© 2012 RM Applications Sdn. Bhd. (The information contained herein is subject to change without notice)

Islamic Credit Card Shariah Compliant Payment Instrument

By Lokesh Gupta Head, Business & Technology Consulting

By

RM Applications Sdn. Bhd.

No.69-1 Medan Setia 1

Bukit Damansara

50490 Kuala Lumpur

Tel: +603-20932677

Fax: +603-20932607

Website : www.rma.com.my

Email : lokesh@rma.com.my

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Presentation Path

1-. Conventional Credit Card Overview

2-. Islamic Credit Card Definition & Evolution

3-. Modus Operandi of Islamic Credit Cards

4-. Islamic Credit Cards Contract

5-. Islamic Credit Card Features

6-. Challenges & the Way Ahead

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Conventional Credit Cards

Conventional Credit cards are means of payment that involves the

concept of ‘Buying first and Paying Later’

They are Plastic Money that serve as essential modes of payment in

today’s modern world

They are symbols of monetary value and comes with a revolving

credit facility with a pre-approved credit limit and payment period.

The customer is charged annual fees and interest on unpaid balances

after the grace period.

They can be a liability, if they are used Unwisely !!!

“Conventional Credit Cards Offer People to Live Beyond

Their Means”

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Why Credit Cards are Preferred ?

They offer flexibility to card holder to make payments for purchases.

Hassle free payment mechanism and minimizes the need of carrying

cash.

They enable easy payment schemes by spreading the payment for

large value purchases

Globally accepted as an alternative mode of payment to cash and

cheques.

It is an essential payment instrument to perform e-commerce

transactions

Non monetary benefits such as bonus points, insurance and other

exclusive privileges in traveling, shopping & dining.

The speed, flexibility, convenience and wide acceptance

has made the credit card an essential financial tool

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Credit Card Payment Process

Card Holder

Issuer Bank

Credit Card Associations/Interchange

Acquirer Bank

Credit Cards

Merchant

Outlets

1

2

3

4

5

Membership

Registration

Card

Issuance

Performing a Cash Withdrawal /

Purchase / e-commerce Transaction

Txn

Request

Txn Request with

Cardholder

Credentials

6 Txn Request

7

Txn Response

Txn Response 8

9 Txn

Response

10 Transaction Status Confirmation

Transaction Settlement

Repayment

Payment Network

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Why are Conventional Credit Cards Unacceptable under Islamic

Finance ?

Interest is charged to the cardholder on unpaid balances after the

expiry of the grace period and interest is strictly prohibited in Islam

No restrictions are imposed on the usage of these cards for making

any type of payment.

The insurance currently offered under these cards is conventional and

may not be compliant with Shariah principles.

Compounding interest is charged on the Outstanding amount

Cash advances using these carda are also treated as interest bearing

loans.

Signing of a conventional credit card agreement is not permissible as it

is a commitment to do something, which is forbidden even if the client

pays the outstanding amount with in the grace period

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Islamic Credit Card Definition

Fatwa by Dr. Monzer Kahf (a prominent economist and counselor)

“Signing a credit card contract and using it in a way that generated

payable interest is haram. It is then borrowing on interest. Signing

the contract, using it, and making the payments within the grace

period and making no cash withdrawals (whenever cash withdrawals

generate interest), is permissible because it amounts to a contract

that gives you a choice to deal or not to deal with interest”.

• Islam permits the use of credit card so long it does not involve the

element of usury

• The credit card serves as a charge card, whereby the client pays only

the principle amount and the service charges is permitted.

Source: www.islamonline.net / Prof. Dr. Mohd. Ma’sum Billah

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Evolution of Islamic Credit Cards in Malaysia

Am Bank Malaysia has launched the Al

Taslif Credit Card in Malaysia 2001

Bank Islam Malaysia launched its Bank

Islam Card – i (BIC) on 23rd July 2002

2002

Bank Simpanan Nasional (BSN) launched

the AL AIMAN credit card on 22 December

2006 2006

Bai Inah

Bai Inah

Bai Inah

Product Name / Bank Year Islamic

Contract

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Bai Inah Practice in Malaysia

Asset

Bank Sells the asset on deferred payment

basis at Sale Price (Purchase Price + Profit)

Buy back the asset at Purchase Price

Customer approaches the bank for Financing

4

Bank Customer

3

1

2

Asset

Identification

Payment of Purchase Price 5

Payment of Selling Price as per agreed

Installment Plan

6

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0

Islamic Credit Card Practice in Malaysia

1. Bank will sell an asset to the customer at

selling price RM 23,600 (purchase price +

profit) on deferred basis

2. Bank will buy the same asset at purchase

price RM 20,000 from the customer

Bai Inah

Purchase &

Sale

Contract

3. Signing of Bai Inah contract

Al-Wadiah

Account

4. Disburses the

agreed purchase

price into internal

Wadiah account

5. Tagging of

agreed purchase

price as maximum

limit to the card

6. Card along with

ATM PIN is mailed

to the customer

Source :www.bankislam.com.my

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Islamic Credit Card Account Structure

Islamic Credit Card

Bai Inah Profit Al Wadiah Qardh Hassan (Max Profit for Bank is

RM 3,600) (Funds avaiable to Card

Holder RM 20,000)

(Extra Limit granted during

emergency situation)

Retail

Purchases

Online Payment

(e-Commerce)

Cash

Withdrawals

Fund Utilization

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Requirement for Bai Inah Contract

There must be two separate contracts:

• Sale Contract : First the contract of sale by bank to customer at

Sale Price (Purchase Price + Profit) on deferred payment terms

• Purchase Contract: Second contract is for repurchasing of same

asset by the Bank from the customer at Purchase Price on cash

terms.

The sequence for execution of contracts must be followed.

The merchandise or the asset must not be a ribawi material in the

medium of exchange category (Gold, Silver or Currency) because all

payments for purchases are made in money

These contracts must have the necessary elements and must meet

the necessary conditions

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Essential Elements & Conditions for Bai Inah Contract

Elements Mandatory Characteristic / Conditions

Buyer / Seller Must be at least 18 years old (Attains the age of Puberty -

(baligh)

Must possess sound mind (aqil)

Asset/ Merchandise Exist at the time of transaction

Bank must be the owner of the merchandise

Must be of pure substance (lawful)

Must be of some use or some value

Must be able to be delivered by seller to the buyer

Known to both the seller and buyer (i.e. full details of the goods

is known to both parties)

Price Must be known to both the seller and the buyer

Must be with the quantum and type of the currency specified

Contract (Aqad) -Offer

and Acceptance

Absolute and in definite and decisive language.

- In the past or present tense.

- Not in the future or imperative tense.

- Not conditional

- Not limited to a certain period.

The acceptance must agree with the offer.

The offer and acceptance must be made at the one and same

meeting or session.

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Bai Innah Contract

Except the Shafie’s school, Maliki, Hanbali and Hanafi’s schools of fiqh

regard the Bay’ as void as their view is the motive of the contracting

parties determine the legality of the contract. Thus, the intention is illegal.

The majority were of the opinion that bai' inah was not permissible

because it was the zari'ah (way) or hilah (legal excuse) to legitimise riba

(usury).

The another reasoning is that the contract is ethically flimsy when applied

in this manner (Virtual Buy & Sale), the sale transacted is a fake sale and

thus just a means of masking Riba.

The SAC, at its fifth meeting on 29 January 1997, passed a resolution that bai'

inah is a principle that is permissible in in Malaysia.

When institutions or individuals are in need of capital for a specific purpose they

can use 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.

Source :www.infad.kuim.edu.my (Fatwa on Bai Inah) / www.bankerme.com (Can a Credit Card ever be Halal)

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Islamic Credit Card Features

100% Shariah compliant with no elements of Riba and Gharar involved

World wide acceptance as cards are Issued under Master Card / Visa

Card (Brand Owner)

Supplementary Card Facility

Cash Advance Facility

The Profit Margin and Selling Price is fixed and is known upfront to the

cardholder

The usage of card is limited to permissible activities only. The Islamic

Card issuer will decline transactions for six categories of non-halal

related activities, including Bars, Discos, Night clubs, Purchase of

Alcohol/Non Halal Goods, Escort and Massage services and Gambling

Various types are available based on the Client’s requirement such as

Classic Card, Gold Card and Platinum Card

Bonus points are awarded on usage of cards and can be exchanged for

gift or waiver of annual fees etc.

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Comparison of Islamic Credit Card Practices in Malaysia

Features Al Taslif Credit Card Bank Islam Card

Card Type Platinum / Gold / Classic Platinum / Gold / Classic

Annual Fee RM688 /RM150 / RM 75 RM 388/ RM 130 / RM 60

Profit/Interest Charges: 1.5% p.a of outstanding amount / daily basis 1.5 % p.a of outstanding amount / daily basis

Cash Advance Fee RM 50 for each transaction • RM12 for RM 1000 withdrawal up to 50% of financing

limit at Bank Islam ATM

• A fee of 3% of cash withdrawal amount or RM50,

whichever is higher is charged for every cash

withdrawal made at other bank’s ATM.

Minimum Monthly

Repayment

5% of outstanding balance or minimum of

RM50, which ever is higher

5% of total outstanding or minimum of RM50, which ever is

higher

Penalty Charge/Late

charge

1% p.a of the minimum repayment amount due

subject to a minimum of RM5 or maximum of

RM12 per card whichever is higher

1% compensation handling fee of minimum repayment or

RM5, which ever is higher

Profit-free period / grace

period

20 days from date of monthly billing statement

(for retail transaction)

20 days from date of monthly billing statement (for retail

transaction)

Other Facilities /

Promotion incentives

• 3 free-for life supplementary cards

• Zakat Payment Incentives

• Bonus Point Incentives

• Annua Fee Waiver subject to certain

conditions (minimum 12 transactions (retail/

cash advance only)

• Free Group Takaful coverage & benevolence expenses

• Profit Rebate

• Zakat Payment Acceptance

• Over limit amount (Qardhul Hassan) – no levy but settle

amount within specified period

• Annual Fee Waiver

Source :www.ambg.com.my/ www.bankislam.com.my

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Comparison of Islamic & Conventional Credit Card

Features Conventional Credit

Card

Islamic Credit Card

Interest Free No Yes

Shariah

Compliant No Yes

Compounding

Factor Yes

No, and the total liability is

known upfront to the

customer

Early Payment

Rebate No Yes

Non Permissible

Transaction

Filtering

No Yes

Takaful Coverage No, only conventional

insurance is offered Yes

Zakat Payment

Acceptance No

Yes

Source :www.ambg.com.my / www.bankislam.com.my

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Challenges & The Way Ahead…

Structuring of an international Shariah compliant credit card

Stress on Ethical Marketing

Create Customer Awareness

Stress on Usage of Debit Cards or Charge Cards instead of Credit

Cards

Usage of Qardh Hassan following the Charge Card principle could

be a viable alternative

Encourage prompt payments by introducing incentives such as

early payment rebates

It is a collateral free and revolving financing and can become a

strong financing tool for customers to avoid the traps of loan sharks

‘Ah Long’

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Thank You lokesh@rma.com.my

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