Shariah Credit Card - the Structure and Usage

Source: http://nibrahosen.multiply.com/journal/item/31

Islamic Finance Institutions is prohibited to issue a credit card, where such issuance is based on
the contract granting the cardholder the right to revolving credit terms that involve interest
or riba, because riba is prohibited in term of either taking or giving something such as services
or money. The prohibition of riba is derived from the holy Qur’anic texts, direct and certain
traditions of the prophet (prayer and peace of Allah be upon him) and the consensus of Muslim
scholars, rendering its prohibition well known in the Muslim community as a self evident.
However, the issuance of credit card free from riba, or from any other legal prohibition
is permissible, as accordance to the AAOIFI standards.

A shariah credit card should be designed to cater the need of Muslims and non-Muslims who
many of them are still using the conventional credit card based on interest. Most of Islamic
scholars have declared interest as Riba. As we all know, conventional credit card charge interest
of around 42% per annum, which means 3.5% per month and compounded. Many people are
not able to pay off their credit card debts, and many have suffered from very horrible
consequences for not being able to pay off their credit cards debts.

A shariah credit card on the other hands has a unique structure, which is free
from riba(interest). This paper would elaborate the definition of the credit card and shariah
credit cards, the AAOIFI of standard rulings of the credit card, DSN-MUI fatwa on shariah
card, a shariah credit card structures, the benefit, and conclusion.

Credit Card

A Credit Card definition According to the AAOIFI standard is as follows:

1. A Credit card is a revolving credit facility within the credit limit and credit period is
determined by the issuer of the card. It is also a mean of payment.
2. The holder of the credit card is able to pay for purchases of goods and services and to
withdraw cash, within the approve credit limit.
3. When purchasing goods and services, the card holder is given a free credit period, during
which the amount due should be paid and no. interest is chargeable. The cardholder is also
allowed to defer paying the amount due and is charged interest for the duration of the credit. In
the case of withdrawal, there is no free credit period.

Shariah credit card

A shariah credit card is similar to the conventional credit card except it is not permissible for
an institution to issue credit cards that provide interest-bearing revolving credit facility,
whereby the cardholder pays interest for being allowed to pay off the debts in installment. If
the institution obliges the cardholder to deposit a sum of money as a guarantee and this
amount is not available for the use of the card holder, then it must be made clear that the
institution will invest the money for the benefit of the cardholder on the basis of mudharabah
and that any profit accruing on this amount will be shared between card holder and the
institution according to a specific percentage. The institution must stipulate that the
cardholder may not use the card for purposes prohibited by the shariah and that the institution
has the right to withdraw the card in case such a condition is violated.

AAOIFI standard rulings on shariah credit card

1. It is permissible for institution to join the membership of international credit card regulatory
organizations, provided the institutions avoid any infringements of shariah that may be
prescribed by those organizations.
2. It is permissible for the institution to pay membership fees, service charges and other fees t
international credit card regulatory organizations, so long as these do not include interest
payment, even in an indirect way, such as in the case of increasing the service charge to cater
for the granted credit.
3. It is permissible for the institution issuing the credit card to charge a commission to the
party accepting the credit card, at a percentage of the purchase price of the items and services
purchased using the card.
4. It is permissible for the institution issuing the credit card to charge the cardholder
membership fees, renewal fees and replacement fees.
5. It is permissible for the cardholder to withdraw an amount of cash within the limit of his
available funds, or more with the agreement of the institution issuing the card, provided no
interest is charged.
6. It is permissible for the institution issuing the credit card to charge a flat service fee for
cash withdrawal, proportionate to the service offered, but not a fee that varies with the amount
withdrawn.
7. It is not permissible for institution to grant the cardholder privileges prohibited by the
shariah, such as conventional life insurance, entrance to prohibited places or prohibited gifts.
8. It is permissible to grant privileges to the card holder that are not prohibited by the shariah,
such as priority right to services or discounts on hotel, airline or restaurant reservations and
the like.

Dewan Syariah Nasional Indonesia’s Ruling on Shariah credit card

In order to understand more about shariah credit card, let us have a look of the Fatwa
concerning shariah card or shariah credit card from Dewan Syariah Nasional (DSN)–
Indonesia National Shariah Board- the highest authority of controlling and monitoring of
Islamic Finance Institution daily operations.
FATWA
DEWAN SYARI'AH NASIONAL
NO: 54/DSN-MUI/X/2006
In the matter of
SHARIAH CREDIT CARD
The details of fatwa of DSN – Dewan Syariah Nasional concerning Shariah Credit Card:
First: The General Rules
In this Fatwa, the meaning of Shariah Credit Card
1. Shariah Credit Card has the same function with credit card that has a
lawful relationship a between parties in any established jurisdiction, based on the principles
of shariah as directed in this fatwa.
2. The parties involved are the card issuer (mushdir al-bithaqah), card holder (hamil al-
bithaqah) and card acceptance/merchant (tajir or qabil a-bithaqah).
3. Membership fee (rusum al-‘udhwiyah) is the payment for using the services of card issuer.
4. Merchant fee – refers to the fee that is given by the merchant to the card issuer as the
payment (ujrah) of being the agent service (samsarah), marketing (taswiq) and billing payment
(tahsil al-dayn).
5. Cash withdrawal fee is the payment for using the facility of cashwithdrawal (rusum sahb al-
nuqud).
6. Ta’widh is compensation payment for the card issuer resulting from card holder late
payment.
7. The late charge fee is the late payment cost to be charged to the cardholder which will be
given to charity.

Second: The Ruling

Shariah Credit Card is permissible as accordance to this Fatwa.

Third: The Rules of aqad

The Shariah Principles of credit card contracts are:
a Kafalah; the card issuer is the guarantor (kafil) for the cardholder on behalf of the merchant
for all the liability (dayn) that occurred as a result of the transactions between the cardholder
and the merchant, and or cash withdrawal from other Banks or ATM (not from the bank or
ATM of the card issuer) On this guarantee agreement, card issuer will receive a fee (kafalah bi
ujrah).
b.Qardh; in this case cardholder acts as the lender (muqridh) to the card holder
(muqtaridh) through the cash withdrawal from the Bank or ATM of the card issuer.
c.Ijarah; in this matter the card issuer is the service provider of payment system and services to
the cardholder, for this services, cardholder is required to pay a certain amount of membership
fee.

Fourth: The Ruling on shariah credit card limitation (Dhawabith wa Hudud)

a. No interest bearing.
b. Not to be used for non-shariah compliance transactions.
c. Will not be encouraged for over spending (israf), by setting - up a credit limit.
d. The main cardholder must have the financial capability to pay his obligation in timely
manner.
e. Do not render to non-shariah compliance facility.

Fifth: The Ruling on Fee

a. Card issuer is entitled to receive membership fee (rusum al-‘udhwiyah) including cardholder
membership renewal fee as a service payment (ujrah) from the cardholder for the permissibility
of render the card facility.
b. Merchant fee- card issuer is permissible to receive any fee derived from the object price of
the transactions or services as a wage (ujrah) being the mediator (samsarah), marketing
(taswiq) and billing collection (tahsil-al-dayn)
c. Cash withdrawal fee- card issuer is permissible to receive a certain amount of fee from
cardholder withdrawal (rusum sahb-al-nuqud) as an income for the service of using this facility
and the amount should be fixed, not depend upon the amount of withdrawal.
d. Kafalah fee- card issuer is permissible to received fee on kafalah/guarantee agreement frrom
the card holder.
e. All method of payments mentioned above point a,b,c and d is determined up front during the
applying for the card in transparency and fixed in term, except for the merchant fee.

Sixth: The Ruling on Ta’widh – Penalty payment

a. Ta’widh – Penalty - card issuer permissible to charge ta’widh a penalty payment, which is the
compensation from the expenses incurred by the card issuer resulting from the card holder late
payment on due date.

b. The late charge- card issuer is permissible to charge late payment fee which will be given to
charity.

Seventh: The Closing Rules

1. In any case that one of the parties is failed to fulfill their obligations or there is a dispute
between them, the dispute settlement will be done thorough Shariah Arbitration Institution or
the Shariah court, only if the negotiation process is a deadlock.
2. This fatwa is valid since the date of its endorsement and if in the future there are some errors
to be found, this fatwa will be altered and rectified accordingly.
Jakarta, 18 Ramadhan 1427 H / 11 Oktober 2006 M

Shariah credit card structures

Shariah credit card has the same function as conventional credit card except it is a non interest
bearing credit card. What make this card different from the conventional credit card are the
contract structures. Shariah credit cards consist of three contract structures or aqad,
namely Ijarah, Kafalah and Qardh.
The three contracts, or 'aqad’, can be distinguished as follows:
1. On the Ijarah scheme, the card issuer acts as the provider of payment and service system for
the card holder. The service provider in this case for example : Cirrus, Master Card or Visa
International. The Customer is using the service from the international organization through
the Bank. The Bank uses their payment services on behalf of its customers. For the provision of
this service, the card holder is charged annual fee.

2. For the kafalah transaction scheme, Bank as the card issuer, acts as the guarantor (kafil) for
the card holders against the merchants, of all obligations to pay (dayn) which arise from the
transactions between card holder and merchant, and/or cash withdrawal from banks other than
the ATM of the bank issuing the card. Based on kafalah, the card issuer can accept a fee
(Kafalah bi Ujrah).

3. Under the Qardh scheme, the card issuer acts as the lender (muqridh) to the card holder
(muqtaridh) through the cash withdrawal from the Bank or ATM of the card issuing bank. The
card holder is therefore obliged to return the same amount of funds he withdrew at the time.
The administration fee of the customer using the service of the bank or ATM machine to
withdraw cash is in fixed amount/ per transaction.

Shariah credit card fee structures

Shariah credit card is a product of personal/cash financing (see table 1) the product feature
are: no asset ownership and ease at withdrawal. Credit card issuer is allowed to receive 3%
profit of the card holder purchases from the merchants .The usage of card is limited by the
issuer bank, using the credit card above the limit is not permissible or subject to penalty
payments. Term of financing is for short tem as the card holder must pay off his outstanding
balance and total purchases at the maximum of 21 days from the date of purchased. Credit limit
is determined based on personal income and creditworthiness of the customers in other Banks.
The total purchases are guaranteed by the Bank without collateral and the total outstanding
balance is covered by Takaful or Islamic insurance company.

In the case that the cardholder did not pay his obligation on the due date the Bank will charge 2
kinds of fees. The first one is late payment fee, ta’widh, for the fixed amount / month for the
penalty or compensation payment of late payment. The second one is late payment fee which is
charged to the cardholder around 3% of the outstanding balance which will be given to charity.

Table 1. Product feature, and fee structure

Product type Shariah credit card

Contract (s) Ijarah, Qard, Kafalah

Product Features No asset of ownership, ease at

withdrawal. There is a credit limit set by

the credit card issuer/Islamic Bank.

Price Structures Profit from merchants 3% of card

holder’s transactions.

Tenor or Period of financing Short term – revolving

Quantum or Financing amount Based on monthly income

Security Bank Guarantee and Takaful coverage

Risk Credit risk and shariah compliance risk.

The Benefits of using shariah credit card

1. shariah credit card is a riba free and easy to use as a medium of payment.
2. shariah credit card uses a lease system of Islamic contract or aqad as compliance to the
shariah principles, such as Ijarah. It is not a loan contract as provided by conventional credit
card issuer.
3. Less expensive compare to conventional credit card in term of annual fee, late payment and
interest which is compounded.
4. Competitive and fair in pricing as it employs a fee calculation which appreciates partial
payment.
5. Insurance covered from Takaful operator in case the customers do not have the capability to
pay off the outstanding balance due to the misfortune, the insurance company will take his
place.
Conclusion
Other alternative to conventional credit card is shariah credit card which is a riba free revolving
credit facility; it should be designed to cater the need of Muslims and non Muslim as a medium
of payment. Although shariah credit Card structure is imitated the product of conventional
bank’s credit card, however, it is free from Maisir, gharar and Riba(Maghrib) elements.

References:
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Dompet Dhuafa
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luncurkan Dirham Card.
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Panin Life Syariah)
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10. Miss. Ati, Bank Danamon Syariah Card Centre staff.
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12. Miss. Rini Bank Danamon Syariah Card Center staff
13. Mr. Agus Syabarudin Product Development and Innovation Manager of Bank Danamon
Syariah.
13. Mr. Bayu Bank Danamon Syariah Card Center Supervisor.
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15. Mr. Adit - Conventional credit card holder.
16. Mr. Hengky Erlangga - credit card holder.
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18. Mr. Aries - Dirham card holder.
19. Mr. Rizki - Dirham card holder.
20.INCEIF 2008, Structuring financing module-IB2001