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The Practice of Islamic Credit Cards: A Comparative Look between Bank Danamon Indonesia’s Dirham Card and Bank

Islam Malaysia’s BI Card 1
Ilham Reza Ferdian 2 Miranti Kartika Dewi Faculty of Economics, University of Indonesia Faried Kurnia Rahman Kuliyyah of Economics and Management Sciences, International Islamic University Malaysia

Abstract
The development of technology has enabled banks to issue products that satisfy the need of its clients. Credit card is one of the latest banking gadgets. It facilitates people to make spot transaction without carrying cash as well as on-line transaction since the credit card issuer pays the proceeds of the transaction on behalf of the buyer. However, for Muslim customers, the usage of conventional credit card which involves practice of riba when there is late payment has brought a conflict with their belief. Therefore, there is a need for a payment instrument which has function as credit card but comply with the Islamic principles. This study will elaborate the practice of Islamic credit cards issued by Bank Danamon Indonesia and Bank Islam Malaysia, which are the first Islamic credit card issuer in both countries. The paper discusses the issue from both economic and shariah point of views. From the practice, it can be seen that the contracts used in Malaysian BI Card are relatively more lenient than which used in Indonesian Dirham Card.

Keywords: Islamic credit card, Dirham Card, Bank Islam Card

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Paper submitted to IAEI International Conference, Surabaya, Indonesia, 1-3 August 2008. Corresponding Author: iref.468@gmail.com

“Signing a credit card contract and using it in a way that generated payable interest is haraam. It is then borrowing on interest (riba). Signing the contract, using it, and making payment within the grace period and making no cash withdrawals is permissible because it amounts to a contract that gives you a choice to deal or not to deal with interest” (Dr Monzer Kahf)

I. Introduction
The development of technology has enabled banks to issue products that satisfy the need of its clients. Credit card is one of the latest banking gadgets. It facilitates people to make transaction without carrying cash since the credit card issuer pays the proceeds of the transaction on behalf of the buyer. Most goods and services can be bought either online or at the usual “brick and mortar” sales outlets by using this card. Normally, the merchant pays around 2.5% - 3% to the bank as a processing fee. In addition, clients are given grace period in order to pay the loan free from charge of late payment. This convenience has led the widespread of credit card. Therefore, not only conventional banks interested to issue credit card, Islamic banks which notably have to comply with the Islamic principle also start to come out with this product.

II. What Does It Mean By Islamic Credit Cards?
Massey (2007) defined Islamic credit card as a payment instrument that meet with at least three criteria of Islamic principles. Firstly, the card must meet the shariah requirements on lending, which vary from region to region. In general, it must avoid the three essential prohibitions in Islamic finance, which are riba, gharar and maysir. Riba, as applied in the interest concept, is clearly proscribed in the Holy Qur’an and the Hadith of Prophet Muhammad p.b.u.h.. Therefore, an Islamic credit card is not allowed to charge any interest to payments even if the user is late in paying. Gharar, or uncertainty, in the practice of Islamic credit card should be avoided by excluding a charging scheme where the monthly repayment or service charges are variable based on a number of factors. Maysir or gambling is also

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prohibited. Thus, apart from preventing the card holder to access sites such as online gambling, Islamic cards need some other form of insurance cover. Secondly, an Islamic credit card must have certainty to be accepted widely. It has to use international payment schemes, such as MasterCard or Visa. Besides that, the card should provide facilities that are not available on debit cards such as CVV numbers for “card not present” transactions and hold amounts. Furthermore, the merchant charges and issuer’s fees should not be withheld. Thirdly, an Islamic credit card should not encourage behavior that is considered haraam. This includes all manner of forbidden behaviors and transactions of an inappropriate nature. To look forward on the application of Islamic credit card, this paper will discuss the practice of Islamic credit cards in Malaysia and Indonesia, by taking a closer look on BI Card which is issued by Bank Islam Malaysia Bhd and Dirham Card which is issued by PT. Bank Danamon Tbk. Further, this paper will also examine the Economic and Shariah Issues pertaining to the credit cards as implemented by the banks, and will identify problems, opportunities and challenges surrounding the products offering.

III. The Practice of Islamic Credit Card in Malaysia
On 23rd of July 2003, Bank Islam Malaysia Bhd has issued a shariah compliant credit card named Bank Islam Card (BIC). This first Islamic credit card in Malaysian market was issued to response the need of its Muslim clients. It is also the first credit card in Southeast Asia adopting the Europay-Mastercard-Visa (EMV) Smart Card with the “chip” technology. The card has all features as payment instrument, however, profit rate is only charged to clients who fail to pay back the minimum repayment within the 20 days grace period.

III.1. Details of the Bank Islam Card The holders of the card are only permitted carry out halal transactions, which exclude transactions related with six categories that don’t meet shariah requirements. These categories are bars, discos, night clubs, purchase of beers,

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escort and massage services and gambling. Operation of BIC involves three aqad (contract), namely Bay al inah, Wadiah, and Qard al hasan. Bay al inah consist of two agreements. In the first agreement the customer buys merchandise from the bank at a stipulated price. Whereas, the bank buys back the merchandise from the client at a lower price. The bank’s profit from this transaction is derived from the difference of the two prices. The profit rate levied by Islamic bank is known in advance. Furthermore, the cash proceeds of the second agreement are deposited into the wadiah account of the customer. Wadiah is a contract of safekeeping where the custodian is not allowed to use or benefit from the asset. However, if the asset is destroyed or damaged he is not held liable unless proven negligent. Obaidullah (2005) stated that the wadiah account is created and maintained by the bank. Then, the customer can use his or her card to purchase goods and services same as the conventional credit card. The only difference is that BIC card is backed by cash held in the wadiah account. The last contract used by Bank Islam in the operation of BIC is qard al hasan. The bank enables the customer to withdraw more than the available balance in his wadiah account. No financial charge is levied on that extra amount used. However, the client is required to settle it in a specific time later. Moreover, for BIC the profit is calculated monthly and it is based on the sum of transaction made during that particular month, the profit is not compounded unlike conventional bank and the total profit cannot be more than the profit stated in the contract of bay al inah. However, for conventional credit card the interest rate imposed is undetermined. Similarly, the fee charged for withdrawal service is not exorbitant as compared to conventional bank because when a client withdraws RM 1,000 or below, a fee of RM 12 is charged. On the other hand, in the case if conventional credit card, a fee of 3% or RM 50 is charged for every withdrawal. To get simpler understanding, figure 1 provides the scheme of BIC operation.

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Figure 1: Scheme of BIC
3. Bank sells the merchandise to customer at cost plus (deferred payment basis) 1. Customer approach bank for credit facility

CARD HOLDER
4. Bank simultaneously buy back the asset at cost.

BIMB

BANK’S ASSET
2. Bank identifies asset e.g. merchandise

III.2. The Economic and Shariah Issues of Bank Islam Card The use of bay al inah in BIC’s operation has gained some controversies among the Muslim jurists. According to Rosly and Sanusi (1999), bay al inah is generally known as sale based on the transaction of nasi’ah (delay). The (prospective) debtor sells to the (prospective) creditor some object for cash which is payable immediately; the debtor immediately buys simultaneously the same object for a greater amount for a future date. Thus, the transaction amounts to a loan. The difference between the two prices represents the profit. According to Shafi’i School, the contract is valid as long as the condition of the contract is fulfilled. The real intention is left to God because there is no way we can ascertained it. For that Shafi’i takes the example of someone who marries his wife for a short term. This marriage, however, is valid because others do not know the real intention. Furthermore, Shafi’i above view is only applicable in the case where the true intention of the parties is hidden and unknown. Hambali and Maliki assert that the contract of inah is not valid. According to them, the permissibility of the contract is determined by the motive of the parties. In the case of BIC, the motive of the parties is to get the loan. Hence, invalid. Another Hambali scholar said that if someone sells his grape to someone

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else and knew that the buyer would use it for the purpose of making wine, this contract is void. This is analog of bay al inah. Furthermore, nowadays there are documents indicating the objective of the contract. Since the sale and contract is a cover up to give a loan, then this is considered as invalid contract. Another argument regarding bay al inah was stated by Ibn Tammiyah who views that sale is divided into three categories. The first one is to purchase goods so that you can consume it. The second is to purchase goods for the sake of trading and the last is to purchase goods because you need money and it is difficult to borrow. Therefore, someone can buy goods on credit and sale them back in the form of cash. In this later condition, inah is prohibited. Conversely to all those opinions, Malaysian’s jurists allowed the use of bay al inah because they say there is a need to adopt some controversial issue such as bay al inah in order not to use riba based loan. There is also a fiqh maxim which says that when faced between two evils choose the lesser one. Moreover, the bank Negara Malaysia confirmed that controversial products only will be used temporary, so that other shariah compliant products can be developed in the future. Besides those all, the issuance of BIC also invites some economic issues to appear to the surface. One of the issues is related with compulsive buying behavior. According to Park and Burns (2005), compulsive buying is a repetitive purchasing that becomes a primary response to negative events or feelings. Compulsive buyers purchase quite a number of goods and services that they do not need and afford it. Shiffman and Kanuk (2000) as notated by Park and Burns (2005) argued that compulsive buying is considered as the dark side of consumption because it tends to destroy the lives of individual who appear impulsively driven to consume and the lives of their relatives and even the societies they belong. According to the fiqh scholars, in general, credit card encourages people to spend beyond their need. Expenditures of credit card depict luxury, unnecessary and unplanned consumption. Hence, this is compulsive buying contradicts the teaching of Islam since Islam teach us that debt should the last resort because it

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should be avoided by any means. Hence, when consumers carry cash they only buy goods and services needed rather than resort to compulsive buying and in the process endanger their lives and the lives of their families Kim ( 2002) as quoted by Park and Burns (2005) mentioned that in Korea, the public held more than 100 million credit cards in 2002. At the same time consumer bankruptcies haves increased significantly. Additionally, there is a grave concern that this figure will rise as more credit card are issued to the public. Moreover, Aysan (2007) mentioned another fact that in Turkey, the number of credit cards issued was 19 million in 2003 and 15.7% of Turkish expenditures were paid on credit. Besides that, in 2003, thirty four cases of death were reported and it was caused by people who default paying their credit cards loan. Because, of this reason the Turkish government intervened in order to protect the consumers and every defaulters are given the opportunity to pay their loan without interest.

IV. The Practice of Islamic Credit Card in Indonesia
The development of Islamic credit card in Indonesia was started with the issuance of fatwa No: 54/DSN-MUI/X/2006 concerning “Syariah Card” by Dewan Syariah Nasional Majelis Ulama Indonesia (National Syariah Council). On this fatwa, the council stated that Islamic credit card, or Syariah Card is built based on three aqad (contracts): kafalah (guarantee), qardh (loan), and Ijarah. The pioneer of the development Islamic credit card in Indonesia is Syariah Division of Bank Danamon (PT Bank Danamon Tbk). On July 18th 2007, it launched the first Islamic credit card in Indonesia, called “Dirham Card”, a collaborative product between Bank Danamon and MasterCard. Detail of the Dirham Card will be elaborated as follows.

IV.1. Details of the Dirham Card When a person wants to have the Dirham Card, firstly he has to become a customer in Bank Danamon Syariah and has an account with minimal balance of

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five hundreds thousand rupiah (around RM 167) 3 . This initial savings will be treated as his ‘goodwill investment’. Goodwill investment is investment or saving that acknowledge as his first intention for being a good customer for the bank. In the Dirham Card regulation, the ‘goodwill investment’ has to be at least 10% from the credit limit. It has a range of credit limit, starting from 5 million rupiah (around RM 1670) to 40 million rupiah (around RM 13,335). Therefore, when a customer wants to apply Dirham Card, he has to give the ‘goodwill investment’ between RM 167 and RM 13,335 depends on his ability to pay and spending behavior. The implementation of ‘goodwill investment’ is to protect both customer and also the bank from inappropriate use of the card. Bank Danamon acts as a guarantor (kaafil) for the card holder. It will guarantee all the payments coming from all transactions which may come from buy-and-sale transactions between merchants and card holder or from cash withdrawal from Bank Danamon’s ATM or other banks which have strategic partnership with it. For example, a card holder bought a bag at Vincci by using Dirham Card. Vincci as the merchant will confirm to bank Danamon as card publisher. Then, the bank will guarantee that the customer can pay the price. If the payment time is due, the customer will pay the price to the bank.

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With the currency exchange of RM 1 = Rp 2,995

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Figure 2: 1st Scheme of Dirham Card

3. Bank claims to card holder

CARD HOLDER
4. Card holder pays to the bank

BANK DANAMON

1. Buy something

2. Guarantee all card holder obligation

MERCHANTS

The bank, which offer guarantee of payment, has a right to collect fees (ujrah kafalah). DSN MUI stated that, “card’s publisher as the payments service provider the card holder. For this ijarah, card holder will be charged by the membership fee”. Moreover, loan contract (qardh) will be executed when card holder withdraws some cash. With this aqad, bank Danamon is a loan lender (muqaridh) to the card holder (muqtaridh) through cash withdrawals from bank Danamon’s ATM or its link. Card holder should return the same amount which is he withdraw at the due time.

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Figure 3: 2nd Scheme of Dirham Card

3. Bank claims to card holder

CARD HOLDER
4. Card holder pays to the bank

BANK DANAMON

1. Withdraw some cash

2. Pay to the bank if card holder withdraws at other bank’s ATM

ATM

When the card holder is late to make repayment, he/she will get two types of fines: ta'widh and proportional fine. Ta'widh is cost that incurred by the bank when they claim to the customer, such as cost to send a letter to card holder or make phone calls to the card holder in order to remind him/her to make repayment. This fine is amounted Rp 17,000 (around RM 5.7) for each month. Furthermore, proportional fine is calculated from the amount of payment. If the outstanding of payment is around Rp 1,000,000, the customer should pay the fine around Rp 30,000. This fine is not recognized as bank's income but will be treated as source of qardhul hasan fund that will be donated later to BAZNAS DD (Badan Zakat Nasional Dompet Dhuafa), a national zakat foundation as a partner for Bank Danamon. IV.2. The Economic and Shariah Issues of the Dirham Card The issue arises from this Islamic credit card is that this card is more expensive than a conventional credit card. The Dirham Card holder has to pay 3% administration cost of the total amount of transaction. This means if the card holder shopped for Rp 1,500,000, then the card issuer will charge Rp 1,545,000 to him/her. The Rp 45,000 comes from 3% of the ‘real’ debt of Rp 1,500,000.

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That practice is different with a conventional credit card. The conventional card holder will not be charged with the interest fee if he/she is able to pay before the due time. Some people acknowledge this latter practice as a better scheme than 'the administration cost' charged by the Dirham Card issuer. The same like BIC case, the issuance of Dirham Card also brings the debate among shariah scholars. Some of them argued that the issuance of Islamic credit card will support the consumerism which is not allowed in Islam. This case become sharper in Indonesia since the Indonesians’ marginal propensity to consume has been more than 1. It means many Indonesians spend more than their incomes. Additionally, this phenomenon is caused by the unwise use of credit card. At this point, Bank Danamon does not deny this phenomenon. The bank argue that the issuance of Dirham Card is not intended to support the consumptive behavior to its holder, but to be an alternative choice for the Muslims to do their transactions in a way that comply with the Islamic principles. Since based on its research, 80% from 4 millions credit card user are Muslims, the bank concluded that it is better to protect the Muslim users from interact with riba by providing Islamic credit card. Another shariah issues accompany the issuance of the Dirham Card is opinion that the Dirham Card is not different with other conventional credit cards. The opinion said that the Dirham Card still include “implicit” riba in its scheme. The card issuer only changes the interest with the term of ‘administration cost’. It is because the implementation of ‘administration cost’ is like interest charge in conventional credit card but with different term. The opinion is somehow rational since if it is just an administration cost, why should it be determined from the value of transaction? Since administration cost will take the same amount whether the transaction in a small or big amount, why not be determined in the fix amount? For the opponent parties of Islamic credit card, they are afraid that this scheme is just a back door to avoid riba, just like stated in the Holy Qur’an:
...(Allah) knows of (the tricks) that deceive with eyes, and all that the hearts (of men) conceal. (Q.S. Al Mukmin: 19)

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V. Islamic Credit Cards: Problems, Opportunities, and Challenges
Because of the differences of the Islamic credit card modes in different countries and some economic and shariah issues surround it, the Islamic credit card is analyzed to have some problems, opportunities, and challenges on its offering. Firstly, aqad that is used in the operation of the Islamic credit card sometime cannot be accepted in every country or region. The example is the case of BIC card that is offered by Bank Islam Malaysia Berhad. The product is offered on the basis of bay al inah or buy-back agreement. This type of product cannot pass the test of strict Islamic compliance as practiced in the Gulf and are often criticized for camouflaging interest payments. Another problem faced by the offering of Islamic credit card is that it cannot really deal with items such as cash withdrawals, the purchase of services or consumables, as there is no asset for the bank to buy back (Massey, 2007). The above debates regarding shariah issues also can be a problem for the operation of Islamic credit card. Service charge applied in this card somehow considered almost the same with the interest applied in conventional credit cards. The difference is that the service charge only act as an annual fee which is payable in quarterly installments. Apart from all of those problems, the opportunity of Islamic credit cards to gain attention from Muslim credit card users is very high. This should be used by the Islamic banks throughout the world to issue their Islamic credit cards which can be guaranteed as shariah compliant products. This opportunity challenges the Islamic bankers to get used

uncontroversial aqad to be applied in the operation of Islamic credit card. Massey (2007) said that at least two aqads can be valuable to face this challenge. Firstly is murabaha. With this aqad, the bank purchases the required product. This product is then resold at a higher price to the customer. By paying this higher price through installments, the customer effectively gets credit without paying interest. Secondly is tawarruq. This aqad, which instigated from a demand for cash, involves a third party in addition to the bank and customer. It is useful when the Islamic card holder deal with transaction which involves tangible items, but also

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transaction which involves intangibles such as services, cash withdrawals and consumables. This can be applied by two ways. Firstly, the customer with a cash requirement buys an item on a deferred installment payment basis. Then, the customer immediately resells the item for cash to another part of the bank. Secondly, the customer who needs the cash may approach his bank and explain a need for a specific amount of cash. The bank then turns around and buys from a third party some product which it then sells on a deferred basis to a customer who sells it in the market in order to realize the cash (Olausen, 2007). Moreover, with regard to the consumerism matter, the Islamic bankers should implement policy that can avoid that. Mechanism to offer Islamic credit cards only for those persons who have certain level of income should be applied. Thus, the use of the card can be supported with the ability to pay. This policy can reduce credit risk that faced by any Islamic bank which issued credit card. Additionally, the Islamic credit card concept is subject to further development. The next strategies are to provide Islamic credit products on a single platform, to structure for an international shariah compliant credit card, to concept the marketing and distribution, and last but not least to develop Islamic credit card growth opportunities by fostering the use of technology and increasing the usage security.

VI. Conclusion
Islamic credit card is issued by the Islamic banks especially to meet the need of Muslim customers to make transactions without holding any cash on hand. Despite of its function to let those customers to do transaction that inline with Islamic principles, the Islamic credit card also has invited debates among jurists. Some of them said that the aqad used in the operation of this card is like another form of interest which is applied in the conventional credit card. Others argued that Islam permits the use of a credit card so long it does not involve the element of riba, e.g. if cash advance withdrawal will result in payment of an interest, it is then prohibited. Therefore, if the credit card serves as a charge card, it is permitted. Some other said that this Islamic credit card is still needed; even it still

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applies controversial aqad. However, by the time, this operation should be improved so that it can purely comply with the Islamic principles which prohibit riba, gharar, and maysir in any form. After all, the Islamic credit card should be used wisely, so that consumerism problem which is become a concern of most jurists can be overcome. Thus, the principle of Maslahah Al Mursalah can be applied in the credit card transaction, since Allah want us to have easiness in life but of course to be harmonized with the Holy Quran and Hadith of Prophet Muhammad p.b.u.h. so it will not deviate from shariah teaching.

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Aysan, AF & Yýldýz, L 2007, ‘The Regulation of the Credit Card Market in Turkey’, International Research Journal of Finance and Economics, Issue 11, 2007, 141-153 Faber, RJ & O’Guinn, TC 1988, ‘Compulsive Consumption and Credit Abuse", Journal of Consumer Policy, Vol. 11 97-109 James Massey. What is so special about Islamic credit cards? MONEYworks. September 2007 Obaidullah, M 2005, Islamic Financial Services, Jeddah, King Abdulaziz University viewed 5 February 2008, <http://islamic-financenet/ifs/ifstitle.html> Olausen, KEW 2007, ‘Squaring The Circle; Islamic Credit on The Card’, viewed 5 February 2008, <http://www.ekohist.su.se> Park, HJ & Burns, LD 2005, 'Fashion orientation, credit card use, and compulsive buying, Journal of Consumer Marketing, vol. 22, no. 3, 2005, 135–141 Rosly, SA & Sanusi, MM 1999, ‘The Application of Bai-al-Inah and Bai-al-Dayn in Malaysian Islamic Bonds: An Islamic Analysis’, viewed 5 February 2008, <http://islamic-finance.net/journal.html>

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