Shari'ah-Compliant Credit Cards - An Analysis Of Underlying Structures

129ISRA International Journal of Islamic Finance • Vol. 4 • Issue 1 • 2012
* Nurbek Kenjebaev is Senior Manager at Central Shariah Group, HSBC Amanah
based in Dubai, UAE. Opinions expressed in this article do not represent the views
of HSBC Amanah and are entirely those of the author. The author can be contacted
at nurbek.ahmad@hsbc.com.
SHARÔÑAH-COMPLIANT
CREDIT CARDS:
AN ANALYSIS OF UNDERLYING
STRUCTURES
Nurbek Kenjebaev*
Abstract
Thepurposeofthispaperistoprovideananalysisofvariousstructures
retail clients today. The paper discusses case studies from several
jurisdictions to show that various SharÊÑah-compliant contracts or
combinations of contracts are being used to structure Islamic credit
cards so that customers enjoy similar benefits to those derived from
conventional credit cards. It is submitted that SharÊÑah-compliant
credit cards which encourage excessive spending (isrÉf) should
not be promoted on the basis that they counter the basic SharÊÑah
principle of moderation and avoiding wastage. Furthermore, the
recent financial crises highlighted that the structure of the product
will provide little benefits if other factors, such as stringent credit
screening processes, need-based analysis and customer’s interests,
are ignored or given secondary importance.
Keywords: SharÊÑah-compliant credit cards, BayÑ al-ÑÊnah, IjÉrah,
Ujrah, Tawarruq.
I. INTRODUCTION
The credit card business started in 1950 when Diner’s Club issued
its first credit card to be used in 27 restaurants in New York. Today,

SharÊÑah-Compliant Credit Cards: An Analysis of Underlying Structures
130 ISRA International Journal of Islamic Finance • Vol. 4 • Issue 1 • 2012
the credit card has become an important financial instrument by
which customers execute their daily purchases as it is a convenient
way of paying for goods and services. At the same time the credit
card business represents a multi-billion dollar industry and is a major
revenue contributor to banks and financial institutions. Moreover, it
provides a business opportunity for banks and financial institutions
to offer additional services and incentives like discounts and point
collection upon purchases of certain goods and services, which in
turn generate additional revenue for these institutions.
Although abuse of credit cards can ruin the financial situations of
individuals–since interest rate charges on conventional credit cards
are usually much higher than for other types of lending–a credit card
can help customers to meet their emergency and short-term liquidity
needs if it is used wisely. Customers of Islamic banks have similar
needs. In order to sustain a long-term relationship with their clients
and offer them a full suite of banking services, Islamic banks have also
started offering SharÊÑah-compliant credit cards to their customers.
The objective of this paper is two-fold. First, it attempts to
analyse various structures used to offer SharÊÑah-compliant credit
cards by Islamic banks and to review these structures in the light of
the SharÊÑah standards of the Accounting and Auditing Organisation
for Islamic Financial Institutions (AAOIFI) and the rulings of the
Islamic Fiqh Academy of the Organisation of the Islamic Conference
(IFA-OIC) on the subject. Second, on the basis of the analysis of
the credit card structures from the AAOIFI standards and the IFA-
OIC rulings, the main criticisms raised against credit cards will be
examined from the SharÊÑah perspective. Accordingly, the paper is
structured as follows: Section II reviews the nature of a credit card
and the parties involved in a credit card transaction while Section III
examines its SharÊÑah-compliant counterpart; Section IV highlights
and discusses the underlying structures of SharÊÑah-compliant credit
cards in the light of the SharÊÑah standards of AAOIFI and the rulings
of the OIC Fiqh Academy; Section V thereafter deliberates on the
issues relating to the SharÊÑah compliance of credit cards. Section VI
concludes the discussion.

Nurbek Kenjebaev
II. THE CONVENTIONAL CREDIT CARD
Before examining the underlying SharÊÑah principles used to structure
Islamic credit cards, it is important to first define the nature of a credit
card and discuss the relationship between the various parties involved
in a credit card transaction.
The credit card works in a simple way. When a customer’s credit
card application is approved by the issuer or the bank, the customer
has to pay an annual fee for the use of the card. The fee may sometimes
be waived by the bank for the first year as a marketing tool to attract
customers. The customer then starts using the credit card to pay for
goods and services bought from the merchants up to the credit limit
approved by the bank. As the bank is lending money to the customer
at the maximum of the credit limit, the customer is charged interest
on the outstanding amount on a periodic basis after the expiry of the
grace period, which is normally after 33-45 days, if the customer opts
to revolve the outstanding balance which is due.
In a typical credit card transaction, there are four parties involved:
(i) the credit cardholder, (ii) the bank that issues the card to the credit
cardholder, (iii) the merchants, and (iv) the clearing houses that
process the merchants’ claims to facilitate transfer of payments from
the issuing banks.
The relationship between the credit cardholder and the issuing
bank is that of debtor and creditor respectively. The issuing bank
provides a credit limit for the cardholder to utilize and gives an option
for the cardholder to either pay back the amount utilized or pay only
a minimum amount and revolve the outstanding balance. The issuing
bank charges interest on the revolving amount–a practice which
does not conform with SharÊÑah principles. At this stage, we do not
intend to venture into other areas such as the relationship between the
issuing bank and the merchant or clearing houses as this will have
little relevance for our discussion. Our discussion mainly revolves
around the relationship between the credit cardholder and the issuing
bank and to determine the relevant SharÊÑah approved contracts used
to establish this relationship.

III. THE SHARÔÑAH-COMPLIANT CREDIT CARD
Lately, SharÊÑah-compliant banks have started to offer credit card
facilities to their retail customers as a result of market demand. As
the use of credit cards helps retail customers to meet their short-term
liquidity needs, the SharÊÑah does not prohibit the concept of the
credit card per se, provided that it does not involve the charging of
interest on the money advanced to customers.
The SharÊÑah ruling regarding the credit card, as per the SharÊÑah
Standards of the Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI), is as follows:
“It is not permissible for an institution to issue credit cards
that provide an interest-bearing revolving credit facility,
whereby the cardholder pays interest for being allowed to
pay off the debt in instalments.”
(AAOIFI SharÊÑah Standard No. 2, Para. 3/3, 2010: 23)
“It is not permissible for institutions to grant the cardholder
privileges prohibited by the Shari’a, such as conventional life
insurance, entrance to prohibited places or prohibited gifts.”
(AAOIFI SharÊÑah Standard No. 2, Para. 4/6(a), 2010: 24)
The OIC Fiqh Academy (2004), in its Resolution No. 139 (15/5) on
credit cards, further stipulated the key principle allowing the use of
credit cards: if the credit card does not entail any charging of interest
and it has an underlying account whereby the amount of purchase is
deducted from the cardholder’s account, then it should be permissible
from the SharÊÑah perspective. Similarly, the OIC Fiqh Academy in
its 12th
session (Sept 23-28, 2000) declared that “it is impermissible
in SharÊÑah to issue a credit card or use it if its conditions include
imposition of interest….It is permissible in SharÊÑah to issue credit
cards that do not carry a condition imposing interest on the debt.”
(Islamic Development Bank and Islamic Fiqh Academy, 2000: 249-
250). However, the OIC Fiqh Academy resolution on credit cards
noted that there should not be any charge if there is a delay on the
part of the customer to settle the outstanding amount on the card. This

Nurbek Kenjebaev
ruling should be read in conjunction with another resolution of the
OIC Fiqh Academy on the same subject (Resolution No. 108 (2/12))
wherein it allows the issuer to charge a specific amount as a fee (if
it covers actual costs) at the time of issuing or renewing the credit
card as well as permitting the issuer to charge a commission on the
goods and services purchased by the customer, provided that those
goods and services are sold at the same price to the credit cardholder
as it is to customers who pay cash to ensure that the banks do not
charge any extra fees to the cardholder for guaranteeing the payment
to the merchants (Islamic Development Bank and Islamic Fiqh
Academy, 2000: 250). The standard practice of the banks is to take
the commission from the merchants from whom the customer buys
the goods or services, which is acceptable as per the above ruling.
At this stage, for the sake of clarification, distinction must be
drawn between credit cards and debit or charge cards. In a debit card
the customer uses funds available in his account with the bank which
has issued the debit card to pay for goods and services as well as to
withdraw money. On the other hand, in the case of charge cards the
bank provides a credit facility up to a credit limit for a specified period
as well as a means of settling the amount used during that period.
Basically, a retail customer is granted a credit facility, say for 45 days.
After the expiry of the 45 days the customer will have to pay back the
full amount of credit availed to the bank. As such, there is no option
for the retail customer to revolve any outstanding amount, which is
a key feature of credit cards. Banks earn their revenue by way of
annual fees and other commissions which are payable by merchants
to the banks. As per AAOIFI SharÊÑah Standard No. 2 (2010), debit
and charge cards are permissible as long as no interest is payable by
the customer on the use of their cards.
Based on an analysis of available SharÊÑah-compliant credit cards
in Saudi Arabia, the United Arab Emirates (UAE) and Malaysia, it
is found that their terms and conditions clearly stipulate that the
customer is not allowed to purchase any goods and services which
are not in line with the principles of SharÊÑah, such as pork and
alcoholic beverages. These terms are in line with the requirements of
the AAOIFI SharÊÑah standard.
Based on the above-cited rulings of the OIC Fiqh Academy and
AAOIFI SharÊÑah Standard No. 2 (2010), we sum up the following

principles that should be present in any structure which is used as a
basis to offer SharÊÑah-compliant credit cards:
i. There should not be any payment of interest.
ii. Interest should not be charged if the settlement of any outstanding
amount is delayed.
iii. The issuer can charge an annual fee, which can be paid on a
monthly basis as well. The issuer can also charge renewal fees.
iv. It is permissible for the issuer to earn commissions from third-
party merchants from whom the customer buys goods or services.
v. It is permissible for the issuer to charge a fee for cash withdrawals,
but such charges should be a fixed fee, not a percentage of the
amount withdrawn.
vi. It is permissible for the banks to offer other services such as
discounts on the goods purchased through credit cards and other
privileges like priority services at restaurants, airports and hotels.
If the credit card issued by any financial institution complies with
the above principles then it will be considered SharÊÑah compliant
as per the OIC Fiqh Academy and AAOIFI. Our analysis of various
structures used for credit cards will be conducted on the basis of the
abovementioned principles.
IV. UNDERLYING STRUCTURES USED FOR
SHARÔÑAH-COMPLIANT CREDIT CARDS
In order to meet customer demand, Islamic banks have structured
their credit card products based on approved SharÊÑah-compliant
nominate contracts. To date, the following structures have been used
by Islamic banks to offer credit cards to their customers:
a. bayÑ al-ÑÊnah
b. ijÉrah
c. a combination of ujrah and kafÉlah
d. tawarruq
e. a combination of tawarruq and muÌÉrabah, sometimes known as
a covered card.

Nurbek Kenjebaev
This list of structures used to offer credit card facilities is not
exhaustive. For instance, recently Bank al Salam, a bank in Bahrain,
announced that it has launched a takÉful-based credit card. It is
noted that these credit card structures have their own strengths and
weaknesses. However, as time goes by, the market will decide which
structure will be widely accepted based on customer preferences,
although the underlying contracts do not contradict the SharÊÑah
principles per se. The following sub-sections will now discuss each
structure.
A. Credit Cards Based on BayÑ al-ÑÔnah
BayÑ al-ÑÊnah involves two sales and purchase transactions, and each
transaction should be independent from the other. In bayÑ al-ÑÊnah,
as a banking transaction, the bank sells an asset to the customer at a
deferred sale price; after conclusion of the first sale transaction, the
customer sells back the same asset to the bank at a lower price on a
spot basis. Some banks in Malaysia use the same structure to facilitate
term investment with the bank. For instance, Bank Rakyat’s Qiradh
General Investment Account is based on the bayÑ al-ÑÊnah concept.1
In the context of credit cards, the bank issuing the credit card sells
an asset to a customer who needs a credit card facility on a deferred
payment basis equal to the credit facility period. The asset which is
the subject matter of the sale can be a building or land owned by the
bank. The sale price of the asset also includes a profit amount for the
bank. Once the sale transaction is completed, the customer will sell
back the same asset to the bank for a lower price. The price which
the bank pays for buying back the asset represents the credit limit of
the credit card facility approved for the customer.2
The proceeds of
the second sale transaction will be placed in a wadÊÑah (safekeeping)
account with the bank. The customer is allowed to use the fund as
his credit limit and has to pay the deferred sale price in the first sale
transaction (Bank Islam Malaysia, 2008).
1 For more details please visit http://www.bankrakyat.com.my/web/guest/
pelaburanqiradhsbpr.
2 For more information, please see Terms and Conditions of Al-Taslif Master Card at:
http://ambankgroup.com/terms_conditions.asp?sc=terms_conditions&pg=terms_
conditions6

The customer may ‘rollover’ the amount on his credit card by making
payment in part or full when he receives a statement from the bank.
If the customer misses the deadline for a minimum payment then
the bank will start charging the profit rate portion of deferred sale
pursuant to the first transaction he entered with the bank.At the end of
the credit card period “if there is any amount unpaid, the customer’s
account will be set off against the deferred sale price. If the fund in
customer’s account is not sufficient, then the bank is entitled for the
sum outstanding pursuant to the deferred sale agreement and can
make claim accordingly against the customer.” (Bakar and Rabiah,
2008: 152). The features of this card imply that it will not be revolving
in the sense that the customer has to pay the deferred sale price which
is fixed and known in advance, which is not the case with tawarruq-
based credit card (which we will analyze later) where there will be
a separate sale transaction on a monthly basis on the outstanding
amount of the credit card. There are issues like, one may question
on what basis the bank charges the customer on a profit rate which
is equal to the profit rate of the first sale transaction if the customer
fails to settle the minimum amount on the payment date. Once the
sale transaction is executed, then the buyer has to pay the sale price,
which can be on a spot or deferred payment basis.
If the customer defaults on the payment of any installment
amount, then he will be required to pay a late payment fee. The late
payment fee is approved by most SharÊÑah scholars today in order to
deter customers from delaying their payment obligations. However,
late payment fee is not considered income to the bank as the latter
is required to pay the sum to charity on behalf of the customer. The
following diagram illustrates the modus operandi of bayÑ al-ÑÊnah
based credit card:
Step 1: The bank sells an asset to the customer at the sale price
on a deferred payment basis through an ‘Asset Sale
Agreement’.
Step 2: The customer sells back the same asset to the bank at the
purchase price (which is usually lower than the sale price
under Step 1), equivalent to the credit card limit.
Step 3: The bank credits the amount of the purchase price into the
customer’s bank account for his utilization after the sale

Nurbek Kenjebaev
back transaction is completed. The customer is obliged
to pay the selling price to the bank within the agreed
period. The difference between the selling and purchase
price is the bank’s profit.
The structure may work similar to a debit card where the fund is
placed in a wadÊÑah account and basically the customer is using his
own funds for making purchases of goods and services (Bank Islam
Malaysia, 2008).
The bayÑ al-ÑÊnah structure is predominantly used in Malaysia
where the majority of SharÊÑah scholars have approved it.3
SharÊÑah
scholars in the Middle East, on the other hand, reject bayÑ al-ÑÊnah.
One of the main rationales for allowing bayÑ al-ÑÊnah has been to
support the development of the Islamic banking industry in Malaysia
in its formative years and provide an alternative for those customers
who want to avoid indulging in ribÉ (interest) transactions. Lately,
however, some of the scholars in Malaysia have advocated the use of
SharÊÑah-compliant instruments other than bayÑ al-ÑÊnah. For instance,
Dr Engku Rabiah, who is a member of the SharÊÑah Advisory Council
of Bank Negara Malaysia (Central Bank) argued that “even if we
look at the general objectives (maqÉÎid) of the SharÊÑah, resorting to
bayÑ al-ÑÊnah has not been proven nor seen to be contributing to the
economic well-being of the people and still seemingly suffers from the
‘oppressive’ character of ribÉ. Hence, with due respect, it is advised
that Islamic banking and financial practices in Malaysia or elsewhere
should avoid bayÑ al-ÑÊnah in their transactions. At the very least,
this move will improve the image of the Islamic banking and finance
industry in Malaysia and globally” (Bakar and Rabiah, 2008: 167).
There have been some efforts by the industry in Malaysia lately to
move away from bayÑ al-ÑÊnah. The establishment of Bursa Suq al-
Sila’ is one example of this. Regulators and industry practitioners
are taking necessary steps to close gaps between Islamic banking
practices in Malaysia and the Middle East, which augers well for
the harmonization of SharÊÑah standards globally. Bursa Suq al-Sila’
3 The Shariah Advisory Council of Securities Commission of Malaysia, in its 5th
meeting on 29 January 1997, passed a resolution making bai al inah permissible in
the Islamic capital market in Malaysia (Securities Commission, 2007: 20).

is a commodity trading platform which is sponsored by financial
institutions in Malaysia to facilitate the trading of palm oil, which
is used by the banks to offer liquidity solutions to customers. This
is a highly regulated platform and palm oil traders have to become
members of this trading platform before placing their commodities
for trade. A similar arrangement (known as TaysÊr) is also prevalent
in Bahrain, where aluminum is used as the underlying commodity to
facilitate the trade.
B. IjÉrah-Based Credit Cards
As the name denotes, the ijÉrah-based credit card is based on the
SharÊÑah concept of ijÉrah. IjÉrah is a sale of usufruct against
payment of lease rentals. The ijÉrah-based card has to comply with
the requirements of ijÉrah; that is, there must be usufruct or an asset
involved. Moreover, one of the most important characteristics of
ijÉrah is that the subject matter of the usufruct must be a durable,
non-consumable item.
Kuwait Finance House in Bahrain offers the Baytik IjÉrah Card
to its customers in Bahrain.4
The Baytik Card can be used to buy
refrigerators and other durable goods. In order for the bank to charge
lease rentals, it must own the asset. Under the structure, the bank
appoints the customer to be its agent to purchase the goods on its
behalf from the merchant. By ‘swiping’ the card, the customer is said
to take possession of the goods on behalf of the bank and has to pay
agreed rental amounts over the agreed period. Once the customer
pays all rentals due to the bank, the goods will be transferred to the
customer, as the structure used is ijÉrah muntahiyah bi al-tamlÊk
(lease ending with ownership).
The modus operandi of the ijÉrah-based credit card is as follows:
Step 1: The customer is appointed as the agent of the bank to
acquire goods from the merchant. When the customer
uses his card to purchase goods, he is said to acquire the
goods on behalf of the bank.
4 For more details, refer to http://www.baytikijara.com/aboutIjara.asp.

Nurbek Kenjebaev
Step 2: The bank leases the goods to the customer and the
customer pays the rental amount to the bank on a
monthly basis until the title of the goods is transferred
to the customer by way of sale for a token amount or in
the form of a gift. The key question that is relevant in the
ijÉrah-type of credit card is that the relationship between
the cardholder and the issuing bank is that of a lessor
and lessee and the bank as lessor will be responsible to
ensure that the customer benefits from the use of the
service of goods or services which are purchased. This
will be difficult to understand in the context of the credit
card payment system, where the role of the issuing bank
is that of guarantor of the customer’s obligation to pay
the merchant.
Although ijÉrah-based credit cards may be acceptable to most
SharÊÑah scholars from the structuring perspective, one needs to
consider whether the structure can meet the liquidity requirements
of the customer. As per the requirements of the ijÉrah contract,
this structure is only to facilitate the purchase of durable assets. It
may not satisfy the needs of the customer in meeting his liquidity
requirements. Moreover, today most of the customers want to use
their credit cards to pay for goods which may not be a subject matter
of ijÉrah, like buying groceries and dining at restaurants.
Kuwait Finance House offers another credit card known as
TaysÊr.5
The structure and features of the card is similar to the concept
of ujrah (hiring of person to do a particular task for a fee), and the
customer’s outstanding amount will be calculated based on the
formula, which takes into account the monthly fixed fee, the amount
which has been spent, and the outstanding amount. However, there is
a minimum repayment amount which is fixed. We will dwell on the
concept of ujrah in the next section.
5 For more details, please visit: http://www.kfh.com/en/banking-services/credit-cards/
al-tayseer.aspx

C. Ujrah-Based Credit Cards
IjÉrah can be divided into two categories based on the subject matter
of the ijÉrah contract. The first type refers to the lease of usufruct of
corporeal goods (Ñayn). Examples would be: renting of a house, car
or any asset which has usufruct value. The second category refers to
the hiring of services of anyone for a wage. This is sometimes known
as service-ijÉrah. For instance, paying for medical or educational
services can be the subject matter of service-ijÉrah, and the person
rendering the services is entitled to ajr (wage). In this section, we will
deal with the second category of ijÉrah, i.e., service-ijÉrah. There are
two types of hired persons (ajÊr): an ‘employee who offers his services
to the public at large’ (ajÊr mushtarak) and a ‘private employee’ (ajÊr
khass) (Al-Baghdadi, 2010). If the person is hired by one entity, he is a
private employee, and he cannot render services to others without the
permission of the employer. As for an ajÊr mushtarak, it is understood
that it can refer today to a service provider. Any person can avail
his services provided he pays the required fee for the services. The
concept which Islamic banks employ for credit card is based on
ajÊr mushtarak, i.e., the banks are remunerated for their services in
the form of, among others, facilitating payments to merchants and
offering certain privileges if the customers use the credit card to make
payments.
The structuring of credit cards based on the concept of ujrah is
a widely used practice of Islamic banks in the United Arab Emirates
(UAE). For instance, Emirates Islamic Bank and HSBC Amanah Al
Wafa Credit Card use the ujrah structure. Under this structure, the
bank charges the customer a monthly fixed fee for rendering services.
These services include managing and maintaining customer accounts
as well as guaranteeing payments to merchants.
There are three scholarly opinions on the charging of a fee
for providing a guarantee (Elgari, n.d: 101). According to the first
opinion, charging any fee or commission to provide a guarantee
is not allowed. That is because the adherents of this view consider
providing a guarantee (kafÉlah) to be by nature a gratuitous act. The
second opinion, advocated by contemporary scholars such as Dr
NazÊh ×ammÉd, holds that charging a fee for providing guarantee is
permissible based on the view that there is nothing which prohibits

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such acts in the text of the Qur’Én and Sunnah. The third scholarly
opinion takes a middle ground, which allows the charging of a fee
provided that, in case the guarantee is enforced, the guarantor must
return the fee to the debtor to avoid any suspicion of ribÉ.
It is submitted that apart from charging a fee for the services,
since the bank guarantees the payment obligations of the credit
cardholder, the bank is justified to charge a fee which may become
part of the ujrah fee.
Under the ujrah, the customer is required to pay a monthly fixed
fee for the services irrespective of the amount outstanding on his
credit card. The fixed fee is not linked to the outstanding amount or a
credit limit. This structure is relatively new, and some customers have
complained about it. One customer told Gulf News that his account
is debited AED 500 every month (Monthly Fee, 2010). However,
when the customer pays in full, the bank reserves AED 500 for the
following month at its own discretion. The bank’s communication
manager’s response was that Emirates Islamic Bank’s credit card is
based on the concept of ujrah and “unlike conventional credit cards,
their card fee is not linked to usage or the outstanding amount on the
credit cards as these are service fee-based cards. As far as the rebate
of the monthly fee is concerned, it is not the right of the customer
to demand it from the bank, since the rebate is given purely at the
discretion of the bank.” (Monthly Fee, 2010).
However, some writers like Bakar and Rabiah (2008: 155)
have questioned the justifications for charging a fixed fee when the
bank advances its money to the customer to utilize it. The ujrah
structure should be understood in the context of services which
the bank provides to its customers such as loyalty programmes
and discounts on the purchases made by using the credit card and
guaranteeing payment of purchase price on behalf of the customer. It
is submitted that the fixed fee that the financial institutions charge is
for the services rendered to the customer rather than for the money
advanced to the customer. The money that is utilized by the customer
is a debt which has to be repaid to the financial institution. The bank
or financial institution does not charge any additional fee in case of
delay of payment by the customer. As such, the payment of the fixed
fee should not be considered as interest for the money utilized by the
customer. Hence, if any of the services offered by the issuing bank are

not satisfactory (for instance, certain dining privileges as advertised
happen to be misleading or false), then the customer is not required
to pay the service fee to the bank as the latter has breached the terms
of the agreement.
It is further submitted that the ujrah structure currently used
by Islamic banks complies with the principles laid by the OIC Fiqh
Academy rulings and the AAOIFI SharÊÑah Standard on credit cards.
Fromamarketingperspective(ifweweretocomparewithconventional
cards), this structure is sometimes considered inefficient as the
customer is charged a fixed monthly fee for the services rendered.
In order to make this credit card competitive, Islamic banks offer
some incentives if the customer meets certain criteria in the form of
a discretionary rebate from the monthly management fee. However,
the discretionary nature of this rebate does not allow the customer
to know in advance how much he is entitled as a rebate even if he
meets the criteria set by the banks. Discretionary rebate can also be
set based on the spending and repayment behaviors of the customers.
The difference between ijÉrah and ujrah-based credit card is that the
former gives flexibility to the bank to charge a different rental amount
for each good bought by the customer using the credit card. This is
not the case with ujrah. However, ijÉrah-based card cannot be used to
buy non-durable goods, which cannot be the subject matter of ijÉrah.
D. Tawarruq-Based Credit Cards
Tawarruq refers to a type of “transaction where a person buys a
commodity with a deferred price then sells it to a third party (other
than the original seller) for an immediate cash price. The purpose
of this contract is to obtain cash immediately” (Zuhaily, 2003: 117).
Unlike bayÑ al-ÑÊnah, as discussed previously, the commodity cannot
be sold to the original seller, i.e., the bank. A tawarruq-based credit
card is offered by some banks in the UAE and Saudi Arabia; for
instance, the Saudi British Bank (SABB).
Under this structure, once the customer uses the limit specified
in the card agreement, he is given a choice to settle either all or some
portion of the outstanding amount owed on the credit card. The
bank then sells a commodity equivalent to the outstanding amount
at the agreed profit rate to the customer. If there is no outstanding

Nurbek Kenjebaev
amount, there will not be any commodity murÉbaÍah transaction.
The customer appoints the bank–or in some cases, employees or a
legal entity owned by the bank–to accept the murÉbaÍah sale price
on behalf of the customer so that it is not required for the customer
to sign the murÉbaÍah contract each time. At the next payment date,
the customer has to pay the new sale price based on the commodity
murÉbaÍah transaction. Alternatively, there will be a series of
murÉbaÍah contracts, each with a different deferred sale price for the
amount used in each month.
If there is no outstanding amount on the payment date, there will
be no commodity murÉbaÍah transaction and no payment required
of the customer. However, if the customer chooses to rollover the
outstandingamount,thenthebankentersintoacommoditymurÉbaÍah
transaction with the customer where the cost price of the commodity
will be equal to the outstanding amount plus profit. The customer
is required to pay the murÉbaÍah sale price of the commodity on
deferred payment terms. The following diagram illustrates the
mechanics of a tawarruq-based credit card upon payment date.
Flow Diagram: A Tawarruq-Based Credit Card at Payment Date
Payment Date
The bank sells
a commodity at
the cost price,
which is equal to
the outstanding
amount plus
profit, to be paid
by the customer
on a deferred
basis.
Outstanding
amounts
Zero outstanding
amounts
No murÉbaÍah sale

Lately, the structure of organised tawarruq has attracted criticisms
with respect to its SharÊÑah compliance. The OIC Fiqh Academy,6
in its meeting in April 2009, issued Resolution 179 (19/5) ruling
that ‘organised tawarruq’, which is used by banks today to offer
financing facility to customers for managing their short-term
liquidity, is not permissible.7
Based on the ruling of the OIC Fiqh
Academy, tawarruq can be categorized into two types: tawarruq
fiqhÊ (or classical tawarruq) and organised tawarruq (tawarruq
munaÐÐam). The latter, as practised by the banks, is not considered
permissible. According to the ruling, the first type of tawarruq is
defined as “a person (mustawriq) buying merchandise at a deferred
price in order to sell it in cash at a lower price. Usually, he sells the
merchandise to a third party with the aim of obtaining cash. This is
classical tawarruq, which is permissible, provided that it complies
with the SharÊÑah requirements on sale (bayÑ).” On the other hand,
‘organised tawarruq’ is defined in the same ruling as “when a person
(mustawriq) buys merchandise from a local or international market
on a deferred price basis. The financier arranges the sale agreement
either himself or through his agent. Simultaneously, the mustawriq
and the financier execute the transactions, usually at a lower spot
price” (OIC Fiqh Academy, Resolution 179 (19/5)).
Based on the above definitions, it is contended that the ruling
is not able to shed light on the difference between the classical and
organised tawarruq clearly, and the basis for the prohibition of the
latter appears to be weak, stating that organised tawarruq amounts to
“deception in order to get quick cash from the contract”. Firstly, if
deception is the main criterion for not allowing organised tawarruq,
the same criterion can also be identified in classical tawarruq as
well (where the customer buys the commodity in order to sell to a
third party to get cash), which the resolution considers permissible.
Secondly, pertaining to the difference between classical and organised
tawarruq, in the latter case, the financial institution acts as agent of
the customer to sell (in case of financing) or to buy (in case of taking
6 OIC Fiqh Academy Ruled Organised Tawarruq Impermissible in 2009. Resolution
179 (19/5). Available at: www.isra.my/fatwas/topics/treasury/interbank/tawarruq
7 For more details on the analysis of the ruling and its consequences, see Haneef
(2009).

Nurbek Kenjebaev
a deposit). If this is the only reason, then this can be avoided by the
bank selling the commodity to the customer and leaving it to the
customer to sell the commodity himself to a third party in the market.
It is submitted that the OIC Fiqh Academy should have paid
attention to other issues like bank ownership of the commodity
(for instance, whether ownership can be physical or constructive)
before selling the same to the customer at a deferred sale price. If the
ratio decidendi (reason for prohibition) is the ‘organised’ nature of
tawarruq, this can be avoided by the bank leaving it to the customer
to sell the purchased commodity to a third party, although the
AAOIFI SharÊÑah standard allows the bank to refer to the customer
to sell the commodity to a third party. However, by this reasoning,
it should also apply to the other types of financing employed by
Islamic banks, such as home financing based on ijÉrah muntahiyah
bi al-tamlÊk (lease ending in ownership). This too can be understood
as ‘organised’ as the financial institution facilitates the customer
obtaining cash to own the house. It looks like the Fiqh Academy’s
concern relates to the nature of the sale transaction; i.e., it doubts if
the bank ever has real ownership of the commodity before selling it to
the customer. However, this issue can be resolved without resorting
to the prohibition of organised tawarruq.
Furthermore, as the industry develops, there will be a continual
tendency to streamline the process and operations (for purposes of risk
management and increased efficiency) of product offerings, which
will mean that every product cycle can be characterized as organised.
It is further submitted that the OIC Fiqh Academy’s concern for
‘promoting the socioeconomic objectives’ of the society can be
achieved through other fiscal and monetary policies which should
aim to encourage the financial institutions to avoid concentrating
their assets on the particular instrument (in this case tawarruq) which
is important for risk and liquidity management and for diversification
purposes. For instance, lately there have been calls for the regulators
to step in and require the financial institutions to diversify their
portfolio based on other types of SharÊÑah-compliant instruments
such as ijÉrah, mushÉrakah and muÌÉrabah. It is submitted that
prevention of abusive practices of tawarruq can be achieved through
other ways and not necessarily by outright prohibition.

As the reason for prohibiting organised tawarruq is shaky from a
fiqh perspective, the IFA-OIC decision has not resulted in consensus
among SharÊÑah scholars and practitioners in the industry. Renowned
contemporary SharÊÑah scholar, Sheikh NiÐÉm Yaquby, based on
his research, found no clear prohibition of tawarruq as practised by
the financial institutions in the fiqh literature (based on the study
of eight madhabs or schools of thought).8
Similarly, AAOIFI’s
(2010) SharÊÑah Standard No. 30 on Monetization (Tawarruq) also
allows tawarruq subject to some control mechanisms; for example,
it should not be used for deposit mobilization; rather, it should be
used for liquidity management purposes. The same can be said of the
International Islamic Financial Market’s (IIFM) TaÍawwuÏ Standard
which contemplates use of tawarruq for SharÊÑah-compliant hedging.
Although the OIC Fiqh Academy has declared organised tawarruq
impermissible, there is no consensus among the SharÊÑah boards of
financial institutions as well as regulators and international standard
setting bodies.
It is submitted that, instead of resorting to outright prohibition of
tawarruq (for which there is no clear legal ruling in either the Qur’Én
or the Sunnah of the Prophet), more attention and research should be
focused to find ways to prevent the abuse of tawaruq transactions,
which will be discussed in the next section of this paper.
E. The Combination of Tawarruq and
MuÌÉrabah (Covered Card)
As the name suggests, this structure uses tawarruq and muÌÉrabah
(profit sharing) contracts to provide liquidity solutions to customers.
Noor Islamic Bank offers a credit card based on this structure.9
The
following are the steps involved:
Step 1: The bank sells a commodity to the customer at the sale
price on a deferred payment basis through a murÉbaÍah
sale agreement. The customer has to pay over an agreed
period.
8 Author was present when the talk was delivered by Sheikh Nizam Yaquby
9 For more details, please see: http://www.noorbank.com/content/pdf/Noor_Islamic_
Bank_cards_terms-and-conditions.pdf

Nurbek Kenjebaev
Step 2: The bank will then act as the agent of the customer to sell
the commodity to another party.
Step 3: The customer authorizes the bank to place the proceeds
of the sale, which is equivalent to the cost price of the
commodity sold, in a muÌÉrabah account with the bank.
The cost price of the commodity will represent the limit
on the credit card.
Step 4: Under the muÌÉrabah contract, the bank acting as a
muÌÉrib (entrepreneur) invests the customer’s funds on
unrestricted muÌÉrabah basis and shares the profit with
the customer based on the agreed ratio.
As per Clause 2.9 of Noor Islamic Bank GeneralTerms and Conditions
of Credit Card, on the payment date, profit which is payable by the
customer will be the difference between the profit payable under
the murÉbaÍah contract and the profit payable by the bank to the
customer under muÌÉrabah. Therefore, some refer to it as ‘covered
card’ as the payment obligation of the customer is covered by his
fund under muÌÉrabah with the bank. The bank usually provides a
card for the customer to use his limit under muÌÉrabah account.
Under this structure, the challenge for banks is to ensure that
funds placed by the customer should be invested in assets that
generate equal or higher returns than the profit amount payable by
the customer under the tawarruq transaction.
V. ISSUES RELATING TO SHARÔÑAH COMPLIANCE
Lately, the structures used by banks or financial institutions to offer
SharÊÑah-compliant credit cards have attracted numerous criticisms
in conferences and lectures on Islamic finance, which range from
accusations of the banks imitating conventional credit cards to some
even doubting the authenticity of the structures which are used by
banks from the SharÊÑah perspective. The author feels that some
of the criticisms are unfounded and not constructive. This type of
criticism does not contribute to the development of the industry.
The criticism should be accompanied by identifying mistakes and
offering viable alternatives. For instance, if the feature of SharÊÑah-

compliant credit cards is similar to conventional credit cards, it does
not mean that the structures underlying the former are not based on
approved SharÊÑah structures. Furthermore, there is nothing against
using SharÊÑah principles, particularly in muÑÉmalÉt (commercial
transactions) matters, to provide commercial solutions.
However, it must be stated that there are some valid points in
some of the criticisms raised, particularly with regard to the abuse
of credit cards by cardholders (e.g., spending beyond one’s means
and indulging in debt, which are not encouraged by the SharÊÑah)
and banks issuing credit card facilities without conducting proper
due diligence, which has resulted in individuals being indebted
beyond their financial capacities. The issue is common to all banks,
whether conventional or Islamic, and all banks should equally be held
responsible for facilitating such economic behavior on the part of
consumers. However, these reasons should not be considered the basis
for ruling that the underlying structures are SharÊÑah non-compliant.
These problems can be addressed through other means such as
financial education, developing a culture which discourages living
beyond one’s means and adopting stringent criteria by the banks for
providing credit card facilities. Apart from these measures, regulators
should play their role by putting a ceiling on customer credit limits.
Bank Negara Malaysia has done just that with its guidelines issued in
2011 on offering credit cards to retail customers in Malaysia (Bank
Negara Malaysia, 2011).
The fact that Islamic credit cards encourage customers to indulge
in debt similar to their conventional counterparts should not be a basis
for doubting the SharÊÑah authenticity of the structures used by banks
for providing Islamic credit cards, which have been approved by
qualified SharÊÑah scholars in Islamic jurisprudence. If the SharÊÑah-
compliant structure is used to facilitate or promote incurring further
debt, then we need to think about processes to ensure that these credit
cards are used only for genuine needs, but we should not condemn
the concept of SharÊÑah-compliant credit cards altogether. Doubting
the SharÊÑah compliance of credit cards without understanding the
process and reasoning behind rulings is a major factor for some to
question the concept of credit cards under Islamic law. For instance,
the SABB Amanah tawarruq-based credit card prohibits murÉbaÍah
sale transactions on the outstanding amount if the customer defaults

Nurbek Kenjebaev
twice in his payment obligations consecutively, and the credit card
facility can be terminated immediately. Some banks prohibit the use of
credit card facilities in some places, such as bars and casinos through
mechanisms of blocking merchant codes which are categorized as
not SharÊÑah-compliant, albeit it may cause some inconveniences to
customers. The author is familiar with a situation where the customer
complained that he could not pay his hotel bills through his Islamic
credit card when he was traveling in a foreign country because the
merchant code of the service was identified as prohibited. Lastly,
Islamic banks do not have incentives to charge late payment fees; as
such fees should go to charity, unlike conventional banks where they
take it as income on their balance sheet.
Islamic jurisprudence has developed a systematic methodology
to derive SharÊÑah rulings based on the sources of Islamic law. In
order to arrive at a reliable ruling on a new issue, a qualified Muslim
jurist should exert his efforts according to that methodology. SharÊÑah
norms relating to muÑÉmalÉt (commercial transactions) are based on a
famous Islamic legal maxim: permissibility is the starting assumption
for commercial transactions (‫باحة‬ ‫ال�إ‬ ‫شياء‬‫أ‬�‫ال‬ ‫في‬ ‫الاصل‬) (Kamali, 2002: 67).
Kamali (2008) further points out that “the principle of permissibility
(ibÉÍah) also means that freedom is the normative position of SharÊÑah
with regard to foodstuff, animals on the land and sea, customary
matters, commercial transactions and contracts. All are permissible
in the absence of clear prohibitions.” YËsuf al-QaraÌÉwÊ says the
following regarding the term aÎl (origin, source or foundation):
“I would like to emphasize here that the principle of natural
permissibility is not only limited to things and objects but also
includes all human actions and behavior not related to acts of
worship, which may be termed living habits or day-to-day affairs.
Here again, the principle is that they are allowed without restriction,
with the exception of a small number of things which are definitely
prohibited by the Law-Giver” (al-QaraÌÉwÊ, 1995: 15).
This maxim implies that any commercial transaction is
permissible as long as it does not contain any prohibited elements
such as ribÉ (interest), gharar (excessive uncertainty), maysir
(gambling) and prohibited acts such as consuming alcohol and
promoting pornography. The key principle of this maxim is that, in
muÑÉmalÉt matters, the SharÊÑah norm is permissibility. It is for the

person who thinks otherwise to adduce evidence from the sources of
Islamic law to prove that a particular act contains prohibited elements.
As the underlying structures for SharÊÑah-compliant credit cards are
SharÊÑah-approved nominate contracts, it goes without saying that
these credit cards are in accordance with the principle of SharÊÑah.
Some of the criticisms are related to decisions of SharÊÑah boards,
where it is said that the decision is based on the legal forms rather
than on substance. It is submitted that the criterion of substance
over form should not be applicable to a SharÊÑah ruling. The Qur’Én
disapprovingly reports such reasoning with regard to the prohibition
of ribÉ:“[T]they say buying and selling are similar to usury, while
God has made buying and selling lawful and has prohibited usury.”
(Qur’Én, al-Baqarah: 275). If we were to apply the form over
substance argument, then a simple murÉbaÍah sale transaction where
the deferred sale price is payable over the agreed tenor, it could be
argued that this transaction should also be categorized as prohibited
as the substance is similar to a conventional loan.
Furthermore, the following ÍadÊth narrated by Anas is highlighted:
“Some meat that had been given to BarÊrah (the freed slave-
girl of ÑÓ’ishah) in charity was presented to the Prophet
(peace be upon him). He said, ‘This meat was charity for
BarÊrah, but it is a gift for us.’”
(Sahih al-Bukhari, Volume 2, Book 24, Number 572)
It is known that the Prophet (peace be upon him) was not allowed to
eat of food given in charity. The above ÍadÊth shows that the charity
that was given to BarÊrah was a different act; once BarÊrah became its
owner and gave it is a gift the prohibition of eating it did not apply
to the Prophet (peace be upon him). A close analysis of this ÍadÊth
shows that, though the substance was the same (i.e., meat given in
charity), form made a big difference in terms of what is permissible
and not permissible.
It is submitted that arguments like substance over form should
not be used in determining SharÊÑah rulings and caution should be
exercised before making any analogical opinions.

Nurbek Kenjebaev
However, regulators should address other considerations, such as
discouraging customers from getting into unnecessary debt, which is
also a key SharÊÑah concern, as well as requiring best credit practices
from the banks. When issuing credit cards, Islamic banks should avoid
using a structure which allows ‘replacement of one debt with another
(larger) debt’, as stipulated by the OIC Fiqh Academy Resolution No.
108 (2/12) (Islamic Development Bank and Islamic Fiqh Academy,
2000). Based on the analysis of the various SharÊÑah-compliant credit
card structures above, it is submitted that the tawarruq-based credit
card may fall within the prohibitions of the OIC FiqhAcademy unless
steps are taken to ensure that the customer is able to pay his debts.
In fact, by providing murÉbaÍah facility to settle the outstanding
amount, it will increase the amount of the debt which the customer
has to pay to the bank. In some cases, the bank is appointed as the
agent (fuÌËlÊ or uncommissioned agent) of the customer to enter into
another murÉbaÍah sale contract if the customer does not pay the
outstanding amount on the payment date.
Although, the customer has an option to cancel or confirm the
murÉbaÍah transactions performed by the agent, this is of little help
as the customer has to pay the outstanding amount in case he refuses
to ratify the murÉbaÍah transaction which amounts to cancellation
of the facility by the bank. Most of the time, the customer may
end up entering the murÉbaÍah transactions (to avoid cancellation
of the facility whereby all outstanding amounts will become due
immediately), which will increase his overall debt burden. Therefore,
the banks offering tawarruq-based credit card need to put robust
processes in place to minimize the abuse of credit cards. For instance,
they could put limitations on the number of murÉbaÍah transactions
once the client defaults on the first minimum payment, or they could
increase the minimum monthly payment amount to ensure that the
customer’s debt burden is not increased beyond his means. As the
purpose of credit cards is to provide a short-term liquidity solution
to the customers, the Islamic finance industry should take necessary
steps to ensure that this facility is not abused.

VI. CONCLUSION
It is submitted that SharÊÑah-compliant credit cards should not
be considered SharÊÑah non-compliant just because they imitate
conventional credit cards, so long as the underlying structure is
SharÊÑah compliant and duly approved by the SharÊÑah board of
the financial institution offering these services. If a patient goes to
hospital for surgery, he will leave it to the surgeon to execute the
surgery and submit his body for an operation trusting the surgeon’s
judgment based on the understanding that he is a qualified doctor
having completed his medical degree from the university. The same
attitude should be adopted with respect to qualified SharÊÑah scholars
and trusting their judgments without questioning their integrity with
respect to SharÊÑah-compliant financial services.

Nurbek Kenjebaev
References
AAOIFI (2010). Shari’a Standards for Islamic Financial Institutions. Bahrain:
Accounting and Auditing Organisation for Islamic Financial Institutions.
Al-Baghdadi (2010). The MukhÏaÎar al-QudËri. Kiani, T. M. (Translated). London:
Ta-Ha Publishers
Al-QaraÌÉwÊ, Y. (1995). The Lawful and the Prohibited in Islam. Kuala Lumpur:
Islamic Book Trust.
Bakar, D. and Rabiah, E. (2008) (Ed.). Essential Readings in Islamic Finance. Kuala
Lumpur: CERT Publications.
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Products and Services. Available at: http://www.bankislam.com.my/en/Pages/
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OIC Fiqh Academy (2004). Resolution No. 139 (15/5). Available at: http://www.isra.
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