CHAPTER NO.

2
LITERATURE REVIEW
The research on credit card in Saudi Arabia revealed some
useful results. The acceptability rate of credit card in
Saudi Arabia was recorded as low. This was due to the fact
that Islam prohibits the use of interest. Interestingly
female Saudis' ownership of credit card was higher than
males (A.mar! "##$%.
According to a study credit cards were becoming more and a
more useful service in the financial and payment systems in
today's age. The reason presented for this was because of
the convenience they have as compared to cash payments which
are more ris&y and short term revolving credit they provide.
In developed countries! the usage rate of credit card was
almost approaching '##(. In Saudi Arabia credit card usage
rate! had also increased significantly in the last couple of
decades (A.mar! "##$%.
)uran being the basic law in Saudi Arabia always prohibited
any financial system which is based on interest. This was
the main reason why Saudis were more cautious and reluctant
to use the credit cards in the starting years. *ver the
years! two different points of views evolved as to the
viability of credit cards in an Islamic financial system. *f
these views! first one was that if one pays bac& the amount
on time and thus do not pay interest on the balance then
this is allowed. The other view held that if interest is
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allowed to accrue on the balance outstanding then this mode
of the financial system is prohibited. (A.mar! "##$%.
Scholars always argued that to do a research on the credit
card usage and ownership is a descriptive study. In this! we
study the number of person who owns the credit card! the
ratio between genders and other demographics li&e level of
income and the views of each user (+luwer! "##,%.
In almost every research conducted on credit card one of the
ma-or findings was the fact that the credit card usage ratio
was high in high income countries li&e SA. Similarly! this
ratio when compared to other nearly e.ual income level
countries was also high e.g. when compared with /uropean
countries. Thus! empirical studies showed that credit usage
is positively lin&ed to the level of income and education.
Also! males were found to own and use credit cards more than
females (+luwer! "##,%.
*ne interesting study was the number of cards owned and used
by a single person referred to as the usage intensity.
Studies showed that this is positively related to the amount
and fre.uency of purchases one used to ma&e and the level of
debt one could afford to pay bac& (A.mar! "##$%.
There were two types of card holders identified. These were
revolving (interest0paying% card holders and non0revolving
card holders. 1evolving cardholders did not pay the full
amount of credit and thus carry on the balance!2 -ust
rolling forward it and thus paying interest. 3on revolving
users paid the full amount of credit bac& to the ban& and
thus avoided payment of interest. 4ecause of the religious
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prohibitions! non revolving card holders were in ma-ority in
Saudi Arabia (A.mar! "##$%.
The study of the occasions when credit cards were used more
and more by Saudis revealed interesting results. 1espondents
were as&ed to tell the occasions when they used their credit
cards the most. The results showed that Saudis used their
cards on the occasion of international travels the most
(A.mar! "##$%.
*ne of the researches on credit card usage in nited States
revealed that women on the average owned and used credit
cards more than males for one or another reasons. This
difference was marginal only however! but it highlighted the
separate niche for the credit card companies where they
could dedicate their mar&eting efforts to women users
(5oore! "##'%.
The main reason highlighted for increased usage by women was
the fact that they were mostly the household and personal
shoppers. Accordingly! they used to be easily trapped by the
credit card companies by their lucrative offers. This study
was also confirmed by the ratio of business women to
business men which was low (5oore! "##'%.
6redit card encompassed ban&0issued cards! 7isa and
5aster6ard! general purpose cards and store cards. *ut of
these! store cards were introduced first. Store cards were
similar to credit cards as they also allowed the loyal
customers to use the cards and ma&e purchases on credit.
8owever! they were different from ban& cards in other ways.
9or e:ample! these were only useful at particular stores
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which were affiliated to issuing store somehow. *n the other
hand! the credit worthiness chec&ing of the customers was
not that stringent comparative to ban& issued credit cards
(+won! "##"%
Store cards and ban& issued credit cards both were used by
the customers for two purposes and accordingly there were
two types of users. These were revolving users who used
credit cards as a means of short term credit and non
revolving users who used credit card due to convenience it
had over cash transactions. ;ue to this revolving user paid
interest on the outstanding balance of the credit while non
revolving users were able to avoid the interest cost
(5i.uelon! '<<'%.
According to a particular study! when credit card payment
revolves or carries forward this constitutes a mode of short
term financing. As such! credit cards competed with other
ban& loans as a financing tool. *ne of the advantage of the
credit card as a mode of financing was that it had low or
nil transaction cost and due to this fact it was very
attractive to potential customers. 8owever! one could ma&e
purchases only to the e:tent of the credit limit which was a
sort of drawbac& with those credits cards (+won! "##"%.
Similarly! the customers with low or poor credit ratings
used credit cards as an alternative mode of short term
financing as the ban&s were reluctant to lend them more
loans. 8owever! because of low=bad credit rating they could
not obtain much of the credit limits on credit cards (+won!
"##"%.
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se of credit card was also related to the income level of
the customers. 9or wealthier customers! the availability of
funds was not a problem and therefore they used credit card
because of its convenience in handling and ma&ing payments.
So they were the non revolving users. *n the other hand
customers who had less access to funds used credit card as a
mode of financing and they rolled over the balances. These
were the revolving users (+won! "##"%.
*ne of the study about the usage of credit card related to
the under graduate student revealed that these students were
easily trapped by the credit card issuing companies. These
companies attracted customers via there lucrative and
apparently effective credit card schemes and thus the
college students! due to their immature minds and their
desire for showing off! used credit card intensively.
1esultantly they ran themselves into thousands of debt
(5oore! "##$%.
6redit cards users en-oyed number of advantages. Some people
owned credit card as an emergency fund. 9or e:ample to pay
in emergencies li&e ma&ing urgent travel arrangements
online! shopping by telephone! and paying while ma&ing
purchases online (;unn.6! "##,%.
The rate of credit card acceptability by the potential
customers was a bit slow early on. Then it started to gain
acceptability very rapidly and millions of credit card
customers were recorded by the financial institutions.
8owever! over the last decades an idea had emerged as to the
disadvantages of using credit card and resultantly heavy
debt to which various people indulged them into. Therefore!
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consumers were vigilant and started to calculate the costs
associated with using credit cards (;unn.6! "##,%.
Study into the matter that whether credit cards will ever be
able to replace the cash payment system revealed that users
still were happy paying in cash due to interest cost
associated with credit cards. The fact was that some time
the interest rates surged up dramatically and thus increased
the e:pected interest cost. This was antagoni>ing for the
customers on the occasions when financial institution did
not inform them about the change of rate on a timely basis
and the fact was disclosed when the credit card statements
were received by the customers (+luwer! "##,%.
There were two costs associated with the credit cards issued
by ban&s. *ne cost was the fi:ed fee per period which the
ban& charged for the facility and the other was the interest
cost associated with the unpaid balance. This resulted
sometimes in a cost higher than what was e:pected because
consumers did not understand how interest charges were being
computed by card issuers (5i.uelon! '<<'%.
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