Islamic Finance: Credit Charge and Debit Cards
“Accounting and Auditing Organization for Islamic Financial Institutions (AAOFI)” is a body that develops international standards that regulate Islamic financial bodies. Based in Bahrain, AAOFI has been in operation, establishing standards from as early as 1993 (Vinnicombe, 2012, p. 79). AAOFI covers charge cards, credit cards, and debit cards financial institutions issue to their clients to enable them to pay for services and goods and withdraw money from their accounts. Apart from AAOFI, Bahrain also hosts several regulatory bodies such as the Sharia Supervisory Board mandated to oversee the application of Sharia laws in the financial sector.
Sharia Standard Number 2: Credit Card, Charge Card and Debit Card
Halal Credit Cards
Credit cards fall within the range of transactions permitted by Shari’ah. The bank makes the initial payment to the seller and the value charged to the holder or the credit card who is charged with the responsibility of making regular payments as agreed (Financial Islam, 2019). The issuer determines the period within which the amount issued by the credit card should be paid, and no interest should be charged. Cardholders are permitted to defer the payment of the amount due, in which case interest is charged for the credit duration.
The simpler model for a Shari’ah compliant credit card holder is to allow the issuing body to debit his or her account directly for the amounts due as billed by the issuer for the use of the credit card. Such an action keeps the cardholder away from the accountability for default which can attract interest payments (Financial Islam, 2019). Customers holding credit cards may also deposit a specific amount of money that represent their savings or funds with the issuer as a guarantee for the set credit limit. In this case, no charge may be made on the holder for the use of the card up to the set limit, meaning that the deposited money is invested with the issuer on a non-interest basis, which is generally on the grounds of Mudarabah. Otherwise, payments to card issuers may be made from cash funds derived from Islamic banks via Tawarruq/Mudarabah with the amount payable based on deferred payments.
Shari’ah credit cards entail three permissible contract structures that differentiate them from conventional credit cards namely Quard, Wakalah, and Kafalah. Regarding Kafalah, the issuer guarantees payment to merchants and other parties on behalf of the cardholder (Benhayoun et al., 2014, p. 20). In Wakalah, the issuing party performs the work of an agent by paying the merchant on the holder’s behalf. Finally, under Qard, the issuer assumes the position of a lender who withdraws money from the bank by issuing the card. In such a case, the holder of the credit card is responsible for returning the utilized amount immediately.
It is also worth noting that in Islamic finance, a credit card issuer can apply Kafalah fee to carter for the membership fee and some services the card renders. Such a fee is not linked to the actual amount spent by the holder and is usually determined in advance. Also, the issuer may apply agency commissions to sellers as wages for acting as financial intermediaries in aiding the settlement of credit card transactions (Benhayoun et al., 2014, p. 21). The commission charged should be based on the buying price of goods and services acquired using the card. The issuer can also charge withdrawal fees when the holder uses the card to withdraw some money. In most cases, the charge is a fixed value for every transaction executed with the card. In case of late payments, a late payment fee may be charged as compensation or penalty for late payment. The late payment fee is calculated as a proportion of the outstanding balance and donated to charity.
Debit Card and Charge Card
As outlined by the standard, some characteristics of debit cards include: the card is issued by a financial institution to customers with funds in their accounts; the card provides the holder with the right to withdraw the money from their accounts to purchase products up to the level of the credit balance; the card-holder will not normally be charged for using the card except when it is used to purchase another currency or withdraw cash from another institution other than the issuer and the issuer may decide to charge or not to charge a fee for issuing the card (Vinnicombe, 2012, p. 80). Under Islamic laws, Quran and hadiths, financial institutions are permitted to issue debit cards provided that the holders do not exceed their account balances.
The charge card extends a credit facility up to a specific ceiling for a predetermined period. Ideally, charge cards issued to pay for services and goods and to obtain money. Charge cards do not provide revolving credit facilities to the holders, as long as the holders are obliged to make payments for the goods acquired or services obtained by the end of the credit period (Vinnicombe, 2012, p. 82). If the holder delays in paying the amount due beyond the free credit period, an interest charge may be imposed. Besides, institutions issuing charge cards do not charge holders any commission on purchases but receives a commission on purchases executed by using the card from the party that accept it. Card issuers have personal and direct rights against cardholders to receive reimbursement for any payments made on their behalf. The institutions are also required to pay the accepting parties for purchases made by the cardholders within a set credit limit. It is permissible under Islamic law for an institution to issue a charge card on some conditions. First, the holder of a charge card is obliged to pay interests in case of any delay in paying the required amount. Second, if the issuer obliges the customer to make a specific deposit as a guarantee and the sum of money is not available to the cardholder, it must be clarified that the institution will invest the funds for the cardholder’s benefit based on Mudarabah and that any consequent profits will be shared between the institution and the holder.
Islamic Finance Applications in Bahrain
Bahrain has been recognized as a center for Islamic Finance since the 1970s because of its legitimate offshore banking and globally accepted regulations. Bahrain Islamic Bank which is Bahrain’s first Islamic bank was developed in 1979. Bahrain’s central bank enacted a comprehensive regulatory and prudential framework to be followed by Islamic Financial institutions (Abdulla, 2016, p. 2). Furthermore, Bahrain hosts various Islamic Finance organizations like the AAOIFI and the Shariya Review Bureau. Islamic credit cards in Bahrain are called Sharia-compliant credit cards because they follow Sharia finance principles. Such cards are increasingly being used by both the Muslim and non-Muslim community. Islamic Banks in Bahrain have added Sharia-compliant credit cards to their banking products making them complete the full range of Islamic finance to cover the needs of all customers regarding Sharia banking.
AAOIFI has been at the forefront in promoting Islamic banking in Bahrain by providing guidance to financial institutions and coordinating efforts for enhancing the development of the Islamic financial services industry. Although Bahrain hosts conventional and Islamic banks, conventional banks the country also allows its conventional banks to offer Islamic banking services through their Islamic window (Abdulla, 2016, p. 4). Different banks in Bahrain complies with the provisions of both the IFSB (Islamic Financial Standards Board) and the AAOIFI. Some areas of cooperation between the IFSB and AAOIFI include: the establishment and revision of Shari’ah and prudential governance and accounting standards on different areas of mutual interest, implementing and promoting Shari’ah and prudential governance and accounting standards to aid the growth of the Islamic financial services sector and enhancing awareness by promoting knowledge sharing and organizing executive workshops, programs, seminars and conferences.
Bahrain also hosts many Islamic banks and other conventional banks offering window operations. Some banks that offer Sharia-compliant credit cards in Bahrain include Gulf International Bank, Arab Banking Corporation, Unicorn Investment Bank, Ithmaar Bank, Bank Alkhair and Khaleeji Commercial Bank among others (Rabaa and Younes, 2016, p. 103). The banks have continued to launch Sharia-compliant credit cards in attempts to fulfill the needs of their customers. For example, in 2007, Kuwait Finance House (KFH- Bahrain) introduced its first Sharia-compliant credit card in partnership Visa. Credit care enables customers to enjoy a revolving credit card facility without paying any interests. KFH only charges a small and transparent service fee as dictated by AAOIFI that advocates for Islamic banking that is Riba-free.
KFH-Bahrain is also considered as one of the banks that provides the rare Ijarah credit card. Ijarah credit cards are normally issued to customers to enable them to purchase fragile assets on lease terms (Rabaa and Younes, 2016, p. 105). KFH-Bahrain started offering Ijarah credit cards by introducing the Baytik Ijarah credit card which enables Sharia-compliant consumers to purchase goods and services they could otherwise be unable to afford. Once KFH-Bahrain approves the credit card facility, the cardholder may use it to purchase products from merchants pre-approved by the bank. Once the credit card is used to execute any transaction, the bank can prepare the repayment schedule of the cardholder on the spot.
In 2017, Al Baraka Islam Bank (AIB – Bahrain) launched its first ever credit card. The credit cards which were based on Quarz-e-Hasan model were aimed at capturing the unique Shari’ah compliant credit card market in Bahrain (Sillah, 2017, p. 3). The credit cards are available for applicants who earn not less than BD250. The bank does not charge any fee for the ownership of the cards. AIB-Bahrain charges a service fee on every transaction rather than interest to comply with the provisions of Islamic Sharia Laws which recommends that banks should issue credit cards free of Riba or interest. The credit cards were introduced by the bank as part of its commitment to provide continuous and flexible financing solutions that follow Sharia laws and address the specific needs of its customers.
Bahrain’s Central Bank (CBB) has an established sharia board which is mandated with overseeing all Islamic finance products in the country. The board also introduces new rules to strengthen governance in Islamic finance (Sillah, 2017, p. 4). The members of the Sharia Board are elected at general meetings by shareholders based on the Board of Directors’ recommendations. The sharia supervisory board is responsible for ensuring strict adherence to the Sharia principles. Some functions of the board include giving opinions on products banks intend to offer and issuing Fatwas on Sharia issues followed by the financial institutions in handling their transactions, examining the activities of subsidiary companies and investment funds and ensuring that financial institutions do not make gains using methods that are not permissible by Sharia laws and principles among other functions.
In 2017 Bahrain made a critical step toward a more centralized model to Sharia supervision. In the model, financial institutions that operate according to Sharia principles are required to turn to their proprietary supervisory boards for decisions concerning new services and products (Sillah, 2017, p. 6). The model has made it easier for financial institutions like banks to comply with sharia principles when making financial decisions like issuing credit cards because they can easily secure approval for their instruments. A pool of sharia boards dispersed throughout the Islamic financial industry in Bahrain also establish a rich intellectual environment that enables new products to sprout, in that the system extends a higher probability for the process of arriving at a legal decision based on Islamic law (ijtihad).Bahrain has a pool of Islamic banking institutions that offer sharia-compliant credit cards which are Riba-free. The Kingdom also hosts several regulatory bodies like AAOIFI which provide guidance concerning the rules and principles financial institutions should follow to offer products that are permissible by Sharia laws. The Bahrain central bank has a Sharia supervisory board which is responsible for ensuring that financial institutions do not reap benefits by indulging in activities that go against the Sharia laws.