Islamic credit cards are still a long way off their conventional banking peers, but it seems the time has come for issuers to look at ways to package them better and distribute them more aggressively. In the last two years the market has seen new launches, but Islamic cards continue to languish and are estimated to be less than 10 per cent of the Islamic savings or current accounts with Islamic banks in the UAE. Various reasons are cited for this but, above all, experts say, the lack of enthusiasm of Islamic customers to use an Islamic card can be attributed to lack of awareness.

In the UAE, most of the Islamic credit cards today offered by banks are variances on the fee-based structure. This means that unlike a conventional credit card holder, an Islamic card user does not pay interest on his outstanding, but an upfront fee instead that allows him to make part payments and rollover his debt to the next payment cycle. Some of the Islamic banks return a part of the upfront fee to an Islamic card holder if he repays his credit in time.

For many new users used to a conventional credit card, the structure seems complex, mainly because they have to pay for utilisation of the card upfront. This has been one reason why converting from conventional to Islamic credit card hasn't been easy compared to shifting from conventional bank accounts to Islamic bank accounts for many customers.

Says Wasim Saifi, executive vice president and head of retail and business banking with Dubai Islamic Bank (DIB)Dubai Islamic Bank (DIB): " In DIBDIB alone we have an upward of 500,000 accounts, current and savings together, but the total number of Islamic credit cards issued by all Islamic banks in the UAE is less than 100,000 cards today. These figures indicate that much more needs to be done with Islamic credit cards."

While Saifi feels that the low number in the credit card product offers a significant potential for growth, Faisal Aqil, Emirates Islamic BankEmirates Islamic Bank's general manager for retail banking, sounds more conservative in the medium term and he feels that the UAE market is saturated with everybody carrying multiple number of credit cards in their wallets. He argues that unless Islamic credit cards offer attractive loyalty programmes and discounts, it will not be easy for them to attract customers.

"Less than 100,000 cards in two years that Islamic credit cards have been around is not a big number for the UAE market. But you have to see the competition that we have in the market. And unless we offer travel benefits like miles as part of our loyalty programme, we will not be able to attract customers in big numbers. But then these have cost implications. So, we will have to see how it works out in the future," he says.

Challenges
One of the challenges of Islamic credit cards is the structure, but users are getting used to them, gradually. Aqil says: "We found the structure that we use to be slightly complicated, but understood. Besides, other Islamic banks also use a similar model and Shari'ah does not allow us to change structures easily. So, we will refine our product to make it simpler in the future, but I don't think we will make any changes to the structure itself."

DIBDIB also has a similar approach towards its card product. Saifi, like Aqil feels that the current DIBDIB card product needs tweaking to make it simpler for people while packaging them better with more benefits for users.

In fact, in the quest towards making the fee-based structure simpler, Standard CharteredStandard Chartered's Islamic Saadiq card, which was launched earlier this summer, has come up with a standard solution of charging a monthly account maintenance fee of AED150 for its Saadiq Visa gold card, which is only charged if the payment due from the cardholder is not paid on time.

The Saadiq Visa gold card has an annual fee of AED500 like any other normal card, while AED150 is the upfront fee that a cardholder has to pay. Unlike some other cards, the Saadiq card has a clearer fee structure and does not combine the annual fee with the upfront "account maintenance" fee.

Ghazanfar Naqvi, director and head of Islamic products with Standard CharteredStandard Chartered's Saadiq, explains: "Our model is the next step in the evolution of Islamic credit cards. We charge an annual fee on the card, while the fixed account maintenance fee is charged on the balance kept in a service account. This occurs when the full payment does not come when it is due and the balance is transferred to the service account meant for this purpose. No maintenance fee is charged on the service account if the balance is paid in full."

Significantly, Emirates Islamic BankEmirates Islamic Bank also now plans to change its fee payment cycle from quarterly to monthly, as a move towards making things simpler for cardholders.

However, challenges are not limited to how Islamic cards operate only, as there are a number of potential users who avoid Islamic cards because they are not fully convinced of their Shari'ah compliance. Saifi emphasises that a big challenge for DIBDIB in the future will be to convince a large number of its existing customers that the bank's cards are fully Shari'ah compliant.

While this is true, it should also not be forgotten that Islamic credit cards are still a new phenomenon. Saifi feels that once customers become more comfortable of the fact that the Islamic credit card offerings in the market today are genuinely Islamic, there will be many more using these cards in the future.

Opportunities
An increasing number of conventional banking customers, however, have begun to convert to Islamic cards as a result of this tactical approach towards convincing with Islamic banks focusing on customer education.

Says Saifi: "There is an education process taking place right now. There is a huge market for Islamic products and services with large numbers of customers are already banking with Islamic banks. It is just a matter of time before these customers begin using Islamic credit cards."

He further gives DIBDIB's example to say that despite the bank's total of upward of half a million accounts, less than 20 per cent of these account holders have DIBDIB's credit cards. As these customers realise that Islamic banks today are equipped to meet their 100 per cent banking needs, including their credit cards, it's likely that they'll prefer to carry an Islamic card as against a conventional card, he says.

"Despite their primary relationships with Islamic banks, many customers have continued to carry conventional credit cards. Also, among them those with strong Islamic beliefs have used their cards only for payments and not for credit purposes. But now we are offering a genuinely Shari'ah compliant card that not only helps their payment needs, but also solves their credit problems. So, I see great potential there," he explains.

Its credit card business is one of the best performing business segments for DIBDIB today, according to Saifi. The bank now plans to vastly expand its cards distribution through its growing branch network and also push the product through telesales and outdoor sales. The bank also plans to reach out to its corporate clients.

This apart, DIBDIB is getting into segmenting the market with the launch of a dedicated Al Johra credit card for ladies. Saifi says there will be more of segmenting for Islamic credit cards in the near future. Aqil also discloses that an Emirates Islamic BankEmirates Islamic Bank ladies card is on the drawing board and should be launched as part of the Al Reem offering of the bank for ladies. However, he adds that Emirates Islamic BankEmirates Islamic Bank will continue to target only the middle and upper segments of the market with its cards as part of its credit card strategy. Some of the plastic needs will be met by the bank's charge and debit cards programmes, he says.

Customer credit behaviour
One of the questions asked by some is: "Does the credit behaviour of Islamic credit cards users differ from those of the conventional card users? And from what Islamic bankers reply to that question, the short and long of it is that it is not. Says Naqvi: "Just because a customer is using an Islamic card, don't expect a customer to behave differently. We are living in the same society and there are customers who want to take their balance to the next month."

In fact, when one compares an Islamic credit card with that of a conventional credit card, it is to the disadvantage of an Islamic card issuer when the cardholder does not pay in time, as unlike the conventional banks Islamic banks cannot charge some of the late fee penalties and interests, says Saifi.

"We work in the same way as a conventional bank when it comes to collection. But in our case the pressure is even more as we cannot charge default fees. So, the moment we pass the due date of collection, the asset stops earning anything for us," he explains.

Aqil argues that this is the reason why, for those, who shift their balance to the next payment cycle, Islamic cards offer a tremendous opportunity to save on costs. And the next thing, he adds, is that with proper education, more users will know how to get the best out of their cards in the future.

The future
Although the Islamic credit card business may not be as lucrative or profitable compared to revenues earned from a conventional credit cards portfolio, Islamic banks are optimistic that in the next two years there will be a major shift in the ratio of Islamic cards to conventional cards in consumers' pockets in the UAE.

"I do not think Islamic banks will make as much money from their credit card business as their conventional peers as a good part of the conventional banks' income come from fees charged to defaulting customers. Our profitability declines if the portfolio gets into the delay stage. But I do see tremendous potential for the Islamic credit card in the next two years. And there is no reason why Islamic credit cards will not emerge as a primary offering for Islamic banks," says Saifi

Naqvi rounds it up when he adds that the success of Islamic credit cards will be a function of Islamic banking becoming more common. If more players start offering Islamic credit cards, you will see a boom quickly, he points out.

"A customer with an Islamic credit card is making a statement that he or she wants to enjoy the benefits of a credit card while staying close to their values. Islam does not prohibit enjoying the blessings of life, like owning a fancy car or travelling to places. Hence, a solid card with a strong loyalty proposition built around it will go a long way in making it a real success," Naqvi adds.

This article appears in the September 2007 issue of MONEYworks magazine.

© UAE MONEYworks 2007

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