Understanding Islamic Finance - Doha Academy of Tertiary Studies

Financing Principles and Practices 37914.4.7 Cards: Debit, Charge, Credit and ATMFour types of card representing plastic money, which are issued by banks and other institutionsto withdraw cash from their accounts, to obtain credit or to pay for goods purchasedor services received, are debit cards, charge cards, credit cards and ATM cards. These cardsprovide all or some of the benefits of liquidity, safety, mobility and flexibility to managethe budgets of the card holders. The AAOIFI has issued a Sharī´ah standard on thesecards (Standard # 2), which provides a useful basis for developing electronic money byIslamic banks remaining within the Sharī´ah framework. 2 Below, we briefly give the generalcharacteristics of the various cards.A debit card, which is issued against the available funds in a customer’s account, givesits holder the right to withdraw cash from his account and to pay for goods and services tothe limit of the available funds. The debit to the customer’s account is immediate and thecard doesn’t provide any credit. The issuing institutions normally do not charge customersfor using the card, except when it is used to withdraw cash or to purchase another currencythrough another institution different from the institution that has issued the card. The issuinginstitution may or may not charge a fee for issuing the card. Some institutions charge theparty accepting payment by means of the card by charging a certain percentage on suchtransactions.A charge card provides a credit facility up to a certain ceiling for a specified period oftime, along with providing a means of payment. It is used to pay for goods and services andalso to obtain cash. However, it does not provide a revolving facility and the card holder isobliged to make payments for the goods and services on the basis of the statement sent bythe institution. In the case of a delay beyond the free credit period, the institution chargesinterest to the card holder. It does not charge the card holder any commission on use of thecard. Rather, it receives a commission in percentage from the party accepting the card forpayment. The card-issuing institution has a personal and direct right against the card holderto be reimbursed for any payments, irrespective of the relationship between the card holderand the party accepting the card for payment.A credit card provides a revolving credit facility, by which the borrower may use orwithdraw funds up to a pre-approved credit limit and the amount of available credit increasesand decreases as funds are borrowed and then repaid. In other words, the credit may be usedrepeatedly. The borrower makes payments based only on the amount he has actually usedor withdrawn, plus interest. The borrower may repay over time (subject to any minimumpayment requirement) or in full at any time. Within the prescribed credit limit, the card holdermay purchase goods and services or withdraw cash. The free credit period is determined bythe issuing bank/institution. No interest is charged if the payment is made within the givenfree credit period. In the case of cash withdrawals, there is no free credit period. The cardholder may defer the payment subject to an interest charge that is normally higher than thegeneral interest rate prevalent in the formal sector in an economy. The issuing institutiondoesn’t charge the card holder any percentage commission on usage. Instead, it receives acommission from the party accepting the card for payment. The institution is obliged to paythe party accepting the card for purchases made by the card holder and this obligation isindependent of the relationship between the card holder and the party accepting the cardfor payment. The institution has a personal and direct right against the card holder to be2 For details, see AAOIFI, 2004–5a, Standard on Cards, pp. 16–27.