Innovations and Payment Systems

Shariah-compliant credit cards become more common


As credit card companies reach out to specific groups by offering credit cards with ties to everything from charities to pro sports teams, they are also actively pursuing a group of people who have traditionally shunned credit cards because Islam forbids

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As credit card companies reach out to specific groups by offering credit cards with ties to everything from charities to pro sports teams, they are also actively pursuing a group of people who have traditionally shunned credit cards for religious reasons.

Muslims are required to follow strict Islamic standards known as Shariah. Generally, these principles state that Muslims are forbidden to participate in any financial practices or do business with any money-lending entity that charges interest, known as riba; invokes gharar, or uncertainty, most commonly in the form of variable interest rates; or uses funds for maysir, or gambling.

While Muslims in the past have typically relied on cash or debit cards, in recent years, many customers have demanded more flexibility and options from their banks. According to Brian Riley, a research director at TowerGroup, a financial services research firm based in Needham, Mass., Muslims constitute almost 24 percent of the world’s population, and he estimates that total assets in Shariah-compliant banks will hit $1 trillion by 2011.

Comparing Shariah-compliant credit cards with typical Western cards

InterestNo interest is charged. Bank is compensated with a fixed monthly feeInterest is variable, depending on the outstanding amount
CollateralCollateral is required in many cases; most banks require an underlying deposit or undated checkNo collateral needed
Contract typeLease-basedLoan-based
Transaction restrictionsThe purchase of alcohol, tobacco, gambling, pork, and sexually-related items are forbiddenThere are no such restrictions on items that can be purchased
Profit margin on depositsFixed. Profit is shared between the bank and customer and is not compoundedNo deposits
Late payment feesFixed amount + 3 percent of outstanding balance; the 3 percent is typically donated to charityVariable, compounded
Credit: Niket Patankar, CEO of Adventity Inc.

Three different cards

Generally, there are three groups of Shariah-compliant credit card arrangements:

  • A bank provides a line of credit to the cardholder and charges a monthly or yearly usage fee tied to the outstanding balance of the line of credit.
  • A customer is allowed to buy an item with a card, but in the instant that the card goes through, the bank purchases the item before selling it to the cardholder at a higher price.
  • A lease-purchase agreement where the bank holds title to the purchased item until the cardholder makes the final payment.

With these cards, terms and fees can vary depending upon the financial institution as well as the region and the local competition, according to Abdi Shayesteh, an associate with the Islamic Finance Practice Group of Atlanta-based law firm King & Spalding. “In general, with line-of-credit cards, a customer can expect to pay usage fees equal to 5 percent to 10 percent of the outstanding balance,” he says. “With the others, a cardholder will usually be required to pay a third of the outstanding balance and have a deposit account with the bank.”

The bank must also follow certain restrictions. “To qualify as Shariah-compliant, a financial institution must have an internal review board of experts in Islamic law to certify that its banking products and practices conform with Shariah principles,” says Riley.

Despite their complexity, experts maintain that Shariah-compliant credit cards have more in common with their nonIslamic counterparts than not. “These cards require no assets of ownership. They’re easy to use. And the limit is set on the basis of creditworthiness of the person,” says Niket Patankar, CEO of Adventity, a financial services research firm with offices in New York, India, and Dubai. “They follow the same models that Visa and MasterCard use and also offer value-added benefits, co-branding, and different type of cards.”

They also may offer rewards. The First Gulf Bank’s Makkah Visa, for instance, allows users to build up points that can be redeemed with a trip to the holy city of Mecca during the last 10 days of Ramadan, a Muslim holy season.

Other Shariah-compliant financial products offered by banks and finance companies include mortgages, car loans and personal loans, which most often follow the lease-to-own format, but they can also be in the form of a partnership. “In this case, the bank and the customer acquire the property together, and the customer increases his equity or ownership position in the property by purchasing the bank’s entire equity interest over time through installment payments,” says Shayesteh.

“These cards require no assets of ownership. They’re easy to use. And the limit is set on the basis of creditworthiness of the person.”

Not just for Muslims
You don’t necessarily have to be Muslim to get a Shariah-compliant card. Since Islamic banks are forbidden from investing in companies that profit from alcohol, tobacco, pornography, gambling or pork, many nonMuslims who object to these practices on personal grounds are also attracted to the programs. Not surprisingly, however, the majority of banks issuing Shariah-compliant credit cards are located in countries in the Persian Gulf region, the Middle East, and Southeast Asia. But since the majority of the cards are processed through Visa or MasterCard, retailers take them wherever credit cards are accepted.

In recent years, a growing number of U.S. financial institutions have gotten on board. University Bank in Ann Arbor, Mich., launched a line of Shariah-compliant mortgage and home refinancing programs, profit-sharing deposit accounts, and shares in Islamic mutual funds in 2003, while Chicago-based Devon Bank offers Shariah-compliant home, construction, and small-business financing products. Finance companies LARIBA American Finance House and Guidance Residential also provide customers with a variety of home, automobile and business finance products.

According to Patankar, this full-service financial approach is the wave of the future. “In the retail finance space, Shariah-compliant finance offers almost all the same products as conventional banks do, including Islamic insurance,” he says. “The only difference is that they are structured to align the product with Shariah principles.”

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