When it comes to credit cards, many consumers are familiar with conventional options, but may be less familiar with Islamic credit cards. These cards, also known as sharia-compliant credit cards, are designed to comply with Islamic law, which prohibits the charging of interest (riba). In this article, we’ll take a closer look at the key differences between Islamic credit cards and conventional credit cards, and provide examples of each type of card.
How does an Islamic Credit Card work?
Islamic financial institutions are not able to provide credit cards that have an interest- bearing revolving credit facility. This means that customers using cards from these institutions cannot pay off their debts in instalments and incur any interest.
Islamic finance offers a credit card as an alternative to cash payments for goods and services. The card issuer pays the seller and then charges the cardholder for the amount due.
The credit period is determined by the issuer and no interest is charged, although interest may be applied if the cardholder chooses to defer payment.
In the case of withdrawals, no free credit period is allowed. This instrument of Islamic finance is in accordance with Shari’ah, allowing cardholders to make purchases without needing immediate payment.
Differences between Conventional and Islamic Credit Cards
Difference #1
One of the biggest differences between Islamic credit cards and conventional credit cards is the way in which they handle interest. Conventional credit cards typically charge interest on balances that are carried over from month to month. This means that the longer you carry a balance, the more interest you will have to pay. In contrast, Islamic credit cards do not charge interest. Instead, they use a system of profit and loss sharing, where the card issuer and cardholder share in the profits or losses of the card’s usage.
For example, consider a conventional credit card with an interest rate of 15%. If you carry a balance of $1,000 for one year, you would end up paying $150 in interest. With an Islamic credit card, there would be no interest charged and the card issuer and cardholder would share the profit or loss based on the usage of the card.
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Difference #2
Another key difference between Islamic and conventional credit cards is the types of purchases that are permitted. Islamic credit cards may not be used for prohibited activities such as gambling or purchasing alcohol. Conventional credit cards, on the other hand, do not have these restrictions.
One example of an Islamic credit card is the Al-Awfar card offered by Al Rajhi bank. This card is sharia-compliant, and uses the profit and loss sharing system. It also does not charge any annual fees and provides rewards on purchases.
On the other hand, a conventional credit card example is Visa Platinum Card offered by Citibank. It comes with a annual fee and offers reward points, cashback and travel benefits. The card does not have any restrictions on usage and can be used for any type of purchases.
What is your Financial Situation?
When choosing a credit card, it’s important to consider your own financial situation and what type of card will best meet your needs. For those who are interested in adhering to Islamic law, an Islamic credit card may be the best option. For others, a conventional credit card may be more suitable.
| Feature | Islamic Credit Card | Conventional Credit Card |
|---|---|---|
| Interest | Does not charge interest. Uses a system of profit and loss sharing. | Typically charges interest on balances carried over from month to month. |
| Prohibited activities | May not be used for prohibited activities such as gambling or purchasing alcohol. | No restrictions on types of purchases. |
| Payment structure | Card issuer and cardholder share in the profits or losses of the card’s usage. | Interest is charged on balances carried over from month to month. |
| Examples | Al-Awfar card offered by Al Rajhi bank | Visa Platinum Card offered by Citibank, American Express, MasterCard |
| Rewards | Rewards on purchases, no annual fee. | reward points, cashback and travel benefits, annual fee |
Please keep in mind that this table is a generalization and specific terms and conditions of each card may vary depending on the card issuer. It’s important to carefully review the terms and conditions of any credit card before applying for or using it.
Types of Islamic Finance – A Brief Guide
Features of Islamic Credit Cards
Interest: Islamic credit cards do not charge interest. Instead, they use a system of profit and loss sharing, where the card issuer and cardholder share in the profits or losses of the card’s usage.
Collateral: Islamic credit cards may require collateral, such as assets or property, to be used as a security for the credit extended. This is to ensure that the card issuer is protected in case the cardholder defaults on the payments.
Contract type: Islamic credit cards typically use lease-based contracts, rather than loan-based contracts. This means that the card issuer purchases a product and then leases it to the cardholder for a fixed period of time, rather than lending the cardholder money to be repaid with interest.
Transaction restrictions: Islamic credit cards may have restrictions on the types of transactions that are permitted. These restrictions may include prohibitions on using the card for activities such as gambling or purchasing alcohol.
Profit margin on deposits: Some credit cards may offer a profit margin on deposits, which is the difference between the interest earned on the deposits and the interest paid to the depositors.
Late payment fees: Some Islamic credit cards may charge late payment fees, but they may differ from the ones in conventional credit cards. They may be based on profit and loss sharing and not as a fixed or percentage rate like conventional credit cards.
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Summary
In conclusion, Islamic credit cards and conventional credit cards have some key differences, such as the way they handle interest, and the types of purchases that are permitted. It’s important to understand these differences and choose the card that best meets your financial needs.
