Islamic Credit Card

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Based on Islamic Finance principles, Conventional Credit Cards are considered as Unpermissible as it doesn’t comply with the Shariah requirement and Interest element is involved. Hence, Islamic Credit Cards were introduced and can be considered as one of the innovative financing products offered by Islamic Financial Institution to meet the demand for interest free credit cards. The slides will provide functions, features and contracts used in Islamic Credit Card.

Transcript of Islamic Credit Card

  • 1.Islamic Credit CardShariah Compliant Payment InstrumentBy Lokesh GuptaHead, Business & Technology ConsultingByRM Applications Sdn. Bhd.No.69-1 Medan Setia 1Bukit Damansara50490 Kuala LumpurTel: +603-20932677Fax: +603-20932607Website : : 2012 RM Applications Sdn. Bhd. (The information contained herein is subject to change without notice)

2. 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 AheadStrictly Confidential 2012 RM Applications Sdn. Bhd. 2 3. Conventional Credit Cards Conventional Credit cards are means of payment that involves theconcept of Buying first and Paying Later They are Plastic Money that serve as essential modes of payment intodays modern world They are symbols of monetary value and comes with a revolvingcredit facility with a pre-approved credit limit and payment period. The customer is charged annual fees and interest on unpaid balancesafter the grace period. They can be a liability, if they are used Unwisely !!! Conventional Credit Cards Offer People to Live BeyondTheir MeansStrictly Confidential 2012 RM Applications Sdn. Bhd. 3 4. 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 toolStrictly 2012 RM Applications Sdn. Bhd. 4 5. Credit Card Payment Process Txn Request withMembershipCardholderRegistration Credentials 1 Credit Card Associations/InterchangeTxn Response Txn Request 8 6Txn Response7Payment Network 5Issuer BankAcquirer BankTransaction Settlement29 TxnCardTxn RepaymentResponse RequestIssuance 4 Merchant Card Holder Transaction Status ConfirmationOutlets 10 Performing a Cash Withdrawal / Purchase / e-commerce TransactionCredit Cards 3Strictly Confidential 2012 RM Applications Sdn. Bhd. 5 6. Why are Conventional Credit Cards Unacceptable under IslamicFinance ? Interest is charged to the cardholder on unpaid balances after theexpiry of the grace period and interest is strictly prohibited in Islam No restrictions are imposed on the usage of these cards for makingany type of payment. The insurance currently offered under these cards is conventional andmay not be compliant with Shariah principles. Compounding interest is charged on the Outstanding amount Cash advances using these carda are also treated as interest bearingloans. Signing of a conventional credit card agreement is not permissible as itis a commitment to do something, which is forbidden even if the clientpays the outstanding amount with in the grace periodStrictly Confidential 2012 RM Applications Sdn. Bhd. 6 7. Islamic Credit Card DefinitionFatwa by Dr. Monzer Kahf (a prominent economist and counselor)Signing a credit card contract and using it in a way that generatedpayable interest is haram. It is then borrowing on interest. Signingthe contract, using it, and making the payments within the graceperiod and making no cash withdrawals (whenever cash withdrawalsgenerate interest), is permissible because it amounts to a contractthat gives you a choice to deal or not to deal with interest.Source: / Prof. Dr. Mohd. Masum Billah Islam permits the use of credit card so long it does not involve theelement of usury The credit card serves as a charge card, whereby the client pays onlythe principle amount and the service charges is permitted.Strictly 2012 RM Applications Sdn. Bhd. 7 8. Evolution of Islamic Credit Cards in Malaysia Islamic YearProduct Name / Bank Contract Am Bank Malaysia has launched the Al2001 Bai InahTaslif Credit Card in Malaysia Bank Islam Malaysia launched its Bank2002Bai InahIslam Card i (BIC) on 23rd July 2002 Bank Simpanan Nasional (BSN) launched2006the AL AIMAN credit card on 22 December Bai Inah2006Strictly Confidential 2012 RM Applications Sdn. Bhd. 8 9. Bai Inah Practice in Malaysia 1Customer approaches the bank for Financing 3Bank Sells the asset on deferred payment basis at Sale Price (Purchase Price + Profit) 4 Buy back the asset at Purchase Price 5Payment of Purchase Price 6 CustomerPayment of Selling Price as per agreedBank Installment Plan 2 AssetIdentificationAssetStrictly 2012 RM Applications Sdn. Bhd. 10. Islamic Credit Card Practice in Malaysia1. Bank will sell an asset to the customer atselling 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 customer6. Card along with 3. Signing of Bai Inah contractATM PIN is mailed to the customer5. Tagging of agreed purchaseprice as maximumBai Inahlimit to the card Purchase & 4. Disburses the Sale agreed purchaseContract price into internal Wadiah accountAl-Wadiah Account Source 2012 RM Applications Sdn. Bhd. 11. Islamic Credit Card Account Structure Islamic Credit CardBai Inah Profit Al Wadiah Qardh Hassan(Max Profit for Bank is(Funds avaiable to Card (Extra Limit granted duringRM 3,600) Holder RM 20,000) emergency situation)Fund Utilization Retail Online PaymentCash Purchases (e-Commerce)WithdrawalsStrictly 2012 RM Applications Sdn. Bhd. 11 12. 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 conditionsStrictly Confidential 2012 RM Applications Sdn. Bhd. 12 13. Essential Elements & Conditions for Bai Inah ContractElements Mandatory Characteristic / ConditionsBuyer / 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 specifiedContract (Aqad) -Offer Absolute and in definite and decisive language.and Acceptance- 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.Strictly 2012 RM Applications Sdn. Bhd. 13 14. Bai Innah Contract Except the Shafies school, Maliki, Hanbali and Hanafis 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 zariah (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 baiinah is a principle that is permissible in in Malaysia. When institutions or individuals are in need of capital for a specific purpose theycan use this method of payment, using their assets as mortgage. As they stillneed the assets, this method allows them to liquidate without losing the asset. Source (Fatwa on Bai Inah) / (Can a Credit Card ever be Halal)Strictly 2012 RM Applications Sdn. Bhd. 14 15. 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 Clients 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.Strictly Confidential 2012 RM Applications Sdn. Bhd. 15 16. Comparison of Islamic Credit Card Practices in Malaysia Features Al Taslif Credit CardBank Islam Card Card TypePlatinum / Gold / ClassicPlatinum / Gold / Classic Annual Fee RM688 /RM