The Islamic Credit Card - A Misnomer?

Ahh… My exams are just around the corner. I can already see it coming closer, but the pressure to study is not really there yet. Maybe it is because I don’t have my hardworking Chinese roommate living with me at this moment. Last time, when he was my roommate in IIUM, I can safely say that he was the reason why I got better results. Stress was the feeling I had knowing that he was studying 24-7 so I decided to study as well. Peer pressure. Totally worth it!

Since my roommate is not here with me to get me to study, I have decided to post some of my revision notes in this blog. It’s not really my revision notes, but it is actually excerpts from my assignments. I use it as my revision notes.

This post is about “The Islamic Credit Cards”.

In Islam, the only loan that is allowed is Qard al-Hasan. Summarily, it means a non-interest based loan. For example, Omar borrows RM1000 from Bank Islam to be paid within 6 months. At the end of 6 months, Omar is required to pay RM1000 to Bank Islam with nothing extra. In essence, the loan is given to assist Omar in his financial difficulty and Bank Islam is not allowed to make any profit from that loan. To include an extra payment would mean that Bank Islam is using money as a trading commodity, just like what conventional banks do.

As for credit cards (also commonly referred to as plastic money), it is not actually money. A credit card is an instrument to obtain easy loan from the bank. For example, the usage of a conventional credit card begins with the Citibank issuing a credit card to Alisha. Alisha then buys a RM3000 Versace dress with her credit card. By swiping RM3000 for her dress, Alisha is actually spending someone else’s money deposited in Citibank. Versace would submit the RM3000 claim to Citibank and Citibank would pay Versace for Alisha’s RM3000 dress less a commission (around 2 – 4%) as service to Citibank. Citibank then bills Alisha for RM3000. Once Alisha pays RM3000 within the 20 days grace period allowed by Citibank, the loan transaction between Alisha and Citibank would be complete. These transactions shift around the existing quantity of money between various card holders, traders and banks but do not change the total.

Alisha’s illustration above is purely a conventional system of credit card. Assuming that Citibank has prior permission to use their depositors money for credit card loans, the above illustration is certainly Syariah compliant as it is based on Qard al-Hasan.

However, it does not stop there. In case if Alisha defaults the payment of RM3000 or if Alisha adopts to pay the minimum 5%, Citibank would than charge interest for the late payment. This makes the process not Syariah compliant anymore.

The Islamic credit cards are different. In fact, it should not even be called credit card because it is actually based on trade[1]. Maybank Islamic calls it Maybank Islamic Ikhwan Card-i. It is actually a Bay’ Al Inah transaction. In this sense, Alisha offers to buy Maybank’s asset worth RM7000 (which will be Alisha’s credit limit). Maybank agrees to sell that particular asset for RM15, 400 (inclusive of the Bank’s profit margin) to be paid on deferred payment. Alisha would then sell back the asset for RM7000 cash. It will be made available in Alisha’s Card Account and can be utilized by Alisha via the use of a card. If Alisha uses part or all of the RM7000 that she has and defaults payment, Maybank can initiate legal proceeding to claim part or all of the RM15,400.

The Securities Commission Syariah Advisory Council[2], decided to accept the opinions of the Syafie and Zahiri Mazhab where they viewed Bay’ Al-Inah as permissible (although the Syafie mazhab clearly stated that Bay’ Al-Inah is only permissible when the intention to do so is not explicitly expressed but most banks explicitly states that their Islamic credit card are based on Bay’ Al-Inah). Hence when institutions or individuals are in need of capital for a specific purpose they can utilize this method of payment, using their assets as mortgage. As they still need the assets, this method allows them to liquidate without losing the asset.

Therefore, if one is able to control their spending and is able to pay the lump sum amount that he swipes in that month, it would be better to use the conventional credit card as it is based upon Qard al-Hasan and the benefits or items that can be exchanged for the points collected is much better than the Islamic concept. If one wishes not to pay in a lump sum for the amount spent for that month, than the Islamic credit card would be the best option.

If one is not able to control their spending, one should not even get a credit card be it the conventional or the Islamic credit card.

[1] For the purpose of this paper and simplicity, the Islamic Bank’s process of supplying capital via Bay’ Al-Inah as will be explained will be referred to as “Islamic credit card”.

[2] See Resolutions of the Securities Commission Shariah Advisory Council, Second Edition, 2009, pg 20-22

There you go.

I hope you learn something about Islamic Credit Card from this post.

Blog adjourned.

(The comment by Twiggy was about the original picture I had uploaded with this post. After thinking about it, I felt that it was not appropriate for this post. I'll put it for some other posts maybe.)