Introduction to Sharia
Sharia is the sacred law of Islam derived from the Quran and examples set by Prophet Muhammad in the Sunnah. In true meaning, Sharia is Muslim or Islamic law, both civil and criminal justice as well as regulating individual conduct both personal and moral. The Sharia can be broadly classified into five main branches ritual worship (ibadah), transaction and contracts (mu'amalat), morals and manners (adab), beliefs (l’tiqadat) and punishments ('uqubat). The financial transaction and contracts section of the law terms the charging and payment of interest as Haraam or forbidden. The charging of surplus (interest or fees) is termed as RIBA (which translates to usury) and any activity that makes people charge or pay such Riba is forbidden. To this modern day Islamic economists put forth the policy of profit or loss sharing (Mudharabah) in financial transactions in order to suit modern day banking in accordance to Sharia. The other Islamic Banking processes include Wadiah or safekeeping, Musharakah or joint venture, Murabahah or cost plus and Ijar or leasing. with these underlying principles all modern day banking activities can be conducted by Islamic Banks following the Sharia Laws.
Trends in the Card industry
The Card industry is shifting focus from credit to debit in this recovery period, on that note the credit card issuers need to focus on tapping new market segments and launching new products to pull back the lost lead to debit cards. One of the segments that they can possibly look into is those who don't use credit cards due to religious reasons and offer a product for them. Thus the concept of Islamic Credit Cards which abide by the Sharia standards is being widely used in many countries today.
Islamic Credit Cards -The Sharia compliant cards
The current credit cards are not suitable to those who follow Sharia due to the fact that they charge interest (RIBA) on outstanding and also has the underlying responsibility of promoting debt and consumerism which is again against Islamic principles. So a new set of rules and policies need to be looked at to tap this segment. But interest free credit will not excite any Issuer, there is little or no revenue generated if there is no charge for outstanding payments and extending credit in order to make profit is against the law. But as there are some grey areas as in any other law, the issuers are looking to exploit this and design new products such that
Types of Islamic Credit Cards
The issuers today have designed 5 products based on these 2 laws which are detailed be low -
1. Fixed fee on card subscription - This model allows deferred payment on outstanding amounts for a longer period and staggers payments in equal installments. The bank charges a fixed subscription fee to provide this facility. The customer is principally charged for usage of the whole package and not for the provision of a credit facility.
2, Fixed fee on revolving facility - This allows customers to revolve outstanding debt and charge a fixed fee once the customer has started using this facility. The bank charges a processing fee if the customer defers payment of the outstanding balance after the due date to the next payment cycle. This model is less acceptable to Sharia scholars who see banks benefiting from a credit facility to the customer.
3. Fixed mark-up on credit limit - Some financial institutions charge a fixed mark-up on the credit limit provided to the customer on a credit card. The mark-up rate is agreed by bank and customer when the card is issued. It is carried out by executing a tawarruq (settlement of outstanding liabilities) transaction by which the customer is offered the credit facility. The bank reimburses the mark-up to the customer on the unused credit facility.
4. Variable mark-up on revolving balance - In this method the bank's charges are proportionate to the value of outstanding credit rolled over by the customer. This facility can be extended either under tawarruq or by Bai al Inah where the bank assumes ownership of the product to prevent default. These products are the closest to a conventional credit card.
5. Fixed mark-up on point of sale transactions - This credit card facility that lets customers defer their outstanding balance at the end of the payment cycle. The customer is offered the facility to stagger the payment over a period of 12 months. The bank charges a fixed fee proportionate to the transaction value at the time of purchase.
Difference between Islamic Credit Cards and Commercial Credit Cards
Early Examples of Islamic Credit Card Products
Though some banks have been issuing Islamic Credit Cards since 2005 in Middle East and South East Asia, they have gained popularity after 2008 when they were launched in larger non-lslamic markets like UK and US. A few banks that Issue such cards are Kuwait Finance House, National Commercial Bank, Emirates Islamic Bank, Arab National Bank, Bank Islam Malaysia and more recently banks such as University Bank in Michigan and Chicago based Devon bank have joined them.
Why should banks issue lslamic Credit Cards
what's in it for the card issuers? Islamic Cred it Cards is fast gaining popularity in many markets. The following are quick pointers that help answer the above question-
Sharia is the sacred law of Islam derived from the Quran and examples set by Prophet Muhammad in the Sunnah. In true meaning, Sharia is Muslim or Islamic law, both civil and criminal justice as well as regulating individual conduct both personal and moral. The Sharia can be broadly classified into five main branches ritual worship (ibadah), transaction and contracts (mu'amalat), morals and manners (adab), beliefs (l’tiqadat) and punishments ('uqubat). The financial transaction and contracts section of the law terms the charging and payment of interest as Haraam or forbidden. The charging of surplus (interest or fees) is termed as RIBA (which translates to usury) and any activity that makes people charge or pay such Riba is forbidden. To this modern day Islamic economists put forth the policy of profit or loss sharing (Mudharabah) in financial transactions in order to suit modern day banking in accordance to Sharia. The other Islamic Banking processes include Wadiah or safekeeping, Musharakah or joint venture, Murabahah or cost plus and Ijar or leasing. with these underlying principles all modern day banking activities can be conducted by Islamic Banks following the Sharia Laws.
Trends in the Card industry
The Card industry is shifting focus from credit to debit in this recovery period, on that note the credit card issuers need to focus on tapping new market segments and launching new products to pull back the lost lead to debit cards. One of the segments that they can possibly look into is those who don't use credit cards due to religious reasons and offer a product for them. Thus the concept of Islamic Credit Cards which abide by the Sharia standards is being widely used in many countries today.
Islamic Credit Cards -The Sharia compliant cards
The current credit cards are not suitable to those who follow Sharia due to the fact that they charge interest (RIBA) on outstanding and also has the underlying responsibility of promoting debt and consumerism which is again against Islamic principles. So a new set of rules and policies need to be looked at to tap this segment. But interest free credit will not excite any Issuer, there is little or no revenue generated if there is no charge for outstanding payments and extending credit in order to make profit is against the law. But as there are some grey areas as in any other law, the issuers are looking to exploit this and design new products such that
- Financial Institution doesn't benefit from any penalty charged on late payment.
- Financial institutions will charge a fixed fee for the card as any fee charged based on amount borrowed is illegal
- Restrict usage to only permissible activities
Types of Islamic Credit Cards
The issuers today have designed 5 products based on these 2 laws which are detailed be low -
1. Fixed fee on card subscription - This model allows deferred payment on outstanding amounts for a longer period and staggers payments in equal installments. The bank charges a fixed subscription fee to provide this facility. The customer is principally charged for usage of the whole package and not for the provision of a credit facility.
2, Fixed fee on revolving facility - This allows customers to revolve outstanding debt and charge a fixed fee once the customer has started using this facility. The bank charges a processing fee if the customer defers payment of the outstanding balance after the due date to the next payment cycle. This model is less acceptable to Sharia scholars who see banks benefiting from a credit facility to the customer.
3. Fixed mark-up on credit limit - Some financial institutions charge a fixed mark-up on the credit limit provided to the customer on a credit card. The mark-up rate is agreed by bank and customer when the card is issued. It is carried out by executing a tawarruq (settlement of outstanding liabilities) transaction by which the customer is offered the credit facility. The bank reimburses the mark-up to the customer on the unused credit facility.
4. Variable mark-up on revolving balance - In this method the bank's charges are proportionate to the value of outstanding credit rolled over by the customer. This facility can be extended either under tawarruq or by Bai al Inah where the bank assumes ownership of the product to prevent default. These products are the closest to a conventional credit card.
5. Fixed mark-up on point of sale transactions - This credit card facility that lets customers defer their outstanding balance at the end of the payment cycle. The customer is offered the facility to stagger the payment over a period of 12 months. The bank charges a fixed fee proportionate to the transaction value at the time of purchase.
Difference between Islamic Credit Cards and Commercial Credit Cards
Early Examples of Islamic Credit Card Products
Though some banks have been issuing Islamic Credit Cards since 2005 in Middle East and South East Asia, they have gained popularity after 2008 when they were launched in larger non-lslamic markets like UK and US. A few banks that Issue such cards are Kuwait Finance House, National Commercial Bank, Emirates Islamic Bank, Arab National Bank, Bank Islam Malaysia and more recently banks such as University Bank in Michigan and Chicago based Devon bank have joined them.
Why should banks issue lslamic Credit Cards
what's in it for the card issuers? Islamic Cred it Cards is fast gaining popularity in many markets. The following are quick pointers that help answer the above question-
- The target segment is big. According a recent report by Towergroup the Islamic population is close to 25OmilIion(close to 24% of the world population).
- The projected growth is immense that it will reach 6million accounts by 2012, doubling from what is there today.
- Ernst & Young in its report has determined an year on year growth in Islamic Banking product at 20%, by this the market worth $9bn today could be worth $25bn by 2015.
- The principle of collateralize credit products can be extended to other customers as a low risk product thereby tapping a few other segments such as students
