Islamic Credit Cards are the latest banking products offered by the Islamic institutions. The principle used is Al Bai Bithaman Ajil or also known as deferred payment scale. Interest-free and penalty free credit cards are issued by Islamic Banks. The Islamic Credit Cards are used to make purchases, the purchases will be rendered by the bank on your behalf and will sell it back to you. The balance amount on your Islamic Credit Cards are deferred and you have to pay through instalments within a time frame set by the bank.
Features of Islamic Credit Cards
The following are the features of Islamic Credit Cards:
- Islamic Credit Cards are open to Muslims as well as non-Muslims.
- Annual fee is charged.
- You get value added benefits of convention credit cards such as shopping discounts, gifts, traveller’s cheque, bonus points etc.
- The financial institution may require you to submit some kind of collateral.
- The credit limit is based on the value of the collateral.
- You can obtain a general Takaful coverage as well.
- Some financial institution provides Zakah payment service through the Credit Card.
- You can also apply for supplementary Credit Cards.
What is Al-Bai Bithaman Ajil?
The term Al-Bai Bithaman Ajil refers to selling and buying transaction between bank or the financial institution and the customer. The bank or the financial institution buys a property or an asset at the prevailing market rate and sells it to the customer at a markup price. The payments are to be made in instalments over a period of time that has been agreed upon at the time of the transaction. The profit earned is legitimate from Shari’ah point of view as the transaction is based on the sale contract rather than the loan contract. Predetermined profit arising from the loan is prohibited.
How do Islamic Credit Cards work?
Islamic law forbids interest. Most business models for conventional banks rely on being able to charge interest for balances that aren’t paid. Islamic Credit Cards use the concept of profit rate and is based on the concept of Tawarruq, a paper transaction occurs in the background every time you make a purchase. These cards functions in the same way as conventional credit cards.
The other type of Islamic Credit Cards consists of a fixed monthly fee and if the card has an outstanding balance, a fixed fee is to be paid. The balance amount is irrelevant in this case. Such cards are ideal to those who pay the entire outstanding balance each month.
Difference between conventional and Islamic Credit Cards
The following are the differences between conventional and Islamic Credit Cards:
|Traditional||Islamic Credit Cards|
|Interest||It is variable as it depends on the amount outstanding.||Interest is not charged. Fixed monthly fee is to be compensated.|
|Collateral requirement||Not required||Collateral is required. Deposit or undated cheques are accepted.|
|Type of contract||Loan based||Lease based|
|Restriction on transactions||No restrictions.||Cannot purchase alcohol, pork, tobacco, sexually related activities and for gambling.|
|Profit margin||No deposits.||Fixed rate of profit is to be shared with the bank. The rate is not compounded.|
|Late payment fee||Variable and is compounded.||A fixed amount is charged on the outstanding balance. The late payment fee collected by the banks are usually donated to charity.|