How Islamic finance treats conventional credit cards

Kenya Commercial Bank Group CEO Joshua Oigara speaks during the launch of the Islamic banking at Hilton Hotel in Nairobi April 9, 2015. A quiet revolution is taking place in the banking and finance sector; the steady growth of Islamic banking in the country. PHOTO | SALATON NJAU |
Kenya Commercial Bank Group CEO Joshua Oigara speaks during the launch of the Islamic banking at Hilton Hotel in Nairobi April 9, 2015. PHOTO | SALATON NJAU | 

Islamic banking has embraced the needs of customers by repackaging and reimagining existing conventional banking products or engineering innovative products to comply with the Shariah principles and guidelines.

These help to regulate human interactions and transactions to promote transparency, fairness, justice and accountability to each other.

The provisions of interest, the financing of business ventures like alcohol production, arms trade and undertaking excessive risks as well as ambiguous contractual obligations that end up benefiting some parties in transactions at the expense of others, form part of the Shariah’s prohibitions.

One of the conventional banking products that has undergone a great deal of engineering in terms of its features that are considered offensive to the Shariah standards are credit cards.

The conventional structure of a credit card operates on the basis of interest that is outlawed in the Shariah.


Credit cards serve the same purpose both for the conventional clients as well as those who consume the Shariah compliant banking services. However, there is a huge difference in the contractual terms and conditions of the credit card as a product offering.

Credit cards are popular as they are portable and secure in addition to being a tool for instant purchases that are usually structured with flexible repayment terms within defined limits.

In certain online bookings and purchases, the use of card credits are a prerequisite for executing such transactions. Cardholders may benefit from earning loyalty points, enjoy certain privileges and perks like accessing VIP lounges in airports, get discounts in selected outlets and even get insurance packages among others.

Default rates

The existence of interest, variation of charges on the basis of amounts of cash withdrawals using the cards and the fact that the default rates with quite punitive charges are some of the features that makes the conventional credit cards non-compliant from the Islamic perspective.

The use of the credit cards to make purchases like alcohol and other non-Shariah compliant transactions are strictly prohibited and this is reflected in the terms and conditions of use of the cards.

Both conventional and Islamic banks issue their clients with credit cards with well-defined limits in line with their credit policies, terms and conditions in place.

The conventional and Shariah compliant credit cards do attract one time joining or membership fees and annual renewal fees as well as replacement charges for lost cards.

The Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI), a standard setting entity based in Bahrain, has given certain guidelines on what is and not permissible as per Shariah standards on the issuance of credit cards.

For instance, it is not permissible for a bank to issue a credit card that provides a revolving credit facility that bears interest like where a cardholder pays interest for being allowed to pay off his or her debt in instalments.

According to the AAOIFI standards, it is permissible for a bank issuing a credit card to charge the cardholder membership fees, card renewal fees as well as replacement fees. It is also permissible for the issuing bank to charge a flat rate service fee for cash withdrawals that is considered proportionate to the service offered but not a fee that varies with the withdrawal amounts.

Permission to charge the cardholder fees for membership, renewal and replacements is given considering the fact that he or she benefits from the services that involve the use of the card. Banks may offer cards as part of their bouquets of offerings to cross sell their products and contain the customers within their eco-system.

One of the popular card version in Islamic finance is a payment or charge card that enables a holder to make transactions which must be repaid in full by the due date and may be subjected to late fees and or restrictions on the further use of the card.

The bank earns from all service related charges but the late fees that are meant to manage delinquency are channelled to a ‘Charity’ account that is outside the control of the banks.

The other popular card is the Service or fee-based card where the customer uses the card and pays either the minimum payment as well as fixed monthly fee instead of the interest that varies with the amount used.

The cardholder may opt to pay the full outstanding amount of the card and enjoy the waiver of the monthly fee. There is no interest or finance charge but it can carry fixed monthly or annual fees as well as fixed late payment, overdue or exceeding the limit fee.

These cards carry fixed rate per transactions as well as fixed fees on card maintenance in terms of renewal, replacements, and statements among others.

Conventional practice

In the current conventional practice, a Shariah sensitive client may opt for a credit card and commit to paying off the entire balance of the card account before it falls due every time as he continues to use the card, thus avoiding paying interest.

Some scholars have deemed the practice non-compliant given that the binding contract and agreement that regulates the card usage has interest factored in the transaction in the event the cardholder misses to pay the amounts as the same falls due.

There are many structures that can be applied to package Shariah compliant credit cards taking into account the prohibitions of the Shariah and the guidance of the scholars who are better placed to ensure that the development of such products are contained with the limits set by the Shariah principles.

Mr Abdulkadir is head of Islamic Banking at KCB Bank Kenya and the chair of Islamic Finance Sub-Committee at the Kenya Bankers Association