Islamic Banks and Credit Cards

Credit cards are an essential element of modern life and Islamic banks have to provide this service in order to stay competitive. Most credit cards allow card holders to defer the payments and charge interest on the remaining balance which is against the Shari’ah rulings. Credit cards allow account holders to buy products and services using the card and grant a certain amount of time during which no interest is charged. As long as the credit card is used in that manner, it is Shari’ah compliant.

Islamic banks have evolved credit card business to keep in line with Shari’ah requirements yet meet the market demand. There are many aspects of credit card business which are easily adapted to Islamic banking without compromising Shari’ah. First, the credit card can used in a charge card mode where the customer uses card during the billing cycle which is usually a month and then the bank bills him for the usage and allows a certain grace period for him to pay the full balance. As long as the customer pays that balance, there is no riba involved. The bank makes money from commissions for each transaction which are paid by the merchant allowing the use of the card. Second, a customer can maintain a Mudarabah type account with the card issuing bank and the transactions up to the balance in the account are allowed. Money is taken out of the account for each transaction. That is a classic debit account setup. The third options is for bank to issue the credit amount in Tawarruq or Murabaha set up where a profit markup is charged to the customer for short term borrowing through commodity transactions. This has been allowed since this fills a genuine need for short term cash.

Islamic credit cards differ from conventional cards due to their contract structures. The contracts include Kafalah, Wakalah, and Qard. Kafalah is the guarantee by the bank that the merchants will get paid; Wakalah allows the bank to act as an agent of the customer and pay the merchant, and Qard is the loan to the customer for the charged amount which must be paid back when due.

The above contracts allow the bank to generate revenue through the card business without resorting to riba. The bank can charge a fixed and declared fee for issuing the card. The bank also collects a commission from the merchant for each transaction which is a percentage of the charged amount. The customer can take a cash advance on his credit for a fixed fee which should not be tied to the amount or the time it takes to pay back. The bank can also charge a fixed late payment fee. If a percentage amount is charged for late payment, it should be donated to charity.