Can a credit card ever be Halal?

At first glance you'd be forgiven for thinking that a marketing brochure for an Islamic credit card must be some kind of elaborate hoax. But banks in the region are now making such seemingly impossible concepts a reality

We all know the arguments in favour of credit cards: "it enables me to spread payment for large purchases;" "it's too dangerous to carry cash;" "sometimes a card is a prerequisite for transactions such as Internet purchases and rental collateral". The problem for Muslim consumers, of course, is that the whole concept of the conventional credit card is unacceptable on religious grounds. Interest payments made when the outstanding balance is not repaid in full are Riba payments, and therefore forbidden in Islam.

Despite this clear-cut position, there are various grey areas of interpretation that enable some Muslims to align credit card usage with their religious beliefs. For example, if one commits to paying off the balance every month and therefore never utilises the credit option of the card, then one can say that Riba is being avoided and thus the card is Halal. As Islamic scholars such as Shariffa Carlo Al Andalusia have discussed when debating such interpretations, however, this argument still doesn't hold water since the signing of a credit card agreement is the signing of an agreement to pay Riba should the cardholder fail to make every repayment in full and on time. Since no human can either know what the future holds or guarantee their own infallibility, such scholars say, then Muslims cannot enter into any contract that promises that they can.

From the card issuer's point of view, therefore, several problems become instantly obvious. Not only will the bank make little or no revenue from a credit card if the balance is repaid in full, but in religious terms it will be colluding in the commitment of sin if it arranges and signs a contract wherein a Muslim agrees to pay Riba in the case of non-payment of the balance. Quite apart from that, the extension of credit with a view to making profit is not a Qard Hassan loan, and thus is unacceptable in religious terms for the creditor as well as the borrower.

Despite this daunting and complex problem, banks have tallied up the market of some 250 million Muslims in MENA and Asia who want and need financing options, and several have decided that this is an opportunity too great to pass up on. Some banks have reacted to this situation by offering credit cards that aren't credit cards at all in a conventional sense. The Dubai Islamic Bank, as just one example, offers a Visa Classic Card but then debits the balance automatically from the holder's current or savings account every month. In effect this is a debit card, as officially no credit is extended to the consumer and so no injunctions against Riba have been broken. The consumer may get a short-term loan in practice, for example if he purchases an item at the beginning of the month and the payment is not debited until the end of the month, but that is a matter of bank administration rather than any deliberate contract to loan funds with a view to paying interest on them.

This example, of course, does not look very profitable for the bank. A membership fee can be charged for the service provided by the card, but otherwise it is more of a value-added service to account holders than a significant retail revenue stream. As a result, banks that are keen to offer a fully-functional and profitable Islamic credit card have been unsatisfied with the debit card alone and so have sought ingenious ways of constructing Sharia-compliant card agreements and repayment structures. These structures one might very loosely describe as falling into either the Asian school of thought or the Gulf school of thought.

The Asian solution

Launched in December 2001, the Al Taslif Credit Card from AmBank in Malaysia (formerly the Arab Malaysian Banking Group) works off the Sharia principle of Bai' Al Inah that covers instalment repayments over a fixed period. Cardholders are charged 1.25% per month or 15% per annum on the outstanding balance, with nothing to pay if the minimum payment requested is made on time. The Bai' Al Inah contract works on the basis of two 'akad' agreements. The first is the bank's agreement to sell an item to the customer at an agreed price, with the second agreement covering the customer selling back to the bank at a lower price. The difference is the bank's profit on the transaction and is a predetermined amount.

Though a percentage repayment is being made, this differs from conventional structures in that payment of the minimum balance only does not trigger interest repayments for the outstanding balance. Just from spending on the card, consumers are also helping charities via the AmBonus scheme. For every RM100 spent on the Al Taslif card, an AmBonus of RM1 is earned that goes to pay off the annual card fee. Once that fee has been repaid, however, all future AmBonus points are donated to charities by the bank.

More recently, Bank Islam Malaysia launched its Bank Islam Card (BIC) on 23rd July 2002, the name of the product deliberately avoiding the word 'credit'. The bank claims that this card, available in MasterCard Classic or Gold, is the first credit card to be based on Sharia contracts and that is thus free from Riba or Gharar (uncertainty) due to the fact that the maximum profit earned is declared up front. BIC also has the distinction of being the first EMV Smart chip card issued in Malaysia.

The bank says that this card works off a combination of three Sharia contracts: Bai' Al Inah (as for AmBank's Al Taslif card), Wadiah and Qard Hassan. Once an initial Bai' Al Inah transaction has taken place, the item nominally transacted being "a piece of land" according to the bank, the proceeds of the second transaction are transferred into the customer's Wadiah BIC account at the bank. The customer can then use the BIC card to make payments with the collateral all coming from the funds in the Wadiah account. Finally the Qard Hassan contract is activated if the cardholder wants to spend more than the funds available in the Wadiah account and the bank agrees to make more funds available on an interest-free basis. The bank's Chairman, Datuk Mohammed Youssef Nasir, says that Bank Islam will have targeted some 55,000 banking consumers with the BIC card by June this year.

"The extension of credit with a view to making profit is not a Qard Hassan loan and thus is unacceptable in religious terms for the creditor as well as the borrower"

The more stringent Gulf view

Critics of solutions such as the two above say that the Bai' Al Inah contract is ethically flimsy when applied in this manner as the sale transacted is a fake sale and thus just a means of masking Riba. As is the case with matters of Sharia-compliance, judgements are based on the Sharia board of each financial institution and so what may be acceptable to one board may yet be Haram for another. For many Middle East bankers, therefore, the solutions found by the Asian banks are simply not stringent enough in their interpretation of Qu'ranic rules. One Bahrain-based banker who prefers to remain anonymous believes that the Asian interpretation boils down to an injunction against using the card to purchase Haram items and services, and indeed the BIC card will reject transactions related to bars, gambling, massages and so on for payment. The depth of the Sharia-compliance of the card contracts, he believes, are less important to the banks than the avoidance of involvement in any blatantly Haram transactions.

Whether you feel this is a fair accusation or not, Gulf banks do appear to be taking a different tack in their approach to credit card contracts. In September 2002 Shamil Bank in Bahrain announced the launch of what in the words of Dr Ahmed Fouad Darwish, Head of Research, Planning and Development, he believes to be "the first Islamic credit card to be launched by a bank in Bahrain and probably in the world". The word 'probably' is a fair caveat in this statement, since as has become apparent there are multiple views on what might constitute an Islamic credit card and certainly several claimants to the laurels for launching the first one.

Dr Darwish explains that the development process started with the Shamil Card, effectively a convenience charge card. The bank charged fees to cover administrative and processing costs and the collateral was the balance in the cardholder's account. Progress began, however, when the bank began to see its relationship with the cardholder in terms of guarantees. In the case of the charge card, Dr Darwish says, the customer has guaranteed himself and his purchased with the balance of his deposits, the bank making money purely off the fee structure.

From this viewpoint, the bank was then able to change tactics when exploring the possibility of an Islamic credit card. It decided that the solution to Riba avoidance was to exercise the acceptable right of charging for the provision of a financial guarantee. "There must be cost elements involved in making that guarantee," Dr Darwish explains, "and in honouring the guarantee those costs are staff costs, processing costs and so on". The guarantee system works by agreeing that the card issuer is guaranteeing the cardholder's payment to the acquirer in any transaction undertaken. That guarantee holds sway in the time lag between the issuer's payment and the acquirer's receipt of funds.

The result of this research is the Al Rubban MasterCard, available in Bahraini dinars, Saudi riyals or US dollars. No Wadiah deposit is required as the collateral comes from a direct salary transfer rather than a balance. The payment system works by treating total card spend during any given month as being payable over 12 monthly instalments. So, for a balance generated of BD100, 12 equal monthly instalments of BD8.34 will be due. The revenue comes from a 5% fee for the provision of the guarantee and administrative costs that is levied on the first statement containing the transaction. This fee must be settled by the due date on that statement and there is a fixed fee for cash advances that must also be repaid in full on the due date of that first statement. Dr Darwish adds that the repayment period is set at 12 months for ease and convenience while the card is still being tested in the market, and that the instalment period can be extended. The key point, he says, is that there is no link between the fees charged and the repayment period as in the case for conventional card repayments.

At about the same time that Shamil launched Al Rubban, fellow Bahrain-based institution, ABC Islamic Bank, also released details of its Al Buraq credit card. The bank had firstly set up a subsidiary called the Islamic Credit Card (ICC) company. The issue of Al Buraq cards began with bank employees and corporate clients and is now available to individuals through ICC participating banks. With the ABC strategy, proliferating the card through multiple markets so as to rapidly earn market share is a high priority. As a result, although ABC has kept $3 million Class a ICC shares to itself, Mohammed Buqais, GM of ABC Islamic Bank, says that major Islamic banks and financial institutions have been invited to buy ICC Class B shares and thus gain the authority to issue Al Buraq cards to their customer bases in other countries.

Neither Shamil nor ABC Islamic Bank are unique in their investigation of Sharia-compliant cards. Al Rahji Banking & Investment Corporation (ARABIC) in Saudi Arabia, for example, also offers Sharia-approved Visa and MasterCards. The question doesn't appear to be whether Halal credit cards should be created, rather the focus is on exactly how they can be designed to be profitable and cost effective for customers while also being Sharia-compliant. If the efforts of pioneers such as Shamil and ABC prove a success, we can expect to see more design ingenuity applied to the issue so that the local banks really can meet the demands of local customers, however mountainous the challenge of meeting those needs might at first appear to be.