Authors
- Silwan Qurabn (MIFM Graduate Student, Effat University, KSA)
- Mona Alansari (MIFM Graduate Student, Effat University, KSA)
Introduction
1) A Credit card is a revolving credit facility within the credit limit and credit period is determined by the issuer of the card. It is also a mean of payment.
2) The holder of the credit card is able to pay for purchases of goods and services and to withdraw cash, within the approve credit limit determined by the card issuer bank.
At the very start of 20th century people used to pay cash for all the goods and services they buy, In 1920, Oil companies and department stores started offering courtesy cards which were metal charge plates, which holder can use to make purchase but such cards were mainly accepted only by the merchant who has issued them, such card were more like the modern days store cards.
There is famous story of McNamara’s dinner at Major’s Cabin Grill New York restaurant, next to the Empire State building, when McNamara finished his Dinner with his friends and reached into his pocket to pay money for meal and shocked when discovered that he forgot his wallet home, immediately called his wife to bring wallet and he paid bill with embarrassment, but from that Dinner he came up with new idea of credit cards which can be used at multiple locations. Mc Namara and his lunch friends Bloomingdale and Sneider all three pooled money together and created a new credit card company in 50’s named it as Diners Club.
At the very beginning Diners club credit card were given to 200 people mainly the friends, such card were initially accepted only on 14 new York restaurants and such cards were not made up of plastic instead of paper and accepted merchants were printed on the back of paper, just in second year profit was more than $60,000.
Diner’s club card first started as mass acceptance, which enabled the cardholder to spend more than no cardholders, and diners club charged 7% fee on each transaction, which also required holder to payback all amount at the end of each month. Just after one year it has 42,000 members and by 1953 it was the first internationally accepted charge card company, within just 40 years its position was challenged by the other major competing companies such as American Express which first issued the plastic card.
Among the other the most innovative one was bankAmericard started from California, and spread, it was most accepted in California, in later years Interbank card association emerged to smooth the transaction between merchant, bank and cardholder, BankAmericard eventually became Visa, while the inter bank card association letter became MasterCard. Both card got acceptance almost everywhere and later on issuer’s starts adding perks to attract more customers, the entry of discover card further enhanced competition. Up till late 1960 there were no concrete regulation in credit card industry although millions of people were now using this facility, and because of lack of regulation different issuers were charging much different interest rate and there were number of frauds in practices, the first major legal and regulation process started with “The Truth in lending Act and consumer credit protection act, with such acts standardize method of calculating interest introduced. More regulation were added for the consumer protection through the consumer credit protection act. After the 2008 financial crisis, more regulation were added in “the truth in lending act” through the card act of 2009.
How Does Credit Cards Work In Conventional Banking?
Conventional credit card system evolved after the Diners Club inc, and American Express. Under the conventional credit card banking system, merchants account is credited by the bank and money is immediately paid to the merchant, while charges are assembled to the credit card holder at the end of billing period, which the credit card holder pays to bank either entirely or in installment with the interest rate also called as Carrying charges.
Credit card is a financial product which is issued by your bank or other financial institution which allows you to make purchase and take cash advance. The main difference between the charge card and credit card is that charge card required you to make full balance payment at the end of month, which credit card allows you to carry balance indefinitely as long as you can make minimum payment at the end of each month.
Credit cards let you to spend money on credit, you can spend up to a limit which is preset when the card is issued, Once you use the credit card, you are required to make a minimum payment every month before the due date and if you are unable and failed to make that minimum payment, then the interest charges will be applied usually charges are applied to backdated when the goods or services is purchased. The best way to avoid any extra charges and using card wisely is to make sure that you are able to make monthly payment, and we can avoid any fiancé charges if we can make full payment back before the 30 days or end of month.
In normal credit card transaction there are three parties involve, 1) card issuer, 2) payment network 3) merchant. Whereas card issuer is your bank, payment network are normally widely accepted, Visa or MasterCard , normally logo are marked on our credit cards, and merchant is the place from where we make purchase, normally merchant has specially bank called acquiring bank which handle the transactions.
For example you finished your dinner in a bank, and swipe your card in a little machine to pay your bill, that machine transfer your information to merchant (Restaurant’s bank), merchant bank use the Visa or Mastercard payment network, receive authorization from the card issuer bank, once card issuer bank accept the transaction it transfer funds to network (Visa, MasterCard) which then sends funds to your restaurant’s or merchant bank’s account. Later on you pay the balance wither as whole or as in monthly installments.
How Does Credit Cards Are Structured In Islamic Baking?
In terms of functions and definition, the Islamic Credit Cards are same like the conventional credit cards, the only thing that is avoided and prohibited is Usury or interest rate, and Islamic credit cards are compliant with Shariah and Islamic principle especially regarding the payment of credit cards.
According to Islamic laws, hadiths and Quran, it is prohibited to pay interest on the money which is withdrawn in advance, like this all the additional interest charges of delaying payment is also prohibited, but if credit card are only served as charge card where you pay the principle amount plus the services charges then its allowed and permitted.
Tawarruq, Murabaha, Bay al Inah and Ujrah are widely used in recent Islamic banking, whereas Bal Al Inah means selling goods with immediate purchase, and Ujrah means service charges or charges against the rendering service.
Bay Al Inah involves selling and buy back transaction of assets by the seller, where seller sales asset to buyer at cash and then buy back on deferred payment basis at higher price, so Bay al Inah is a two parties contract where a person sells commodity on credit at specific price, and then buy back at lesser price for cash, and the difference between that specified price and lesser price is called profit, modern Islamic banking refer that profit as the credit limits.
Islamic credit card are used and allowed only to buy halal goods and services, Islamic credit card cannot be used to purchase anything that is declared haram by the Shariah. The main different between the Islamic credit cards and conventional credit cards are Riba (interest) and Gharar (Overcharging) both are prohibited in Islamic.
Another famous financial instrument concept used in Islamic credit cards is Tawarruq, where the buyer buys a commodity from seller on deferred payment basis, and the sells same commodity to another party at cash or on the spot payment basis. Basically in this way initially buyer is borrowing cash from the bank via initially purchase, like this way in Islamic credit card use customer buy goods or services from bank on cost plus profit basis and then customer resale it on cash basis, so Tawarruq is basically transfer of ownership process and allowed by the shariah.
Ujrah is another concept used in Islamic credit, it’s the fee that Islamic banks charged against the services they render to its customers, so Ujrah is service fee.
Islamic Credit Cards Used In KSA
In Saudi Arabia, AlAhli Islamic Credit Card use the Taqarruq as a financial Instrument for making credit transaction, according to this concept as mentioned above customer buys the good or service from Islamic bank at a marked up price to be paid latter then quickly sales the goods for cash, but it is also necessary tangible assets should underlie all the transaction, for example buying a precious metal from bank at $1000 and then selling it to market at $900 cash.
SABB another bank in Saudi Arabia uses Tawarruq (Mal) and Murabah (SAHM) financial instrument for credit lending, where you can get credit up to SAR 1,500,000 with 5 years of repayment period, but the card holder mush be above 21 years and should have minimum salary above SAR 3000.
According to Tawarruq contact you buy a metal from SABB bank at higher price (bank keeps its profit) on deferred payment, and sale it into market for cash at lower price.
According to Murabaha concept SABB bank purchase Shariah compliant share from local stock market and sale you at known fix profit, after buying share from SABB bank you have the option either to invest share in halal investment portfolio or Sale share to generate cash.
Saudi Investment bank is another Islamic bank which issue Silver, Gold and platinum credit cards to its customers, SAIB and SAMBA credit card also works on Tawarruq principle basis as we discuss earlier.
AL Rajhi credit card works on Murahaha finance basis and offers customer flexibility where you buy now and pay later. Here bank purchase goods such as car, furniture, electronics or any other goods on behalf of customer and then sell it to customer at a profit, and intermediary retain the ownership of the goods until the loan is fully paid.
Case Study – An Islamic Credit Of A Bank
United Arab Bank UAE
United Arab Bank in UAE functions on the basis of personal Murabaha Finance solutions which is a contract between the bank and its client, where bank purchase the goods and sell them to client at cost plus profit on deferred payment basis, and client is required to make payment to bank on installment basis, in this way bank can avoid the charging interest rate forbidden in Islam.
An example of Murabah finance is owning a car, for example you have a favorite car and you want to buy it but you don’t have money to pay it off at once, under United Arab bank Vehicle murabaha scheme bank will purchase the car for you can sell it to you at purchase price plus profit margin, and you will pay back money in installment, the benefit of this credit is that you know the profit and total amount which you have to pay to the bank.
MayBank Malaysia
Maybank is based in Malaysia and their credit card products are variety of Visa and MasterCards under the name of MAybankIkhwan.
The concept if MayBank Islamic credit card is based on the Bay Al Inah and Ujrah, Bay al inah is buy back contract , where seller sale goods on credit at higher price and buy back on cash bases at lower price, different between two prices is profit and it’s also the credit limit.
But the problem with such method is that, buying and selling is pre-specified with no risk, which is haram in Islam, plus most of the cases this is only on the paper buy and sale and no actual physical asset is moved.
Because of the above mentioned problems bank also uses the Ujrah as financial instrument, which is basically charges for rendering services.
Like the conventional bank MayBank also has grace period of 20 days. And Maybank Islamic card requires 5% of the outstanding loan as the minimum payment. In case of failure to make minimum payment 1% of the outstanding loan is charges as a fee and then used to help needy people to perform Umrah trip.
References
Tsosie, Claire. “The History Of The Credit Card – Nerdwallet“. NerdWallet. N.p., 2017. Web. 26 Apr. 2017.
“The Incredible True Story Of The Very First Credit Card”. ThoughtCo. N.p., 2017. Web. 26 Apr. 2017.
ZAID, FATIMAH. “The Difference Between Conventional And Islamic Credit Card”. Academia.edu. N.p., 2017. Web. 1 May 2017.
Erol, C., Kaynak, E. and Radi, E.B., 1990. Conventional and Islamic banks: patronage behaviour of Jordanian customers. International Journal of Bank Marketing, 8(4), pp.25-35.
Jamshidi, D. and Hussin, N., 2012. A conceptual framework for adoption of Islamic Credit Card in Malaysia. Kuwait Chapter of the Arabian Journal of Business and Management Review, 2(3), p.102.
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Islamic Finance Expert 