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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 Card1
Ilham Reza Ferdian2
Department of Management
Faculty of Economics, University of Indonesia
Miranti Kartika Dewi
Department of Accounting
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
1
Paper submitted to IAEI International Conference, Surabaya, Indonesia, 1-3 August 2008.
2
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
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,
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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, 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
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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.
3
Figure 1: Scheme of BIC
3. Bank sells the merchandise
to customer at cost plus
(deferred payment basis)
1. BIMB
Customer
CARD
approach HOLDER
bank for 4. Bank simultaneously buy back
credit the asset at cost.
facility
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 else and knew that
4
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 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
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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 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
3
With the currency exchange of RM 1 = Rp 2,995
6
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.
Figure 2: 1st Scheme of Dirham Card
3. Bank claims to card holder
CARD BANK
HOLDER DANAMON
4. Card holder pays to the bank
2. Guarantee all card
holder obligation
1. Buy
something
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”.
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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.
Figure 3: 2nd Scheme of Dirham Card
3. Bank claims to card holder
CARD BANK
HOLDER DANAMON
4. Card holder pays to the bank
2. Pay to the bank if
card holder withdraws
1. Withdraw some at other bank’s ATM
cash
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
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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.
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 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
10
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 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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Bibliography
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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-finance-net/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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