Credit Cards in Islamic Banking: Are They Really Shariah-Complaint?

Are Credit Cards in Islamic Banking Really Shariah-Complaint?

Credit Cards in Islamic Banking are one of the most interesting topics for Muslims. Another important aspect of Islamic banks’ profitability is consumer finance. Consumer finance is a type of lending that provides credit to a consumer for personal or household use.

Issue with Conventional Lending

In conventional lending, banks primarily offer their customers secured and unsecured credit. Secured credit is a credit or a loan tied to the asset it was used to purchase, such as a car or a house. Unsecured credit is not tied to an asset but, rather, to an individual or company’s credit standing. Islamic banks have a problem with this form of financing since they cannot lend out money. There must be an underlying asset or product that needs to be purchased by the bank and resold or leased to the customer. How, then, do Islamic banks offer consumer credit such as credit cards?

Credit Cards in Islamic Banking

Credit cards are available in Islamic banks, although they might make up a very small of the bank’s overall portfolio. The credit cards operate on a deferred payment basis using primarily a cost-plus financing structure. Islamic bank customers find credit cards unappealing for two reasons. First, Islamic banks do not offer large credit limits. They prefer to set them on a case-by-case basis, based on the customer’s monthly salary (typically one month’s salary or more). This tends to discourage customers from using them because the amount they may purchase with them is not very much. However, setting credit limits is not unique to Islamic banks.

Second, the structure itself isn’t that appealing. The bank must be the party selling the items to the consumer in order to extend credit through cost-plus financing. As a result, the credit card operates as a bank’s agent in purchasing goods and immediately reselling them to the consumer at a higher price. As a result, payback is always in instalments, and there is always a markup. However, with a conventional credit card, you can pay back immediately to avoid interest costs, or the user can pick interest-bearing instalments.

Rather than using them to make big money, credit cards are increasingly being used to provide a service to clients. Banks make a tiny fee for issuing the cards and/or a minor yearly fee from these cards, which are interest-free. These serve more as a way to meet the requirements of their clients.

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