A credit card allows the user to purchase goods and creates a revolving unsecured debt up to a predetermined limit granted by the issuer. It differs from a Debit Card, where the purchase is debited from the users checking or savings account. A credit card user typically repays the debt in installments with a minimum payment determined by the balance on the card. Most credit cards charge relatively high interest rates based on the unsecured nature of the debt. The interest charged on the balance is considered haram or impermissible. In certain structures the feature has been replicated, e.g. by tawarruq.
The general relationships involved in a credit card transaction are between the issuing bank, the client and the merchant. Those needs to be understood from the viewpoint of the Shariah issues in order to come up with a solution to offer permissible banking card activities.
The commission based relationship between the issuing bank and the merchant is accepted according to the AAOIFI standard No. 2, No. 4/2 but the nature of this relationship was subject to intense debate. Under the commission-based relationship, the credit card issuer charges the merchant a service fee for the purchases charged by the merchant's customers. The problematic points discussed according to Abdul Wahab Abu Sulaiman were the guarantee of payment offered to the merchant. The controversial aspect is that many scholars believe there cannot be compensation for a guarantee. Further it is viewed as a kind of bargaining, to exchange an amount due with a discount be paid at once, also an impermissible activity.
A Debit Card is issued by an institution to a customer with available funds in his account. The amount due is directly debited to his account and no credit provided. Its permissibility is stated in AAOIFI standard No. 2, 3/1 as long as the cardholder “does not exceed the balance available on his account and no interest charge arises out of the transaction.”
A Charge Card does provide on contrary “a credit facility up to a certain ceiling for a specified period of time, as well as providing a means of repayment.” According the AAOIFI definition 2/2 standard No. 2. Its permissibility is subject to a number of conditions, which are challenges for a bank, as such are named in Standard No. 2, 3/2:
“(a) The cardholder is not obliged to pay interest in the case of delay in paying the amount due.”
Further a bank may ask for a deposit to guarantee the amounts spent. This fund needs to be invested in form of a Mudaraba profit sharing agreement for the cardholder. Regarding the relationship between the client and the bank another important issue for a Shariah compliant institutions applies:
“( c) The institution must stipulate that the cardholder may not use the card for purposes prohibited by the Shari’a and that the institution has the right to withdraw the card in case such a condition is violated.”
Credit Card with credit function
As for the credit card it is understood as it does “provide a revolving credit facility with the credit limit and credit period determined by the issuer of the card. It is also a means of payment.” Further it allows to withdraw cash in the limits of the credit and is allowed to defer payment against interest charged for the duration of it. The decision regarding this type of banking cards is its impermissibility outline in Standard No. 2 3/3:
“It is not permissible for an institution to issue credit cards that provide an interest-bearing revolving credit facility, whereby the cardholder pays interest for being allowed to pay off the debt in installments.”
Other prohibitions are concerned if privileges offered to cardholders are impermissible by its respective nature, e.g. conventional life insurance, entrance to prohibited places or prohibited gifts, such as alcoholics.
The standard allows an institution to pay a membership fee to organisations like Visa or Mastercard.