What to Know About the Pawn System

There are various ways to fulfill financial needs, ranging from traditional loans to pawning assets. A method that has been around for centuries and remains relevant today is the pawn system. Pawning has become one of the most popular alternatives for obtaining loan funds.

But before utilizing a pawn, it is better to understand the details of the pawn system. By understanding the definition, laws, and advantages and disadvantages of the pawn system, you can consider utilizing it. Check out the full review!

What is a Pawn?

According to KBBI, Gadai means borrowing money within a certain time limit by submitting goods as collateral, if the time has not been redeemed, the goods become the right of the lender.

In the financial world, a Pawn is a financial system where a person or company pledges a valuable item to a pawnbroker as collateral for a loan of money. The valuables will be held by the lender.

In return, the pledgor will receive some funds as a form of loan until the loan funds are paid back to the pledgee. This is a commonly used way to obtain a loan by using an asset as collateral.

Legal Basis of Pawn

The legal basis of a pawn can vary by country. In Indonesia, the law governing pawning is Law Number 42 Year 1999 on Fiduciary Guarantee. This law provides a legal framework governing pawn transactions and protection for parties involved in such transactions. In addition, the legal basis of pawning in Indonesia is also regulated in the Civil Code articles 1150-1160 as well as POJK NO31/POJK.05/2016. All rules regarding pawning, the rights and obligations of the pawn giver and receiver, to the pawn settlement process.

Pawn Scheme in Indonesia

In Indonesia, the pawn system has a well-structured and regulated scheme. Usually, a person or company can submit items that have economic value to financial institutions such as banks or pawnshops. After the value of the item is assessed, the institution will offer a loan amount based on the value of the item. If the pawn recipient agrees to the amount, the pawned item will be held by the institution as collateral. The pawn recipient also sets the duration of the loan to a certain time limit, so that if it is not redeemed within the specified maturity, the collateral becomes the property of the pawn recipient.

Types of Items that Can be Pawned

There are many types of items that can be pawned, depending on the policy of the pawn institution or bank. Generally, pawnbrokers take items such as jewelry, motor vehicles, electronics, and even property as collateral. However, the value of the item, liquidity, and potential depreciation should also be considered in determining the loan amount. Two divisions of pawn items can be used as collateral for a pawn, namely:

1. Tangible movable objects, which are objects that can be moved. For example: television, gold, vehicles, gadgets, and others.

2. Intangible movable objects. For example: securities such as stocks, bonds, property titles, cheques, and others.

 

As for items that cannot be pawn collateral such as items that have a validity period or expiration, legally prohibited items such as drugs and narcotics, as well as items that are difficult to assess the value.

Implementation of Pawn Settlement

In the pawn process, if the pawn-giver can pay off the loan funds, then the item that is pawned as collateral will be returned. But what if there is a default from the pawn-giver? Several forms of breach of contract often occur by customers. Two of them are the inability to repay the loan in full and the delay in repaying the loan.

Certain factors can lead to a breach of contract in a pawn agreement. These factors are divided into two categories, namely external factors which include force majeure circumstances, and internal factors such as financial problems and malicious intent.

In dealing with a breach of contract, three mechanisms are usually used for settlement. These mechanisms include extending the maturity period, transferring to other products, and conducting auctions on pawn goods according to the applicable pawn law.

Sharia Pawn

In practice, there are two types of pawn services in Indonesia, namely conventional pawn and Sharia pawn. In the Islamic context, the pawn system is known as "Rahn". Islamic economic principles emphasize the need to avoid Riba (interest) and ensure fairness in transactions. In Rahn, a valuable item is given as collateral for the pledge, but the owner of the item retains the right to the item. If the borrower defaults on the loan, the pledged item can be sold at a fair price to settle the debt.

Conclusion

Pawning is one of the alternatives to obtaining a loan by submitting items that have economic value as collateral. It is important to understand the legal basis and scheme of pawning in your country before engaging in this kind of transaction. In the context of Islamic economics, the principles of fairness and avoidance of usury must be upheld. Before entering into a pawn transaction, carefully consider the type of item to be pawned as well as the ability to repay the loan so that the valuable item is not permanently lost.