Examining a distinctive loan contract “Pagang Gadai” practiced in a Muslim society: an Islamic finance perspective

Purpose

This study aims to examine a distinctive loan contract widely practiced in a Muslim society.

Design/methodology/approach

This research adopts a qualitative research approach. The study was divided into two main stages. Stage I research relied on documentary analysis of pagang gadai contracts. Hence, Stage II research was an in-depth study in a selected nagari, adopting an ethnography approach. The study was conducted in the district of Tanah Datar, West Sumatera, from 2020 to 2023.

Findings

The findings of this study show that the distinctive mode of contact breaks some basic rules of Islamic finance (the practice contains riba and gharar). The practice however is prevalent in the society studied due to the influence of the customary law namely the communal ownership of lands. The practice brings impacts on the society both positives and negatives.

Research limitations/implications

This study focuses on the traditional mode of pagang gadai contract, which involves the transfer of right to cultivate productive agricultural lands for an exchange of loan measured in gold measurement system and excludes other modes of pagang gadai.

Practical implications

Revision(s) of the contract mode is an urgent matter if the society to be rescued from practicing this type of contract that contains element of exploitation and oppression.

Social implications

The revision(s) is needed if the society wants to follow the teaching of Islam comprehensively, as claimed in the philosophy adopted.

Originality/value

To the best of the author’s knowledge, this is the first study on pagang gadai that focuses on impacts of the practice on the society studied.