Salman Ahmed Shaikh
In consumer choice, there are two important aspects from Islamic economics perspective that must be understood. The first aspect is related to the ‘choice set’ and the second aspect is related to the ‘budget constraint’.
Limit on Choice Set
Islam discourages lavish consumption (Israaf, i.e. extravagance even in lawful things and Tabzeer, i.e. consumption in unlawful things like intoxicants). Islam encourages modesty and moderation in life (Wasatiyyah). Islam encourages spending on society with explicit directives for charity rather than engaging in wealth accumulation (Kanz) and miserliness (Bukhl). Allah promises great rewards for charity. Belief in afterlife expands the decision making horizon for a consumer and the consumer is promised compounded increase in utility for forgone consumption and charity payments in this world after fulfilling one’s own needs.
Limit on Budget Constraint
Islamic principles discourage indebtedness unless it is ‘necessary’. Following Ahadith show the viewpoint of Islam on indebtedness, especially when it is beyond one’s capacity to repay. These Ahadith provide the guidelines as to what extent indebtedness should be avoided.
Prophet Muhammad (pbuh) said:
“O Allah! I seek refuge with Thee from sin and debt.” [Sahih Muslim]
The Prophet Muhammad (pbuh) said:
“After the grave sins which Allah has prohibited, the greatest sin is that a man dies while he has debt due from him and does not leave anything to pay it off, and meets Him with it.”
Following supplication is related to the Prophet Muhammad (pbuh) for salvage from debt:
“O Allah! I seek refuge in You from all worry and grief. I seek refuge in You from incapacity and slackness. I seek refuge in You from cowardice and niggardliness, and I seek refuge in You from being overcome by debt and being subjected to men.”
Implications for Islamic Finance
But, the currently practiced Islamic finance contracts used widely are based on debt based financing than equity financing.
Some financial institutions in Islamic countries have developed Islamic credit cards for consumer financing. Problem arises due to the fact that credit cards could be used for impulsive buying or even fulfilment of one’s needs which may not involve a tangible asset. Even when a transaction may involve a tangible asset, it is hard to fulfil all the necessary requirements of debt based modes of finance like Murabaha, Diminishing Musharakah and Ijarah in quick time.
One way to deal with it is to use no mode of financing and simply offer it as a ‘convenience’ product and charge a transaction fee.
But, charges must be realistic and must not be too high. It also must be noted that a credit is still provided to the customer (else it will be same as a debit card), but an additional amount cannot be charged over the credit amount. Then, the charges so taken from the customer must be transaction specific and not time specific preferably. In current practice, they are time specific.
Furthermore, the product that provides the same convenience ‘debit card’ is free of any cost nowadays. If credit card is marketed as a ‘convenience product’ and a transaction fee is charged, it would imply for all practical purposes that it is in lieu of credit facility and not in lieu of convenience provided since such convenience is provided by the same banks free of any costs in ‘debit cards’ anyways.
As a matter of fact, banks want to make profit out of the business of providing finance, even for consumption purposes. Fiat money based monetary system with fractional reserve banking at its core requires consumerism for credit expansion. This is not the preferable path to follow looking at the various principles and philosophy of Islamic faith. Islamic economics and its principles and objectives may very well be increasingly undermined if such path is taken too far.
One bank in Pakistan had offered a credit card facility where at the back end; there is investment and disposal of investment in mutual funds units to engineer the final outcome of conventional credit card, feature by feature. Transactions where neither the buyer nor the seller has intent to transact in such back-end investments or even knowledge of it and where aim is just to mimic the conventional credit card like cash flow stream and features to the every minor detail is problematic to say the least. Financial market investments like mutual funds have variable performance depending on various market factors. It appears that for the ‘end objective’ which motivates such financial engineering, any asset including soil of dessert or mars could also be used because the price in exchange has no connection with the actual real economy factors of that market.
The Qur’an is quite explicit on how it sees the form versus the substance debate in the event of Sabt and also with regards to Halala in divorce. Legal stratagems shall not be overly used as foundation for establishing and running system and countless transactions in it. Jews who put net one day earlier and caught fish one day after Sabt were not praised for their cleverness and smart legal strategy. Rather, they were condemned severely. Likewise, Halala mentions only a genuine way for possible re-association after three divorces. The message which comes out of that is not to use this as a legal strategy, but to not trivialize divorce, institution of family and Allah’s teachings.
It is appreciable that apart from this particular bank which is offering credit card on this scheme, other full-fledged Islamic banks have not ventured in this direction. It is important to pursue financial engineering in innovative ways, but also keeping in view the Ahkam and Maqasid of Shari’ah.
Alternatively, with Fintech, blockchain and digital technologies, at least debt based modes of financing like Murabaha could have been employed in actual subject matter that is purchased by consumer from the credit card. Even when Murabaha is not considered ideal mode of financing and where the pricing linked with conventional interest based benchmarks is not preferred, this will have at least meant that the subject matter which is organically and genuinely desired and purchased by the client is driving the prices, rather than some back-end investment in completely unrelated markets at prices which are completely unrelated to pricing in such markets and all this being done is not in the slightest of knowledge of clients.
Categories: Articles on Islamic Finance
Islamic Economics Project 
Thanks for the feedback and questions.
When Islamic banks just issue a service fee based credit card, then, the customer can repay the loan within grace period. They have to pay annual or monthly fee which is income for the bank. Bank does not charge any markup.
In Murabaha based credit cards, sanctioning credit card limit is one thing, but with each purchase, a separate Murabaha agreement is to be signed between bank and the client. That is not easy in the instinctive way we usually use the credit card.
Regarding cost differences, it depends on features. For instance, a credit card that does not have a grace period, but which also does not have a service fee is not comparable to a card with grace period but service fee. There can be many different types of clients looking for safety, liquidity or convenience in different degrees of importance. Their different preferences may make both forms of credit cards attractive.
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Thanks for the information and update on this.
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Thank you Mr. Salman for your write-up!
With reference to your recommendations on credit card, I would like to highlight the Sharia’h aspect of the transaction itself.
Shariah principles are very clear and require that we must identify and choose a right contract.
The credit card transaction has two aspects i.e. a built-in credit period and possible lending if customer does not pay the bill on time. The built-in credit period does not attract any Shariah issue; however, the problem is how to finance the customer if he does not pay on time.
I am of the opinion that Islamic bank should not finance its customers under credit card mechanism. There is no possibility of referring to any direct mode of finance (as you mentioned) and hence let us not try to accommodate the clients through Tawarruq or other fictitious structures.
An Islamic bank may issue the credit card providing a built-in credit period and customer should pay charity in case of default/delay in paying the periodic bills.
By the way, I don’t find any Shariah permissibly for charging in the name of convenience!
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Yes, I share the same view. Jazak Allah for your feedback and insights.
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The way you have proposed for using credit cards include following attributes:
1. As ‘convenience’ product
2. Transaction fee can be charged
3. Charges must be realistic and must not be too high.
4. An additional amount cannot be charged over the credit amount.
5. The charges so taken from the customer must be transaction specific and not time specific.
Charges are realistic and not too high is a subjective term. Who is going to decide it is not high and is very realistic. In case of default, how the money will be recovered? The transaction fee will be a part of profit or designated charity? These are the ambiguities which need to be addressed.
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Charges will be decided by demand and supply. The product structure is to be defined by people like us and overseen by Islamic scholars. Bank can take collateral by asking the customer to maintain a current account with sufficient minimum balance. In preventing default risk, it is important to screen the clients very sharply beforehand. ECIB in Pakistan is a database that has records of every consumer finance client and its credit history. This is accessible to every bank. Regarding transaction fee, it is profit, but it can be charged for an agreed upon service provided by the bank to the client.
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