Avoiding interest or riba is one of the main principles of Islamic banking. While this has been perfectly adopted in many variations of Sharia-based financing, the use of a credit card has raised questions.
Issuers of conventional credit cards demand — besides service fees — interest to be paid on the amount spent on the card, as it is technically an advanced payment eligible for interest. In this case, the use of a credit card would not be permissible for Islamic banking customers.
Islamic scholars have had many in-depth discussions on this issue. The Islamic Fiqh Academy of India ruled in a general fatwa that possessing a credit card is not permissible because the transaction is an interest-based one, even though an individual may pay within the allotted time and so avoid any interest.
On the other hand, Muhammad Taqi Usmani, an influential Islamic scholar in Pakistan, said in a recent statement that credit cards have become a necessity without which many transactions cannot be made, and therefore it is permissible to use it on the condition that the payments are made before the due date to avoid interest.
Other scholars have said that credit cards are generally haram as they are interest-based in their full conception, while the use of debit and cash cards is not, as there are no interest payments involved. However, many conservative scholars are against credit and debit cards of all types as they see it as an invention by Western culture — a concept of enjoying the opportunity of spending money that is not in their possession.
This uncertainty has prompted Islamic banks to develop special editions of credit cards that are fully compliant to Sharia rules. How do they work?
Some issuers solve the problem by distributing prepaid cards that are, by definition, interest free. Before using the card, the holder usually has to transfer money to the card. In this case it is like a debit card and large companies such as MasterCard or Visa are involved, according to Shariah-Fortune, an online Islamic finance website and community forum. The cards can be presented in many shops worldwide as well as for internet payments. On this type of card, the bank does not earn any interest on the balance.
Role of guarantor
Sharia-compliant credit card schemes used by banks include the concept of Kafalah, under which the bank acts as the guarantor for its clients in order to secure a credit card transaction. No interest payments are involved.
With the concept of Qard, the bank becomes, in principle, a lender to the credit card holder, used in cases of advanced payments. Within a certain period, no interest is paid. Bay Al Inah is a concept whereby the bank acts as the buyer as soon as the credit card is used. After that, it sells the product at a higher price to the cardholder and makes a profit.
Most of the Sharia-compliant card issuing banks, however, require a basic deposit to be paid, and payment for haram activities such as gambling, alcohol or escort services are denied. Moreover, Islamic credit cards do not come free; in fact the occurring fees are mostly higher than that of conventional credit cards. There are also service charges, membership fees, renewal fees, and so on.
MasterCard jumped on the bandwagon and introduced a Sharia-compliant credit card in 2008 in cooperation with Malaysia's Eon Bank. Its main competitor Visa has been co-branding Sharia-compliant cards with many banking institutions ever since.
"Fully exploiting the Islamic banking niche means targeting customer segments that care most deeply about Sharia compliance in their financial dealings, as well as offering products and services that meet not only general financing but also Muslim-specific customer needs," says Cyril Garbois, partner, AT Kearney Middle East, in an analysis entitled ‘The Future of Islamic Banking' released this April.
"Islamic banking products abound in auto finance and credit cards. Products tailored to Muslim-specific needs provide a platform for true differentiation,"he added.
There is in fact a dazzling array of Islamic credit cards issued in the UAE. For example, the Saadiq Visa gold credit card issued by Standard Chartered UAE, which is, according to the bank, fully compliant to Sharia principles and approved by a Sharia committee comprising of three scholars. HSBC in the UAE also offers Sharia-approved credit cards within its Amanah brand line.
Dubai Islamic Bank offers one of the biggest choices for Islamic credit cards via its Al Islami card programme. The cards are available in a choice of classic, gold and platinum versions. They do not have joining fees and are free from riba and non-Islamic charges such as late payment fees or over-limit fees. The bank's gold and classic cards have been ranked first in the 2011 Forbes Middle East Credit Card rankings.
Other banks that have Islamic credit cards on offer in the UAE include Emirates Islamic Bank, Abu Dhabi Islamic Bank, First Gulf Bank, Emirates NBD, Sharjah Islamic Bank, Abu Dhabi Commercial Bank, and Mashreq. For instance, to obtain the Emirates NBD Islamic Infinite credit card, it is mandatory to set up a 100 per cent direct debit option on the bank account that is related to the card, which gives a maximum of 45 free credit days. Instant cash can be withdrawn for a cash advance fee instead of interest charges.
Among the latest banks in the region offering Sharia-compliant credit cards is Barwa Bank, Qatar's fastest growing Sharia-compliant banking service, in conjunction with Qatar Airlines' frequent flyer programme. "Customers can get the card by either transferring their salary or against a cash deposit," said Hussain Al Abdullah, head of retail at Barwa Bank, at a recent presentation of the card at the company's headquarters in Doha. According to Al Abdullah, this is the first fully Sharia-compliant credit card in Qatar.
"It is a blend of two structures. First being Qard Al Hasana, and second Ujrah," added Asif Iqbal, Manager of Product Development and Propositions at Barwa Bank.
"Under Ujrah we provide financial assistance to customers by offering a payment guarantee to merchants on behalf of the beneficiaries. For this, we have a right to charge our customers, but in certain case we waive it off too. And this is approved by our Sharia board."