Prospects of Islamic Credit Cards in Pakistan

INSTITUTE OF BUSINESS AND TECHNOLOGY

Prospects of Islamic Credit Cards in Pakistan

Prepared By

Shazia BashirBM-25069

Sadaf OadBM-25088

Asad MazharBM-25065

Course Code : MKT-606

MBA (Banking and Finance)

FACULTY OFMANAGEMENT AND SOCIAL SCIENCES

SPRING - 2011


Institute of Business and Technology

CONTENTS

ACKNOWLEDGEMENT

ABSTRACT

CHAPTER NO.1 INTRODUCTION

1.1 Introduction ............................................................................................... 1

1.2 Purpose of Study....................................................................................... 1

1.3 Research Objectives ................................................................................. 1

1.4 Research Methodology ............................................................................. 2

CHAPTER NO. 2 LITERATURE REVIEW

2.1 Literature Review ...................................................................................... 3

CHAPTER NO.3 CONVENTIONAL CREDIT CARD AND ISLAMIC CREDIT CARD

3.1 History ....................................................................................................... 7

3.2 Nature of Credit Card ................................................................................ 8

3.3 Credit Card System................................................................................... 9

3.4 Conventional Credit Card ........................................................................ 11

3.5 Islamic Credit Card.................................................................................. 13

3.6 Islam and Credit Card ............................................................................. 14

CHAPTER NO.4 ROLE OF ISLAMIC CREDIT CARD IN PAKISTAN

4.1 Islamic Credit Card in Pakistan Saadiq ................................................... 15

4.2 Islamic Banking History ........................................................................... 16

4.3 Islamic Vs Commercial Banks in Pakistan .............................................. 22

CHAPTER NO.5 KEY BENEFITS OF ISLAMIC CREDIT CARD

5.1 Structuring Of Islamic Credit Card........................................................... 24

5.2 Islamic Finance………………………………………………….................. 28



5.3 Islamic Contracts..................................................................................... 33

5.4 Transition Form of Conventional toIslamic Credit Card .......................... 35

5.5 Islamic Credit Card Controversy ............................................................. 36

5.6 Differnce Between Islam and Conventional Credit Card ......................... 37

5.7 Benefits of Islamic Credit Cards .............................................................. 38

CHAPTER NO.6 FINANCIAL ANALYSIS OF ISLAMIC CREDIT CARD

6.1 Findings................................................................................................... 40

6.2 Demographics ......................................................................................... 40

6.3 Finding Analysis ...................................................................................... 47

CHAPTER NO.7 CONCLUSION & RECOMMENDATIONS

7.1 Conclusion .............................................................................................. 54

7.2 Recommendations ................................................................................ 54

REFERENCES 56



ACKNOWLEDGEMENT

First of all we would like to thank to ALLAH Almighty Who gave us courage,

health, and energy to accomplish our Project in due time and without Whose help

this study which required indefatigable efforts would have not been possible to

complete within the time restrictions. All esteem for his Holy Prophet Hazrat

Muhammad (P.B.U.H) who enabled us to recognize our originator.

Motivation, support, guidance, corrections, advices, and overall support are the

key elements required from the supervisor to write down and complete a Project

of a good quality standard and a quality within deadlines. It is a matter of extreme

pleasure for me to extend my thankfulness and give due credit to our supervisor

DR. NOOR whose support has constantly been there in need of time and who

provided us with all these key elements to complete our dissertation within the

time frame.

Moreover, he has been supporting us enthusiastically throughout our work to

make our Project ready in due time. Our thanks are also due to our examiner Dr.

NOOR whose valuable comments and suggestions made colossal contribution in

improving our dissertation. Last but not least, we pull out our thanks to our entire

family for moral support and pray for our health and successful completion of our

dissertation within time limits.

Shazia Bashir Sadaf Oad

Asad Mazhar



INSTITUTE OF BUSINESS AND

TECHNOLOGY

ABSTRACT SUBMITTED BY: Shazia Bashir

Sadaf Oad

Asad Mazhar

DISCIPLINE: MBA (Banking and Finance)

TITLE OF PROJECT REPORT: Prospects of Islamic Credit Cards in

Pakistan

MONTH OF SUBMISSION: April, 2011

NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon

Abstract:

This project discusses research, which was undertaken about the Prospects of

Islamic Credit Cards in Pakistan we have studied all the conventional and Islamic

credit card system as well as key benefits of Islamic credit card system. A

theoretical frame work is developing from literature research and this is used by

us as a model for further research. We have collected data within this frame work

and analyzed it according to requirement of the project. This research also

covers the awareness which people might have about the credit card system and

also the scope in Pakistan. Islamic credit card system can thrive on sustainable

basis only if aware around the country. Then in the last the detailed study some

recommendations are made on the source of the analysis of system practice and

conclusion are drawn.


Institute of Business and Technology 1

1. INTRODUCTION

1.1 Introduction

Credit card in general also termed as plastic money has become an essential

mode of payment in today’s society. Islamic Shariah permits the concepts of

credit card when the factor of usury (interest) is removed from it because

ALLAH prohibits Usury and permits sale. Islamic credit cards are based on

Bai’ (Trade), that’s why Islamic credit card do not involve in any money

lending transaction therefore the element of usury (interest) in conventional

money lending is eliminated from this card .

The research has tried to identify insight about the prospects of Islamic

credit cards in Pakistan.

1.2 Purpose of Study

The purpose of this research is how an Islamic credit card functions, what are

the differentiating factors which makes an Islamic credit card different from a

conventional credit card. The religious grounds on the basis of which the

Islamic credit cards were permitted to be launched and the current as well as

the future customer usage of Islamic credit cards.

1.3 Research Objectives

The objectives of this research are as follows

1. To provide a detailed insight so as to how does an Islamic credit card

function.

2. To enumerate the distinguishing factors which make Islamic credit

cards different from conventional credit cards.

3. To analyze the acceptability Islamic credit card in global market and

especially in Pakistani market.

4. To identify that what is the opinion about Islamic credit cards that carry

surrounded by Pakistani masses.

5. To identify the level of awareness among the customer.



1.4 Research Methodology

A mix of both primary and secondary research would be used in order to

obtain the required information. Our research is combination of both primary

and secondary research we first started our research by collecting information

through secondary data available online such as research journals, literature

review, different study conducted in different parts of world, more over we will

be collecting the information available at State Bank’s Library, library of other

universities. Our primary research would start by questionnaire filled by

respondents.



2. LITERATURE REVIEW

2.1 Literature Review

According to Nuradli Rizwan Shah Bin Mohd1 (2007) credit card mostly use

as a fundamental mode of payments in today’s society. Generally people wish

to use credit card for certain reasons for e.g. to acquire credit facility, easy

payments, cash advance, charge card and as a prestige. Islam allows the use

of the credit card if there is no contribution element of usury at the same time

it does not go against with rule of Shariah. Islamic credit cards offer minor

penalty rate, more value of money; free bonus point looks much fancier and

gives annual fee waiver. To use the credit card or not two distinctive

processes and those persons who hold the credit card have Islamic base

credit card or not. Through this interprets that generally choosing of Islamic

based credit card are government staff as compared to private sector staffs.

The actual and a absolute frequency to use credit card for the purpose online

purchases and it has increase the factor of choosing Islamic based credit card

but it does not increases the chance of having credit card. Islamic based

credit card holds some attractive features for the purpose of online purchase

to attract and encourage people to use this product.

According to Adil Manzoor Bakhshi2 (2006) Islamic finance is under

Islamic law (or shariah) principles. Shariah fundamental source is Quran and

Sunnah which are followed by the mutually consensus of the Jurists and

interpreter of Islamic law. The main features of the Islamic finance system are

the prohibition of the receipt and payment of interest or Riba. Islam

disapproves the role of interest and as we can see that there is a vital role of

the interest in the present banking system by adopting this act of commercial

banking system Muslim thinkers thinks that commercial banking could be

structured on the basis of interest free system. So that for the Muslims Islamic

1

www.kantakji.com/fiqh/Files/Finance/ICC.pdf2

http://www.islamicmortgages.co.uk/index.php?id=287



credit card becomes a main source of controversy in recent years.

Conventional card becomes a question of great concern for Muslims that can

we use them or not? There is a lack of Islamic characteristic in I conventional

credit cards basically it is connected with an interest. The law of Shariah

comes from a combination of the Quran the holy book of Muslims and the

Hadith the saying of Prophet Mohammad and fatwa’s the rulings of Islamic

scholars.

According to Ill ham Reza Freidan 3(2008) the hottest banking

convenience is credit card. With no carrying hard cash it facilitates people

basically the issuer of the credit card pays on behalf of the buyer. Through

this goods and services are able to buy through online and from outlets. Two

point five to three percent on average pays as processing fee. The

convenience of credit card is too much that is the main reason not only

conventional bank as well as Islamic banks is also interested to issue credit

cards. Islamic credit card meet up minimum three criteria of Islamic principles

the first one is the card meet shariah requirement on lending which is different

from region to region the three mandatory ban on Islamic finance are Riba,

Maysir and Gharar. Riba is illegal in Holy Quran; if the user is not on time in

payment Islamic credit are not permitted to charge any interest to payment.

Gharar or uncertainty in the practice of Islamic credit card ought to be avoided

by not including a charging scheme where the monthly service charges are

up-and-down based on a number of factors. Maysir or gambling is also

prohibited because Islam condemns and prohibits gambling. Secondly an

Islamic credit card has to be accepted broadly it has to use global payments

schemes, such as master card or visa. It also provides facility that is not

available on debit cards such as CVV numbers for “card not present

“transaction and hold amounts. Further the trade charges and issuers fees

should not be withheld. Thirdly an Islamic credit card should not give

3

http://staff.ui.ac.id/internal/060603200/publikasi/200808IAEIConference_IslamicCreditCard.pdf



confidence that is considering Haram. Malaysia Bhd has issued a shariah

compliant credit card called Bank Islam card (BIC). In Malaysian market first

Islamic credit card issued to accomplish the necessitate of Muslim

community. Also the first credit card in South East Asia region following the

euro pays master card visa (EMV) smart card with the chip technology. It has

all features as payments an instrument on the other hand profit rate is only

charged to clients who fail to pay back the minimum repayment within the

twenty day grace time. Indonesia started Islamic credit card through the

issuance of fatwa that connecting to “Syariah card” by the Dewan Syariah

National Majelis Ulama Indonesia (National Syariah Council). First Islamic

card in Indonesia called “Dirham Card” a joint product between bank

Danamon and Master Card.

According to Mohammad Hanif4 (2011) interest is prohibited by all

religions and charging of interest is Haram (unlawful) for Jews, christen and

Muslims. It is clear from the above records that dealing in interest is Haram

and design of conventional bank is based on interest. Commercial bank

significant role cannot be rejected in present financial system so change in

the thinking and design of commercial banking is required to meet the

religious responsibility. Shariah compliant products represent that modes of

financing where return of financier is already pre determined and fixed but

with in shariah constrains. The tool which relatively balancing the operations

of Islamic financial system by conventional banking includes Murabahah,

Ijara, Bai Salam, Bai Muajjal, Istasna and diminishing musharaka are all

shariah compliant products. Shariah based transactions mean the financing

modes adopted by IFIs on profit and loss distribution basis as well as

Musharaka (partnership in capital) and Mudarba (partner ship of capital and

skill). Modes of financing beneath shariah based returns of financier are not

prearranged in advance to a certain extent it depends upon the outcome of

the project. Despite the fact that loss is shared according to capital

contribution. Islamic financial institutions are working in the same society 4

www.ijbssnet.com/journals/Vol._2_No._2;_February_2011/20.pdf



where conventional bank are working and performs all functions which are

expected from financial organization. Credit card provides twice facility to

consumer including financing as well as facility of plastic money where

consumer can fulfill his necessity with no carrying hard cash.

According to Noorudin Mansoor 5(2009) credit card are mainly lines

of credit that one time establish depending on the terms allows an entity to

use certain permissible amount of money and payback the amount either in

monthly or full amount. An intensified interest in the promotion of credit cards

not only through out the state other than that in the greater part of the

countries in the world. This is for the reason that most of credit card issuers

normally grant higher credit limit amongst the higher income group. The richer

card holders on the same and lot of times wish to use credit card in their

purchasing transactions. The core target of credit card issuers is higher

income groups. The general supposition recommended that when consumer

seeks for resolution to credit card problems it might not be trouble to the

higher income group other than the evidence confirmed that education and

socio economic standing be the main determinants for the credit card usage.

Credit card in metropolitan areas where the average wages is a lot higher

than those living in rural areas.

5

www.ccsenet.org/journal/index.php/ass/article/download/4544/3877



3. CONVENTIONAL CREDIT CARD AND ISLAMIC CREDIT

CARD

3.1 History

The system of credit card 6was primarily originated within the United States of

America in the form of credit documents created from cards. After that in the

twentieth century Western Union and other banks started using embossed

metal addressograph plates to recognize customers and record the detail of

their account. In 1947 the Flatbush National Bank introduced its ‘Charge-it’

plan which was a monthly charge account that limited clients to pay the

amount owed in a definite period. In 1950 the first modern credit card was

issued when Diners club launched the travel and entertainment credit card.

On the other hand in 1951 Franklin national Bank became the first bank that

issued credit cards to (Lindsey, 1980) followed by American Express in 1958

which provided clients with a credit period between expenditure and

settlement but had no facility for roll-over credit or paying a portion of their

exceptional balance. The idea of National credit card was introduced in the

year 1966 while Bank of America licensed its credit card to other banks in

United States and out of the country. This give in the direction of a great

achievement to an extent that other rivalry bank joined hand with Bank of

America and created a competitive system under the name of Inter Bank

which after that was named Master charge and then its name was altered to

MasterCard.

By seeing its triumphant outreach Barclays in the year 1966 made

agreement with Bank of America to issue credit in United Kingdom as well.

The full process was imported by Barclays and required changes and

alteration were made in the computer program that was needed to use

program for United Kingdom purpose only.

6

http://homepages.nyu.edu/~jac614/nyny/credit-card-history.html



3.2 Nature of Credit Card

Credit card is an tool on which loan is advanced with no any security taken by

the issuing bank from the consumer it has an interest free of charge grace

period as a free short term period loan. The payment time is not specified by

a ordinary Credit card agreement but it is commonly said that if the amount

owed is cleared within thirty days no interest is charged by the bank on the

amount out standing. From the time when bank do not get interest on the

amount outstanding for thirty days so in order to cover up this expense bank

typically charge high rate of interest. More over the funding of the industry

wishes to be made by shorter period first choice with higher interest rates due

to which the rate of the credit card are higher then the regular card. Credit

cards offer card holders safe and convenient spending pattern as credit card

are approximately acceptable any where in the world which gives customer

easy right of entry to marketplace etc. The consumer under two groups

according to their usage first one are ease user who pay the credit card bill on

due date that is when ever whenever payment comes due they clear their

account and use credit card just for payment reason for that particular point in

time and do not pay interest for the reason that of paying on time. The second

type of user is revolver who on the payment date pay part of the amount due

and rest is carried forward. For issuing bank revolvers are more beneficial

than convenient user for the reason that banks earns from revolvers simply in

the form of interest and more over the interest free grace period of the

convenience user is also financed by revolvers.

Another classification of credit card consumer is according to the risks

level and are classified as liquid or illiquid customers. Seller may possibly

offer low price in selling on cash than with credit card due to commission and

extra charges. So customer who buy goods on hard cash are provided cash

discounts on the other hand customer who prefer using credit cards because

there is a risk associated with customer using credit cards.



3.3 Credit Card System

Visa, Master, American Express and Diners Club are authorities which give a

back up against all credit cards and provide an easy flow of transaction

whenever and wherever a credit card is used by the customer. These

authorities by and large allocate a limit to the customer for his card usage.

Furthermore there are retailers who accept cards with these authorities so it

provides an easy flow of cash without hard cash being involved. All credit

card transaction7 follows four steps

When the customer uses a credit card to make payment.

The issuer (bank) who supplied the card to the customer operates the

account from which payment is made.

The retailer (or merchant) who exchange goods or services for the

customer’s card details and consent to make the payment.

The acquirer acts as a facilitator between issuer and retailer and gives

the detail of cardholder and collects money from the issuer on behalf of

retailer and then transfer the money to the retailer. 7

www.mbs.unimelb.edu.au/home/jgans/papers/interchange.pdf



A Credit card also transaction involves four parties the issuer, who is

bank in this case, the acquirer, the facilitator between issuer and retailer,

customer who is buying or using a service and the retailer who is selling

goods or services. The operation of the credit card starts by means of a

customer who decides to buy some goods from a retailer as a given price.

Now the customer has two options either he pays throughout cash or if he

owns a credit card can use it to make the payment. The credit card has been

issued by an issuer (bank). As mentioned on top of there are instance when

the retailer charges higher or does not give a discount when a customer

purchases good through credit card due to risk level. After the customer has

decide to pay through a credit card of visa, Master card or dines club etc and

the similar is accepted by the retailer the customer gives his card detail to

retailer and confirms his identity through signature etc. For a number of

transactions the retailer may be required to seek authorization form card

issuer (bank) to check that the card is not stolen or the customer is not more

than his credit limit assigned to him.

The retailer then sends transaction detail to the merchant acquirer

who acts as facilitator between retailer and issuer. Once the transaction detail

has been sent to acquirer, the acquirer then forward this information to the

relevant issuer online. The merchant acquirer pays the retailer price less a fee

knows as a merchant service charge. The issuer on the other hands pay the

acquirer the retail price less a further fee know as an interchange fee. The

payment period from issuer to acquirer is determined by authorities such as

that of MasterCard, Visa etc.

The final stage is when the issuer charges the customer account of the

amount for which the goods were purchased initially plus any fee specified in

the term of accounts. The issuer will provide the customer a monthly

statement stating the detail of his transaction through a credit card. Once the

whole transaction is completed the customer ends up with goods for which he

has paid the retail price plus any fee imposed by the issuer. The retailer



receives the retail price less merchant service charge; the acquirer on the

other hand receives the merchant service charge less interchange fee. The

income of the issuer is generated from two sources one is through the annual

fees and interest payment received from the cardholder, secondly from

merchant acquirer in form of interchange fee.

3.4 Conventional Credit Card

Credit card also termed as ‘Plastic money8’ has become an vital form of

payment in today’s society there are large number of economies which are

dependent on this plastic money and this had played an significant role in the

fall of major economies of the world today. A credit card is just a system of

payment name after a small thin plastic card issued to users of the system. It

is a thin plastic card of rectangular shape (ISO 7810 standard9) similar to the

size of a common business card, the cards contains information such as a

signature or photo, and authorizes the person name on it to charge purchases

or service on his account charges for he will be billed periodically. All the

information of card owner is stored on microprocessor built into the card itself

in which information is stored in form of secret codes called cryptography. A

credit card is used by a customer to pay for goods or services that he has

purchased or rendered to an amount that has been allowed to him through his

credit limit which is assigned to him by the issuing bank. The card holder is

then required to pay back the amount along with interest on the amount for

which the card was used to pay the bill in accordance with the terms and

condition of the credit card agreement. A credit card is different from debit

card, in a debit card whenever a customer uses his card the amount for which

the card is used would be drawn from his account at the time of transaction

whereas in credit cards the cash is not removed from users account after

every transaction, instead the customer is allowed to pay the amount any time

according to his choice. The idea that promotes the conventional card is that

8

http://www.halaljournal.com/article/1899/evolution-of-islamic-credit-card9

http://en.wikipedia.org/wiki/Credit_card



buying first and paying later on due to this it facilitate cardholder in spreading

out of the payments for large purchases. That is the normally significant

reason that credit card offers convenience to the customer. Conventional

credit card can be use at any where for paying the meeting either it is for the

pure Halal reason or it can be use for the not halal activities such as alcohol

beverages bars or in night clubs. The insurance that offered to the

conventional credit card holder is conventional insurance which is not fulfilling

according to shariah. Withdrawal of any for of cash from auto teller machine

or bank from outlets can be treated and interest must be paid over it which is

not allow in Islam but in conventional it is permissible. To avoid interest

payment credit card holders have to pay the outstanding payments with in the

appropriate date that is allow in conventional but not allow in the Islamic

shariah. Conventional credit card system is not allowed in the Islamic system.

People own and use credit card for a variety of reasons such as to get credit

facility, hard cash in advance, easy payment and prestige. It has become a

status sign for people as it shows the wealth status of a person, but the

purpose of credit card is much more then just a status symbol. It is most

usually used in e-commerce business and is accepted approximately every

where in the world. Plastic payments credit cards, debit cards have quietly

revolutionized that how we pay on behalf of goods and services. They also

revolutionized that how we coordinate the timing of when purchase

commodities and services and what time we pay for them. Among all these

cards much focus on credit cards which give confidence people to use

beyond their income and be mired in debt. On the other hand, credit cards

have enabled many more of us to attain a better and better standard of living.

The credit card is a changeable line repayment card which offers a line

of credit to the card holder who knows how to use up to the pre arranged

maximum amount level. The extended credit must be settling with in a

specified period or else interest will be charged on the left behind balance.



3.5 Islamic Credit Cards

Islamic credit card was introduced in Malaysia these cards were issued using

the Shariah concept of Bai-Al-Inah followed by other principles such as Ijarah

and tawarruq. According to some religious scholars and economists, credit

cards are allowed on the basis of only two shariah contracts, which are Bai-

Al-Inah and tawarruq. According to Taqi Usmani a renowned scholar gave his

fatwa on the use and approves the shariah compliance of the credit card

structuring “He agree to to the make use of credit card by a purchaser and

declares that is permissible in shariah, no matter whether the card is issued

by a banking organization or some other company. He argues that the

permissibility or impermissibility of a contract depends on the actual terms

and conditions upon which it is based.

From above discussion it is clear that Islam allows the use of credit

cards as long as the element of usury is eliminated from it, but what are the

principles on which the banks issue Islamic credit card? According to mufti

Mohammad Abu Bakar Siddiqui al Qadri some bank for solving the problem

of interest based credit cards have applied different method and issued their

credit cards according to different shariah concepts such as ijarah, Bai-Al-

Inah and tawarruq.

Al-Ijarah Bases card: This card is based on Ijarah or service charge. Incase

a yearly service charge is levied depending upon the credit card type while

granting loans generates the funds.

Al-Bai-al-Inah Card: This card is based on Bai-Al-inah principle. Bai-Al-inah

comprises of two agreements in the first agreement the bank agrees to sell an

item to the customer at a pre-determined price and the second agreement

states the customer selling back the same item at a lower price. The different

between the selling price and purchasing price is consider as bank’s profit on

the transaction and is a predetermined amount. The percentage repayments

that the customer is making does not mean that he paying off interest rather



that a certain percentage of this amount is use to retire his outstanding

balance.

Tawwaruq Based Card: Tawwaruq become a legal source of funds by

combining two separates sale and purchases transaction. As individual who is

in need of funds purchase a commodity on the basis of deferred payment

from a seller and then sells the same commodity in the market in order to

obtain cash the bank then create promise (wadiah) principle a guarantee

deposits accounts for customer money safety.

3.6 Islam and Credit Cards

Credit cards used today in most cases contradict with Islamic shariah

principles. A conventional credit card charges interest on outstanding

balances and allows the credit card holder to go on borrowing as long as he is

within his credit limit. When the customer uses the credit card beyond limit he

is allowed grace period during which he is not requires paying interest. After

the grace period interest is imposed on outstanding balance resulting in the

huge indebtedness. When credit card imposes interest on delay payments, it

will not comply with shariah requirements due to which use of credit card is

termed as Haram.

Islamic permits use of credit card as long as it does not involve the

element of interest and at the same time does not contravene with principles

of shariah. For example if the withdrawing cash advances from credit facility

back will result in payments of an interest, it is prohibited. Hence, if the credit

card is used the same as a charge card where you just pay the principle

amount that you use plus the service charge it is allowed. Dr Monzerkahf in

live fatwa on Islam online 08-august-2001 he said that “By signaturing the

credit card agreement and using it in a way that generated payable interest is

treated Haram. Signing the contract, using it, as well as making the payments

within the grace period and making no cash withdrawals whenever cash with

drawls generates interest is allowed because the amounts to a contract that

gives you a option to deal or not to deal with the interest.



4. ROLE OF ISLAMIC CREDIT CARD IN PAKISTAN

4.1 Islamic Credit Card in Pakistan “Saadiq”

Standard charted bank limited is the first bank to launch Islamic cards in

Pakistan10. Saadiq visa credit card is the nation first shariah compliant

Riba or interest free credit card which is permitted by an independent

shariah supervisory committee. The basic aim introducing Islamic credit

card is to facilitate Muslims who would like to use credit card facilities in

accordance to the laws of shariah as they keep away from conventional

credit cards due to the reason of religious preferences. The card also aims

to facilitate those customers who are not satisfied with paying interest for

their usual conventional credit cards. The Islamic credit cards operates on

Ujrah (Islamic mode of fiancé) concept that is based on the fee structure

which means that there is only fixed fee will be charged to the consumer.

The Islamic credit card would not include any floating percentage fee

depending on the outstanding balance.

An international team of Islamic financial expertise who ensure

shariah compliance of the card develop Saadiq credit card. Of the initial

team two international shariah advisors cleared the authenticity of the

Islamic credit cards in accordance to shariah.The customer of the Islamic

credit cards would have the option of paying amount less than the total

outstanding balance while keeping minimum five percent of the balance or

fixed amount whichever is higher. The remaining balance outstanding

after the payment would be transferred to service account as fixed

monthly fees. Saadiq VISA Credit Cards is provided that you the choice

that moreover paying the entire outstanding amount at once or pay only a

least amount of the outstanding balance by the payment due date.

Incase you have alternative to pay any amount a smaller amount

than the total outstanding balance then the left behind balance gets

10

http://abuusamah.wordpress.com/2007/12/08/shariah-compliant-credit-cards/



transfer to the Service Account which is a non-interest and non-profit

manner account, linked to your Saadiq Credit Card. A fixed monthly

safeguarding charge will be levied just only for the month the Service

account is used and it reflects an outstanding balance. Saadiq Credit Card

in Pakistan its first shariah compliant card with world wide reliability and

services. It operates on Ujrah concept which is based on a structure of

fixed fee mans that to the customer only fixed fee will be charged. The

card would neither be levied with any of the floating percentage fee

depending upon the outstanding balance.

4.2 Islamic Banking History in Pakistan

Islamic banking in Pakistan 11is increasing day by day with full speed. The

serious effort took place in since 1979 to Islamize the financial system in

this regard State Bank of Pakistan introduces twelve mode of financing to

replace the instrument on interest based. Council of Islamic ideology in

1980 advised to State Bank of Pakistan to interchange the money market

discount rate with the help of arrangement through this State Bank of

Pakistan become empowered to finance the banks on the basis of profit

and the loss sharing. Other suggestion to put up on interest free is

‘common pools of funds’ on cooperation basis to replace the existing

interest bearing government securities. Towards the development drastic

steps took place by the State Bank of Pakistan and financial instrument

implementation is totally based on Islamic principles. Afterword the

process is comes towards decline side. No serious effort had been taken

towards the removal of interest from interbank’s transactions, inter

government transaction and foreign currency accounts. In 1999 Supreme

Court of Pakistan asked the government to take serious step for the

elimination of the interest for the economy in this regard a meeting took

place under the supervision of President of Pakistan in this meeting they

have decided to permit Islamic banking sector to operate equivalent to the

11

islamicbankingzone.com/e-library/1-islamic%20banking.pdf



conventional banking system and also conventional banks to offer and

allow Islamic banking service through dedicated windows. So right now

Six Islamic banks and thirteen conventional banks with overall network of

two hundred branches are offering Islamic banking services and their

products as well. Non banking financial institution such as Takaful and

Islamic mutual fund industries, Mudaraba companies’ house building

finance corporation are also active participants. Some efforts also took

place for the development of Islamic sukuk bond. Islamic banks and

conventional banks to maintain cash reserve of five percent and salutatory

liquidity requirement eight percent requires State Bank of Pakistan.

Conventional banking sector is increasing rapidly as compare to Islamic

banks they are far behind. State Bank of Pakistan has built Islamic

banking unit to give focus and attention to that area a shariah board is

also in place at State Bank of Pakistan having number of panel of experts

to guide Islamic banking industry.

Growth of Islamic Banking in Pakistan: Pakistan was created as an

independent state on the basis of Islam. All the structure of Pakistan was

prepared on the basis of Islam so the main objective of the state of

Pakistan policy was subtraction of Riba (interest)12 .The founder of

Pakistan Muhammad Ali Jinnah in his dialogue at the time of an occasion

of an opening ceremonial of State Bank of Pakistan he addressed that his

wish is for developing Islamic banking structure in Pakistan. Islamic

banking appears in Pakistan should fulfill the requirement of both

economic and religious needs. To the period of 1970 the main effort was

to remove Riba (interest) from economy and most of the concrete steps

taken place in 1980 it was very bold and complete exercise. In the world

three countries including Pakistan trying to execute interest free banking

structure at the nationwide level. Many steps were put to initiate Riba

(interest) free banking formation in Pakistan. Banking and other related

laws State Bank of Pakistan acts were revised to help out interest free

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banking structure as well as industry was given certain time line to change

them into Islamic system. New rules and regulation were equipped to

fixing the methods of investment, returns sharing mechanism for deposits,

State Bank of Pakistan financing facility which represented ground work

for islamization of financial system. The important effort was in the mid

eighty’s in the expansion of Islamic banking structure in the nation. As

technically it was main advance structure for expansion of Islamic banking

in Pakistan as compared to any other structure in the world which was

being practiced at that time. In 1980 practical efforts were taken to

Islamize the economy at nationwide level and believe as establishing work

in the Muslim world which also becomes important reference stuff for other

countries which started the pathway towards introduction and institution of

an Islamic banking system. In the beginning of 1990s the total practice

was challenged in Federal Shariat court and in second last month of 1991

the Federal Shariat Court declared that all the methods apoted is un-

Islamic which was established in Pakistan banks since 1st July 1985. The

system was typically based on mark-up procedures with buyback

measures. The Shariat Federal Court affirmed that variety of requirements

of laws held repulsive to the commands of Islam in its conclusion dated

14th November 1991 would come to an end to have effect as from 1st July

1992. On 4th September 2001 a meeting conducted under the chairman

ship of President of Pakistan, official of ministry of finance and law,

Governor State Bank of Pakistan chairman and some member of the

council be presented at and it was sure that the move towards interest

free economy would be made in gradual and phased wise mode and

without reasoning any interference. State Bank of Pakistan offered three

institutional decisions; setting up subsidiaries by the commercial bank for

the idea of conducting Shariah compliant transaction, specify branches by

the commercial banks completely selling an Islamic products with all

safeguards to make sure honesty and clarity of Islamic banking process,

setting up a new full fledge profit-making bank to fulfill completely banking



business based on proposed Islamic products. Due to this effort as a end

result in 2001 an Islamic banking separation was established in the

banking policy department at State Bank of Pakistan. Concrete efforts

were prepared by State Bank of Pakistan to undertake Islamic banking in

its correct spirit also keeping in sight the period from the experience of

Bahrain, Saudi Arabia and Malaysia.

A consumer Perspective; Islamic Banking in Pakistan: Islamic bank

ideology13 is still focal point in these days. Islamic organization and as well

usual banks are opening further branches to focus this Shariah based

financing products and services. How immense they are Islamic still

consumer perplexed. Pakistan followed Bahrain and Malaysia as a role

model for Islamic banking. Government organization and their authorities

still not judge their nature whether they proved their self or not while

consumer does. The main services provided by the Islamic bank a

common consumer of Islamic banking sector in Pakistan they have the

uncertainty in their state of mind whether it is according to Shariah based

or not. In the market Islamic financial organizations that already have

many other competitive existing in shape of commercial banks. Islamic

financial organization is skilled to make their considerate and status in the

economic world and can offer Islamic bank services in non Islamic

markets like United Kingdom, Australia, Singapore they can plan to

enhance an emergent consumer base of the local resident in Pakistan.

Some of who may reason themselves from dealing with usual financial

organization because of the use of interest. The customer believe the fact

that lack knowledge about basic concept of Islamic banking service in

Pakistan would not accept Halal product banking because of

apprehension they fell that what will happen if credit facility were taken

away. Sharing profit not losses is the concern. Many of the consumers

they are using Islamic banking service are not aware about the loss 13

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sharing. This would assign that some economic organization have been

assuring profits actually it break the fundamental law of Islamic financing

structure that is relating compensation to the risk on investment without

risk. Any kind of money earned is simply profit happily than profit.

Islamic structure makes a differentiation among profit and interest

they have to come across at the dissimilarities in financial beliefs. In

capitalist theory where the first identity acquires interest and the second

identity is allowed to get the profit. It is understood that interest is fixed

return to offer capital and profit can only be produced after allocate the

fixed return toward land, labor and capital.

Islamic monetary system does not consider as entrepreneurs and

capital as separate identity of production. It accepts as true that each

person who puts in capital in the form of money to a business enterprise

assumes the threat of loss and as a result is allowed to a proportional

share in the actual profit.

System is caring by the entrepreneur, who in a capitalist economy

would have to make predetermined interest repayments even when the

business enterprise is building a loss. Capital has a fundamental feature of

entrepreneurship, until now the risk of the industry is anxious and for that

reason, somewhat than a fixed return as an interest, it develops profit.

Profit as a great deal one earn of the business, the extra come back on

capital. Profit would be advantaged if there are no fixed interest

repayments. The profits produced in this by the currency making activities

in the public are uniformly detached among all those who have given

capital to the organization. An incorporation in this way of social liability

and additional Islamic standards in rewarding consumers desires to be

worthy of ultimate consideration as it signifies an excellent and basic

favoritism between conventional and Islamic banking systems, and to

push Islamic banking potentially competent to better pinnacle in securing

consumers’ gratefulness and response. In the area of Islamic Finance Top



researchers have affirmed that assurances prepared by organizations that

customers will take delivery of a set rate of return without having to

acquire losses are illegal and immoral. Hence not only financial

organizations continuing this practice but government societies in Muslim

nations are as well contributing venture openings with certain income.

Taking that consideration that the Muslim management is responsible for

the supervision of the structure in order to fight the illegal practices of the

financial institutes, by giving definite returns the governments seen to be

overlooking the performance of the monetary organizations. In the short

run Even though these proceedings may assist Islamic Banks develop, but

in the long run overall cost will prevail over the profit in form of damage to

the repute and legitimacy. Progress such like also offer ammunition to the

detractors of the system who are previously questioning whether the

structure is not anything more than an interest based system operating

under guise of profit. By the past behaviors the most essential information

discovered that consumer satisfaction is over and over again is directly

related to the quality of service that is offered by the Islamic banking

sector. Excellence of services comprises of factors as like taking care of

customers with respect and appreciation workforce capability to put across

faith and self-assurance; efficiency and effectiveness into managing any

process; and well informed and attention in offering clarifications and

answers relating to the services and products of an Islamic bank.

Therefore, only at marketing strategy Islamic bankers can no more rely of

pulling religious and holy consumers towards them who might only worry

about Islam city of banking services. Some important insights accepted on

the basis of dissimilar thoughts of customer banking selection criterion

entails the requirement for Islamic banks to improve its excellence of

services which is at the present calculated as an significant success factor

that have a result on an institute’s competitiveness. Variety of a bank

selection criterion, some of these without a doubt transform accordingly of

people having turned out to be further aware of the culture of Islamic



banking. For instance, advertising on media would be likely to have a

tremendous good impact on Muslims. Muslims aspiration to be

compensated a high rate of interest have to decrease If in case of non-

Muslims, media advertising may turn out to be well rated accordingly of

being uncovered to illuminating bank promotion.

An additional considerable subject besides this, which needs

awareness, is the need to community strengthens learning and

understanding towards the unique features of Islamic banks and how it

may helpfully go away with the distress of customers in their financial

transactions. Customers who are concerned with the legality of the ability

from Islamic perspective Islamic banks have latent of being advertised to

different sectors of and those who try to discover for service value, skill

and disciplined business. Customer knowledge programs are for that

reason if they are to amplify the level of consumer realization about the

typical features of Islamic banking and the variety of services and products

offered by it. In general after consumers have been uncovered to the

ethnicity of Islamic banking, it would be expected that customer

knowledge of what Islamic banking engages would improve their opinion

towards this category of banking should differ. Change would be

estimated to be much bigger in local customers. Likewise with the

standing of the different banking selection criterion. Shifts would be likely,

likewise with extra predominant with banking consumer through out the

country.

4.3 Islamic Vs Commercial Banks in Pakistan

Conventional and Islamic banks 14are facilitating their consumers in

Pakistan. Uncertainty and due to constant lack of unbalanced policy

Pakistan baking sector have faced a very pathetic position since 1950. In

1974 Pakistan banking sector has moved towards nationalize by doing

this they showed a very poor performance. They have offered

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substandard product and services which causes and effected the whole

banking system and as a result of this in the year 1992 Pakistani banking

sector move towards privatization. Meezan bank in year 2002 launched

as full fledge Islamic bank in the territory of Pakistan at this time Islamic

banking sector was the new entrant in the Pakistan and it requires

complete check and balance and the facilities they are provided that to

their customer as contrast to conventional banking system. Both of them

Islamic banks and conventional banks has created a competition among

the banks to make happy the customer needs, and accomplish their

expectation and provide long term impacts to the financial system. The

conventional bank and Islamic bank usually discriminated on their goal.

Islam banking follows shariah laws means Quran and Sunnah and

conventional banking not following this practice. Islamic banks and

conventional are distinguish as an interest free based banks. Islamic

banks have captured large number of customers to beat conventional

bank by offering product and services as compare to conventional banks

on interest free basis mean there is no involvement of interest in Islamic

banking products. This is also a reality that Islamic banking sector have

lower power to catch the attention of the customer as compare to

conventional banking sector in Pakistan. Most of the Conventional banking

sector has also started partial Islamic banking they have made separate

window to provide Islamic banking facility. Islamic banking has shown a

good growth rate and on every passing day it is increasing. Basically

Islamic banking sector are influenced by religious factor by obeying

religious order and have good understanding on Islamic rules.



5. KEY BENEFITS OF ISLAMIC CREDIT CARD

5.1 Structuring of Islamic Credit Card

Islamic shariah has defined two structures for credit cards, that is Bai-al-inah

and Tawwaruq. Bai-al-inah is used in South East Asia and Tawwaruq is used

in Gulf countries. Bai-al-inah is defined as back to back sale and purchase

transactions whereby in the first transaction the bank sells its assets to the

customer on a deferred payment basis at selling price (cost plus profit). In the

second phase, the bank will repurchase the same asset from the customer at

purchase price, which is lower then the selling price, on cash basis (cards

limit) where the purchase and the selling price different is the bank ceiling

profit. There are a lot of controversies on Bai-al-inah as it is suppose in golf

countries that this structure is not a strong basis for issuing credit card as a

sale transacted in this manner is counterfeit and used just as a mask to cover

interest, so credit card which use this structure are criticized of being wholly

shariah compliant. Tawwaruq the other structure of Islamic credit cards is

referred to as a classical case of hayal or legal stratagem that has been

allowed by scholars under certain conditions. Tawwaruq has become a

source of funds by combining two separates sale and purchase transactions,

any individual who is in need of cash purchases a commodity on a deferred

payment basis from a seller and then sells the same commodity in the market

to convert the commodity into cash. This is said to be hayal where the

individual has as such no real intention of selling or buying the goods. He

involves in the transaction to realize cash. Credit card also works on both the

theory as well as defined below.

According to some religious scholars and economist, credit cards are

allowed on the basis of two shariah contracts which are Bai-al-inah and

Tawwaruq. According to Taqi Usamani a renowned scholar gave his fatwa on

the use and approves the shariah compliance of the credit card structuring.

He permits the use of credit card by a purchaser and declares that is allowing

is shariah no matte whether is card is issued by the banking institution or



issued by some other companies. He argues that is wrong to assume that all

contracts involving three parties are invalid and prohibited; rather the

permissibility or impermissibility of contracts depends on the actual terms and

conditions upon which it is based”.

The two functions on which credit card functions are as follows

Bai-al-Inah: Numerous credit cards offers in Malaysia are working on the Bai-

al-inah principles these cards are prepared on shariah principles that covers

stallment repayments over a fixed period. Cards holder are charged a certain

percentage per month on the outstanding balance and nothing is required to

pay if minimum payment requested is paid on time. The Bai-al-inah principle

works on two ‘akad’ agreements. The first contract is made by the bank to sell

an item to the client at a decided price and with second contract is done

stating the client selling back the same item at a lesser price. The difference

between the selling price and purchasing price is banks profit on the

transaction and is predetermined amount. The percentage repayment that the

customer is making does not mean that he is paying off interest rather than a

certain percentage of this amount is use to retire outstanding balance.

Many banks identify collectives or individual assets owned by it

because the market value of assets it owns should be equal to the credit

facility. For example if the credit facility is Rs 10k then the value of the

identified assets must be equivalent of Rs 10k as well. The Islamic shariah

defines the way the assets or the subject matter is taken into consideration

such as:

The subject matter is supposed to exist at the time of the

agreement exceptions are given in case of Salam, Istisna.

The seller (bank) should legally own the asset.

Both the parties should be benefitted from transaction

Subject matter should possess from transaction.



After that the bank will sell the identified assets to the customer.

The selling price charged to the customer is the sum of cost and profit (which

is normally quoted is percentage). The next contract will be executed when

the same bank buys back asset at cost and cash will be given to the client.

Client will then utilize this money to obtain goods and services using the credit

facility provided.

Although of so many objections by some scholars which has Bai Inah

transaction not considered as usury? The reason is that the mark up price is

based on trade and service not loan. According to shariah any transaction

backed by assets is permissible. Therefore, an Islamic credit card is not

based on lending but rather in trade and services where banks sell and buy

back at lower cost for profits.

Structure of Bai Inah



Activities involved in the transaction of Bai Inah are as follows:

A. Client is need of amount X sells product A to bank for a price of

X on cash basis.

Client buys product A back at price X plus the inflated price (I)

Lying on deferred payment basis.

B. Client pays the amount X+I on the maturity to bank.

Tawwaruq: Tawwaruq is an additional financing product that is still facing

legal difference between different scholars in the world but has been

prevailing in Gulf countries. Tawwaruq becomes legal source of fund by

combining two separates sales and purchase transactions. An individual who

is in need of money purchases a commodity on a deferred payment basis

from a seller and sells the same commodity in the market in order to obtain

cash. The bank then creates a promise (Wadiah) principle a guarantee

deposit account for customer’s money safety. Tawwaruq contracts are

considered as a legal trick, because the individual troubled have no real

intention of buying or selling the goods. He engages in these purchases and

sales transaction for realization of cash.



Structure of Tawwaruq

The activities involved in the transaction of Tawwaruq are as follows

1) Client approaches the bank to get required amount of cash

2) Bank purchases product A of the value equivalent to client’s need.

3) Bank sells product A to client on the deferred basis.

4) Bank as the agent of the client sells A back to the vendor at a

certified amount on cash basis.

5.2 Islamic Finance

Background: Islamic finance is constituted under the Islamic constabulary15(Shariah) point of view. The basis of shariah is the Holy Quran and the

Sunnah then comes the agreed verdict by the jurists and the scholars of Islam

jurisprudence known as Ijma. The fundamental uniqueness feature of the

Islamic financial system is the prohibition in the Quran of the payments and

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the receiving of (Riba). The strong repugnance of interest by Islam and the

significance of the same in modern commercial banking forced Muslim

thinkers to discover ways and means by which commercial banking could be

molded on an interest free basis.

Development: Islamic financial institution are not that an old developments.

In Egypt first Islamic bank was made in the year 1963. Islamic development

bank was also established in 1975 which gave momentum to the Islamic

banking. It was the first time in modern Muslim history that an international

financial institution undertook to conduct its activities in conformity with the

shariah. The bank was authorized to levy a service fee to cover its

administrative expense instead of working on the basis of interest. Since the

creation of Islamic development bank a number of Islamic banking institution

have been established all over the world and some countries have taken the

necessary action to manage their banking system along Islamic lines. Dubai

Islamic bank the first Islamic private Commercial bank was founded in the

year 1975.

The Shariah and the Shariah Board: The religion Islam discusses values

covers all aspects connected to human life including political and social

economic issues. The body of Islamic law is famous as shariah which means

a clear pathway or way to be followed and observed. The shariah is not a

imperfect body of law it’s a form of law capable of adaptation change

development and interpretation. The shariah does not point out general

canons of law instead it deals with specific case or transactions and set out

principles that govern them.

The shariah developed out of four main Islamic juristic schools and is

based from two primary sources the Holy Quran (the holy book of Muslims)

and Sunnah (the living tradition of the prophet Mohammad S.A.W) in addition

to two dependent basis Ijma (consensus) and ijtihad/qiyas (individual

reasoning through analogy). One very important of the recent Islamic banking

movement is the function of the shariah board which created an integral part



of an Islamic bank. A shariah board is the own which keep an eye on the

process of the Islamic bank and every new transaction that is subject to doubt

from a shariah twelve stand point has to be approved by it. These boards

include some of the most respected and well-regarded scholars of shariah

and the decision of such board are expressed in the form of fatwa’s. In adding

to that there is an global association of Islamic bankers which is an self-

governing body supervising the working of individual shariah boards while its

supreme religious board scrutinizes the fatwa’s of the shariah boards of

member banks to determine whether they are according to shariah. Shariah

laws are open to interpretation and Shariah board open have different views

on key issues. In this regards there sometimes arise a great confusion or

there is no practical guide as to what makes up a religiously acceptable

Islamic financial. A document or structure may be approved by one shariah

board but rejected by a different shariah board. Islamic banks must set up a

religious committee comprised a high caliber religious jurists. The shariah

board has both monitoring and counseling duty to ensure that the banks

operation is in conformity with the shariah. The Islamic bans on all sources of

unjustifiable multiplications and the prohibition of undertaking those

transaction or financial deals that constitutes excessive risk or speculation are

among the most crucial teachings of Islam in marinating justice and

eradicating exploitation in business transaction. Accordingly Islamic scholars

have derived three injunctions’ from the shariah that from the benchmark of

Islamic finance and that distinguish Islamic finance from its conventional

opposite.

Principles of Islamic Finance: The main injunctions of Islamic finance

include are as follows.

The prohibition of dealing in interest both receiving and paying

the most essential characteristics of Islamic banking is that it is

free from interest. Islam prohibits Muslims from paying or

receiving interest (Riba) irrespective of the rates at which



interest is charged. Riba literally refers to an augmentation

addition multiplication expansion or growth. However it is not in

every increase or growth which has been banned in Islam. In

shariah Riba technically refers to the premium or margin that

must be paid by the borrower to the lender together with the

principle amount taken as loan as a must condition for the loan

or for an extension in its maturity period. In this Riba has the

same meaning and implications as interest in congruence with

the mutually consensus of all fuqaha (jurists) with no any

exception. This prohibition of unjustified increment and financial

benefits is in line with the most crucial teachings of Islam in

maintaining justice and eradicating exploitation in business

transaction. The prophet Mohammad S.A.W condemned not

only those who give Riba but also person who take Riba as well

and even those who record transaction or become witness to it.

The ban of interest (Riba) is the most significant tenants of

Islamic finance. Riba denotes a prominent source of unjustified

benefits. All Muslim scholars are strict that this prohibition

covers all forms of interest and that there is as such no

difference between interest bearing funds for the purpose of

consumption or investment because shariah do not consider

money as a commodity for exchange instead shariah takes

money as medium of exchange and a store of value.

The capital having an ethical and social objectives beyond pure

undue return investment in business ventures dealing with

alcohol or any alcoholic products gambling, drugs or any thing

else that the shariah deems unlawful are considered

undesirable and prohibited a prohibition on transaction involving

maser (speculation or gambling).



A prohibition on Gharar or improbability about the terms of

contracts and subject matter his include a prohibition on selling

something which is not prior owned. Any transaction that has

Gharar involved (that is uncertainty and speculation) is

prohibited. Parties to a contract must knowledge of the subject

material of the agreement and its implications. An example of

an agreement fraught with Gharar in contract to sell

commodities that have previously been lost. Because of the

prohibition investments which earn interest Islamic bank must

yield their earnings through fee based returns or profit sharing

investment. When loans are given to business purpose if the

lender wants to make a legitimate profit under the umbrella of

shariah should be the participant in the risk as well. If lenders

do not taking part in the risk his receipt on any gain over the

amount he made as a loan is classified as an interest. Islamic

financial institutions also have the adoptability to involve into

lease transactions and dealings including leasing transactions

which has purchase option.

Loss and profit sharing financing is a form of partnership where

partners share profit on the basis of their capital share effort

provided unlike conventional finance there is no guarantee of

the rate of return on investment. Islam advocates the view that

Muslims do not act as creditors in any investments but as a

partners in the business.



5.3 Islamic Contracts

Islamic scholars have approved certain basic type of contracts as being

complaints with the principle of Islamic finance16, which Islamic bank can use

to attracts funds and provide financing in Islamic way.

Mudarabah (finance by way of trust): Mudarabah is a form of partnership in

once one partner (rab-ul-maal) provides the capital required for a project

whiles the other partner (mudarib) act as agent/manager and manages the

investment using his or her expertise. It is similar to the partnership but a

proper company is not needed to be formed as long as profit for both the

parties is determined separately. Profits generated through investment are

distributed according to the fixed and a pre determined ratio. In case if there

is a loss on the investment the partner who has provided the capital bears all

the loss unless it is proven that the loss was due to agent’s (mudarib)

negligence misconduct etc.

Mudarib may be conducted between an Islamic bank as provider of

funds on behalf of its depositor as a trustee of their funds. The banks pay its

depositors all of the profits from the investment, after the deducting of its

intermediary fees. So it may also be conducted between a bank’s depositors

as a provider of the funds and an Islamic bank as a mudarib.

Musharka (finance by way of partner ship): Musharaka is similar to normal

partnership contracts in which two or more partners come together invest

capital and obtain profit. The difference of musharaka with normal partnership

contract is that every partner decides the ratio of their profit on the total profit

that would be earn by their investment not on the amount of capital invested

as is the case in conventional partnership. Moreover in case of loss in

musharaka loss is bear by the partners in proportion of their investment. It is

different from mudarbah as in mudarbah only one partner invests and the

other manages the money by acting principal’s agent and other hand in

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musharaka both partner invest and manage the money towards profit

maximization.

Murabahah (cost-plus financing): Murabahah is mainly famous type of

Islamic financing. Within a Murabahah contract, the bank agrees to buy an

assets or goods from a third party at the request of his client, and then resell

the same goods to its client with a markup profit. The client purchases the

goods either paying on spot or on deferred payments. In this case the bank

specifies its margin above to the cost which is allowed in Islam. The mark up

is not connected to the time as if the client not able or fails to pay a deferred

payment on time, the mark up do not raise due to delay and remain as pre

agreed. Most importantly the banks own the goods between the two sales

and so assume the title and the risk of the purchase goods pending their

resale to the client.

Ijara (leasing): Ijara is defined as the renting out some thing or sales of

manfa’s (that is, the right to use goods) for a specific period. Ijara is contract

under which a bank buys an assets and leases out the same required by its

client for rental fee. During a predetermined period, the ownership of the

assets remains with the lesser (which is the bank) who is answerable of its

maintenance so that it may continues to give service on behalf of which it was

rented. The lessor assumes the risk of the ownership and in practice seeks to

minimize risk by insuring the asset in its own name. In an ijara contract the

lessor has the authority to re-negotiate the terms of the lease payment at

every agreed interval. This is to make sure that the rental remains in line with

the market leasing rate and the residual value of leased asset.

Beneath this contract, the lessees (i.e., the customer) do not have any

option to buy asset at the end or during of the lease term because this is

measured under the shariah to be tainted with uncertainty. However this

object may possibly be achieved by means of related type of agreement

identified as ijara WA iktina (hire purchase). In the situation of a hire purchase

the commitment on the part of the lessee to by the asset at the end of rental



period, on an agreed price (with the rental fee paid up to the point of sales

constituting part of the price) is built at the outset.

Salam (advance purchases): Salam term is defined as a forward purchase

of specified goods for full payment made on spot this contract is generally

used for financing of agricultural production.

Istisna’a (commissioned manufactured): Istisna’s (order to manufacture) is

a process that basically offers the future structuring possibilities for trading

and financing. The payments can spot or deferred, one party buys the goods

other party undertakes to manufacture them, according to the agreed

specification. Islamic bank use istisna transaction to finance construction and

manufacturing projects.

5.4 Transition from Conventional to Islamic Credit Card

The potential growth of Islamic credit card in the Middle East, Far east Asia

and south Asia where by the market could cater 250 million customer17. He

believes the population of this region has awareness about the change in the

world’s technologies like the emergence and benefits of plastic and electronic

money where a huge section of population have access to all sort of credit,

debit or charged cards. The study about the potential card holder suggests

that the high probabilities of Islamic credit card customer are government staff

as compare to private staff. Beside the study found that these users find

benefits of using Islamic credit card for online shopping because of its

attractive features. The banks that are offering Islamic credit cards attracted

majority of Gulf population as it is shariah. Compliant and provide existing

offer to customers due to fierce competition. The battle of the Islamic credit

cards will hot up as more issuer streams in and then the penetration and

success will depend on how transparent the Islamic banks are about the

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structures and shariah compliance and the cost competitiveness. In Pakistan

however there is no such competition in Islamic credit cards as only standard

charted is offering its Saadiq credit card. Pakistan market has the potential as

usage of credit card itself has not reached a saturation level.

5.5 Islamic Credit Card Controversy

The competition between Islamic banks has got intense over offering shariah

compliant cards18, which was once a controversial subject among Islamic

jurists. However the popularity of Islamic credit cards is also accompanied by

consumer complaints that the expensive costs is charged by some of Islamic

banks that offer them, infact these credit cards have become even more

expensive comparatively than that ones offered by the conventional banks.

Customers have reported that they were astonished to discover about the

charge fees required to get the Islamic credit cards offered by Islamic banks

and which the shariah committees of the banks have approved.

The Islamic credit cards customers are been exploited by middle

eastern banks which have rejected the prevailing concept of “Bai inah “ in

Malaysia and using the concept of south Asia like in Malaysia , for example

are following Bai Inaah concept which the banks in the gulf have rejected on

the basis that there is flimsy line which is masking Riba. This statement

contradicts the customers points of view in Saudi Arabia, Islamic credit card

offered by banks entail usury and even resort to interest in some transactions

moreover the bank practice the concept of Tawwaruq and sell commodities

on behalf of the consumer receive payment for them and then pay the

accrued interest onto the cards if the customers continues to pay remaining

installments on the card. The Islamic Fiqh academy IFA has recently criticized

the Islamic banks in Muscat on approving and endorsing these cards.

Islamic finance criticized the policies of some banks are misleading

and that resort to usury in their practice and it causes great injustice to the

credit card customers and are not shariah compliant. Most banks are offering 18

http://www.asharq-e.com/news.asp?section=3&id=13869



credit cards with the objectives of acquiring interest that is strictly and is

unequivocally prohibited in Islam.

Shariah committees however believes that the administrative fee

charged by the banks are their rights since they need to make a profit and

thus do so without resorting to Riba like conventional banks but aggress that

most of the local banks in Saudi Arabia charge exorbitant fee. Some believes

that there is no such thing as non shariah compliant credit cards and upholds

that customers have a choice to either accept the terms and authorizes the

banks to sell commodities through Tawwaruq on their behalf.

5.6 Difference between Islamic and Conventional Credit Card

Islamic credit card do not involve in any money lending transaction since the

structure of Islamic credit card19 is based on Bai or trade, therefore the

element of usury (interest) in conventional money lending is eliminated from

this card. In Islamic credit card there is no compounding of profit the profit

margin of the card holder is fixed for a tenure of three and five years and the

actual profit is based on the total outstanding amount of a particular month.

Convention credit card can be used for any purpose such as to use them in

nightclubs, bars, purchase of beer etc. Islam prohibits such activities and

regards them as Haram on Muslim so an Islamic credit card cannot be used

for the transaction of such Haram activities namely, paying bills at bar, discos

nightclubs, beers, escort, and massage service and gambling. In Islamic

credit card the financial charges are applied on the par value for which the

card was used as a medium of payment and there is no compounding factor

is involved on unpaid amount due to this factor Islamic credit cards are also

becoming popular in non Muslims.

19

Islamic Credit Card in Practice By Prof. Dr. Mohd. Masum Billah



5.7 Islamic Credit Card Benefits

Credit card is useful for number of reasons not just for purchasing things

when one is out of money but for mail orders20, internet payments, hotel

booking or car hiring which require extra charges above the initial amount. A

conventional credit card is not permitted an any case, even if the user of the

card pays his dues to the bank in the time limit because he has entered into

the contract with the bank that he is obliged to pay the interest if he delays the

payments. Islamic bank pays all due steps to meet the needs of the customer

by providing the facilities of Islamic credit cards. Islamic credit card are

popular among Muslim because in this type of credit card system they are not

required to pay any interest rather pay a fees or service charge on principle

amount for which the card was used. Paying fees on the principle amount

rather than on compounding amount is the one of the reason that has

attracted non Muslims towards Islamic credit card as well.

In order to classify the Islamic credit card ethical it has to meet the

shariah requirements on lending which differs region to region. Therefore the

model of Islamic credit cards must avoid the three essential prohibitions in

Islamic finance, which are Riba, Gharar and Maysir. The concept of riba

(interest) is known in the light of Quran and Sunnah, as prohibited so an

Islamic card cannot apply interests to payments even if the user is late in

paying. Gharar (uncertainty) is open to interpretation but Islamic cards should

not involve a charging scheme where the monthly repayment or service

charges are variable based on number of factors. Maysir (gambling) is also

prohibited, so apart from preventing access to sites such as online gambling,

Islamic cards need some other form of insurance cover.

Islamic credit card must wok through accepted international payments

schemes, such as master card, visa and provide facilities that are not

available on debit cards like pin number for card not present transaction and

20

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hold amounts. Moreover an Islamic credit card should not encourage any act

that is consider Haram (prohibited). The category of Haram includes all

manner of forbidden behaviors and transaction of an inappropriate nature

must be declined immediately by a shariah compliant processing system.

Islamic credit card being shariah compliant is shown through the

transaction schemes by the Islamic banks. A transaction could be executed

only by use of the customers own funds that is providing the money against a

saving account to exclude the risk of the percent accrual. The main problem

with this product is that they are not credit card at all but they are practically

used as debit or charged cards. The customer is getting short term loan which

is guaranteed against his account and it debited completely at the end of

credit period.

Another ways is to base the Islamic credit card on service charge. In

this case an annual service charge is levied depending on credit size. The

Islamic credit works in a similar way to the conventional credit cards however

with no interest charged. It only charges an annual fee which is payable

quarterly installments.



6. FINANCIAL ANALYSIS OF ISLAMIC CREDIT CARD

6.1 Findings

1. Owner-ship of Credit Card.

2. Knowledge Of Islamic Credit Card

3. Encouragement of Islamic credit card v/s conventional credit card.

4. To own Islamic Based Credit Card Willingness

6.2 Demographics

Table 1 Frequency sexual category Wise

Gender Frequency Percent

male 130 65.0

female 70 35.0

Total 200 100.0



Figure 1 chart sexual category Wise

Table 2 Frequency age wise

Age Frequency Percent

19-25 64 32.0

26-30 52 26.0

31-35 28 14.0

36-40 21 10.5

41-45 22 11.0

46 & above 13 6.5

Total 200 100.0



Figure 2 Graph showing age

Table 3 Frequency according to monthly income

Monthly Income Level Frequency Percent

Rs.0-25000 65 32.5

Rs.25001-700000 89 44.5

Rs.700000 &

above46 23.0

Total 200 100.0



Figure 3 Graph according to monthly income

Our mostly answerer belongs to the income category 250001-70000 which

mean out of 200, 89 in that category and then we have found 65 people in

category 0-25000 and as well as we have found 46 people in category

70000 and above.

Cross Tabulation

Table 4 cross tabulation Gender and age

Age

Total19-25 26-30 31-35 36-40 41-45 46 & above

gender male 38 30 18 15 17 12 130

female 26 22 10 6 5 1 70

Total 64 52 28 21 22 13 200



Figure 4 Graph Gender and age

The total answerer were 200 out of which we have found 130 male from age

group 19-25, 30 answerer we have found in the category 26-30, 18 answerer

from age group 31-35, we have found 15 peoples the age group 36-40, we

found 17 peoples category 41-45 and we found 12 from 46 and above.

If we talk about female answerer role we found 25 from 19-25 category, we

found 22 from 26-30 category, we found 10 from 31-35 category and we

found 6 from 36-40 and also we found 5 answerer from 41-45 and 1 answerer

from 46 and above.



Table 5 cross tabulation age and monthly income

Figure 5 Cross Tabulation age and monthly income

Monthly Income

Total0-25000 25001-70000 70000 & above

Age 19-25 22 29 13 64

26-30 32 17 3 52

31-35 5 15 8 28

36-40 2 13 6 21

41-45 2 11 9 22

46 & above 2 4 7 13

Total 65 89 46 200



There were 6 age levels between ages ranging from 19-46 and

above. The first levels of 19-25 had 22 answerers who earned between

Rs.0- 250,00, 29 were such who earned between 25001- 70000 and 13

were such out of a total of 64 who earned Rs. 70000and above.

The second age levels was of 26-30, had 52 answerers in all of

whom 32 were such who earned between Rs.0-25000, 17 were such who

earned between 25001- 70000 and 3 were such out of a total of 64 who

earned Rs. 70000 and above.

The third age level was of 31-35 had 28 answerers in all of whom

5 were such who earned between Rs.0- 25000, 15 were such who earned

between 25001- 70000 and 8 were such out of a total of 64 who earned

Rs. 70000 and above.

The fourth age level was of 36-40, had 2 answerers in all of whom


between 25001-70000 and 3 were such out of a total of 64 who earned


The fifth age level was of 41-45, had 2 answerers in all of whom


between 25001- 70000 and 3 were such out of a total of 64 who earned


The sixth age level was of 46 & above, had 2 r answerers in all of

whom 4 were such who earned between Rs.0- 25000, 7 were such who

earned between 25001-70000 and 3 were such out of a total of 64 who

earned Rs. 70000 and above.



6.3 Findings Analysis

1) Owner-Ship of Credit Card

Table 6 Type of Credit Card Owner-Ship

Frequency Percent

yes 115 57.5

no 85 42.5

Total 200 100.0

Figure 6 Type of Credit Card Owner-Ship

Out of 200 answerers 115 individual owned credit card while 85 answerers

did not own any type of credit card.



1) Types of Credit Card Owner-Ship.

Table 7 Type of Credit Card Owner-Ship

Frequency Percent

0 85 42.5

Conventional 88 44.0

Islamic 21 10.5

Both 6 3.0

Total 200 100.0

Figure 7 Type of Credit Card Owner-Ship

Type of credit card owner-ship



Out of 200 answerers as we have mentioned earlier 85 answerers

did not own any type of credit card on the other hand 88 answerers owned

conventional credit card, 21 were those answerers who owned Islamic

credit card and 6 were answerers were those who owned both

conventional and Islamic credit card.

2) Knowledge of Islamic Credit Card

Table 8 Detail information of Knowledge of Islamic Credit Cards

Age N Mean

19-25

awareness of Islamic

credit cards64 1.753

26-30



31-35

awareness of

Islamic credit cards28 1.46

36-40



41-45



46 & above


credit cards 13 1.7138



Figure 8 Knowledge of Islamic Credit Cards according to age.

1.3

1.35

1.4

1.45

1.5

1.55

1.6

1.65

1.7

1.75

1.8

19-25 26-30 31-35 36-40 41-45 46 & above

If we talk about the awareness level in terms of age the survey shows the

people from age group 19-25 are most unaware of Islamic card followed by

the respondent above age 46. Respondent with the age group 31-35 are

more aware as compare to the other age group. Answerers with in this age

group own the highest number of credit cards so they are aware of Islamic

cards in the market. The initial age group do not own credit cards there fore

they have lesser knowledge about Islamic credit card the graph also gathered

detail analysis.

Table 9 Detail information of Knowledge of Islamic credit by Monthly income.

Monthly Income N Mean

0-25000 awareness of Islamic


25001-70000 awareness of Islamic


70000 & above awareness of Islamic




Figure 9 Graph showing Knowledge of Islamic credit card through Monthly

income.

Those people who are from lesser income group they are lesser responsive

of Islamic credit card relatively to the higher income level because lesser

income earners cannot afford the to own credit card most of the times.

3) Encouragement of Islamic credit card v/s conventional credit card.

Table 10 Encouragement of Islamic credit card v/s conventional credit card

Frequency Percent

Yes 141 70.5

No 9 4.5

I don’t know 50 25.0

Total 200 100.0

1.4

1.45

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1.85

Rs.0-25000 Rs.25001-70,000 Rs.70000 & above



Figure 10 Encouragement of Islamic credit card v/s conventional credit card

Most of the answerers were answer that Islamic credit cards are

really low in promotions when it comes to comparison to other credit cards

which are conventional in nature. Probably this is the main reason of most

of the people not knowing about Islamic credit card availability or even

existence.

4) To Own Islamic Based Credit Card Willingness.

Table 11 Detail information to own Islamic Based Credit Card Willingness

Male N Mean

willingness to own

Islamic credit card130 1.11

Female

willingness to own

Islamic credit card70 1.32



Figure 11 Graphic information to Own Islamic Based Credit Card Willingness

This shows that males are more interested rather then females to

have possession of Islamic based credit cards that mean that while

making promotional movement the Islamic cards companies should take

this factor into thought that so as to which gender is to target more.

1

1.05

1.1

1.15

1.2

1.25

1.3

1.35

Males Females



7. CONCLUSION AND RECOMENDATTIONS

7.1 Conclusion

Our research study shows that most people have severely low knowledge

regarding Islamic credit cards, be it about their existence or about their

functions or operations in Pakistan. Thus companies offering Islamic credit

card should take in to consideration the factor due to which knowledge

and understanding is lacking in Pakistan people of which might have

contributed to the low awareness is the extreme lack of promotional

campaign by the banks for Islamic credit cards. Though Standard charted

bank’s Saadiq which is the only Islamic credit card opening in Pakistan

exist but people hardly know about that. And if even if we suppose there

are people who have knowledge about their existence is unaware how

these cards function and hence they perceive that there is hardly any

difference between the Islamic and conventional credit cards. Our study

also proves that when the perception analysis comes out to be on the

negative side for most our respondent. Our study also suggests that most

of the respondent are either to enthusiastic about Islamic credit card or

switch to one who already hold conventional cards.

7.2 Recommendations

Banks should come with such promotional campaign that can

highlight the basic structure on which Islamic credit card is based and their

benefits. Also bank should develop the structure of these cards on criteria

that is across the world accepted so that more people can go for Islamic

credit cards. Moreover other bank should also come with Islamic credit

cards as there is huge market for these cards in Pakistan since it is

Muslim country and people would prefer to go to for the products that are

shariah compliant and backed by Islamic principles. Our study also

suggests that most of the respondent is either to enthusiastic of Islamic



credit card or exchange to one whom already hold conventional cards. If

we forces several bank to coming up with Islamic credit cards and

launching them in Pakistani market not only we can expect their business

to thrive but we can expect a more grown-up and develop market after

that.



8. REFERENCES

1. Abu Usamah (2007) “Islamic Credit Card Saadiq” Shariah compliant credit card Review:http://abuusamah.wordpress.com/2007/12/08/shariah-compliant-credit-cards/

2. Bruckhaus.G (2006) “Islamic Finance Basic Structures and Principles” Review: www.freshfields.com/publications/pdfs/2006/13205.pdf

3. Dr. Noor Ahmed Memon (2007) “Islamic Banking Present and Future challenges” Review:

http://islamicbankingzone.com/e-library/1-islamic%20banking.pdf

4. Dr. Shamshad Akhter (2007) “Pakistan Islamic Bank Past present and Future” Review:

www.sbp.org.pk/about/speech/.../Islamic-Banking-11-Sept-07.pdf

5. Hourani.H (2006) “ The Three Principle of Islamic Finance Explained Supplement of Islamic Finance” international Financial Law Review:

http://www.iflr.com/Article/1984844/Channel/193438/The-three-principles- of-Islamic-finance-explained.html

6. IIham Reza Ferdain (2008) “The Practice Of Islamic Credit Card: A comparative look between Bank Danamon Indonesia Dirham card & Bank-Islam-Malaysia-BI-card”-Review: http://staff.ui.ac.id/internal/060603200/publikasi/200808IAEIConference_IslamicCreditCard.pdf

7. James Massey (2007) “Islamic Credit Cards Operates Under the different Structures in Different Countries unlike Conventional Card” Review:

http://www.bpcgroup.ru/information_items_property_2359.pdf

8. Js-Gams (2008) “Credit Card System” Review:

www.mbs.unimelb.edu.au/home/jgans/papers/interchange.pdf

9. Lokesh Gupta (2008) “Evolution of Islamic Credit Card” Review:

www.halaljournal.com/article/1899/evolution-of-islamic-credit-card



10.Masum Billah.M (2004) “Islamic Credit Card in Practice “Review:

www.islamicmortgages.co.uk/index.php?id=262

11.Mohammad Azhar Sheikh (2010) “Islamic Vs Conventional Banks in Pakistan” Review:

www.iub.edu.pk/jer/JOURNAL/BRM_Research_Article.pdf

12.Mohammad Hanif (2011) “Difference and similarities in Islamic and Conventional Credit Card” Review:

www.ijbssnet.com/journals/Vol._2_No._2;_February_2011/20.pdf

13.Mushtaq Parker (2002) “Battle of Islamic Credit Card to Hot Up” Review: http://archive.arabnews.com/?page=6&section=0&article=19231&d=7&m=10&y=2002&pix=business.jpg&category=Business

14.Nooruddin Mansoor (2009) “Islamic Credit Card: Are demographic Factor-a-good-indicator?”-Review: www.ccsenet.org/journal/index.php/ass/article/download/4544/3877

15.Nuradii Rizwan Shah Bin Mohammad Dali (2007) “A Study on Islamic Credit-Card-Holders”-Review: www.kantakji.com/fiqh/Files/Finance/ICC.pdf

16.Obaidullah.M.(2005) “Islamic Financial Services” Review:http://islamiccenter.kau.edu.sa/english/publications/Obaidullah/ifs/ifs.html

17.No Author (2008) “ Islamic Credit Card Controversy” Review:

http://www.asharq-e.com/news.asp?section=3&id=13869

18.No Author “Credit Card History” Review:

http://homepages.nyu.edu/~jac614/nyny/credit-card-istory.html

Prospects of Islamic Credit Cards in Pakistan

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