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 |
By JAAFAR S. ABDULKADIR
In Summary
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
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