Islamic Credit Card

What would we do without credit cards? In this day and age, credit cards are fast becoming a necessity for consumers. However, for Muslims, the utilization of conventional credit cards has nearly become an indelible question of faith; are they 'halal' (permissible)?

According to some Muslims, conventional credit cards are allowed as long as the cardholder disciplines himself to pay on time to avoid interest payment. To them, this is not contradictory to the 'Syariah' principles, as they are not indulging themselves in the activities of 'riba' (interest).

On the other hand, there are others who regard conventional credit cards as non-Islamic. To them, conventional credits cards not only engage in 'riba'-based activities but also lack Islamic features or elements, as cardholders are charged a premium or interest for late payment.

With the increasing ethical consciousness and the need for 'Syariah'-compliant credit cards, there are some banks which offer an alternative for Muslim and non-Muslim customers alike.

An Islamic credit card has to be free from two determinant elements, which are 'riba' and 'gharar' (ambiguity of transaction or business). The first 'Syariah' principle used by the banks is 'Bai Al-Inah' (deferred payment sale), a concept defined as two transactions entered into by two parties whereby the bank undertakes to sell its asset (in this case, the card's limit) to the customer on a cash basis. The bank will subsequently buy back the same asset at a higher price, which is normally at par on a credit basis. Through this approach, the cardholder owns the limit amount given to him and he may use the amount within the scope of the credit card facilities. They have a purchase and a selling price and the difference between these two prices is the bank's profit.

The second 'Syariah' concept utilized by the banks is the guaranteed safe custody of cash that cardholders are allowed to use. For instance, 'Al-Wadiah' account is an Islamic card's safe custody. So, the purchase price incurred with the 'Bai Al-Inah' transaction will be deposited in the Al-Wadiah account. When the bank buys back the asset from the customer, at $10,000 for example, this amount will be credited to the customer's Al-Wadiah account. The amount in the account is basically the card's limit and is deposited in the bank's safe custody to be used to pay for the transactions made by the cardholders with their Islamic cards. This amount will fluctuate according to their spending habits.

Islamic credit cards differ from conventional cards in the profit calculation. The monthly profit is calculated on a monthly basis based on the outstanding amount due or total transaction made for that particular month. Unlike conventional credit cards, the profits from Islamic cards are not compounded.

The total monthly profit cannot be more than the total profit earned by the end of the contract as determined upfront during the 'akad' (contract of buy and sell). Therefore, cardholders will know the maximum cost that will be imposed within the contract period, unlike conventional credit cards, whose interest rates are often undetermined ahead of time.

When renewing their cards, cardholders of Islamic credit cards will have to perform a new 'akad' before they can utilize their card's facilities for a certain period. For conventional credit cards, their renewal is solely based on the agreement with the bank.

It is also important to note that Islamic cards come with ethical obligations for their cardholders. Islamic cardholders are advised not to transact for products and services that are deemed non-Islamic like purchasing alcohol, gambling and clubbing.

The Islamic cards, like their conventional cousins, are tied to international payment systems companies such as MasterCard and Visa, therefore, offer international recognition and access to ATMs worldwide.