Glossary of Islamic Banking & Credit Card Terms

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 (profit-sharing)
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:

  1. Al-Ijarah contract (hire)
  2. 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.

Islamic Credit Card

Definiton of Credit Card

islamic credit card

Credit card refers to a card that facilitates the cardholder to purchase goods and services as well as to withdraw cash based on the agreed terms and conditions specified in the contracts between the cardholder and card issuer. The cardholder is allowed to pay the purchase transaction based on credit as an alternative method of payment apart from payment by cash or by cheque. In order to ensure that Islamic credit card is used according to Shariah requirements, various guidelines on the usage of Islamic credit card need to be established.

Islamic Credit Card Based on Bai` `Inah and Wadi`ah

There was a proposal from an Islamic financial institution to offer Islamic credit card based on two Shariah concepts, namely bai` `inah (to raise fund for the purpose of providing credit facility to customers) and wadi`ah (to provide custody services for the fund raised under the bai` `inah contract).

Under this credit card product mechanism, the Islamic financial institution will sell an asset at a nominal value plus profit to the customer with deferred payment terms of three years. Subsequently, the customer will sell back the same asset to the Islamic financial institution at a nominal value and payable on cash basis. The sale proceeds will be credited into wadi`ah account in the Islamic financial institution to facilitate the purchases of goods or services by the customer. Both sale and purchase transactions will be consecutively executed in two separate and independent contracts.

Islamic Credit Card Based on the Concept of Ujrah

There was a proposal from a number of Islamic financial institutions to offer credit card product based on the concept of ujrah (fee). The cardholder is imposed with ujrah as a consideration for the services provided as well as the benefits and privileges offered by the Islamic financial institutions to the cardholders. In this regard, the SAC was referred to on the issue as to whether the proposed credit card structure based on the concept of ujrah is permissible.

The concept of ujrah is permissible subject to the following conditions:

  1. Islamic financial institutions shall ensure that the ujrah is imposed as a consideration for the provision of actual or non-fictitious services, benefits and privileges that are permissible under Shariah;
  2. The imposition of different amount of ujrah on various types of credit cards that offer different kind of services, benefits and privileges is permissible;
  3. The imposition of ujrah on the services, benefits and privileges which are not related to qard, deferment of debt and exchange of cash with cash at a different value is permissible;
  4. The imposition of ujrah on the services, benefits and privileges relating to qard, deferment of debt and exchange of cash with cash at a different value is not permissible. However, charges may be imposed to cover the actual management cost (nafaqah/taklufah).

Takaful Cover for Islamic Credit Cardholders

There were proposals by Islamic financial institutions to provide takaful coverage associated with personal accident as one of the privileges of which ujrah will be imposed to Islamic credit cardholders. In this regard, the SAC was referred to on the issue as to whether the proposed provision of takaful coverage with the imposition of ujrah is permissible.

The imposition of ujrah for personal accident takaful coverage is not permissible due to the following considerations:

  1. The Islamic credit cardholders are not direct participants in the takaful scheme. However, the payment of ujrah is instead imposed on the cardholders as a consideration for the takaful cover arranged by Islamic financial institutions with a third party; and
  2. Since the ujrah is paid by the customers to the Islamic financial institutions for benefit coverage against risk, hence such arrangement is prohibited by the Shariah considering that the cash is exchanged with cash at different values.

Therefore, the application of hibah concept is considered as an appropriate alternative compared to ujrah in order to avoid syubhah associated with the prohibition of exchanging cash with cash at different values. In addition, there is no Shariah restriction on the application of hibah.

Cash Back Rebate on Credit Card Annual Fee

The Islamic financial institution that offered ujrah-based credit card is not permitted to offer cash back rebate to the Islamic credit cardholder. Nonetheless, this facility may be offered as a hibah to the cardholders without any imposition of ujrah.

Islamic Credit Card Based on the Concepts of Wakalah and Kafalah

An Islamic financial institution proposed to offer Islamic credit card product based on the concepts of wakalah and kafalah that incorporate specific credit limit on the cardholder. Purchases of goods and services made by the cardholder will be paid by the merchant bank on behalf of the cardholder. The merchant bank would then send all the documents relating to the transactions to Visa/Mastercard, which functions as intermediary between the merchant bank and the Islamic financial institution. In this regard, Visa/Mastercard will claim from the Islamic financial institution the amount payable to the merchant bank.

Under the wakalah concept, the credit cardholder will be charged with ujrah. The charges will be calculated based on a specific percentage of the approved credit limit as a consideration for agency services provided by the Islamic financial institution to settle the cardholder’s payment obligation to the merchant bank. In the case of kafalah concept, the Islamic financial institution guarantee the payment to Visa/Mastercard (for the payment made to the merchant bank) and guarantee the payment for goods or services purchased by the credit cardholder
from the merchant.