SHARIAH POINT OF VIEW

Bank Cards & Commercial Papers

YOUSUF SULTAN

Deputy Mufti, Jamia Shariyyah Malibag

2 6 T H T R A I N I N G C O U R S E O N I S L A M I C B A N K I N G & F I N A N C E , A R R A N G E D B Y C E N T R A L

S H A R I A H B O A R D F O R I S L A M I C B A N K S O F B A N G L A D E S H , 1 2 T H J U N E , 2 0 1 4

Bank Cards

Topic Outline - Bank Cards

What is a Bank Card?

Why Cards?

Different Types of Cards

How Cards Work?

What does Shariah say? Credit & Shariah

Examples of Islamic Credit Cards

Other Shariah Issues in Bank Cards

What is a Bank Card?

A bank card is typically a plastic

card issued by a bank to its clients

that performs one or more of a

number of services that relate to

giving the client access to funds,

either from the client's own bank

account, or through a credit

account.

- Wikipedia

Why Cards?

Alternative mode to Cash transactions

Immediate transfer of Funds

Instant Cash withdrawal from ATM

Pay for goods and services easily

Easy to carry, handle and manage

Earn bonus points, gifts or get Cash back

Other benefits like Insurance Coverage etc.

Different types of Cards

Debit Card

Credit Card

Charge Card

CharacteristicsDebit Card

Credit Card

Charge Card

Issued to Customer with available funds Y N N

Cash Withdrawal Y Y/N Y

Pay for goods and services Y Y Y

Credit facilityN (except overdraft)

Y (certain ceiling)

Y (certainceiling)

Revolving Credit NY (within credit limit)

N (fullpayable within credit period)

Interest chargedN (except in case of overdraft)

YY (for delay in repayment)

Yearly Fee Y/N

Visa/ MasterCard/ American Express

Payment networks that connect merchant payment

terminals with Issuer bank’s credit card department.

Third party networks to process transactions.

They do not issue cards. They make money by

processing transactions between the point of

purchase and the issuer bank.

How

Car

ds W

ork

What does Shariah say?

According to AAOIFI Shariah Standard No. 2

Debit Cards

• Permissible

• Condition: the cardholder does not exceed the balance available on his account (overdraft) and no interest charge arises out of the transaction.

Charge Cards

• Permissible

• Condition: The cardholder is not obliged to pay interest in the case of delay in paying the amount due.

Credit Cards• Not Permissible

• Because of interest-bearing revolving credit facility.

Credit & Shariah

Credits are generally discouraged.

A dead person was brought to the Prophet ( ( ملسو هيلع هللا ىلص so that he might

lead the funeral prayer for him. He asked, "Is he in debt?" When

the people replied in the negative, he led the funeral prayer.

Another dead person was brought and he asked, "Is he in debt?"

They said, "Yes." He (refused to lead the prayer and) said, "Lead

the prayer of your friend." Abu Qatada said, "O Allah's

Messenger ملسو هيلع هللا ىلص I undertake to pay his debt." Allah's Messenger ملسو هيلع هللا ىلص

then led his funeral prayer. – (Sahih al-Bukhari: 2295)

Credit & Shariah

Credits are generally discouraged.

All the sins of a Shahid (martyr) are forgiven except debt. – (Sahih Muslim: 1886)

Beware of debts! Their beginning is a worry and their end is destitution. –Umar Ra.

-(Muatta Malik, Book 37, Hadith: 1465)

Qard-Hasan is encouraged

Who is he that will give Qard-Hasan to Allah? For (Allah) will increase it manifold to his Qard (credit), and he will have (besides) a liberal Reward.

– Al-Qur’an (57:11). See also 64:17, 57:18, 2:245

Credit & Shariah

Any type of Interest is prohibited

Allah has permitted trade and forbidden Riba. - Al-Qur’an 2:275

The Messenger of Allah ( ( ملسو هيلع هللا ىلص cursed the one who accepts Ar-Riba(the usury) and the one who pays it.

-Muslim

The narration in At-Tirmidhi adds: And the one who records it, and the two persons who stand witness to it.

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Qard-Hasan

Helping the people in need

No interest is charged for late or in-time payment

A tool for business with Allah, not with the debtor

Shariah Compliant Credit Card

Credit based on Qard-Hasan

No interest fee for late payment

Any compensation for late payment to be added to charity fund.

A fixed reasonable monthly / yearly service fee (Ujrah) can

be charged for the services involved for credit advances.

No excess can be charged. Fees should be determined by Shariah

Supervisory board.

For cash withdrawals, it is necessary that the charges imposes be

certain and reasonable, excluding profits. Not permitted to link the

charge to the amount withdrawn.

- AAOFI Shariah Standard No. 19, Clauses 9/1 and 10/3/2 and Standard No. 2

Examples of Islamic Credit Cards

Qard-Hasanand Ujrah

Local :

IBBL (Khidmah Card) Prime Bank (Hasanah)

International:

Dubai Islamic Bank (Al Islami Credit Card)Kuwait Finance House (Al-Tayseer) Standard Chartered Bank (SaadiqCredit Card)

• Fixed monthly & Annual fees

• Fixed Cash withdrawal fee

• Fixed Late payment charge,

used for charitable clauses, not

added to bank’s income.

Murabahaand Ujrah

Local :

Exim Bank Ltd. SIBL

• Yearly x% Mark-up Profit will be charged with the purchase price of Goods and Services• All other fees are generally fixed

Examples of Islamic Credit Cards

Tawarruq/Bai Inah

Bank Islam Malaysia BerhadMany other banks in Malaysia

Shariah Issues in Organized

Tawarruq and Bai ‘Inah

Other Shariah Issues in Bank Cards

Name of Service/ Contract Permissible? Shariah Basis

Membership of international card regulatory organizations (pay membership fees, service charges and other fees)

Yes Ujrah

Commission to the card issuer payable by merchants accepting the card

Yes Ujrah

Fees charged by the institution to the cardholder (membership, renewal & replacement | Reasonable)

Yes Ujrah

Purchasing gold, silver and currency with cards

Yes

(with debit cards and charge cards, where payment is settled without delay)

Constructive Possession

(International Islamic FiqhAcademy –Resolution No. 53)

Other Shariah Issues in Bank Cards

Name of Service/ Contract Permissible? Shariah Basis

Cash withdrawal using a card (reasonable fixed fee)

Yes Ujrah

Cash withdrawal using a card (variable fee) No Riba

Privileges granted by card issuing parties that are prohibited by Shariah

No

Helping in Haram(At-tawawunalal Ithmi walUdwan)

Privileges granted by card issuing parties that are permitted by Shariah

Yes Tabarru

AAOIFI Shariah Standard No. (2) Debit Card, Charge Card and Credit Card,

International Islamic Fiqh Academy Resolutions: 108 & 139

Questions?

Commercial Papers

Topic Outline – Commercial Papers

Definition

Types

Shariah Rulings

Bai-al-Dayn

Alternatives

Definition

Commercial paper is a money-market security issued

by large corporations to obtain funds to meet short-

term debt obligations, and is backed only by an issuing

bank or corporation's promised to pay the face

amount on the maturity date specified on the note.

- Wikipedia

Types

Bill of exchange

Promissory note

Cheque

- Geneva Uniform Convention on the Law of Commercial Papers, Issued on 1349-1350 H corresponding to 1930-1931 and adopted

by a large number of countries.

(According to AAOIFI Sharia Standard No. (16) Commercial Papers)

Bill of Exchange

A bill of exchange is a certificate issued in a particular legal form. It consists of an order from a person (known as the drawer) to another person (known as the drawee) to pay a certain sum of money at sight, or at a particular or determinable date, to a third person (called the beneficiary).

Promissory note

A promissory note is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.

Cheque

A cheque is a document that orders a payment of

money from a bank account.

Bill of Exchange – an example

Shariah Rulings for Commercial Papers

Bill of exchange

• Permissible

•Hawala or Qard, or in the meaning of suftaja (demand note).

• Abdullah ibn Abbas RA used to take silver from traders at Mecca and write down a demand note for them to be paid at Kufa.

-Al-Bayhaqi in Sunan al-Kubra 5/352

Promissory Note

• Permissible, as it’s a document acknowledging a debt

•Allah SWT says, “O you who believe! When you deal with each other, in transactions involving future obligations in a fixed period time, reduce them to writing.” (Al Baqara: 282)

Shariah Rulings for Commercial Papers

Cheque

• Permissible

• Hawala (Transfer of Debt)

• The muhil (transferor) is the account holder, the muhal is the beneficiary and the muhal 'alayh(transferee) is the drawee bank.

Collection of the amount of commercial papers

• Wakalah (Agency)

Discounting of Commercial Papers

Discount commercial papers(to a third party)

• Not Permitted

• Amounts to a loan with interest.

Pay an amount that is less than the value of the paper to the first beneficiary prior to the date of maturity

• Permitted,

• Condition: Not based upon an agreement concluded prior to the date of maturity.

-AAOIFI Shariah Standard No. 16 (Commercial Papers); -The Council of the Islamic Fiqh Academy, Resolution No. 64/2/7

Various use of Commercial Papers

Sell commercial paper that has not become due for an amount similar to its value

• Not Permitted

• Riba al-nasi'ah

Sell commercial paper that has not become due for an amount that is more than its value

• Not Permitted

• Riba al-nasi'ah plus fadl

Purchase goods to be delivered later (on the date of maturity of the paper), and after the debt is established as a liability

• Permitted

• The holder of the paper transfers the claim of his creditor to his debtor through this paper. In such a case, the transaction amounts to hawala.

Bai’ al Dayn (Sale of Debt)

Sale of debt in exchange of debt

• Prohibited according to majority Fuqaha

• Rasul SM prohibited to sell debt in exchange of debt (Bai’ Kali bil Kali’ )

- Recorded by Hakim in Mustadrak 2/65, Daraqutni

71, Baihaqi 5/290

Sale of debt to the debtor in spot

(i.e. Zayd took 500 taka from Omar. Zayd says to Omar, buy my book in exchange of the debt I owe you)

• Permitted according to majority Fuqaha

Bai’ al Dayn (Sale of Debt)

Sale of debt to a third party

Hanafi, Hanbali, Zahiri:

• Not Permitted • Hawala is permitted (for hawala, recourse to the original debtor is there. But in a sell, no recourse to original debtor)

Shafi’e:

• Permitted • Condition: Debt must be recovered within the session.

Maliki:

• Permitted • Conditions: Many. Among them, debtor must be present, and he must admit about the debt.

Bai’ al Dayn (Sale of Debt)

Opinions of Contemporary Scholars

The Council of the Islamic Fiqh Academy:

• Not permissible• because this results in Riba (usury)

-Resolution No. 101 (4/11)

Shariah Advisory Council, Malaysia:

• Permissible with some conditions

- 14th meeting dated 8 June 2000, ShariahResolutions In Islamic Finance, Bank Negara

Malaysia

Alternatives to Discounting of Bills

Musharaka

• Trader will enter into Musharaka with the Bank before exporting goods. The return is known, so no difficulties for bank. Bank will advance money to the trader, and upon maturity date, it’ll receive the debt and keep its profit.

• i.e. 10% return is known to both parties. Bank will advance the money with 5% profit to the trader. And upon maturity Bank will get the rest 5%. This 5% is Bank’s profit.

• Nearby example in practice: MDB (MusharakaDocumentary Bill) in IBBL and other Islamic Banks

Alternatives to Discounting of Bills

Wakalah and Qard-Hasan

There will be two contracts.

• Wakalah: The exporter will appoint the bank as his agent to collect receivables on his behalf. The bank can charge a fee for this service

• Qard-Hasan: The bank will provide an interest free loan to the exporter, which is equal to the amount of the bill, and the exporter will give his consent to the bank that it can keep the amount received from the bill as a payment of the loan.

• The two contracts will be separate and none of them will be linked with the other.

• The agency fee will not vary with the maturity date, rather it’ll be fixed and reasonable.

• The agency fee must not be excess for advancing qard-hasan, as this will constitute benefit in exchange of qard, which is Riba.

Sources

AAOIFI Shariah Standards No. 2 (Debit Card, Charge Card and Credit Card), 16 (Commercial Papers) and 19 (Loan/ Qard).

Bai’ Dayn details and alternatives to it are taken from Taqi Usmani, Bai’ al Dayn, Issue 11, Islamic FiqhAcademy Journal

Questions?

Thank you.

Yousuf SultanDeputy Mufti, Jamia Shariyyah Malibag

E-mail: myousufs@gmail.comWeb: www.yousufsultan.com