Islamic Credit Cards

All forms of banking contain several risks that pose a challenge to banks and management authorities. Islamic banks, like other conventional banks, are financial institutions providing services to depositors and investors and financing companies, public sectors and individuals. Therefore, Islamic banks are subject to the risks similar to those confronted by conventional banks. While Islamic banking has been around for several decades, originating from groundbreaking efforts from the Bahrain, Malaysia, Iran, Sudan and Egypt. At the foundation of Shariah compliance there are two concepts of profitability in Islamic banking: profit and loss sharing and mark-up. Islamic banking is based on the totally Riba (interest) free and there is no transaction involving the interest. In the profit and loss sharing the rate of return on the financial assets is either not known or fixed before the undertaking; in case of mark-up the purchase-resale transaction is determined with reference of the benchmark rate of return. Profit share involves the bank’s ability to secure a high return arises from its own investment decision and input post-investment. By comparison, in conventional banking the borrower of the money become responsible for the entire risk. Poor investment decisions by the bank have a direct bearing on the returns gained by depositors, as the rate of return is determined by the profit-and-loss sharing ratio.

Shariah-compliant instruments differ from conventional banks’ offering in the legal contracts, governance and the liquidity structure.

Moving from evolutionary stage, institutions are structuring and offering a wide range of financial instruments and exploiting new modes of financing and market. On consumer financing side, Islamic credit card based on tawarruq offers all features of a credit card, easy purchases and repayments through a series of commodity transactions. Islam allows the use of credit card so long it does not engage the factor of usury. As an example if the withdrawing cash advance from the credit facility will result payment of an interest, it is forbidden. In the same way if there is an additional interest charge due to delay in payment, it is forbidden also. Therefore, if the credit card works as a charge card, where you only pay the principle amount that you use plus the service charges, it is permitted. However, there are certain questions still to be answered; how does Islam accept the role of credit card as a medium of payment? What are the underlying principles required by Shariah in the functionality of credit card? What would be the possible legal issues and how Islam addresses these issues? What are the differentiation factors in the Islamic credit cards?

Credit cards concept is allowed by the Shariah, if it does not involve the element of usury because 'Allah (SWT) permitted sale and prohibit usury'. AmBank Bank Berhad offered Islamic Credit Card in Malaysia called Al-Taslif and it was launched in 1992. Shariah concept of Bai Inah is being used in Malaysia for issuing Islamic credit cards. Bai Inah is defined as back-to-back sale and purchase transactions entered into, whereby in the first transaction, the bank sells items to the customer on a deferred payment basis keeping some profit. In the second transaction, the bank will repurchase the same asset from the customer at purchase price, which is lower than the selling price, on cash basis (card’s limit), and the difference between the purchase and the selling price is the bank’s ceiling profit. Now ABC Islamic Bank has launched its Islamic credit card named Al Buraq in Bahrain. Maybank Islamic has also rolled out its lkhwan Card, new Islamic credit card series. The cards feature either the international cards franchise of American Express or Visa International. Similarly, Dubai Islamic Bank (DIB) has also launched its first Islamic credit card with the support of Card Tech Limited, a leading UK-based bankcard systems provider and processor.

The expert, who specializes in Islamic law and transactional jurisprudence, considers that the burden of the responsibility belongs to the banks’ Shariah committees that support banks to offer such services which are commonly prohibited by the majority of present-day Muslim scholars. Most banks offering credit cards do so with the purpose of getting interest - which is sternly and clearly prohibited by Islam.

The expert went on to warn people against falling into the trap of the supposed Shariah-compliant cards which begin effectual advertising campaigns nowadays. Moreover, the only Shariah-compliant credit cards are the charge cards which only a limited number of banks offer.

In the meantime, the Shariah committees in banks have issued their defenses in the face of the charges leveled against them and the debate is still ongoing. The expert also explained that credit cards represent a guarantee by the bank to the customer, particularly in places such as hotels which rely more on credit cards than they do on cash.

Looking beyond domestic shores, the Islamic cards based on the Bai Inah concept might not be able to penetrate the Gulf markets, which insist that Bai Inah is not a sufficiently strong basis for issuing Islamic cards. The Banker reported that the concept is ethically flimsy when applied in this manner as the sale transacted is a fake sale and thus, just a means of masking riba. Therefore, the structure or basis for Malaysian Islamic cards has been criticized for not being wholly Shariah compliant as compared to Islamic cards issued by Bahraini banks.

The conflict boils down to differences of belief. There are many interpretations within Islam on what is acceptable, given that the schools of thought on Shariah law are not homogenous. However, local Islamic bankers have referred this conflict to the National Shariah Advisory Board, which ruled that the Bai Inah transaction is indeed acceptable. Malaysia follows the Shafie school of madzhab, which approves the Bai Inah transaction for Islamic cards as it conforms to all the essential elements of a valid sale.

The Islamic cards, like their conventional cousins, are tied to international payment systems companies such as MasterCard and Visa, therefore they offer international recognition and access to ATMs worldwide.

The future of Islamic cards is indeed bright in Malaysia as there is demand for it. The market for Islamic cards is huge and growing in response to the government’s urge to introduce more Islamic financial products in Malaysia. It will take a while for consumers to understand the structure of the products, but once they see and appreciate them, the growth rate of the Islamic products is going to be even better. There is a substantial Muslim population in Malaysia and a number of them seek Shariah compliant products and services. As an aggressive promoter of Islamic banking and finance, AmIslamic Bank is optimistic about the demand for Islamic products including Al-Taslif Card.

Islamic credit cards are emerging tool for the Islamic banking profitability. Now Islamic cards are widely used in Gulf and the popularity is increasing but different banks uses different laws and rules to support their activities. However, in Pakistan the concept of Islamic credit cards is not introduced yet. There is need of one common rule for the Islamic credit cards to solve the controversy and make it a useful tool for the Islamic banking era.

Source: pakistanbanks.org, islamicfinanceupdates.wordpress.com