Islamic Credit Cards – An Introduction

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 Marketing8(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 Review2(3), p.102.

http://www.alahli.com/en-US/personal-banking/credit-cards/Documents/Credit-Card-terms-EN.pdf

http://www.sabb.com/en/financing/personal-finance/

https://www.saib.com.sa/en/content/visa

http://alrajhibank.com.sa/en/personal/credit-cards/cards/pages/platinum-visa-credit-card.aspx

https://www.samba.com/en/pdf/Samba_Alkair_TC_en.pdf

https://www.usbank.com/credit-cards/how-credit-cards-work.html

https://www.uab.ae/islamic-banking/murabaha

https://www.moneyadviceservice.org.uk/en/articles/credit-cards

http://www.quickanddirtytips.com/money-finance/credit/how-do-credit-cards-really-work

https://www.capitalone.com/credit-cards/blog/how-credit-cards-work/

http://www.maybank2u.com.my/

http://www.maybank2u.com.my/mbb_info/m2u/public/personalDetail04.do?channelId=CRD-Cards&cntTypeId=0&cntKey=CRD01.34&programId=CRD01-CreditCards&chCatId=/mbb/Personal/CRD-Cards

 

‘Islamic banking should be on national agenda’

KARACHI: Islamic banking should be part of the national agenda in order to promote a Shariah-based financial system, according to State Bank of Pakistan (SBP) Head of Islamic Banking Salimullah.

He was addressing the participants here at the Islamic Finance Conference and Exhibition on Friday.

Salimullah said that Islamic banking has been on an expansion path throughout the country, providing a viable alternative model of the economy to the world.

The SBP has planned to intensify its efforts towards creating awareness and promoting Islamic banking across the country in collaboration with all Islamic banks, he informed the participants.

Read more : http://tribune.com.pk/story/566510/islamic-banking-should-be-on-national-agenda/

source : tribune.com.pk

Major Islamic funds conference opens

Leading players, industry thought leaders and key regulators in the international Islamic investments and asset management industry will come together in Bahrain today for the start of a two-day conference.

The 9th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2013), is taking place in strategic partnership with the Central Bank of Bahrain (CBB), organisers said.

More than 400 international industry leaders are expected to participate in critical discussions that will focus on “Broadening the Base of Investors and Issuers; and Boosting the International Growth of Islamic Capital Markets and Investments”.

The conference will open with a keynote address by CBB executive director for financial institutions supervision Abdul Rahman Mohammed Al Baker.

The recent acceleration in the Islamic funds and investments industry is set to grow further as governments and institutions in the Middle East, South East Asia and beyond increasingly seek Sharia-compliant instruments as a viable alternative for raising capital and also for diversifying their investment portfolio, he said.

read more at : http://www.gulf-daily-news.com/NewsDetails.aspx?storyid=354082

source : Gulf-daily

Islamic microfinance: An instrument for poverty alleviation

With the growth of Islamic finance industry, Islamic micro finance is becoming a populor tool in allviating the poverty in the developing countries, the artical is about Islamic mirco financing..

From The Financial Express Bangladesh

Islamic microfinance (IM) is becoming an increasingly popular mechanism for alleviating poverty, especially in developing countries around the world. The Islamic microfinance industry as a whole is expected to reach over $2.0 billion in 2012 and is a continually growing sector due to its ethical principles and prohibition of riba (interest). This amount of assets is, however, only 1.0 per cent of the total microfinance of the world.

The concept of IM adheres to the principles of Islam and is a form of socially responsible investment. Investors who use their wealth for IM projects only involve themselves in halal projects which benefit the community at large. Such projects include zakat, which is charity based, or trade and industry projects to develop a country’s economy.

Read more at : http://www.thefinancialexpress-bd.com/more.php?news_id=141342&date=2012-08-28

What Can We Learn from Islamic Finance?

From blogs.worldbank.org

In over 70 countries, from financial centers in Malaysia to the Middle East, Islamic finance has been growing rapidly around the world. In fact, Shariah-compliant financial assets have increased from about US$5 billion in the late 1980s to about US$1 trillion in 2010. Even more impressive is that this class of financial instruments appears to have avoided many of the worst effects of the recent crisis, making it an increasingly attractive investment vehicle.

Given its rapid growth and relative stability, are there lessons we can garner from Islamic finance? Three years after the onset of the global financial crisis—as regulators are still grappling with how to deal with predatory lending practices, opaque derivatives, and overly leveraged financial institutions—can Shariah-compliant finance challenge our notion of conventional banking?

Perhaps it can. By and large, Islamic finance relies on the core principles of Islam concerning property rights, social and economic justice, wealth distribution, and governance. Two of its main tenants are the prohibition of interest on debt in any form and the removal of ambiguous contracts to enhance disclosure and proscribe deception. Among its other key precepts is a commitment to back all financial contracts by assets and activities in the real economy, as well as an emphasis on the principles of morality and ethics in conducting business.

read more at

http://blogs.worldbank.org/growth/node/8810

source : blogs.worldbank

Business schools turn to Islamic finance

As unemployment levels remain high in the West, finance students are being encouraged to gain expertise in Islamic banking so that they will be able to work in the Gulf states and in the wider Islamic world.

Universities are also exposing students to other non-conventional and ethical finance models that include eco-finance and micro-finance.

While universities in the United Kingdom and France have offered Islamic finance programmes for some years because of their large Muslim populations, Spain is also increasingly looking into these programmes.

The Instituto de Empressa (IE) business school in Madrid has been offering Islamic finance programmes for five years and partnered with Saudi Arabia’s King Abdul Aziz University (KAU) to launch the Saudi-Spanish Center for Islamic Economics and Finance (SCIEF) earlier this month.

Speaking at the event, Dr Ahmad Mohamed Ali Al Madani, head of the Islamic Development Bank, said the financial crisis had raised people’s concerns beyond profit margins into where their money is invested. Al Madani was acting rector of KAU from 1967 to 1972 and was Saudi Arabia’s deputy minister of education in the 1970s.

Business schools needed to respond accordingly and Spain was in a good position to do this considering the country’s Arabic heritage, he said.

“You look around and find that Islamic institutions are in the hundreds. Amounts of the assets are in the billions. The system proved that it can support economic systems and respond to big demand from people in different parts of the world.”

full story :

source : university world news

World’s Largest Gathering of Islamic Finance Leaders to Address Next Phase of Global Growth

Manama, Nov. 20 (BNA) — The 18th Annual World Islamic Banking Conference opens on the 21st November with a series of pre-conference summits

Bahrain: 20 November 2011: Leading players, industry thought leaders and key regulators in the international Islamic banking and finance industry will take part in the 18th Annual World Islamic Banking Conference (WIBC 2011), which is set to commence on the 21st of November 2011 at the Gulf Hotel in the Kingdom of Bahrain.

The three day event which ends on the 23rd of November is convened under the patronage of HRH Prince Khalifa Bin Salman Al Khalifa, the Prime Minister of the Kingdom of Bahrain and held under the support of the Central Bank of Bahrain.

Speaking to the media ahead of the event, David McLean Managing Director of the World Islamic Banking Conference said that “in recent years Islamic finance has further transitioned into a dynamic, fast growing and highly competitive market servicing an increasingly international community.
This expanding globalization of Islamic finance has now gained significant momentum as manifested by increasing cross-border investment and deal flows that are Shari’ah compliant, greater participation in international Islamic financial markets, and the increased presence of Islamic financial institutions in new jurisdictions.
Held under the theme “Competing for Global Growth”, the 18th Annual World Islamic Banking Conference (WIBC 2011) will set the stage for discussions that will seek to boost the scale of Islamic finance activities across international markets.”

He also that said “this year we have delegates attending from more than 50 countries providing the discussions at WIBC with a truly international perspective.”

WIBC 2011 will begin on the 21st of November 2011 with a series of pre-conference summits. The pragmatically focused pre-conference executive briefing sessions, led by experienced and respected industry experts, will place a range of complex themes in a practical framework, enabling a deeper understanding of the critical issues facing the Islamic finance industry.

The main WIBC 2011 conference, which begins on the 22nd of November 2011, will be inaugurated by H.E. Rasheed Mohammed Al Maraj, Governor of the Central Bank of Bahrain. The inaugural session which focuses on strengthening the regulatory frameworks to accelerate the international development of Islamic finance will also feature H.E. Khaled Mohammed Al-Aboodi, Chief Executive Office & General Manager, The Islamic Corporation for the Development of the Private Sector, the private sector arm of the Islamic Development Bank Group (IDB), Saudi Arabia.
The inaugural plenary session will be followed by the high profile Industry Leaders’ Power Debate led by internationally respected CEOs and decision-makers from the key players in the industry.
Moderated by Ashar Nazim, Senior Director, MENA Leader for Islamic Finance, Ernst & Young, this dynamic session will analyze how the leading players are positioning themselves to capitalize on the new growth opportunities presented by the increasing internationalization of Islamic banking and finance.
The Power Debate session will feature Tirad Mahmoud, Chief Executive Officer, ADIB; Toby O’Connor, Chief Executive Officer, The Islamic Bank of Asia; Syed Abdull Aziz Jailani Bin Syed Kechik, Chief Executive Officer, OCBC Al-Amin Bank Berhad; Asad A Ahmed, Chief Executive Officer, Gulf African Bank; Abdulrazzak Mohammed Elkhraijy, Executive Vice President and Head of the Islamic Banking Development Group, The National Commercial Bank – Saudi Arabia; and Dr. Salah Addeen A Qadar Saeed, General Manager – Credit & Risk Management, Bahrain Islamic Bank.

WIBC 2011 will also feature a special keynote address on “Competing for Global Growth: Preparing for the Asian Century” by Prof. Kishore Mahbubani, the Dean and Professor in the Practice of Public Policy at the Lee Kuan Yew School of Public Policy (LKY School) at the National University of Singapore on the 23rd of November 2011. Jaseem Ahmed, Secretary-General of Islamic Financial Services Board (IFSB) will be the opening keynote speaker on the final day of the event.

Commenting on the Central Bank of Bahrain’s support for the event, Khalid Hamad Abdul-Rahman Hamad, Executive Director – Banking Supervision, Central Bank of Bahrain noted that “Bahrain has a long and proud history in supporting the progress of Islamic finance. The Kingdom continues to play a pioneering role in the advancement of industry standards, best practices and in developing a strong regulatory structure. We look forward to welcoming back the global stage of the 18th Annual World Islamic Banking Conference to the Kingdom of Bahrain and to continuing its tradition of supporting growth and innovation in the international Islamic finance industry. The past few years were so challenging for Islamic finance but at the same time the future raises several business development potentials and opportunities which we are all looking forward to explore during the 18th Annual World Islamic Banking Conference,” he said.

A similar view was expressed by Shaikh Mohamed Bin Essa Al-Khalifa, Chief Executive of the Bahrain Economic Development Board who said that “Bahrain continues to be widely recognised as a global leader in Islamic Finance, and is also home to a number of central bodies which set the standards for the industry across the globe. Guiding over thirty countries on conducting business by Islamic principles has provided many investors with the confidence they need despite the turbulent market conditions in recent years. We have built a solid foundation for Islamic banking in the Kingdom; presently there are more than twenty five Islamic banks and the monthly issues of the Sukuk Al-Salam Islamic securities are regularly over-subscribed.”

He also said that “given our heritage in Islamic Banking, and our commitment to a strong future for the sector, we are proud to continue to host and support the 18th Annual World Islamic Banking Conference.”

As a part of the world comes to WIBC initiative, a leading panel of international experts will converge at the Country Focus Roundtable to address how well-positioned Islamic banks can explore international opportunities in the most dynamically evolving high-growth markets for Islamic finance. The Country Focus Roundtable along with the WIBC Country Pavilions will explore exciting opportunities in key jurisdictions including France, the United Kingdom, Singapore, Bahrain, Bermuda, Luxembourg and Labuan.

HMA Iain Lindsay OBE, British Ambassador to Bahrain, who will be inaugurating the UK roundtable at WIBC 2011, noted that “with a proven track record as a leading international financial centre and a long history of building strong regulatory infrastructure, the United Kingdom is keen to further establish its links and partnerships with the international Islamic finance industry. Given the UK’s strong financial and trade links with the Gulf and South East Asia, which are the major centres for Islamic finance, there are tremendous opportunities for cross-border investment flows that are Shari’ah-compliant. The progress made by UK firms in the Islamic finance industry is notable and the UK Pavilion at the World Islamic Banking Conference 2011 will be an opportune platform to showcase the Islamic finance capabilities of the UK and further build our relationships with the leading international players.”

WIBC 2011 will feature more than 60 leading industry partners and exhibitors showcasing their latest innovations at the World Islamic Banking Exhibition organised along the sidelines of the conference. The exhibition will be officially inaugurated on the 22nd of November.

The eagerly anticipated 2011/12 edition of the World Islamic Banking Competitiveness Report, developed in collaboration with Ernst & Young, will also be launched on-site at the 18th Annual World Islamic Banking Conference in an exclusive session on the 22nd of November 2011.

source : Bahrain News Agency