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One of the major challenges Islamic banks face is to compete conventional banks in terms of offering retail banking products to attract customers. The conventional banking system has been offering various retail banking products to its customers which also attract many Muslims and when these Muslim customers switch to Islamic banks, they expect similar products available in their own banking system. This issue is becoming very important and narrowing this gap is becoming essential for Islamic banks to attract large group of customers. Therefore, at the retail end, Islamic banks developed various banking products which include current and savings accounts, debit cards, credit cards, home financing, auto financing and many more. While most of these products received wider acceptance as being Shariah complaint, Islamic credit card created a considerable amount of mixed reaction in terms of its legitimacy and usage.
ISLAMIC CREDIT CARD MARKET: Although, there is no verifiable source that could provide a reliable global overview of Islamic credit card, it can be undoubtedly said that the there is a strong demand for Islamic credit card. Estimate suggests that the global non-cash payment transactions grew 8.8 per cent to reach 307 billion transactions in 2011. During this time the Central Europe, Middle East, Africa and the Emerging Asia regions each grew by more than 20 per cent. As credit card is one of the tools to do non-cash payment transaction and Middle East, Africa and Emerging Asia is the main market for Islamic banking products, the demand for credit card is strong in these areas.
Islamic Credit Card emerged in 2001 when Malaysia introduced first Islamic credit card in that country. Bahrain introduced Islamic Credit Card in 2002. Now Islamic credit cards are being offered in many courtiers, such as-- Saudi Arabia, Qatar, Kuwait, Indonesia, Bangladesh, Pakistan, to name a few.
SCHOLAR'S OPINION: The opinion of scholars with regard to Islamic Credit Card can be described from two important viewpoints: firstly, the permissibility of the usage of credit cards and secondly, the legality of the tools and techniques being used for offering credit cards by various Islamic banks across the globe.
On the point of permissibly of the usage of credit card, some scholars argue that conventional credit cards demand interest to be paid on the amount spent on the card and as it is technically an advanced payment eligible for interest, therefore, the use of a credit card is not permissible for Islamic banking customers. The Islamic Fiqh Academy of India views the same and ruled a fatwa that possessing a credit card is not permissible. On the other hand, Mufti Taqi Usmani, a renowned international Islamic scholar viewed 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. This argument is also supported further by the fact that all deeds are backed by intention, and since the intention is to clear the full balance every time and not withdraw cash, using card is halal. However, this view of scholars also received counter argument by many who argue that a contract of this type is not permissible despite the fact that one can always pay on time to avoid interest. They hold a view that one who enters into it commits himself to pay interest if he does not pay on time, in fact, commits to do something which is not allowed in Islam, even if he pays full balance on time.
Apart from the view above, many scholars opine that credit cards are not Islamic products as these are a means of spending money for pleasure of buying now and paying later, and this sometimes encourages spending beyond the ability which goes against the Islamic concept of moderation and rationality of consumption in real life. However, some view that credit might be used for medical treatment purpose or education purpose, therefore it is not true that credit card is always used on impulsive spending.
On the point of the legality of the tools and techniques being used by Islamic banks, there are numerous arguments which question the validity of the current Islamic credit cards. The first Islamic credit card was introduced by using bay' al- Inah model. Under this model, bank sells a commodity to the client (card holder) at a price consisting of the principal price plus profit to be paid by the customer on deferred payment and buys it back from the card holder by paying cash. This cash is credited to cardholders account. The card holder now can use this money for various commercial transactions like conventional credit cards. Under this model, two separate contracts are made which are executed separately with a difference in both selling price. All school of Fiqh except Imam Shafi rejects this model claiming that in this model selling and buying back is merely a legal trick where no actual sale takes place. On the contrary, Imam Shafi views that there is no harm in selling and buying back as there is no relationship between the first sale and the second one, therefore, it is valid as long as the condition of the contract is fulfilled.
Although Bay' al-Inah model has been widely used in offering credit cards in Southeast Asian region , it received tremendous criticism by Islamic scholars mostly from the Gulf region. Therefore, another model known as tawarruq was used by banks for offering Islamic credit cards in the Gulf region. Under this model, card holder buys a commodity with a deferred price, and then sells it to a third party (other than the original seller) for an immediate cash price. A guaranteed deposit account is then created by bank under wadiah principle for the customer for the safe custody of the amount. The customer now can use this card for various purchases and cash withdrawals like conventional cards. Under this model, cash held in card holder's wadiah account backs each transaction. At the end of each month, a fresh tawarruq is commenced to refill the deposit account against the value of total transactions by the card holder. This model resembles bai-al-inah except selling to the third party other than the original seller and also invited criticism. The OIC Islamic Fiqh Academy in its 17th meeting disallowed organised tawarruq. However, the four schools of Islamic Fiqh view that Tawarruq is permissible. The AAOIFI has also taken up similar view and asserted that it is acceptable in the Shariah.
However, the ongoing debate on the models continued and another model known as Ujrah was used to introduce credit card by some banks. For example HSBC Amanah applied this model in offering credit cards. Under this model, bank gives credit facility to the card holder through the credit card account and maintains the credit card facility and charges the fees (ujrah) for the services. The customer will pay the charges according to the usage of the card.
There will be no interest to be paid after the grace period but fixed fees to make the payment. Bank also charges a percentage from the product/service provider, thus making profit from two sources -- the card holder and the product/service provider. The Ujrah model also received criticism. Scholars from all four school of Fiqh view that the charges imposed by banks appear as a benefit of a loan and the lender cannot make any benefit from the loans as it constitutes riba.
ISSUES TO BE RESOLVED: No other product in Islamic banking has unresolved fiqh issues like credit cards. The permissibly of usage of credit cards and the models being used to offer credit card by various Islamic banks are subject to strong criticism and controversies. There is no unified Islamic banking authority that can create a set of rules binding for all Islamic institutions across the globe. Shariah law differs among various school of Fiqh, therefore, a structure may be accepted by one School of Fiqh but rejected by other schools.
While providing credit card service Islamic banks depend on Mastercard, Visa and American Express etc which are doing business based on the conventional system. Islamic banks have no alternative to these global players as there is no Islamic alternative available now. Many have proposed for introduction of one Islamic brand owner which provides the basis for Shari'a-compliant credit cards. However, the current size of the industry is not big enough to support such a venture due to the huge costs associated with it.
WHAT CAN BE DONE: The models now being used should be reviewed to make them more shariah-complaint keeping in view the fact that Islam permits concessions while the purpose is avoiding clear prohibitions by adopting a less preferable line of action during this transitory period under which Islamic institutions are operating now.
Steps should be taken to develop a unified standard for offering Islamic credit cards. The AAOFI, IFSB, OIC all have to play a critical role here.
The can together develop a globally accepted model for Islamic credit cards through Ijtihad which can be implemented by banks while offering credit cards.
Due to its resemblance to ethical banking, Islamic banking products can be offered to ethical minded non-Muslims who also can be users of Islamic credit cards. Islamic banks should develop a rigorous marketing strategy by focusing on their target market.
Given the current market size, establishing Islamic brand owner for providing basis for Islamic credit card is not possible. However, an alliance can be made with existing conventional global players to develop a platform for an Islamic window.
Credit card adds value and attracts customers due to its features and beneficial services. Now, credit card is not only an instrument of mitigating short-term funding needs, but also it provides other advantages to the customers. It reduces the risk of carrying cash. It also facilitates the advantage of buying things from anywhere in the world. All these added advantages have provided added capacity to credit cards to become one of the most popular retail banking products. The 1.6 billion Muslims across the globe undoubtedly comprise a very big market size and providing solution to their banking needs through their own religious belief is the main challenge for the Islamic banks. Therefore, evolution of a unanimously accepted credit card is now one of biggest challenges for Islamic bankers.
Chowdhury Shahed Akbar is with the Southeast Bank Limited, Bangladesh. He has a post-graduate degree in Islamic banking, finance and management from the UK.