The Middle East is cash heavy and banks aspire to modifythis reality, by weaning more and more of their customersfrom carrying paper money. Electronic cash is bettermanageable and more profitable for financial institutionsand thus the credit card industry is expanding into cardswhich they hope will appeal to regional customers –including a new variety of sharia-compliant credit cards.
As with all Islamic banking products, plastic is relativelyrecent. A Malaysian bank, AmBank, started foraying intoelectronic payments around 2001 when it launched its AlTaslif card in December of that year.
Hot on the heels of their Malaysian counterparts, banksoffering sharia-compliant financing options in the Gulf havebeen rolling out “Islamic credit cards” at an increasingpace since 2002.
Prior to the unveiling of Bahrain-based ABC Islamic Bank’sAl Buraq card in 2002, plastic money adhering to shariaprinciples available in the GCC was limited to debit cards.The cards were designed for use when traveling and backed byfunds in customers’ current or savings accounts, settled atthe end of every month and not allowing for spending beyondthe amount of actual cash a customer had.
Debit still rules over credit
Although credit card companies laud the Middle East as theworld’s fastest growing market for payment cards, the creditcard penetration in the region is relatively low and in mostcountries, debit cards are the rule. The sole exception isthe UAE whose residents account for one-third of credit cardholders in the region comprising the Middle East andPakistan, a study by MasterCard said.
Sharia-compliant banks had to overcome a number of hurdlesin developing cards that would appeal to their clientele.Islamic jurists consider standard credit cards haraam(sinful) for a variety of reasons. Charging interest orpaying interest is forbidden because it treats money as acommodity instead of an essentially valueless means forexchange. So the card issuers cannot charge interest, orribah, payments on cards whose balance is not paid in fullat the end of the month.
Furthermore, conventional credit cards often come withvariable interest rates. The amount one has to pay canfluctuate so when signing a credit card contract, one isignorant of the exact amount one will have to pay in a givenmonth. This uncertainty, or gharar, is also forbidden.
Finally, insurance policies linked to standard creditcards are, along with all conventional insurance, generallyconsidered forbidden because the concept itself isconsidered a form of gambling, or maysir. One can eitherbenefit from insurance when it covers insured losses or loseall they money paid in premiums if the need to cash in neverarises.
In order to tap into the market of people who want thebenefits of a credit card while still observing religiouslaw, Gulf banks have employed a variety of sharia-compliant finance concepts to enter the credit card arena.By charging different fixed fees the banks are able to stillturn a profit.
Based on the concept of ijarah, or lease or servicecharge, the UAE’s Emirates Islamic Bank, or EIB, has cardsthat let customers spend beyond their total cash bytechnically purchasing the item for them. The bank explainson its website that the card falls under the principle ofijarah by charging a yearly fee for the service of lettingcustomers hold an outstanding balance on the card. The fees,which in one example amount to $325 for a card with a $2,200(AED8,000) limit, can be paid quarterly.
The basic repayment structure is the same among thedifferent cards. Like a conventional card, users purchasegoods with the card, receive a statement of what they owe atthe end of the month and can opt to pay it all or pay aportion. The minimum due monthly is either a percentage ofthe amount owed – usually between five and 10% – or a fixedamount (AED100 for the EIB card in our example).
New concept
Saudi Arabia’s Samba financial group, another strongregional bank that has taken the Islamic business to heart,introduced its Al Khair card in 2003 under the tawaroqconcept. Under this concept, a cardholder who does not wantto pay the full balance on the card at the end of the monthwill agree to a tawaroq transaction in which the bankpurchases an asset at the cardholder’s expense. The bankresells the asset to a third party and the cardholder paysthe bank in set monthly installments.
Typically with tawaroq transactions, “the asset purchasedand resold is managed by the bank’s core banking system,”said a report released in April on sharia-compliant creditcards by the financial services company BPC Group. The assetcosts more than the amount due.
It sounds complicated and financing of purchases throughsharia-compliant credit cards can probably not be consideredlow-cost, although no independent statistics on averagecosts and consumer satisfaction with the cards in the youngindustry have been published.
There are also no numbers on the actual size of theIslamic credit card industry yet, but a growing number ofbanks is venturing this year into this segment, includingnot only regional banks but also multinational ones.
After First Gulf Bank started offering a sharia-compliant credit card under the name, Makkah Card, thisspring, it said that it “recorded high demand” fromcustomers for the product, which the bank called theregion’s first standalone, unsecured Islamic credit card.
In April, London’s Standard Chartered Bank threw its hatinto the Islamic finance ring by launching sharia-compliant services under the name saadiq, or truthful –including a fee-based card.
This incarnation of the cash-less payment system relies onthe service fee concept of ujrah. Under this system, insteadof paying an annual fee for the card, users pay a fee forthe use of borrowed money.
If a customer does not pay the full amount owed at the endof a month, the remainder goes into an account the bankestablishes. The remaining money is paid back monthly with aminimum payment due each month. Standard Chartered turns aprofit by charging a monthly maintenance fee each monthprovided there is money in the account.
Adding a twist, Saudi Arabia’s National Commercial Bankjust launched the first Titanium Islamic MasterCard, whichcomes with a cash-back program, cannot be used forun-Islamic purchases, and, according to one newspaperreport, invests a customer’s unpaid balance in commoditieseach month, keeping the profit.
