Based on Islamic Finance principles, Conventional Credit Cards are considered as Unpermissible as it doesn’t comply with the Shariah requirement and Interest element is involved. Hence, Islamic Credit Cards were introduced and can be considered as one of the innovative financing products offered by Islamic Financial Institution to meet the demand for interest free credit cards. The slides will provide functions, features and contracts used in Islamic Credit Card.

1. Islamic Credit Card
Shariah Compliant Payment Instrument
By Lokesh Gupta
Head, Business & Technology Consulting
By
RM Applications Sdn. Bhd.
No.69-1 Medan Setia 1
Bukit Damansara
50490 Kuala Lumpur
Tel: +603-20932677
Fax: +603-20932607
Website : www.rma.com.my
Email : lokesh@rma.com.my
© 2012 RM Applications Sdn. Bhd. (The information contained herein is subject to change without notice)

2. Presentation Path
1-. Conventional Credit Card Overview
2-. Islamic Credit Card Definition & Evolution
3-. Modus Operandi of Islamic Credit Cards
4-. Islamic Credit Cards Contract
5-. Islamic Credit Card Features
6-. Challenges & the Way Ahead
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3. Conventional Credit Cards
 Conventional Credit cards are means of payment that involves the
concept of ‘Buying first and Paying Later’
 They are Plastic Money that serve as essential modes of payment in
today’s modern world
 They are symbols of monetary value and comes with a revolving
credit facility with a pre-approved credit limit and payment period.
 The customer is charged annual fees and interest on unpaid balances
after the grace period.
 They can be a liability, if they are used Unwisely !!!
“Conventional Credit Cards Offer People to Live Beyond
Their Means”
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4. Why Credit Cards are Preferred ?
 They offer flexibility to card holder to make payments for purchases.
 Hassle free payment mechanism and minimizes the need of carrying
cash.
 They enable easy payment schemes by spreading the payment for
large value purchases
 Globally accepted as an alternative mode of payment to cash and
cheques.
 It is an essential payment instrument to perform e-commerce
transactions
 Non monetary benefits such as bonus points, insurance and other
exclusive privileges in traveling, shopping & dining.
The speed, flexibility, convenience and wide acceptance
has made the credit card an essential financial tool
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5. Credit Card Payment Process
Txn Request with
Membership Cardholder
Registration Credentials
1 Credit Card Associations/Interchange
Txn Response
Txn Request 8
6
Txn Response
7 Payment Network 5
Issuer Bank Acquirer Bank
Transaction Settlement
2 9 Txn
Card Txn
Repayment Response Request
Issuance
4
Merchant
Card Holder Transaction Status Confirmation Outlets
10
Performing a Cash Withdrawal /
Purchase / e-commerce Transaction
Credit Cards 3
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6. Why are Conventional Credit Cards Unacceptable under Islamic
Finance ?
 Interest is charged to the cardholder on unpaid balances after the
expiry of the grace period and interest is strictly prohibited in Islam
 No restrictions are imposed on the usage of these cards for making
any type of payment.
 The insurance currently offered under these cards is conventional and
may not be compliant with Shariah principles.
 Compounding interest is charged on the Outstanding amount
 Cash advances using these carda are also treated as interest bearing
loans.
 Signing of a conventional credit card agreement is not permissible as it
is a commitment to do something, which is forbidden even if the client
pays the outstanding amount with in the grace period
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7. Islamic Credit Card Definition
Fatwa by Dr. Monzer Kahf (a prominent economist and counselor)
“Signing a credit card contract and using it in a way that generated
payable interest is haram. It is then borrowing on interest. Signing
the contract, using it, and making the payments within the grace
period and making no cash withdrawals (whenever cash withdrawals
generate interest), is permissible because it amounts to a contract
that gives you a choice to deal or not to deal with interest”.
Source: www.islamonline.net / Prof. Dr. Mohd. Ma’sum Billah
• Islam permits the use of credit card so long it does not involve the
element of usury
• The credit card serves as a charge card, whereby the client pays only
the principle amount and the service charges is permitted.
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8. Evolution of Islamic Credit Cards in Malaysia
Islamic
Year Product Name / Bank
Contract
 Am Bank Malaysia has launched the Al
2001 Bai Inah
Taslif Credit Card in Malaysia
 Bank Islam Malaysia launched its Bank
2002 Bai Inah
Islam Card – i (BIC) on 23rd July 2002
 Bank Simpanan Nasional (BSN) launched
2006 the AL AIMAN credit card on 22 December Bai Inah
2006
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9. Bai Inah Practice in Malaysia
1
Customer approaches the bank for Financing
3
Bank Sells the asset on deferred payment
basis at Sale Price (Purchase Price + Profit)
4
Buy back the asset at Purchase Price
5
Payment of Purchase Price
6
Customer Payment of Selling Price as per agreed Bank
Installment Plan 2
Asset
Identification
Asset
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10. Islamic Credit Card Practice in Malaysia
1. Bank will sell an asset to the customer at
selling price RM 23,600 (purchase price +
profit) on deferred basis
2. Bank will buy the same asset at purchase
price RM 20,000 from the customer
6. Card along with
3. Signing of Bai Inah contract
ATM PIN is mailed
to the customer
5. Tagging of
agreed purchase
price as maximum
Bai Inah
limit to the card
Purchase &
4. Disburses the Sale
agreed purchase Contract
price into internal
Wadiah account
Al-Wadiah
Account
Source :www.bankislam.com.my
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11. Islamic Credit Card Account Structure
Islamic Credit Card
Bai Inah Profit Al Wadiah Qardh Hassan
(Max Profit for Bank is (Funds avaiable to Card (Extra Limit granted during
RM 3,600) Holder RM 20,000) emergency situation)
Fund Utilization
Retail Online Payment Cash
Purchases (e-Commerce) Withdrawals
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12. Requirement for Bai Inah Contract
 There must be two separate contracts:
• Sale Contract : First the contract of sale by bank to customer at
Sale Price (Purchase Price + Profit) on deferred payment terms
• Purchase Contract: Second contract is for repurchasing of same
asset by the Bank from the customer at Purchase Price on cash
terms.
 The sequence for execution of contracts must be followed.
 The merchandise or the asset must not be a ribawi material in the
medium of exchange category (Gold, Silver or Currency) because all
payments for purchases are made in money
 These contracts must have the necessary elements and must meet
the necessary conditions
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13. Essential Elements & Conditions for Bai Inah Contract
Elements Mandatory Characteristic / Conditions
Buyer / Seller  Must be at least 18 years old (Attains the age of Puberty -
(baligh)
 Must possess sound mind (aqil)
Asset/ Merchandise  Exist at the time of transaction
 Bank must be the owner of the merchandise
 Must be of pure substance (lawful)
 Must be of some use or some value
 Must be able to be delivered by seller to the buyer
 Known to both the seller and buyer (i.e. full details of the goods
is known to both parties)
Price  Must be known to both the seller and the buyer
 Must be with the quantum and type of the currency specified
Contract (Aqad) -Offer  Absolute and in definite and decisive language.
and Acceptance - In the past or present tense.
- Not in the future or imperative tense.
- Not conditional
- Not limited to a certain period.
 The acceptance must agree with the offer.
 The offer and acceptance must be made at the one and same
meeting or session.
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14. Bai Innah Contract
 Except the Shafie’s school, Maliki, Hanbali and Hanafi’s schools of fiqh
regard the Bay’ as void as their view is the motive of the contracting
parties determine the legality of the contract. Thus, the intention is illegal.
 The majority were of the opinion that bai' inah was not permissible
because it was the zari'ah (way) or hilah (legal excuse) to legitimise riba
(usury).
 The another reasoning is that the contract is ethically flimsy when applied
in this manner (Virtual Buy & Sale), the sale transacted is a fake sale and
thus just a means of masking Riba.
 The SAC, at its fifth meeting on 29 January 1997, passed a resolution that bai'
inah is a principle that is permissible in in Malaysia.
 When institutions or individuals are in need of capital for a specific purpose they
can use this method of payment, using their assets as mortgage. As they still
need the assets, this method allows them to liquidate without losing the asset.
Source :www.infad.kuim.edu.my (Fatwa on Bai Inah) / www.bankerme.com (Can a Credit Card ever be Halal)
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15. Islamic Credit Card Features
 100% Shariah compliant with no elements of Riba and Gharar involved
 World wide acceptance as cards are Issued under Master Card / Visa
Card (Brand Owner)
 Supplementary Card Facility
 Cash Advance Facility
 The Profit Margin and Selling Price is fixed and is known upfront to the
cardholder
 The usage of card is limited to permissible activities only. The Islamic
Card issuer will decline transactions for six categories of non-halal
related activities, including Bars, Discos, Night clubs, Purchase of
Alcohol/Non Halal Goods, Escort and Massage services and Gambling
 Various types are available based on the Client’s requirement such as
Classic Card, Gold Card and Platinum Card
 Bonus points are awarded on usage of cards and can be exchanged for
gift or waiver of annual fees etc.
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16. Comparison of Islamic Credit Card Practices in Malaysia
Features Al Taslif Credit Card Bank Islam Card
Card Type Platinum / Gold / Classic Platinum / Gold / Classic
Annual Fee RM688 /RM150 / RM 75 RM 388/ RM 130 / RM 60
Profit/Interest Charges: 1.5% p.a of outstanding amount / daily basis 1.5 % p.a of outstanding amount / daily basis
Cash Advance Fee RM 50 for each transaction • RM12 for RM 1000 withdrawal up to 50% of financing
limit at Bank Islam ATM
• A fee of 3% of cash withdrawal amount or RM50,
whichever is higher is charged for every cash
withdrawal made at other bank’s ATM.
Minimum Monthly 5% of outstanding balance or minimum of 5% of total outstanding or minimum of RM50, which ever is
RM50, which ever is higher higher
Repayment
Penalty Charge/Late 1% p.a of the minimum repayment amount due 1% compensation handling fee of minimum repayment or
subject to a minimum of RM5 or maximum of RM5, which ever is higher
charge RM12 per card whichever is higher
Profit-free period / grace 20 days from date of monthly billing statement 20 days from date of monthly billing statement (for retail
(for retail transaction) transaction)
period
Other Facilities / • 3 free-for life supplementary cards • Free Group Takaful coverage & benevolence expenses
• Zakat Payment Incentives • Profit Rebate
Promotion incentives • Bonus Point Incentives • Zakat Payment Acceptance
• Annua Fee Waiver subject to certain • Over limit amount (Qardhul Hassan) – no levy but settle
conditions (minimum 12 transactions (retail/ amount within specified period
cash advance only) • Annual Fee Waiver
Source :www.ambg.com.my/ www.bankislam.com.my
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17. Comparison of Islamic & Conventional Credit Card
Features Conventional Credit Islamic Credit Card
Card
Interest Free No Yes
Shariah
No Yes
Compliant
No, and the total liability is
Compounding
Yes known upfront to the
Factor
customer
Early Payment
No Yes
Rebate
Non Permissible
Transaction No Yes
Filtering
No, only conventional
Takaful Coverage Yes
insurance is offered
Zakat Payment Yes
No
Acceptance
Source :www.ambg.com.my / www.bankislam.com.my
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18. Challenges & The Way Ahead…
 Structuring of an international Shariah compliant credit card
 Stress on Ethical Marketing
 Create Customer Awareness
 Stress on Usage of Debit Cards or Charge Cards instead of Credit
Cards
 Usage of Qardh Hassan following the Charge Card principle could
be a viable alternative
 Encourage prompt payments by introducing incentives such as
early payment rebates
 It is a collateral free and revolving financing and can become a
strong financing tool for customers to avoid the traps of loan sharks
‘Ah Long’
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19. Thank You
lokesh@rma.com.my
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20. Disclaimer :
The materials presented in the slides are provided voluntarily. The
information is made available in good faith and is derived from sources
believed to be reliable and accurate at the time of release.
The user of the slide is responsible for making his or her own decision
about the accuracy, reliability and correctness of information found. We
do not accept liability for any loss or damage incurred by reliance on
the information provided.
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