Financial institutions provide credit cards as loans to credit card holders with the condition of paying an additional amount in case of delay in repayment of the full withdrawn amount from the card beyond a specific date.
Credit cards come with many benefits to their holders and issuers and have become part of our modern life. However, since they involve payment of interest by the cardholder to the issuer if there is a delay in repayment, Islamic banks attempted to make them comply with Shariah rules.
Credit cards issued by Islamic banks
In order to correct this relationship between the issuer and the cardholder, the structure has been adapted through different formulas; the most popular are the following two:
Credit cards based on ‘īna or tawarruq
Given that credit cards are used for financing, and given that riba is impermissible, some Islamic banks that do not have a problem with dealing in tawarruq and ‘īna have used them in structuring their credit cards.
The Islamic bank would first execute‘īna or tawarruq sale with the client and the amount payable to the client would be placed in a special account. Once the money is in the account, the client would be given a credit card with a credit limit that is equal to the amount in that account. Thus, when the credit cardholder uses his card, he pays from the money that he has from the ‘īna or tawarruq procedure and therefore, in theory, he does not borrow from the card issuer. The cardholder is requested to place in the account an amount equal to the amount used every month after the monthly bill is issued. This has to be done within a specific time period (equal to the grace period in a conventional card) to restore the credit limit again. If the customer is late in making repayments the bank does not charge “riba” from the customer but deducts from the difference between the two prices in ‘īna or tawarruq sale an amount equal to the amount that it wants to charge the customer for a delay in repayment. For example, if the bank sells a commodity on ‘īna to a customer for 12,000 deferred, and then buys it from him for 10,000 spots, the 10,000 is the credit limit of the card. This 10,000 is placed in the card’s account and not given to the customer. Then, when the customer is late in repayment for the given period, the bank charges what it wants to charge (the interest) from the difference between the two prices: 10,000 and 12,000, i.e. 2,000. If the cardholder repeats delay until the amount charged to the customer is 2,000, the bank requests the customer to sign another ‘īna or tawarruq sale.
This means that ‘īna sale or tawarruq does not come into effect if the cardholder always pays during the grace period, or returns the card without falling behind in repayments, because the client then would not have given the bank the ground to charge him any amount! The bank would simply write off 2000 if the customer returns the card.
From a Shariah perspective, we know that both underlying contracts (‘ina/tawarruq) are highly controversial and were ruled as impermissible by the Fiqh academies due to their essence being effectively no different from Riba loans. Hence, issuing credit cards based on them is impermissible.
Credit cards issued based on service ijārah
Credit cards provide a number of different services, such as not needing to carry cash, having the ability to purchase on the internet, and other possible benefits, such as membership to some clubs, gaining air miles, complimentary access to lounges, complimentary insurance, or discounts on some items. Hence, placing fixed fees on credit cards for services can be justified, as long as the original services are permissible.
The different types of services justify different types of fees. If the services of a gold credit card are higher than the services of a silver card this justifies a higher fee for the gold than the silver. The card issue it entitled to the fixed fee in return for services embedded in the cards regardless of whether the cardholder uses them or not. This fee is not related to use of the card as in the case of conventional cards, whether the card is used to its full credit limit or less than that, the fee paid is the same.
In reality, we see the Islamic banks issuing these cards waive the fee if the cardholder pays the full value of the items bought using the card during what is called the grace period. If he does not repay the full amount and leaves some of it, even if only a single dirham, the bank obliges him to pay the full monthly fee. Conventional credit cards pardon the cardholder from paying any additional amount if repayment occurs within the grace period, and Islamic banks do the same waiving their fees in order to remain competitive in the market. There is no Shariah issue with this practice, as what is given in return for a counter-value can also be given for free, as a gift (hiba).
However, credit cards contain a loan, which is the credit card limit that the issuing bank provides the cardholder. This credit cannot be formulated except as a loan, and profiting from a loan is impermissible, as it is riba. Hence, there are two things in a credit card: the service fee and the loan. A profit can be earned from the former, but not from the latter and thus, having them together as a sensitive issue because it is feared that the bank issuer my increase the fee on the services to cater for the loan. There is Hadith (Sunna report) suggesting the prohibition of joining a sale with salaf, i.e. a loan, and ‘sale’ in the Hadith refers to any exchange contract, including Ijarah, as the jurists say. The reason for the prohibition is that the price of the sale item could increase or decrease in relation to the loan. The lender may state, for example, I lend you 100 on the condition that you buy this from me for 20, even though it’s market value is less than that; or on the condition that you sell me this for 20, even though it’s market price is higher.
However, if there is no suspicion of Riba because the price is the market price, then the traction can be validated. Applying this to credit cards, the following two conditions have to be fulfilled:
- The fee charged for credit card services does not exceed than the normal market fee for these services independently from the credit cards.
- The fee does not change if the credit limit changes unless a credit card with a higher credit limit provides extra services, whereby the market value of these additional services makes the difference compared to the lower credit card limit.
For example, the monthly fee for a gold card is 50 dollars, and the credit limit is 10,000 dollars, and the monthly fee for a platinum card is 100 dollars with a credit limit of 20,000 dollars. There is no difference in the services between the two cards except for complimentary valet car parking for a limited number of times per month, and the monthly market value for this service is only 10 dollars. This makes the remaining amount (40 dollars) in return for the extra credit limit, and thus it is unlawful because it is effective against the loan, which is supposed to be free of charge.
In conclusion, the credit card Ijarah model is principally valid as long as the fee remains against the services, so that the loam remains free of charge as in the way described above.
Holding a conventional credit card when no real Islamic alternative is available
If the cardholder is genuinely in need of the card and he takes necessary precautions to prevent payment of riba by making automatic deductions of the value of the bought items from his bank account, and he is also cautious that he always has enough balance in his account to cover the card expenditure, then the only issue remaining is his undertaking to pay interest in case he defers payment. However, this is something cardholders can never negotiate and it is effectively useless if cardholder exercises extra caution to avoid payment of any interest.