card issuers attempt to reconcile the time-honoured interest-based
business model with the requirements of the religion. There is
potential for enormous growth and issuers are increasingly turning
to innovation to bridge the divide. Truong Mellor
One interesting side effect of the move away from cash payments is
that as card issuers enter new markets, they are having to engage
with practices and traditions that turn their own established
business models upside down.
In the case of credit cards, the interest-based risk-assessed model
that has been used by issuers for nearly half a century is
prohibited by the tenets of Islam, as the religion forbids interest
payments made when the outstanding balance is not repaid in
While a Muslim could potentially commit to paying off a credit card
balance every month and thus not incur any interest charges, this
interpretation of Islamic law is still frowned upon by many, as the
cardholder has agreed to pay interest in the instance of them not
meeting the repayments, and no individual can truly guarantee their
complete dependability in this regard.
However, the continued growth and the inevitable modernisation of
Muslim economies across the globe – fuelled through either the
petro-dollar boom in the Middle East or the expansion of middle
class consumerism and e-commerce in countries such as Malaysia and
Indonesia – has meant that issuers have begun in earnest to adapt
their card products and business models in order to make them
compliant with Islamic Shariah law.
A research report recently published by US-based financial services
consultancy firm TowerGroup argues that although the Islamic credit
card market is still in its infancy, the potential global market
for the sector reaches approximately 250 million individuals. At
present, there are around 1 million accounts, but TowerGroup
predicts that this figure will grow rapidly over the next few years
and reach 6 million by 2012.
Variations on a theme
There are currently several different variants of a
Shariah-compliant card scheme in operation across the globe
identified by the TowerGroup report. The more universal model is
that of a secured card that is linked to a non-interest bearing
deposit account that the issuer holds for the customer, making a
profit from transaction and membership fees only.
There are several banks that offer similarly structured products
that are in effect more akin to a debit card, as no financial
credit has been extended to the customer. The Dubai Islamic Bank
offers a Visa classic card, but subtracts the balance of any
purchases made from the holder’s current or savings account at the
end of every month.
However, making a profit from transactions and membership fees
alone does not make for a lucrative model. As such, there have been
differing attempts to devise repayment structures for card products
that are Shariah-compliant.
A lease purchase card scheme model is prevalent in the Gulf region,
whereby a cardholder leases a purchase from the bank or card issuer
with a pre-arranged fee structure instead of interest. By contrast,
the model preferred in the Asia-Pacific region works through the
cardholder’s transaction generating another operation that sees the
purchase sold to the card issuer and then bought back by the
customer at an agreed-upon price that is marked up.
Many Islamic scholars based in the Gulf region view the Asian Bai’
Allnah model as simply a means of disguising interest payments, and
the model runs into problems when there is no item of purchase for
the cardholder to buy back, such as a cash advance on a credit
card. In the case of Shariah compliance, judgments are dependent
upon the interpretations made by a review board of experts in
Islamic law, so what may be Haram (forbidden) for one institution
may be acceptable for another.
Brian Quarrie, vice-president for global payment processor First
Data’s Middle East region, told CI: “Between different
institutions, what we find is that there are certain pillars of
Shariah law that have to be adhered to. No interest, certain places
where the cardholder cannot purchase certain items – those are
pretty much standard.”
However, even two banking institutions in the same country will
have Shariah councils made up of different scholars that will have
a slightly different interpretation. According to Quarrie, the
further that banks and issuers push the envelope in terms of
product functionality, the more pronounced the differences between
products will inevitably become.
“Within the Middle East, it is certainly not much different to how
each country sets up its civil law,” he adds. “We all live in
Many in the Middle East believe that the Asia-Pacific model hinges
upon the prohibition of transactions made in licentious
establishments such as bars and casinos. The stringency of
Shariah-compliance regarding the contracts involved is perhaps seen
as less important than the prohibition of Haram transactions.
Dr Mohammed Ma’sum Billah, professor of Islamic financial
regulations at the International Islamic University in Malaysia and
a renowned academic expert in the field of Islamic banking,
believes that instead of creating conflict and confusion, the
differing payment models that are found across the globe can be
healthy for Islamic finance as a whole.
He told CI: “Different experiences and practices may discover an
opportunity to share knowledge and upgrade products, policies and
mechanisms to create the utmost satisfaction of customers with
Challenges for the model
At a time when the financial services industry is struggling with
profits, somewhat niche sectors such as Islamic banking may
initially seem unsustainable for many companies concerned about
their bottom line. Moreover, in predominantly Islamic markets such
as the United Arab Emirates, Shariah-compliant financial products
continue to languish. In some cases, many potential customers are
unconvinced that the products are truly Shariah-compliant. As these
propositions are fairly new to the market, this perception may take
some time to alter.
“In the Middle East, there is still a general issue when it comes
to card penetration,” says Quarrie. “About 90 percent of
transactions are still cash-based.”
“When you look at the spread, and the difference between the
various Islamic models and the traditional Western model, in
looking to expand that, the question is whether it a loss leader or
not,” says Brian Riley, research director at TowerGroup for bank
cards and the author of the recent report.
Nevertheless, he believes that such products are necessary for
issuers wishing to remain active in Muslim economies.
“It gives you the ability to be full-service within your banking
needs. This is definitely a service you need if you are in that
part of the world,” adds Riley. “Of course it doesn’t make
practical sense to have it, but having that firewall, the purity,
it’s considered an important part of the lifestyle.”
However, the structure of a fee-based credit card account seems
unduly complicated for consumers that are used to traditional
banking products, which could explain why the uptake or even
conversion towards Islamic financial products has until now
remained somewhat muted. Additionally, many Middle Eastern markets
where Shariah-compliant card products could reasonably be expected
to have some traction are currently saturated, which serves as a
considerable impediment for growth in this burgeoning sector.
“Certainly there is a requirement, a need and an opportunity – and
some institutions have been able to meet that,” says Quarrie. “In
the very general sense however, there is still a fairly long way to
Processing must be separate
One of the most crucial obstacles for a successful Islamic business
model is the processing element of the equation. Aside from
prohibiting certain types of merchants and operating in an
interest-free environment, Islamic processing must be
Because traditional and Islamic transactions cannot be processed
using the same technology platform in order for the latter to be
truly Shariah-compliant, software for such a programme has to be
customised and operate in a completely separate environment.
“You have to be able to separate the profit and loss elements for
the business if you are running a conventional bank side by side,”
explains Quarrie, likening the process to setting up different
silos. “The real trick is to make Shariah-compliant cards as
flexible as the conventional products, and as
Innovations: rewards and ethics
Where Shariah-compliant cards may prove to be innovative is in how
banks and other issuers harness the traditional elements of Western
card programmes such as rewards points and utilise them with a
peculiarly Islamic twist. One such example is the Makkah card
offered by Abu Dhabi-based First Gulf Bank. This card allows
customers to accumulate reward points that count towards a free
trip to Mecca for the Hajj pilgrimage, one of the ‘Five Pillars’ of
According to Riley, there is a huge market for this, especially in
countries such as Malaysia where a pilgrimage to Mecca is more of a
challenge both financially and geographically.
“Another interesting feature on these cards is the typical ‘alms
for the poor’, where the cardholder can make a donation,” he
These rewards schemes will become more diverse as the market and
the products that are on offer start to mature, according to
“Even the rewards side will start to differ,” he explains. “Not
surprisingly, a lot of the first cards have the rewards related to
things like Hajj, charities or something like a religious festival.
As we move forward, I’m sure that will start to expand.”
Indeed, many of the principles that guide Islamic cards are ones
that many non-Muslims could be expected to subscribe to, and the
sector may eventually open up to become an alternative ‘ethical’
financial services option, provided that the products can
effectively compete with the more traditional ones on offer.
“I think this is already happening,” says Quarrie, citing a 24
percent year-on-year growth for Islamic banking as a whole across
the Gulf Co-operation Council (GCC) region.
“There are quite a number of Western institutions that have got
involved with Islamic banking. Part of the reasoning is obviously
to scoop up some of the Muslims who want to invest in that way, but
also from an ethical perspective, they put some limitations on
where they spend the money. It is very similar to a co-operative
society as we would know it in the West. A lot of people are pretty
comfortable with that.”
Other innovations such as contactless payments are already being
incorporated into some Islamic card offerings. On 1 August,
MasterCard Worldwide and EONCAP Islamic Bank of Malaysia launched
the world’s first Islamic debit MasterCard card, equipped with
MasterCard PayPass contactless payment functionality. The EONCAP
Islamic debit MasterCard card encompasses debit, contactless, EMV
and ATM functionalities, blending traditional purchasing power with
modern technology, and is Shariah-compliant.
“The EONCAP Islamic debit MasterCard card is designed for
individuals who prefer to spend what they have in their accounts,
yet seeking the same functionality and assurances of a credit
card,” said Shuan Ghaidan, head of product sales and delivery for
the Asia-Pacific region at MasterCard Worldwide.
Islamic prepaid cards
UAE-based Sharjah Islamic Bank (SIB) has announced the launch of
its Jeans Card, a prepaid offering that is intended to function
like a credit card but is backed by a preloaded amount of the
“The launch of the Jeans Card is part of SIB’s strategy to launch
innovative products and services that suit all ages and at the same
time are compliant with Shariah principles,” said Mohammed Abdulla,
CEO of SIB.
This comes hot on the heels of the Cordoba Gold prepaid card, a
Shariah-regulated prepaid offering that is being issued in the UK
by Advanced Payment Solutions (APS).
With up to four additional cards being made available on a single
account, the Cordoba Gold offering is also being touted as a simple
and affordable method of money transfer.
The card also comes equipped with APS’s ‘Creditbuilder’ solution to
help improve the credit rating of the cardholder by adding positive
information to their credit file, using a gradually repaid loan as
opposed to a monthly fee.
As a traditional prepaid card avoids interest payments and penalty
charges that are forbidden by Islam, one of the ways in which these
new products seek to establish their Islamic credentials is through
the marketing of the cards and the investments that the companies
behind them are making.
For example, Cordoba Finance has a detailed corporate social
responsibility agenda it adheres to, and aims to give back to a
variety of communities and charitable causes.
Moreover, this type of financial transparency is something that
both Muslims and non-Muslims alike could potentially sign up to.
Cordoba is certainly positioning the new prepaid offering as a
mainstream financial product, as the company believes that the
values it stands behind are increasingly being sought after by