Comparisons Between Islamic and Conventional Credit Cards
Banks, as institutions, provide financial services to the community and have always aimed to retain existing customers while attracting new customers through developing innovative, attractive, and competitive products. The rise of Muslim demand for Islamic financial services has caused many banks to create financial packages based on Islamic principles as features within their services, or they have established new Islamic banks with the same bank brand, sometimes even changing from a conventional bank into an Islamic bank.
Credit cards have been one of the flagship products of conventional banks for many years. Credit cards facilitate cardholders to transact in many places without carrying cash. As discussed in the previous section on credit cards in aMuslima, card holders can trade (up to a given limit) now and pay later with credit cards. If the card holder does not pay off the funds in instalments before or on the due date, then he/she must pay not only the principal owed but also the interest, as well as other fees such as late penalties.
Conservative Shariah scholars do not agree with the concept of a conventional credit card due to the interest imposed as interest derived usury is forbidden in Islam. A credit card is considered a product of the West, luring cardholders to shop more for consumer goods and increasing their debts. Many cardholders who continuously shop with credit cards ultimately often find that their debts are beyond their abilities to pay. As a result, at the maturity date the customers are only able to pay the minimum amount or instalment per month with compounded interest and in consequence, the bill becomes larger and larger. It is also exacerbated by the ease with which individuals can obtain credit cards from banks with the lure of cheaper annual fees, smaller interest, and better facilities offered, so that customers usually have more than one credit card.
Interest is indeed an income for the issuing bank. How is it then that Islamic banks can earn an income and compete with conventional banks if they issue Islamic credit cards? Especially when the need for credit cards is indispensable for making online payments, hospital deposits, education fees, etc.
Beata Paxford of Warsaw University stated that Islamic credit cards are based on the following forms:
Ujra. Customers pay for the services of the use of credit cards per year, and still Banks do not charge any interest or other hidden costs.
Ijara. Customers use credit cards as a leased assets and the customers will pay the instalments regularly. The asset owner will transfer the asset purchased to the customer after he/she pays the final payment.
Kafala. Banks act as a kafil or a guarantor for transactions carried by the cardholder. The card holder is obliged to pay the kafala bi ujra (fee).
Qard. Customers acts as the borrower and the bank as the lender.
Bai al-ina deposits. Banks sell a product at a certain price in accordance with the item to be purchased by the customer then the bank will buy back the item from the customer at a lower price. The price difference is the bank’s revenue. So the Bank sells and buys back at lower costs to gain profit.
As conventional banks, Islamic banks have a grace period for its customers. Islamic banks, however, do not charge interest when customers are late or do not pay their duties but they do bear an extra fee. The fee can be treated as the bank’s revenue but it can also be as a shodaqoh (donation) depending on the agreement between the parties. If the bank treats the additional fee as its income, it will be mentioned in the agreement. If the bank does not treat it as an additional income then the fee will be included as voluntary alms and the bank will transfer these funds to a charity.
Finally, below are characteristics of Islamic and Conventional Credit Cards:
- Interest. Islamic: no interest is charged, the Bank is counteracted with a predetermined monthly fee. Conventional: interest is changeable, it relies on the unsettled amount.
- Collateral. Islamic: is commanded in several cases, most banks oblige a main deposit or undated check. Conventional: no collateral is required.
- Contract type. Islamic: Lease-based. Conventional: Loan-based.
- Transaction restrictions. Islamic: transaction of alcohol, tobacco, gambling, pork, and sexually-related products are prohibited. Conventional: no transactions restrictions.
- Profit margin on deposits. Islamic: the bank shares profit with its customer and is not compounded. Conventional: no deposits.
- Late payment fees. Islamic: Fixed amount plus percentage of outstanding balance and the percentage is usually donated to charity. Conventional: inconsistent, compounded.