The credit card "plastic money" is an essential mode of payment in today's society and its important role in e-commerce transactions is indisputable. But how does Islam accept the credit card as a medium of payment? What are the underlying principles required by Shariah for credit cards? What are the possible legal issues and how does Islam address these issues? What are the differentiation factors in Islamic credit cards?
Islam permits the use of credit cards as long as they do not involve usury. For example, if withdrawing a cash advance from the credit facility will result in payment of interest, it is prohibited. Similarly, an additional interest charge due to delay in payment is also prohibited. However, if the credit card serves as a charge card, where the customer only pays the principal amount used, plus service charges, it is permitted.
Bay al-Inah Principle
The credit card concept is allowed by Shariah if it does not involve usury because "Allah (SWT) permits sales and prohibits usury."
AmBank Berhad offers an Islamic credit card in Malaysia called Al-Taslif that was launched in 1992. The Al-Taslif credit card uses Bay Al-Inah. In Bay Al-Inah, two separate contracts are used, namely Albay' Al-Mutlak (cash sale) and Bay Al-Bai Bithaman Ajil (deferred sale), which are both carried out one after another. There are times when the deferred sale precedes the cash sale, but this is not an issue because the end result is the same.
For example, the bank might sell an asset to the customer and the buyer would be required to pay with equal installments for a specific time period (deferred sale). The installment sale by the bank would be followed by the buyer executing his rights to sell the asset back to the bank on a cash basis (cash sale). The deferred sale should be higher than the cash sale in order for the bank to gain profit from the transaction.
How does AmBank apply this concept of Al-Inah in its Al-Taslif Islamic credit card? If an applicant meets the standard requirements for a credit card facility, AmBank will identify collective or individual assets owned by AmBank whose market value is equivalent to the credit facility. So if the credit facility is worth RM 10,000, then the value of the identified assets must equal RM 10,000 as well.
The assets involved need to comply with Shariah principles:
The asset should exist at the time of the contract. However, exceptions are made for some types of contracts such as Salam, Istisna', Jualah and Ijarah.
The asset must be legally owned.
The asset should bring benefit or significant result for the contracting parties.
The subject matter should have commercial value.
AmBank sells the identified assets to the customer. The selling price is the sum of cost and profit (which is normally quoted in percentage). The next contract is executed when AmBank buys back the asset at cost and cash is given to the customer. The customer then uses this cash to buy goods and services using the credit facility provided.
Why is this transaction not considered usury? The reason is that the mark-up price is based on trade and services, not on a loan. Any transaction that is backed by assets is permissible under Shariah in Malaysia. Therefore in the theoretical sense, an Islamic credit card is not based on lending, but rather business in trade and services, whereby the bank sells and buys back at lower cost to gain profit.
Controversial Doctrine
Bai Al-Inah, or buyback sale, is used to validate credit card transactions, but this doctrine is debated among Muslims. The doctrine is not recognized by some scholars, including the Ulama from the Middle East. It is recognized in Malaysia.
The general sources of Islamic law start with the Quran and Sunnah of the Prophet (s.a.w.). These two sources are vital for other secondary sources such as Ijma, Al Masalih Al Mursalah and Istihsan, as those secondary sources must be within the boundaries set by the two primary sources.
Allah says in the Holy Quran: "O you believe! Obey Allah and Obey the Prophet and those charged with authority among you. If you differ in anything among yourselves, refer it to Allah and His Messenger, if you do believe in Allah and the last Day: that is the best, and most suitable for final determination." (Q:4:59)
In the primary sources, there are no clear indications of the validity of the Bai Al-Inah transaction. There is one hadith saying that this type of transaction is not valid; however, the authenticity of the hadith and the class of the hadith are unknown. Since the Quran and Sunnah are silent about Bai Al-Inah transactions, Islamic scholars use secondary sources of rulings to justify the validity of Bai Al-Inah. Ulama in Malaysia consider all the aspects from primary sources on the socio-economy and practicality of Bai Al-Inah in the modern environment. The secondary sources must harmonize with the primary sources.
Creating a Better Life
Concerning Bai Al-Inah, the use of the Al Masalih Al Mursalah doctrine was adopted by Bank Rakyat to justify using such transactions in credit cards or personal financing. In the new era of globalization, many financial dealings are not exactly the same as practices in the time of the prophet (s.a.w.). Innovation of financial products has evolved due to the changes in technology and the times, as people try to create new things that can make life better. This is not only innovation in goods and services, but in financial products as well. The idea is to ensure a comfortable life, which is also a wish of Allah (s.w.t.) as evident in the following ayat: "Allah (s.w.t.) intends every facility for you; He does not want to put you to difficulties."
Al Masalih Al Mursalah can be applied to credit card transactions, since Allah wants us to have ease in life, but, of course, harmonized with the Quran and Sunnah so as not to deviate from Shariah teachings.
Sticky Issues
Among the advantages of using credit cards are convenience to the buyer, security and cost effectiveness, helping create a comfortable life. Although the use of credit cards is unlimited, especially in the digital world, issues surrounding their application need to be addressed so that acceptance among Muslims can be improved. However, we don't intend to give answers, as views among the members of Fuqaha' differ. Our intention is more to address potential issues and offer humble opinions.
Free Cash Advances
If you withdraw a cash advance from your credit card, there are charges on the outstanding balance until full settlement is made. If not settled, the charges (or interest) will continue to accumulate. The question is whether the Islamic credit card issuer is prepared to forgo charges on cash advance withdrawals. That would mean that the Islamic credit card would be offering a free cash line to the customer. However, from the bank's point of view, this option is expensive due to an asset and liability management conflict. In other words, the return rate for the deposit is higher than the interest rate charged to the credit facility. This may cause liquidity mismatch.
Late Charges
Sometimes late charges are imposed on customers who delay payment. Is this acceptable? In the case of the Al-Taslif credit card, there are no charges for late payment that is outstanding not more than 30 calendar days. In our opinion, if the late charges are put in place due to administrative costs to maintain problematic credit facilities, then they are acceptable. But if such charges are meant as interest, then they are haram. The question is why late charges are calculated as percentages of the outstanding balance, rather than as a flat rate. The banks claim that late charges are for maintenance costs, but it does not make any sense that they are calculated as percentages. Maintenance costs should be fixed and do not depend on the amount of the outstanding balance. The value of the outstanding balance should not be the baseline for calculation of the late fees. We recommend that the credit cards impose a flat rate for late charges, regardless of the minimum payment amount.
Control
There is a risk that a lack of validation of the parties involved in a contract of exchange may pose some security issues. For example, purchasing online is easy using credit cards. In e-commerce purchases, the parties involved in the transaction have never met and don't know each other. What happens if a minor makes a transaction without the consent of the credit card owner (such as parents)? Is the transaction valid? Generally, the transaction is valid as long as the service has been rendered and the benefits of the service have been utilized by the purchaser. But how can we minimize this unethical conduct? Perhaps there could be a PIN code system for credit cards in which a PIN code must be entered before a transaction can be made. PIN codes would help to minimize any misuse of credit cards by unauthorized users.
Bonus Points and Rewards
Many banks offer bonus points and reward systems with credit cards in order to maintain loyal customers as well as entice new ones. Are bonus points and rewards permissible? We think they are permissible because they are like gifts (hibah), as long as there is no interest-lending base.
There are several elements that differentiate Islamic credit cards from conventional ones:
No money lending. Since the credit card transaction is based on trade (Bai'), the element of usury that applies in conventional money lending is eliminated from the loan transaction.
No compounding of profit. The profit margin for the card issuer is fixed for the whole tenure of the installment purchase (between three and five years) and the actual profit is charged based on the remaining balance. The monthly profit is calculated on a monthly basis, based on the outstanding due or total transactions made for that particular month.
Control on transactions/merchants. Users are allowed to carry out only halal, or Islamically permissible, transactions. The bank will decline transactions for six categories of non-halal related activities, including bars and nightclubs, alcohol, escort and massage services and gambling.
The Islamic credit card can attract non-Muslim customers due to the attractive features offered. There will be no compounding factor for card issuers and the financing charges are on par with other credit card offers.
Acceptable Solution
Islam accepts credit cards as a medium of payment, as this type of transaction does not go against Shariah and it can give a more comfortable life to the Muslim community, according to the doctrine of Al Masalih Al Mursalah, in terms of socio-economy as well as the practicality of Bai Al-Inah in the modern environment. The underlying principles required by Shariah for credit card transactions are validated under Al Masalih Al Mursalah, even though the Bai Al-Inah doctrine is debated among Muslim scholars. The justification found in secondary sources harmonizes with the Quran and Sunnah.
Prof. Billah is the director of Global Trade and Investment Cooperation (OIC Zone), Islamic Chamber Of Commerce and Industry (ICCI) as well as professor of applied Islamic finance and dean of the Faculty of Islamic Finance, University of Camden, USA (Malaysian Center). He is also the founder of the Global Center for Applied Islamic Finance and author of http//.www.applied-islamicfinance.com. He works as an international Islamic corporate and financial advisor in different parts of the world and can be reached at masum2001@yahoo.com.
By Prof. Dr. Mohd Ma'sum Billah
© Business Islamica 2007
