LONDON, 7 October — It is the dream of every consumer to have a credit card that does not charge interest. The likes of Al Ruban, Al Buraq, Al Taslif, and BIC are not yet household names, but they have one thing in common. Their issuers all claim that the cards operate on an interest-free basis. In fact, Al Ruban, Al Buraq and BIC were launched in the last few weeks, and Al-Taslif toward the end of last year. They are of course the Islamic credit cards, whose moment seems to have arrived.
But is an interest-free credit card possible? How will a bank issuing a card make money if it cannot charge interest on minimum payments or late payments? Some argue that the very concept of an Islamic credit card is a misnomer, because in Islamic finance there is no such thing as a loan (apart from a Qard Hasan).
There are various contracts between the provider of capital and the user of capital, with the bank usually playing the role of the manager (the mudarib). One or two banks have tried to use the concept of “an Islamic equivalent to a credit card” but that is a nightmare for the marketing men and copywriters. For the lack of a better phrase, most banks have stuck to the generic concept of an Islamic credit card.
But banks (both Islamic and conventional) eying a potential Islamic credit card market of over 250 million customers in the MENA (Middle East and North Africa), south Asia, and Southeast Asia countries, cannot afford to ignore the advance of technology and the emergence, benefits, and flexibility of plastic and electronic money, especially for this nascent geographic market, where huge sections of the population still do not possess a card of any sorts — whether credit, debit or charge cards.
Armed with their product developers and their Shariah compliance advisers, the banks claim to have innovated a number of Islamic credit card structures which are Shariah-compliant and yet competitive in both cost and benefits to the cardholders. Card companies such as Visa and MasterCard have seized this new market opportunity with equal enthusiasm. Their input is the brand label, payments processing, and card security. They leave the Shariah compliance aspects to the banks issuing the cards.
Yet all is not quite on the eastern front. There seems to be a clash between the banks on the Islamic financial structures on which the credit cards are based. The divide is roughly between Gulf banks and Malaysian banks — yet both sets of structures have been approved by respective Shariah compliance advisers. The Gulf banks tend to be coy about revealing their Shariah structures claiming that it is their proprietary rights and intellectual property. As such they would not like to reveal this to rivals. Nevertheless, one issuer has stressed that its structure is based on installment repayment basis. Other contracts on which such a card can be based is Murabaha (a mark-up) or even a Musharaka (partnership) or a combination of more than one contracts.
The Malaysian banks, on the other hand, tend to use a combination of Bai Al Inah and Wadiah (deposit) agreements.
The issue of dispute between the Gulf and Malaysian Shariah advisers is the use of Bai Al Inah, which effectively is a contract of sale and immediate buyback at different prices.
A major contention is that the Bai Al Inah is a “bogus” buy and sell transaction to obtain cash with a repayment which has been imposed through an interest-based mark-up (in other words the mark-up is based on the prevailing interest-rate benchmark such as Malaysian LIBOR). The only point of conformity with the Murabaha or Bai Bithaman Ajil contracts (both mark-up contracts) is the fixing of the selling price, a cap or ceiling on the mark-up the bank can charge.
The latest Islamic credit cards to hit the market include Al Ruban MasterCard, launched in September by Bahrain-based Shamil Bank, a subsidiary of the Saudi-owned Dar Al Maal Al Islami (DMI) Group headed by Prince Muhammed Al Faisal; Al Buraq launched also in September by Bahrain-based ABC Islamic Bank through its dedicated Islamic Credit Card Company (ICC), incorporated by the Bahrain Monetary Agency in June 2001 as a restricted investment banking license; and BIC (Bank Islam Card) launched by Malaysia’s premier Islamic financial institution, Bank Islam Malaysia Berhad (BIMB) in July under the MasterCard label. Last December, another Malaysian bank, Arab Malaysia Bank Berhad (AMBB) launched the Al Taslif credit card, also under the MasterCard label. They all charge an annual fee and some of them have a minimum charge per transaction.
Of course other banks such as Saudi Arabia’s Al-Rajhi Banking & Investment Corporation (ARABIC) and Kuwait Finance House (KFH) would claim that they launched Islamic cards a few years ago. ARABIC’s MasterCard and Visa cards are increasingly widely used by Saudis, and KFH’s Al-Tamweel cards are similarly are well-established.
Shamil Bank claims that Al Ruban will offer its users the same convenience, power, and flexibility as that of a conventional credit card while being fully Shariah compliant, and together with its latest consumer finance liquidity product Tamweel Al-Shamil, which is based on the Islamic Tawarruq cash flow management contract, is expected to significantly boost its retail banking business in Bahrain and the Gulf region.
According to Shamil Bank’s Chief Executive Dr. Said Sa’ad Al-Martan, the Al-Ruban MasterCard will cost less to the cardholders and will allow them to conduct all transactions comparable to conventional credit cards, through the convenience of repayment in installments. Al-Ruban will be welcomed at more than 12 million locations in 247 countries and territories, and will provide customers with an immediate access to 250,000 ATMs through the MasterCard ATM network.
Al Buraq, on the other hand will be available from banks participating in Islamic Credit Card (ICC) Company. ABC Islamic Bank will float two classes of ICC shares — Class A shares worth $3 million will be held by ABC Islamic Bank itself, while Class B shares would be offered to Islamic banks and financial institutions.
The battle of the Islamic credit cards will hot up as more issuers come on stream. However, market penetration and success will depend on how transparent their issuers are about the structures, the Shariah-compliance, and the cost competitiveness.
