Basically, to qualify the credit card as being Islamic, it must adhere to one basic requirement, the card must be completely free from any riba or gharar.
Riba is usually translated as “interest” which means an extra amount charged in transactions dealing with silver, gold or money while gharar means uncertainty or ambiguity.
This means that Islamic credit cards can’t be charged with any compounding interest from clients’ outstanding balance and management fees. Also the profit margin is fixed for the whole tenure of contract, which is basically span up to 3 years.
Tawarruq Contract for Islamic Credit Cards
Tawarruq means the purchase of commodity on differed payment basis by way of either direct sales or cost plus sales. The commodity is then sold for cash to a party other than the original seller. The commodity usually being used for this purpose in Malaysia is crude palm oil (CPO).
Discussion among the majority of classical Muslim scholars on tawarruq was done simultaneously with bai’ al-‘inah. In fact, they do not differentiate the discussion on tawarruq and bai’ ‘inah; except the scholars of Hanbalis who have distinguished it.
Generally, tawarruq and bai’ ‘inah are similar in terms of its objective to obtain cash through the selling and buying transactions, but they are different in two aspects. Firstly, bai’ ‘inah does not involve third party as purchaser of the object of sale (asset/commodity), while tawarruq involves third party. Secondly, the sales object in bai’ ‘inah is returned back to the original owner, whereas in tawarruq, there is no such condition.
Banks such as Bank Rakyat and Bank Islam are currently using this contract for their Islamic credit card.
Other terms used in Syariah Banking Concept
Al-Wadiah (savings with trust/guarantee)
Al-Wadiah refers to agreement where customers deposit money in the Bank, and the Bank becomes wholly responsible and liable for its safekeeping.
Al-Mudharabah refers to an agreement where customers deposit capital in the Bank, and the Bank becomes wholly responsible and liable in the management and investment the deposits in halal business ventures. Profits gained will be divided and distributed accordingly, based on margins agreed upon earlier.
Bai-Bithaman Ajil (deferred payment sale)
Bai-Bithaman Ajil refers to the sale of goods on a deferred payment basis at a price which includes a profit margin agreed by both parties.
Bai-Al’Inah (immediate cash)
Bai-Al’Inah refers to the selling of an asset by the Bank to the customer through deffered payments. At a later date, the Bank will repurchase the asset and pay the customer in cash terms.
Al-Musyarakah (joint venture)
Al-Musyarakah refers to a partnership or joint venture for a specific business purposes with a profit motive, whereby the distribution of profits/losses will be apportioned according to the capital contributed.
Qardhul Hassan (benevolent loan)
Qardhul Hassan refers to an interest-free loan. The borrower is only required to repay the principal amount borrowed, but he may pay an additional amount at his absolute discretion, as a token of appreciation.
Al-Ijarah Thumma Al-Bai’ (hire and purchase)
Refers to two contracts undertaken separately and subsequent as follows:
- Al-Ijarah contract (hire)
- Al-Bai’ contract (purchase)
Under the first contract, the customer hire the goods from the Bank at an agreed rental amount over a specified period. Upon expiry of the hiring period, the customer enters into a second contract to purchase the goods from the Bank at an agreed price.