The arguments about Islamic credit cards

The charge

An Islamic card and a conventional card do the same thing, cost the customer a similar amount, and differ mainly in the vocabulary on the statement. The bank still earns roughly what a lender earns, and the classical contracts are stage machinery.

The body that permits tawarruq, warning about it

AAOIFI

Shariah Standard No. 30 says this about its own subject matter. Appendix B goes further, telling institutions they “have to show strict commitment towards using modes of investment and financing such as the various forms of Musharakah”, and that restricting tawarruq is meant to “curb any tendency for expanding monetization to the extent that jeopardizes the extensive use of the original modes of investment and financing”.

“Monetization is not a mode of investment or financing. It has been permitted when there is a need for it, subject to specific terms and conditions.”

AAOIFI, Shariah Standard No. 30, clause 5/1

The Fiqh Academy is blunter

OIC International Islamic Fiqh Academy

Resolution No. 179 (5/19), Sharjah, April 2009 prohibits organised and reverse tawarruq. The operative word is trick. AAOIFI uses the same word about bai' al-inah in Standard No. 30's Appendix B, where inah “is a trick for practicing Riba”.

“explicit, implicit or customary collusion between financer and finance seeker to make a trick for obtaining a present cash for a larger amount in future debt which is riba.”

IIFA Resolution No. 179 (5/19), Sharjah, April 2009

A regulator telling a bank its fiqh was wrong

Bank Negara Malaysia, Shariah Advisory Council

At its 78th meeting on 30 July 2008, considering a proposed wakalah and kafalah card. The bank had described itself as the customer's agent for settling merchants, a role too narrow to justify the fee it wanted to charge.

“The fiqh adaptation (takyif fiqhi) of ujrah on wakalah in the proposed credit card structure is not accurate.”

BNM SAC, 78th meeting, 30 July 2008

The defence

Form matters in Islamic law, and it is not trivial that it does. A sale and a loan are different contracts with different consequences. In a murabahah or tawarruq the price is fixed and cannot grow, whereas an interest-bearing balance compounds indefinitely. On any of these structures your debt is capped on day one, which is not a cosmetic difference to somebody who falls behind.

The defence also notes that the bodies raising these objections are the same ones certifying the products. That is what a functioning standards system looks like rather than a captured one.

Pricing a fee off the credit limit is ruled out

Bank Negara Malaysia, Shariah Advisory Council

At its 78th meeting on 30 July 2008. The stated reasoning is that pricing the fee off the credit limit “would give rise to the issue of conditional benefit on loan (qard), which is prohibited by the Shariah”. A loan that draws a benefit for the lender is riba, and a fee that rises with the size of the facility is a benefit that tracks the loan.

“Ujrah on wakalah or others shall be a fixed amount without being tied to a credit limit in order to avoid the element of riba.”

BNM SAC, 78th meeting, 30 July 2008

The same destination from a different direction

AAOIFI

Shariah Standard No. 2, clause 4/1/2 bans charges that include interest “even in an indirect way, such as in the case of increasing the service charge to cater for the granted credit”. Clause 4/5/2 allows only “a flat service fee for cash withdrawal, proportionate to the service offered, but not a fee that varies with the amount withdrawn”.

Appendix B item 9 blocks the same trick from the deposit side. If a bank requires a deposit before approving a card and stops you investing it, that is “tantamount to a loan that draws extra benefit”.

Where there is still room to argue

The Council expressly permits different fees on different cards offering different services. Tiering by card type, where a Platinum card genuinely provides more, is allowed. Tiering by credit limit is not.

In practice the two overlap heavily, because higher-tier cards usually carry higher limits. That overlap is where the honest disagreement now sits, and it is a factual question about a particular product rather than a doctrinal one.

Position A: no, even then

OIC International Islamic Fiqh Academy

Resolution No. 108 (2/12), 12th session, Riyadh, 23 to 28 September 2000. It is forbidden to issue or use an unsecured credit card if its terms involve charging interest.

That last clause is the load-bearing part, and it is the part most often left out when this ruling is summarised. The Academy was not merely warning people who revolve a balance. It was addressing exactly the person who says: I always pay in full, so it does not apply to me. The objection is to entering a contract that obliges you to pay interest in a defined event, not to whether the event happens. Signing it is the act.

“even if the cardholder intends to pay within the moratorium period before charging interest.”

IIFA Resolution No. 108 (2/12), Riyadh, September 2000

Position B: yes, provided you settle inside the interest-free period

Absa Bank Shariah Supervisory Committee, South Africa

A real, named, institutional counter-position held by a bank's own scholar panel. It is the position most cardholders are relying on, whether or not they know it has a name.

Established by prior research on this project. The source page was not re-fetched in this pass, so the exact wording and date are not yet confirmed.

Position C, which is not really a third position

OIC International Islamic Fiqh Academy

Resolution No. 139 (5/15), Muscat, March 2004, says at clause 1 that it is permissible to issue and deal in unsecured credit cards, “provided that issuing such Cards or dealing in them does not involve charging interest for repayment defaults”.

Read against Resolution 108, the Academy's line is consistent. The objection is to the interest term, not to cards. What it does not do is retract the sentence about intending to pay in time.

AAOIFI does not answer this one

AAOIFI

Its standards are aimed at the bank rather than the customer. Standard No. 2 clause 3/3 prohibits an institution from issuing an interest-bearing revolving card, and Appendix B adds that “the issuance of credit cards free from Riba, or from any other legal prohibition, is permissible”.

Neither sentence tells an individual what to do about the card already in their wallet.

The mechanism

The bank sells you an asset on deferred terms at a high price and immediately buys it back for a lower cash price. You have cash, you owe more. There is no third party and the asset ends where it started.

The Gulf and international position: prohibited

AAOIFI

Shariah Standard No. 30, clause 4/5 requires the commodity in a tawarruq to go to a third party “so as to avoid 'Inah which is strictly prohibited”. Appendix B states that inah “is a trick for practicing Riba”, that it “takes place between two parties who are in fact a borrower and a lender”, and that “the majority of the Fuqaha subscribe to prohibition of 'Inah”.

Because AAOIFI standards are mandatory regulation in the UAE, Bahrain, Qatar, Oman, Jordan, Sudan, Syria, Pakistan, Nigeria, Yemen, Mauritius, the Kyrgyz Republic and the QIFC, an inah card cannot be sold in those markets.

The Malaysian position: permitted, with conditions

Bank Negara Malaysia, Shariah Advisory Council

The Council approved a credit card built on bai' al-inah plus wadi'ah at its 18th meeting, 12 April 2001.

Its stated basis is that two separately and independently concluded sales, each with proper offer and acceptance, are two valid sales; that some Shafi'i scholars and a few Hanafis including Abu Yusuf permitted inah; and that al-Shafi'i wrote in al-Umm that where a person sells an asset for a term and the buyer takes possession, “there is nothing wrong if he buys back the asset from the one who bought the asset from him at a lower price”.

Why practice moved anyway

Bank Negara Malaysia, Shariah Advisory Council

At the 82nd meeting on 17 February 2009 the Council resolved that a stipulation to repurchase the asset “will render the contract as void”, and was explicit that this catches a stipulation appearing in a recital, in marketing brochures, in supplementary documents or in appendices, not only in the operative clauses. It cited al-Nawawi's report that scholars unanimously hold a repurchase stipulation linked to another contract annuls the contract.

The entire operational convenience of an inah card lay in that pre-arrangement. Once it was voided the structure lost most of its advantage over tawarruq, which the Council had already approved.

The two things being argued about

Ta'widh is compensation for a loss the bank actually suffered. Gharamah is a fine imposed to enforce discipline, with no loss needing to be proved. Bank Negara's own text defines them that way.

Position A: both permitted, with the fine given away

Bank Negara Malaysia, Shariah Advisory Council

At its 4th meeting (14 February 1998), 95th meeting (28 January 2010) and 101st meeting (20 May 2010), subject to four conditions: ta'widh only on obligations from exchange contracts and qard; only after the due date; ta'widh may be recognised as income because it compensates actual loss; and the fine may not be.

The reasoning rests on the hadith that delay by a solvent debtor is tyranny, the maxim of neither harming nor reciprocating harm, and an analogy to usurpation, on the basis that a delayed payment deprives the financier of the use of property in the same way.

DSN-MUI takes the same shape in Fatwa No. 54, clause Keenam: ta'widh for costs actually incurred, plus a late charge “recognised entirely as social funds”.

“Gharamah shall not be recognised as income. Instead, it has to be channeled to certain charitable bodies.”

BNM SAC, 95th and 101st meetings, 2010

Position B: neither permitted, only actual recovery expenses

AAOIFI

Clause 2/1/3 closes the courtroom route too: no judicial demand for such compensation may be made. Clause 2/1/4 allows recovery of “legal and other expenses incurred by the creditor in order to recover his debt”, which is narrower than the Malaysian ta'widh because it is expenses rather than compensation for loss.

The Fiqh Academy said it itself in Resolution No. 109 (3/12), Riyadh, September 2000: “The imposition of a penalty clause in debt contracts is usurious in the strict sense.” The same resolution permits penalty clauses in construction, supply and manufacturing contracts, where the obligation is to perform rather than to pay a debt. That contrast is the cleanest way to see the principle. It is not penalties that are objectionable, it is increases on debts.

“It is not permitted to stipulate any financial compensation, either in cash or in other consideration, as a penalty clause in respect of a delay by a debtor in settling his debt, whether or not the amount of such compensation is pre-determined; this applies both to compensation in respect of loss of income (opportunity loss) and in respect of a loss due to a change in the value of the currency of the debt.”

AAOIFI, Shariah Standard No. 3, clause 2/1/2

Does donating it actually cure it? For

The objection to a penalty is that the creditor profits from the delay. If the money never reaches the creditor, that objection does not apply.

AAOIFI itself endorses a version of this at clause 2/1/8, which permits a debtor to undertake that if he procrastinates he will donate an amount or a percentage of the debt to charitable causes through the institution. So AAOIFI does not think a charitable outflow is inherently tainted.

Does donating it actually cure it? Against

The charge still functions as a price for time, and the debtor still pays more for paying later. The bank also gains indirectly: it gets its money on time from the deterrent, it gets the reputational benefit of the donation, and it retains discretion over which causes are funded.

AAOIFI's clause 2/1/8 is framed as the debtor's own undertaking to donate, not as the bank's right to levy a charge and then dispose of it. Those are not the same instrument even though they produce the same cash flow.

What is clearly permitted

AAOIFI, IIFA and DSN-MUI

AAOIFI Shariah Standard No. 2 clause 4/2 permits the issuer to charge the merchant a commission calculated as a percentage of the purchase price, and Appendix B item 5 explains this as partly brokerage and marketing and partly a service charge for collecting the debt.

Clause 4/6/2 then permits granting the cardholder “privileges ... not prohibited by the Shari'ah, such as a priority right to services or discounts on hotel, airline or restaurant reservations and the like”. IIFA Resolution No. 139 (5/15) clause 4 says the same: prohibited benefits are out, “Shariah-acceptable benefits, like service priority and price discounts” are in.

DSN-MUI Fatwa No. 54 clause Kelima (b) permits the merchant fee as ujrah for intermediation, marketing and debt collection.

Cash back on the card's own annual fee is ruled out

Bank Negara Malaysia, Shariah Advisory Council

77th meeting, 3 July 2008. An issuer offering an ujrah-based card may not offer a cash-back rebate on the annual fee, because that creates an exchange of cash for cash at different counter values, which is riba al-fadl. It may be given as a gift instead.

Note carefully what this ruling is and is not. It is about cash back on the fee, not about cashback on spending in general.

The underlying argument, which nobody has settled

If the reward is funded by merchant interchange, the merchant recovers it in prices, and the cost is spread across all customers including those who pay cash. Some scholars treat that as an ordinary commercial externality of a permitted brokerage fee.

Others treat a rewards scheme that only makes sense if cardholders spend more than they otherwise would as falling foul of israf, wasteful spending, which DSN-MUI made a condition of card compliance in Fatwa No. 54 clause Keempat (c). A rewards programme designed to maximise spend sits awkwardly against that clause. No body cited here has ruled on it directly.

Conventional insurance bundled with a card is prohibited

AAOIFI and IIFA

AAOIFI Shariah Standard No. 2 clause 4/6/1: it is not permissible for institutions to grant the cardholder privileges prohibited by Shariah, “such as conventional life insurance, entrance to prohibited places or prohibited gifts”. IIFA Resolution No. 139 (5/15) clause 4 agrees, ruling out commercial insurance.

This is the rule most likely to be quietly broken by a card in a mixed market, because free travel insurance and purchase protection are standard conventional card features and are usually underwritten conventionally.

Takaful instead does not automatically fix it

Bank Negara Malaysia, Shariah Advisory Council

77th meeting, 3 July 2008. Providing personal accident takaful coverage as a card privilege for which ujrah is charged is not in line with Shariah, for two reasons. The cardholder is not a direct participant in the takaful scheme, since the bank has arranged the cover with a third party. And the cardholder is paying money and receiving risk cover, which the Council treated as exchanging cash for cash at different values.

The permitted route is to give the cover as hibah, a gift, with no fee attached. The Council's own words are that hibah is “an appropriate alternative compared to ujrah in order to avoid syubhah”, doubt.

Packaging is the trigger, not proximity

Bank Negara Malaysia, Shariah Advisory Council

70th meeting, 12 September 2007. A takaful company proposed group cover for conventional credit card customers, with the bank making the cover a condition of the card application. The Council resolved that this is not allowed, because the takaful contract and the conventional card contract “are interconnected since both contracts are packaged in one product”, which “will indirectly cause the takaful business' involvement in practices of riba”.

The contrast with the immediately preceding item matters. Takaful cover on an asset financed by a conventional loan was allowed, because the two contracts “are two separate and independent contracts” and the takaful company “is not directly involved in the conventional loan transaction”. A compliant product sold alongside a non-compliant one is fine. A compliant product bundled into a non-compliant one is not.

The concern

An Islamic window is an Islamic banking division inside a conventional bank. If it shares the parent's capital, liquidity, treasury, technology and staff, and the parent's balance sheet is funded by interest-bearing deposits and wholesale borrowing, then the window's compliance is a matter of ring-fencing rather than of substance. The money is the same money.

What can be said honestly

Bank Negara Malaysia, Shariah Advisory Council

One pair of directly relevant verified rulings gives a usable principle without settling the window question. The Council allowed takaful cover on an asset financed by a conventional loan, because the two contracts are separate and independent. It then refused takaful cover packaged into a conventional credit card, because the two contracts are interconnected.

The principle being applied is packaging, not proximity. Operating next to a conventional business does not contaminate a compliant contract. Being bundled into one does.

Applied to windows, that suggests the question is not whether the bank also does conventional business, but whether this specific product is structurally entangled with a conventional one. That is a useful test, and it is not the same thing as a ruling on windows.