Islamic Credit Cards: How Do They Work, And Is There A Better Alternative?

Abstract

Credit card, which is one of the noncash payment methods, has been growing exponentially. Credit card generally uses credit balances advanced by the banks to make payments. The banks charge cardholders for using the credit payment system or based on the outstanding balances owed. Charging fees based on the outstanding balances can tantamount to Riba Nasi’ah. To avoid thisRiba, the Islamic banks have packaged their cards based on certain Islamic ‘transaction principles’. These packages include Charge cards, Qard Al-hasan cards, Bay Al-Inah cards, Tawarruq cards, and Murabahah cards.Some of these packages have become subjects of increasing juristic criticism. I review these packages and conclude that they suffer either from reduced Shari’ah compliance or high price.I propose an alternative package that could minimize the juristic criticisms and improve competitiveness. It extends the Tawarruq package by introducing a buy-and-hold element in the ownership of the underlying asset. It eliminates the need for revolving money credit that can attract interest charges and replaces it with cash reserve and asset holding that the cardholder replenishes as he/she makes repayments into his/her card.