَىٰ سَفَرٖ وَلَمۡ تَجِدُواْ كَاتِبٗا فَرِهَٰنٞ مَّقۡبُوضَةٞۖ ﵞ [البقرة: 283] 

Translation:

“I And if you are on a journey and cannot find a scribe, then let there be a pledge taken (mortgaging)…”}

- In Hadith:

 حدثنا مسلم بن إبراهيم، حدثنا هشام، حدثنا قتادة، عن انس رضي الله عنه، قال:" ولقد رهن النبي صلى الله عليه وسلم درعه بشعير، ومشيت إلى النبي صلى الله عليه وسلم بخبز شعير وإهالة سنخة، ولقد سمعته، يقول: ما اصبح لآل محمد صلى الله عليه وسلم إلا صاع، ولا امسى، وإنهم لتسعة ابيات۔

Translation:

Anas (may Allah be pleased with him) said:
The Prophet ﷺ mortgaged his armor for some barley. I once took to the Prophet ﷺ some barley bread and stale fat. And I heard him saying: ‘The family of Muhammad ﷺ never had even one measure (ṣāʿ) of grain for the morning or evening meal, while they were nine households

 
What are the Principles of Rahn in Islamic Finance?

There are several conditions which should be taken in consideration while executing the Rahn contract. The most important amongst them are as follows:

1- Collateralization

The marhun (the asset which will be pledged) should be a permissible item from a Shariah perspective, it should be a product that can be sold, the collateral must exist, absolute valid by Islamic legislation, it should be specified and transferable while contracting.

However, there are some items that are not allowed to be pledged from a Shariah perspective, they are:

- Pledging of the non-existing items or doubtfully existing.

- Pledging of the carcass because it has no value. 

- Pledging the hunted animals in the holy places like Mecca. 

- Pledging the free man because he is not a preproperate.

- Pledging of the liquor or pig, whether both or one party of the contract is Muslim, because these things does not have a value for the Muslims. 

- The Marhon asset may be a movable or immovable asset, both type of assets can be pledged with the pledgee. 

2- Prohibition of Gharar and Riba

The contract for which the collateral is offered should be a Shariah-compliant contract and should be free from the excessive Gharar and Riba.

If the contract in it self is non-Shariah compliant then obtaining or offering a collateral will be not allowed from a Shariah perspective.

Read more about: Gharar: What exactly is it and how to avoid it?

3- Profit and loss

The pledged asset is the property of the debtor. So, any profit generated or loss incurred from it is belong to the debtor (the pledger).

Read more about: The Basics of Shariah Compliant Profit & Loss Sharing Models

4- Redemption and Release

If the pledger repays the borrowed amount, he has the right to redeem the pledged asset from the creditor (the pledgee), and the creditor has no right to retain the pledged asset after repayment.

How is Rahn Financing different from conventional loans?

The core difference between Rahn and conventional loans lies in the treatment of interest. In conventional finance, loans are extded to borrowers on the basis of interest, which is strictly prohibited under Shariah.

Therefore, Rahn cannot be applied in conventional loan structures. However, in both Islamic and conventional financial institutions, Rahn (collateral/pledge) serves the same purpose—providing security for the financing.

Read more about: A Shariah Perspective on Profit Sharing vs. Guaranteed Interest

Modern Applications of Rahn Financing

There are different types of applications that are mainly used in Islamic finance, the most common amongst them are:

- Islamic mortgages:  commonly using a property for home finance.

- Corporate financing: the companies pledges their assets for raising their funds.

- Real estate financing:  lands or properties are pledged for the Shariah compliant financing.

- Personal financing: individuals use their valuable items for the purpose of pledge to obtain the loan.

Referencesbin Awang, A. B., bin Md Harun, A. S., bin Awang Hamat, M. A., & bin Sitiris, M. (2025). Al-Rahn from an Islamic Jurisprudential Perspective. AL-HIKMAH: INTERNATIONAL JOURNAL OF ISLAMIC STUDIES AND HUMAN SCIENCES, 8(1), 1-14.

https://aaoifi.com/ss-39-mortgage-and-its-contemporary-applications/?lang=en