For many years, an Islamic Credit Card proposition has been a challenge to Islamic Banks to develop as a viable proposition. The advanced nature of a conventional Credit Card, with many built-in features, rewards mechanism and credit limit flexibility, which runs hand-in-hand with a robust penalty system for defaulters, does not make the development of its Islamic version any easier. We have to balance the strict Sharia views on debt / credit with the attractiveness of a conventional Credit Card. No easy feat, as the consumers are well-informed of the benefits of the facilities.
There are a few models for Credit Cards out there. Some are more readily accepted by the consumers than others. I may not know most of them but here are some that I took notice:
- Tawarruq Card (tripartite Murabahah).
This is used by some Banks in the Middle-East and based on an approved facility limit. The initial purchase of any items via this card is made on the basis of Qardh (interest free loan) and after a certain period, if the loan is not paid, a tawarruq is made based on an agreed profit rate and payment tenure. An instalment is agreed upon and the customer pays this over time. For each purchase not settled, this tawarruq will be done, either monthly or daily. Operationally tedious unless there is a ready system to support this. Some Banks has managed to squeeze in a cash advance facility, but I believe the cash advance will just remain as a Qardh and will be charged a fixed, one-time cash advance fee. This is a popular feature as the customer only pays one fee and it’s an “interest-free loan” for the remaining tenure. Not so good news for Banks, resulting in conditions where the cash advance limit is reduced to be lower than the approved credit line.
- Ijara Card (Leasing/Lease to Own).
This is also used by a few Banks in the Middle-East where the purpose of the card is to obtain fungible assets from suppliers on a lease basis. Technically, the customer obtains an Asset and pays rent on it for an agreed period of time, and the obligation on the asset is released upon full payment of the total rental. There are limitations for this structure where only selected merchants can accept this card for the purpose of leasing. I remember having a list of merchants that are updated periodically for customers to deal with, and this booklet is published for reference as well on website updates. It’s usage is limited and there isn’t be a cash advance facility.
- Commodity Murabahah (Cost-Plus-Sale of Commodity) / Bai-Inah (Sale for Cash).
This was the envisioned structure for Credit Cards which I feel meets the requirements for Credit Cards. The structure is feasible on the premise that there is an underlying transaction involving an Asset for the purpose of creating debt. The debt is created based on the assumed use of the whole limit, at the maximum profit rate charged, throughout the whole tenure. For example should a limit of RM50,000 is given, the Murabahah transaction will involve a Selling Price of (RM50,000 x 18% APR x 4 years (card expiry date)) + RM50,000 = RM86,000. This RM86,000 can be broken down in terms of monthly Instalments (RM1,792) or payment of Profit (RM750) with lump-sum principal settlement at the end of the tenure. The Selling Price of RM86,000 is the maximum amount the Bank can collect, and the profit portion of the unutilised amount will be “rebate” to the customer. Technically, the customer will only be charged based on the amount they use on the card. However, there are several disadvantages to this structure, due to the Sale Price nature of the facility. Firstly, the transaction will result in Cash proceeds and this is an argument by the Sharia that this is essentially the Customer’s cash money. It cannot behave as an Authorised Limit or Approved limit, and the flow of Cash should be recorded somewhere in account. There are also limitations when the Selling Price is breached, for example in request to increase limits and temporary top-ups, this is problematic as new Aqad on the commodity needs to be performed. Other concerns are such as Annual Fees or other charges, as essentially, this is not a facility but a disbursement of cash therefore additional fees charged are difficult to justify. The Bai-Inah Cards have been demise recently in Malaysia.
- The Ujrah Card (Services)
Used in certain geographies, this card works on the premise that the Bank is providing a payment mechanism for purchases via a card issued by the Bank. By providing this service, the customer is charged a fixed service fee for each transaction. Irregardless of the amount of charge, a fixed fee is charged for the use of card, and the total amount outstanding is to be paid over an agreed period of time at no further “profit charge”. This also becomes a Qardh once incurred; the Bank only earns the fee for the transaction. The Bank usually price this fee on a high side, to compensate the cost of funds, but this becomes unpopular for small purchases. And since the use makes sense for bigger purchases, the risks of default becomes higher on bigger amounts, and the Bank is not allowed to charged additional fee or penalties as the amount remains a Qardh. Other recourse is to convert this default amount into a term structure based on Tawarruq, but this will require customers explicit consent to convert. This can be a problem to execute. For cash advances, this card becomes an attractive “personal loan” facility where no subsequent interest can be charged.
Ujrah Cards in Malaysia
However, there is another variant of the Ujrah Card is the model used by some Banks in Malaysia, which I find interesting. Similar premise as the above, but with a different fee structure and mechanism. Instead of the fee is charged based on transactions, the fee is charged based on the Bank providing the customer with the service to purchase goods, via a payment instrument i.e. Credit Card. This fee is determined yearly, upfront at the point of Aqad. The fee, which the customer will have to agree to, is calculated based on the authorised limited with the assumption that the customer agree to this service for 1 year. Providing this service to the customer is the discretion of the Bank; renewal of the service depends on the yearly review.
The charge imposed on this service is based on the following formula benchmark ie Authorised Limit (approved limit) x profit rate. This profit rate is determined based on the normal rate that a credit card normally charge, which is APR of 18.00%. Therefore for an approved limit of RM50,000, the total upfront service fee that the Bank impose for providing the facility of purchases via this card, is RM9,000 per annum. This charge is imposed monthly into the customer’s account statement ie RM750 per month.
The rationale for this charge is the assumption that the customer can, on day 1 itself, fully utilise the card to purchase up to RM50,000 worth of goods. However, if the customer do not use the card fully and immediately, the Bank will rebate (Ibra) the service fee during the month back to the customer. If the customer only uses the card to purchase RM10,000 worth of goods from the limit of RM50,000, the Bank will rebate to the customer RM600 of service fee thus the net service charge is RM150 (RM750 less RM600). This gives the same effect of how a normal, conventional credit card is charging ie RM10,000 x APR 18% / 12 months = RM150.
I know that the Middle-East scholars are not fans of the rebate structure being used by many in Malaysia. This method has been used in various products such as the Islamic floating rate home financing, revolving credit and overdraft. BNM has been very supportive of this structure and has issued the Ibra’ Guidelines to outline the rules for rebate. My personal view is that this is workable structure so long as the rebate formula is clearly made known to the customers and agreed upon. Technologically, the system is able to support the Ibra requirements, and I feel this is an important feature to ensure a competitive product can be designed.
I have a reservation, though. The Ujrah Card is based on the premise that the card is issued as a service for purchases, on which the fee is charged. Now, what about cash advances? Cash advances are allowed under the Ujrah Card, and carries the same fees. I had some interesting discussions with Sharia heads and product heads on this feature, and I am yet to be convinced of its validity. Their argument is that the cash advance is part of the package offered under the service. How can that be logical? If it makes sense, I can structure all of my personal financing products based on this understanding, and that I provide a card to facilitate this service offered to customer. Can I have an Ujrah Personal Financing product based on this premise?
Ujrah makes the Credit card structure as simple as can be, with the ease of use and the bundling of various service into an attractive package and also easy to revise most terms, such as increases in credit limits. My only reservation is on the cash advance feature, that has neither underlying transaction of an asset to create a debt, nor a purchase of goods. It is simply a cash lending, withdrawn from the ATM, onto which a cash advance fee is charged, and on a monthly basis the service fee is incurred. Perhaps I am a bit prejudiced in this thinking, someday I hope to be able to understand this more clearly.
Overall, the model used in Malaysia shows promise to match the conventional proposition. Hopefully, there will be continuous development to improve acceptance, features and usage. And over time, the concerns that the industry may have will be fully addressed. That includes my own personal reservations on Cash Advances in an Ujrah Card.