How Islamic Credit Cards Work
Want to enjoy the convenience of a credit card facility that adheres to Islamic principles of financing? Or are you looking for an alternative form of financial option? Learn how an Islamic credit card works and find the best Islamic credit card to complement your lifestyle.
An Islamic credit card – also known as credit card-i in Malaysia – offers a viable option for Muslims to have the convenience of a credit card while keeping true to their faith. It’s also an alternative option for non-Muslims as you don’t necessarily have to be Muslim to have an Islamic credit card. For non-Muslims who prefer the concept of Islamic banking, an Islamic credit card would give them an option aside from the conventional credit card.
An Islamic credit card functions similarly to a conventional credit card but with some slight differences in the offered features. Below is a comparison of the features between a conventional credit card and an Islamic credit card.
|Conventional Credit Card||Islamic Credit Card|
|Compounding Factor||Yes||No, and total liability is known upfront.|
|Early Repayment Rebate||No||Yes|
|Non-Permissible Transaction Filtering||No||Yes|
|Takaful Coverage||No, but conventional insurance is offered||Yes|
See also: Islamic Banking 101
So What Makes A Credit Card Islamic?
Islamic credit cards need to be Shariah compliant and free from any activities that are deemed as unlawful in Islam. The main differences between Islamic credit cards and conventional credit cards are the prohibition of gharar and riba. Gharar is overcharging, while riba is interest. There are no compound charges as overcharging is also prohibited under Shariah law.
An Islamic credit card would also have a filtering system to ensure that the credit card will only be utilised for halal transactions It simply means that an Islamic credit card cannot be used to purchase alcohol, gambling or for other activities and purchases that are not permissible in Islam. In the event that the card is used for such purposes, the card issuer will not allow the transaction to go through.
Any interest or riba is strictly prohibited under the Shariah law, therefore the service provided by Islamic credit cards cannot involve any interest. It should also be noted that the prohibition of interest works both ways, which means a Muslim cannot pay for interest and cannot receive interest. Therefore, what Islamic banks do is provide Islamic credit cards by charging for their service, which is known as the ‘profit charge’, and only charged if there is an outstanding amount that is not paid within the grace period. The profit charge is usually calculated on a daily basis at 13.5% to 18% per annum. The profit charge is based on a tiered system, which means if you’d like to enjoy a lower rate for your outstanding balance, you’ll have to make sure you are consistent with your repayments. This is because missing a payment for your outstanding balance will cause the banks to increase your profit rate.
Cardholders generally needs to make a minimum monthly repayment of 5% on their credit card bills (or a minimum of RM50 – depending on the bank) by the due date of each month. Failure to make the minimum monthly repayment will not only make the profit rate charged on your outstanding balance to rise to a higher tier, you will also be charged a late payment penalty of 1% (or a minimum of RM10 – depending on the bank).
For example, this Islamic credit card from Maybank charges a profit rate depending on the tiered table as per below:
|Per Month||Per Annum||Condition of Payment|
|1.25%||15%||For prompt payment of 12 /12 months|
|1.42%||17%||For prompt payment of 10 / 12 months|
|1.50%||18%||For prompt payment less than 10/12 months|
Credit cards often comes with perks and privileges, and the same goes for an Islamic credit card. An Islamic credit card usually offers takaful coverage, and some also offer benevolence expenses. It means that in the event of the cardholder’s passing, Islamic banks that offer benevolence expenses will pay the premium to cover some or the entire outstanding balance of the deceased cardholder. Aside from that, Muslims will also have the added convenience of paying being able to pay their Zakat with an Islamic credit card.
Shariah Concepts Used For Islamic Credit Cards
The concept of Tawarruq is based on the basis where a buyer purchases a commodity from a seller on a deferred payment basis. The buyer then sells the same commodity to a third party where payment is made on the spot. What this really means is that the buyer is borrowing cash needed from the bank to make the initial purchase. This concept provides a way of taking a loan while making sure the loan adheres to Shariah principles. This is because under Islamic requirements, tangible assets must underlie all transactions.
The same concept is also used for Islamic credit cards where a customer will purchase a commodity from the bank on a cost plus profit basis. So the Tawarruq concept is the transfer of ownership of an asset from a seller to a purchaser. A credit card under the Tawarruq concept then means the bank gives the customer aid to make a purchase, and in return the customer will pay the bank for the aid which was provided through the means of a credit card.
Examples of Islamic credit card that uses this concept in Malaysia is Bank Islam’s Platinum Visa Credit Card – i and Gold & Classic Credit Card – i.
Ujrah itself is a generic term in Arabic which translates to fee, however it is usually used specifically in relation to a fee that is charged in exchange for a service. The Shariah concept of Ujrah used by Islamic banks refers to payment of a service fee in exchange for the services rendered to customers, and most Islamic credit cards in Malaysia are based on this concept.
The Islamic credit cardholder is charged a fee for the services, benefits and privileges provided by an Islamic bank instead of being charged interest. Cash advances are also available under the Ujrah concept, which sees some Islamic banks offering it along with the service of an Islamic credit card. Islamic credit cards which uses this concept are the Maybank Ikhwan and CIMB Islamic MasterCard.
See also: How Does An Islamic Personal Loan Work?
Muslims can now rest assured that they have a permissible option when it comes to credit card. Want to have the convenience of a Shariah compliant credit card? Check out and compare the best Islamic credit cards with CompareHero.my’s free credit card comparison tool today!