Islamic credit cards: spending to please God

Islamic finance has become a popular and profitable niche for many financial institutions. Mohamed Dabo reports on credit cards that are not quite like the others

Islamic finance is a way to manage money that keeps within the moral principles of Islam. It covers things like saving, investing, and borrowing to buy a home.

The moral principles many Muslims live their lives by are sometimes known as the Shariah. In other words, Sharia is the Islamic religious law.

One financial product that was designed in accordance with Islamic law is the Islamic credit card.

What is an Islamic credit card?

Islamic credit card is a Shariah-compliant financial product and an important part of Islamic banking.

This type of credit card offers similar perks and benefits as their conventional counterparts. For example, they offer rewards, cashback, air miles, and others.

However, Islamic credit cards provide some advantages that conventional cards do not.

From an Islamic perspective, conventional cards are associated with great debts that people get themselves into. The debts are viewed as the result of the high interest rates they carry.

Interests on debt under Islamic law

A Muslim is not allowed to benefit from lending money or receiving money from someone.

This means that earning interest (known as riba) is not allowed – whether you are an individual or a bank. To comply with these rules, interest is not paid on Islamic savings or current accounts or charged on Islamic mortgages.

What makes a credit card Islamic?

The primary differences between Islamic and conventional credit cards are the prohibition of riba and gharar.

Riba refers to an interest, while gharar stands for overcharging. Compound interest charges accumulate to form gharar.

Another factor that makes a credit card Islamic is the filtering system that ensures the card will only be used for halal transactions. Halal (which means ‘permissible’ or ‘lawful’ in Arabic) refers specifically to food that is permissible according to Islamic law.

The halal requirement means that you can’t use an Islamic credit card to pay for alcohol, for gambling, prostitution, or to pay for other activities forbidden by Islam.

While Islamic credit cards are designed with Muslims in mind, non-Muslims can also benefit from these cards due to the absence of compound charges and high interests.

How do Islamic banks make money?

If charging interests is forbidden under Islam, how can banks make money?

Banks can profit from the buying and selling of approved goods and services.

The principal means of Islamic finance are based on trading. Trading activities involve risk. So, banks and other financial institutions will trade in sharia-compliant products with the money deposited by customers, sharing the risks and the profits with their customers.

Islamic banks are structured so that they maintain a clearly differentiated status between shareholders' capital and clients' deposits in order to make sure profits are shared correctly.

Many Muslim countries have strict laws governing the types of businesses with which the banks can trade. There should be absolutely no investment in unsuitable businesses, including those involved with armaments, pork, tobacco, drugs, alcohol, or pornography.