DUBAI -- Making Islamic credit cards a near substitute to conventional credit cards seems a bridge too far for local Islamic banks, despite the fact that all of these institutions offer some sort of card based credit options to customers.
"Islamic banks offer asset backed finance where cash transactions and interest are avoided. In most 'credit' situations the bank buys the 'asset', that could be a product or service on behalf of its customer, and the customer buys back the asset from the bank in installments. In the case of personal loans and credit cards too such asset backed transactions are possible," said Hussain Ahmad Al Qemazi, Chief Executive Officer of Sharjah Islamic Bank.
In the case of available Islamic credit cards in the UAE market today, most are payment cards (debit cards) or at best cards with credit option that comes with an yearly service charge that compensates for interest payments. Going by Islamic principles, the concept of the conventional credit card is forbidden on religious grounds.
Interest payments made when the outstanding balance is not repaid are Riba payments, and therefore not acceptable in Islam. Thus most banks offer cards, which requires the customers to pay off the entire card-spend at the end of each month. "If one commits to paying off the balance every month and therefore never utilises the credit option of the card, then the Riba avoided," said the General Manager, Personal Finance of an Islamic Bank. "The question of interest does not come into picture if the whole product is structured on regular repayment in full or part along with a pre-agreed profit rate (service charge)," he added.
The problem is when a customer defaults on repayment. If the default results in penalty it will be in violation of Shari'ah principles. In addition, regular repayment of balance in full would mean that the issuing bank will make little money from such a product.
Complexities apart, all four Islamic Banks in the UAE are offering credit cards. Dubai Islamic Bank offers Visa charge card, which offers up to maximum of 40 days free credit, and its operations are approved by Shari'ah. The Visa card usage is debited automatically once a month, to the customers' current or saving account maintained with DIB.
The major criticism against these products are that these are not credit cards at all. "For all practical purposes these are debit cards. The customer is getting a short-term loan, which is guaranteed against his account, and it is debited fully at the end of the credit period. At best it could be considered as a value added service," an said an industry source.
Emirates Islamic Bank (EIB) a new entrant into Islamic Banking has made a bold attempt to offer a fully Shari'a compliant credit card. The card is based on 'Ujra' or service charge. In this case, a yearly service charge is levied depending on the credit size. The card works similar to conventional credit cards, however with not interest charged. It only charges an annual fee which is payable in quarterly installments.
As far as the credit amount is concerned, customers should pay 10 per cent of the outstanding every month. Although free of interest, the card comes with a hefty annual fee of Dh800 for annual credit up to Dh6000. "Though the annual fee might look a bit higher compared to other conventional banks, the card is totally free from any element of interest. There is no hidden cost associated with the usage of the card," said an EIB official.
With the growing demand for Islamic 'credit' products many local banks are looking at possibility of designing innovative products. Malaysian banks offer Islamic credit products including credit cards on the basis of 'Bai' Al Inah' contracts that covers installment repayments over a fixed period. Customers are charged a fixed rate profit per month on the outstanding balance, with nothing to pay if the minimum payment is made on time.
The Bai' Al Inah contract works on the basis of two 'akad' agreements. The first is the bank's agreement to sell an item to the customer at a pre- agreed price, with the second agreement covering the customer selling back to the bank at a lower price. The difference is the bank's profit on the transaction. Such products do not pass the test of strict Islamic compliance as practiced in the UAE and is often criticised for camouflaging interest payments. Thus, many in the Islamic banking community say it will be a while before any Islamic equivalent of a conventional credit card will be available in the market.
By Babu Das Augustine
© Khaleej Times 2005
