Credit Cards : Ujrah

  • Contract : Ujrah 
  • Definition : Service for a Fee
  • Transaction : Service
  • Category : Other
  • Secondary contract : Nil
  • Commonly used for : Credit Cards, Banking services

Ijara Cards

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

Ujrah Card

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.

Ujrah Fee CCThe 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.

Ujrah Fees1I 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?

Summary

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.

17 thoughts on “Credit Cards : Ujrah”

  1. can the Ujrah model apply to mortgage? Example: If you borrow $200,000 for your home, you repay only the $200,000 principal without any interest or compounding. Using the UJRAH MODEL, you pay a service fee rate (“Ujrah”) agreed at the time of the loan. Eg. $5,000 service fee over 5 years.

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    • Salam Muhammad

      Yes you can, technically. The end result can be the same however we do need to consider the following esp for long term facilities: firstly, a fee implies a service rendered, therefore what is the service provided to justify the fee. Secondly, fees implies GST. Exemption is when a transaction is executed for the purpose of booking a profit. Thirdly, it doesnt fit the model of long term financing where the rate is based on float rate. Lastly, how would you cater for floating things?

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  2. can the Ujrah model apply to mortgage? Example: If you borrow $200,000 for your home, you repay only the $200,000 principal without any interest or compounding. Using the UJRAH MODEL, you pay a service fee rate (“Ujrah”) agreed at the time of the loan. Eg. $5,000 service fee over 5 years.

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    • Hi Naveed,

      Ujrah represents a lot of flexibility. However you have to determine that to charge an Ujrah fee, there must be a service where the fee is justifiable. In a credit card arrangement, the card facility ie the use of a card for purchases earns it a service fee. For mortgage, the service must be identified. What is that service fee for, and is there any real function that without this function, the whole structure do not work.

      While it is possible to come up with a mortgage with Ujrah, you have to identify the service provided in the mortgage arrangement and whether such “fees charged” is justifiable.

      Wallahualam

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      • Thanks for the clarification. I am currently shopping around for a “halal” mortgage in Canada. The mortgage786.com company uses the Ujrah model for their mortgage product. I’d really appreciate your opinion on it. Let me know your email address and I can send you some information.

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      • Hi Muhammad,

        Thanks for informing me about Mortgage786. It seems to be based on 2 concepts ie Qard (loan) on the principal amount and Ujrah (service fee) on the services. I cannot comment whether it is halal or not, because I am sure their scholars have done their assessment. And it is not right if I based my opinions based on a write up, and neither am I qualified to do so unless I am able to discuss on it with them. But in all honesty, it is a possible structure to design, where the “credit” element is in the fees earned. Fees are usually the result of a service provided, therefore the documents/agreement should show the scope of services provided, to justify the fees charged.The fees should not be coming from the function of money lending, but services rendered.

        A quick test of this is as follows: if the cost of funds in the market increases, does the service fee increase accordingly? If the property market index increases ie price of rentals increases, does the service fees also increase?If the service fees increase, then the assumption is that the increase is tied to the money (returns on money), because services will not change with these increases (unless there are certain aspects of the services that need to change). If there is no additional services being offered, there will be no changes in fees.

        I don’t know the full mechanics of Mortgage786 but the Ujrah needs to be determined to either tied to the cost of money or services rendered. Wallahulam

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  3. am i right to believe that the buying of a house is buying an asset which allows the seller to mark-up as he wishes rather than using ujrah where it can be argued that his profts will be limited?

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    • Hi Aziz,

      Yes in that perspective, buying a house is based on “willing buyer and willing seller” concept of trade. Physical asset is the house so you can compare it to a person selling the house at their perceived value. But when it comes to Ujrah, it is more on the context of “earning a fee for an action undertaken”. We really have to define the “action” done and link the charge/fee to it. The argument is always when you intend to charge a fee, is it based on actions done or there is still element of “based on percentage” to it? If the cost of processing a home financing (including manpower, expertise and resources) is $10,000 for a home financing of $500,000 then what is the additional processing required if the home financing is for $5,000,000? What is different in terms of service/processing that will justify charging a fee of more than $10,000 if the processes are basically the same?

      $10,000 fee = 2% charge on financing amount of $500,000
      If the financing amount is $5,000,000 then 2% charge = $100,000 fee

      So what would justify the difference between $100,000 and $10,000 i.e. $90,000?
      Has the processing work for the home financing increased by 9 times when the financing amount is increased? What work is “additional” that it will justify a 9 times increase in costs?

      In that sense, yes Ujrah will be a limiting condition that product team have to justify to Shariah officers for approval.

      Hope that answers your question

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  4. Could you point me to any known scholars that have given the go ahead to the ujrah model? preferably from the west or middle east (only because thats more familar to myself). thank you.

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    • Hi Ahmed,

      I am not able to confirm these scholars. In Malaysia, we rely on the individual bank’s scholars, and the fatwa will be applicable for only the bank. Each bank will have to obtain endorsement on its own. As an industry, perhaps guidance from AAIOFI will be the right forum. But at the Bank’s level, each bank will have to clear each model individually, guided by any framework issued by the Central Bank.

      Thanks

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  5. i second to your doubt on ujrah for cash advance. But at the other side of the coin, can’t we argue that the “service” here is the “withdrawal at ATM”, i.e. had there not been the card, customer would not be able to draw the amount when their savings is nil. Hence, can we say this is the “service” which entitles the bank for the fee? Does that make sense to you?

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    • Hi Sofea,
      Currently there is already a charge imposed on withdrawal from ATM. Most banks charge RM50 for the facility withdrawal from ATM. And we generally accept that each withdrawal = RM50 irregardless of amount. But the argument we are making is that, under Ujrah, which is a service to purchase something allowing us to earn a fee. But in case of cash advance, there is no purchase of “something”. I have trouble consolidating the understanding the rationale of charging Ujrah fee for “non-purchase” and there is already a RM50 charge for withdrawal at ATM.
      We do discuss at the product level and try to make sense of it, and the justifications for it. At the moment I am yet to be convinced, as I did ask if it is possible to launch an “ujrah personal financing”, which is the same concept. The answer I got was “no” for ujrah personal financing.
      I hope to be unconvinced 😀

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  6. Salam Aleykum
    Have you had a chance to look at the 786 mortgage mentioned above by another reader? I am in the same boat and wanted to see if the model they are proposing is Halal.
    You can email me if that is better.
    Jazak Allah

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    • Hi Ilgar,

      Apologies I think I have missed out to your question as there are quite of overlap of question.

      I have reverted on the Mortgage786 model so I will paste my opinion as is.

      It seems to be based on 2 concepts ie Qard (loan) on the principal amount and Ujrah (service fee) on the services. I cannot comment whether it is halal or not, because I am sure their scholars have done their assessment. And it is not right if I based my opinions based on a write up, and neither am I qualified to do so unless I am able to discuss on it with them. But in all honesty, it is a possible structure to design, where the “credit” element is in the fees earned. Fees are usually the result of a service provided, therefore the documents/agreement should show the scope of services provided, to justify the fees charged.The fees should not be coming from the function of money lending, but services rendered.

      A quick test of this is as follows: if the cost of funds in the market increases, does the service fee increase accordingly? If the property market index increases ie price of rentals increases, does the service fees also increase?If the service fees increase, then the assumption is that the increase is tied to the money (returns on money), because services will not change with these increases (unless there are certain aspects of the services that need to change). If there is no additional services being offered, there will be no changes in fees.

      I don’t know the full mechanics of Mortgage786 but the Ujrah needs to be determined to be either tied to the cost of money or the services rendered. If it is tied to the money and returns on the money, then perhaps a greater understanding on their decision is needed on the reasons for such. At the moment, I do not have sufficient information on that. But if it is tied to services rendered, the scope of such services needs to be determined and justifies the fees, and the factors to which these fees may fluctuate.

      Wallahualam. Thanks

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