Halal credit cards

Credit cards are a very convenient method of

making purchases without carrying cash. This is
a service that is provided by most banks as a
form of consumer finance. Unlike conventional
credit cards that provide a revolving credit
facility based on interest, Islamic financial
institution cannot issue credit cards that provide
an interest-bearing revolving credit facility,
whereby the cardholder pays interest for being allowed to pay off the debts in
instalments.

In Islamic finance, a credit card is an instrument which provides the holder with the
ability to purchase goods and services from merchants, without requiring making
immediate payment of the cash price. It can be considered either as a guarantee given by
the issuer to the seller who accepts it or as a transfer of the debt by the debtor to the
issuer. Hence, it falls within the permissible transactions in Shari’ah. Payment is first
made to the seller by the card issuing bank, and the amount is then charged to the card
holders who make repayments according to the agreement between them. The credit
period is determined by the issuer of the card, 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.

The simpler model for the holder of a Shari’ah compliant credit card is to authorise the
card issuer to directly debit his bank account for amounts payable as billed by the card
issuer for the use of the card This keeps him away from the possibility of default which
may in some cases, carry the risk of interest. The card holder’s can also deposit a sum of
money representing his own funds or savings with the card issuer as a guarantee for the
stipulated credit limit; no charge will be made for the use of the credit card up to that

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limit; therefore the deposit is invested with the card issue on a non-interest basis,
generally, on the basis of Mudarabah. Otherwise, the payment to the card issuer can be
made from cash funds obtained from an Islamic bank through Tawarruq / Murabaha
with the cash funds repayable on a deferred payment basis.

Shari’ah credit cards consist of three permissible contract structures that make it
different from a conventional credit card, namely Kafalah, Wakalah and Qard. Under
Kafalah, the card issuer guarantees payments on behalf of the cardholder to merchants
and other third parties; under Wakalah, the card issuer is considered an agent of the
card holder, he pays the merchants on behalf of the card-holder; with a promise to
provide the card holder with a loan to pay the amounts resulting from the use of the
credit card; And under Qard, the card issuer acts as the lender to the card holder
withdrawing cash from the card issuing bank and the card holder is liable to
immediately return the amount of funds utilised.

The card issuer may apply a Kafalah fee to cardholder as a membership fee to the
cardholder charged for certain services rendered by the card. This fee is determined in
advance and the term is fixed, the fee amount should not be linked to the amount
actually spent by the card holder. The card issuer may also apply an agency commission
to the sellers as a wage for acting as a financial intermediary in facilitating the
settlement of transactions. This commission should be a percentage of the purchase
price of the items and services purchased using the credit card. Cash withdrawal fee can
be charged for any cash withdrawals using the card; the charge should be a fixed
amount per transaction. And late payment fee is a fixed amount as penalty or
compensation for late payment; it is calculated on the outstanding balance and will be
given to charity.

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