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Use of credit cards in Islamic banking


The credit card payment value in USA grew to $3.16 trillion in 2015/16 from $2.55 trillion in 2012 at a rate of 7.4% per annum, and this growth rate is found to be the largest among all noncash payment systems. These trends of credit cards in USA are observed worldwide (Capgemini 2016). Credit card generally uses credit balances advanced by the banks to make payments. Banks charge the cardholders for using the credit payment system or based on the outstanding balances owed. These outstanding balances in USA reached $716 billion in 2015 (Consumer Financial Protection Bureau 2015).

Charging fees based on the outstanding balances can tantamount to Riba Nasi’ah. To avoid this Riba, the Islamic banks have packaged their cards based on certain Islamic ‘transaction principles’. Some of these packages have become subjects of increasing juristic criticism. In this brief, these packages are reviewed with proposing an alternative package that could minimize the juristic criticisms.

Current practices of Islamic credit cards – There are four parties to the business of credit card. They are network service companies, merchants, card issuers, and cardholders. Network service companies, such as Visa and Master Card, provide recognition and brand services. The merchants subscribe to the network to accept the cards as devices for payment of good and services. The banks issue the cards, and some network companies issue their own cards. The customers apply to the banks to become cardholders. Network service companies charge fees to the merchants and credit card issuers.

The merchants earn increased sales and secured and fast payments. The banks earn through three major channels namely membership fee, annual fee, and interest income. Some card issuers also charge cardholders for not using the cards. Membership fees vary from one class of credit cards to another, and annual fees are often the fees the card issuers pass on to the cardholder from the network service companies, who charge the card issuers certain fees for network services. The interest income comes from interest charges on card outstanding balances not paid within due date, on the late interest income, and on the cash withdrawals. The card is a revolving credit line, where the money refunded is reused by the cardholder as a credit. Credit cards satisfy the impulse spending, e-shopping and instant cash needs of the cardholders.

What is the position of Islamic finance with respect to the credit cards? Islamic finance cannot ignore the benefits of the cards in the growing demand for digital payment, and the role they play in ecommerce.

In reviewing the literature, seven positions concerning the use of credit cards come across in Islamic finance.

Non-compatibility- Credit cards are said to encourage impulse spending, consumerism and debt proliferation. These consequences of the use of credit cards are seen to negate Islamic manners of consumption. Shari’ah discourages excessive consumption, and that credit should be taken for meeting the pressures of necessities and not luxuries. Siddiqi (1983) model of Islamic banking, which is based on the principles of profit and loss sharing, will find it hard to adopt the use of credit cards. Because there is no sharing of profit or loss in the business of credit cards. Some scholars have come up with alternative methods of credit cards, and they did not totally ban the use of credit cards.

The fees in the conventional credit cards are Shari’ah compliant. The interest charges are what make the conventional credit cards non-Shari’ah compliant. Therefore, it is argued that if the cardholder can refrain from cash withdrawals and refund the utilized money within the grace period, he/she will not deal with Riba (interest). The interest clause in the conventional credit is conditional on cash withdrawals and late repayments, and the cardholder can choose to avoid this clause, Kahf (2016). However, the Council of the Islamic Fiqh Academy disapproves of the conventional credit cards, because the interest clause is part of the contract, and the cardholder will find it hard to resist late repayments.

To avoid interest, some Islamic banks have resorted to the use of charge or prepaid credit cards. The money in the charge cards are deposits from the cardholder, and the bank provides him/her with a plastic card to facilitate digital payments. The bank charges fees to the cardholders for the use of network services and memberships. The plastic card can be treated as a property of the bank, and the bank can rent it to the cardholder. Charge cards are common in Middle East, (Central Bank of Kuwait, 2003), and it is often considered a non-controversial Islamic credit card (Al-Sharq Al-Awsat, August 27, 2008). This type of card can be called a debit card with network service features. It defeats the credit purpose of use-now-pay-later, and it is not competitive, Paxford (2010).

In this card, instead of having customer fill the card with his/her own money, the bank fills the card with an interest-free loan (Qard Al-hasan). The cardholder uses the money and refunds it within the due date. In return, the cardholder pays fees for being a member of a particular class of the cards, and for using the network facility of digital payment services on an agency basis – . The fees should be fixed regardless of the utilized amount of money by the cardholder. It can only vary from one card type to another. The cardholder can be penalized for default and late payments, and the penalty money should be given away as a charity; it should not make a part income for the bank. Some Islamic banks in South East Asia, Feridian et al (2008), Noor and Azli (2013), and ADCB Islamic Banking Fatwa (2013) implement this type of credit cards. However, advancing Qard Al-hasan to customers with the intention to hook them and constantly benefit from them through the agency fees can defeat the existential reason of Qard alhasan. There is also a temptation to vary the agency fees proportionate to the utilized amount money, and this will tantamount to charging interest.

Bay al-Inah credit card was first introduced in Malaysia. It avoids the issue of filling the card with Qard alhasan or having the cardholder fills it with his/her own money. It has two sale transactions. The first transaction is a deferred sale, where the bank sells a specific asset to the card applicant at a deferred price, says $1100 to be paid in a year.

The second sale is a spot sale, where the card applicant sells back the same asset to the bank, and the proceeds of this sale are deposited into the card. The difference between the deferred and spot prices constitutes a profit for the bank. This profit is realized only when the cardholder utilizes the money and fails to refund it within the grace period. There is no compound profit, or no charges on late profit repayments.

The bank can charge fees for the network services and card memberships. Late repayments and defaults can be penalized, and the penalty money is given away as a charity, Abozaid (2008), Arifin (2011), Shaharuddin (2012), and Abd Razak (2014). This credit card has been severely criticized on three accounts: i. intention, ii. Ownership and iii. Revolving credit. On the intention account, several schools of thought including Hanafi, Maliki, Hanbali, have disapproved of Bay al-Inah because it is seen as a legal artifice to consume Riba (interest). The intention is to get money today in exchange of money in the future at a different price, and that constitutes Riba Nasi’ah (interest on deferred loan). The asset in the sale transaction is a pretext to charge interest. The ownership of the asset is highly questionable.

It is not clear how the bank sells and buys back the same asset, whose ownership should be transferred and established for the card applicant, before he/she sells it back to the bank. The same assets will be used and reused in creating multiple credit cards to the extent that the asset can be assumed to befictitious. The final issue with Bay Al-Inah credit is revolving credit, where the repayments are recycled into new refills of the card, and these refills could require new Bay Al-Inah sales. Due to these criticisms, Bay Al-Inah credit cards did not expand widely beyond Malaysia, and it has now been abandoned even in Malaysia, Amin (2017)


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