Killing them works, too--the town is still happy that you got rid of them. You can obtain the same material rewards either way, though I think you get a bit more EXP for killing the Rakshasa. (Have Jan in your party for an interesting little interaction with her.)
That Scimitar is crap, by the way. (There just aren't any really good Druid weapons until ToB, and even then there's only one.)
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Volothamp's Comeuppance
Everything you ever needed to know about the entire Baldur's Gate series......except spoilers.
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