Prospects of Islamic Credit Cards in Pakistan

INSTITUTE OF BUSINESS AND TECHNOLOGY
Prospects of Islamic Credit Cards in Pakistan Prepared By Shazia Bashir BM-25069 Sadaf Oad BM-25088 Asad Mazhar BM-25065 Course Code : MKT-606
MBA (Banking and Finance) FACULTY OF MANAGEMENT AND SOCIAL SCIENCES SPRING - 2011
Prospects of Islamic Credit Cards in Pakistan
CONTENTS
ACKNOWLEDGEMENT ABSTRACT CHAPTER NO.1 INTRODUCTION
1.1 Introduction ............................................................................................... 1 1.2 Purpose of Study....................................................................................... 1 1.3 Research Objectives ................................................................................. 1 1.4 Research Methodology ............................................................................. 2
CHAPTER NO. 2 LITERATURE REVIEW

2.1 Literature Review ...................................................................................... 3
CHAPTER NO.3 CREDIT CARD
CONVENTIONAL CREDIT CARD AND ISLAMIC
3.1 History ....................................................................................................... 7 3.2 Nature of Credit Card ................................................................................ 8 3.3 Credit Card System ................................................................................... 9 3.4 Conventional Credit Card ........................................................................ 11 3.5 Islamic Credit Card.................................................................................. 13 3.6 Islam and Credit Card ............................................................................. 14
CHAPTER NO.4 ROLE OF ISLAMIC CREDIT CARD IN PAKISTAN

4.1 Islamic Credit Card in Pakistan Saadiq ................................................... 15 4.2 Islamic Banking History ........................................................................... 16 4.3 Islamic Vs Commercial Banks in Pakistan .............................................. 22
CHAPTER NO.5 KEY BENEFITS OF ISLAMIC CREDIT CARD

5.1 Structuring Of Islamic Credit Card........................................................... 24 5.2 Islamic Finance.................. 28
Institute of Business and Technology
5.3 Islamic Contracts..................................................................................... 33 5.4 Transition Form of Conventional toIslamic Credit Card .......................... 35 5.5 Islamic Credit Card Controversy ............................................................. 36 5.6 Differnce Between Islam and Conventional Credit Card ......................... 37 5.7 Benefits of Islamic Credit Cards .............................................................. 38
CHAPTER NO.6 CARD
FINANCIAL ANALYSIS OF ISLAMIC CREDIT
6.1 Findings................................................................................................... 40 6.2 Demographics ......................................................................................... 40 6.3 Finding Analysis ...................................................................................... 47
CHAPTER NO.7 CONCLUSION & RECOMMENDATIONS

7.1 Conclusion .............................................................................................. 54 7.2 Recommendations ................................................................................ 54
REFERENCES
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ACKNOWLEDGEMENT
First of all we would like to thank to ALLAH Almighty Who gave us courage, health, and energy to accomplish our Project in due time and without Whose help this study which required indefatigable efforts would have not been possible to complete within the time restrictions. All esteem for his Holy Prophet Hazrat Muhammad (P.B.U.H) who enabled us to recognize our originator. Motivation, support, guidance, corrections, advices, and overall support are the key elements required from the supervisor to write down and complete a Project of a good quality standard and a quality within deadlines. It is a matter of extreme pleasure for me to extend my thankfulness and give due credit to our supervisor DR. NOOR whose support has constantly been there in need of time and who provided us with all these key elements to complete our dissertation within the time frame. Moreover, he has been supporting us enthusiastically throughout our work to make our Project ready in due time. Our thanks are also due to our examiner Dr. NOOR whose valuable comments and suggestions made colossal contribution in improving our dissertation. Last but not least, we pull out our thanks to our entire family for moral support and pray for our health and successful completion of our dissertation within time limits.
Shazia Bashir Asad Mazhar
Sadaf Oad
INSTITUTE OF BUSINESS AND TECHNOLOGY

ABSTRACT SUBMITTED BY: Shazia Bashir Sadaf Oad Asad Mazhar DISCIPLINE: TITLE OF PROJECT REPORT: MBA (Banking and Finance) Prospects of Islamic Credit Cards in Pakistan MONTH OF SUBMISSION: April, 2011
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon
Abstract: This project discusses research, which was undertaken about the Prospects of Islamic Credit Cards in Pakistan we have studied all the conventional and Islamic credit card system as well as key benefits of Islamic credit card system. A theoretical frame work is developing from literature research and this is used by us as a model for further research. We have collected data within this frame work and analyzed it according to requirement of the project. This research also covers the awareness which people might have about the credit card system and also the scope in Pakistan. Islamic credit card system can thrive on sustainable basis only if aware around the country. Then in the last the detailed study some recommendations are made on the source of the analysis of system practice and conclusion are drawn.
1. INTRODUCTION
1.1 Introduction Credit card in general also termed as plastic money has become an essential mode of payment in todays society. Islamic Shariah permits the concepts of credit card when the factor of usury (interest) is removed from it because ALLAH prohibits Usury and permits sale. Islamic credit cards are based on Bai (Trade), thats why Islamic credit card do not involve in any money lending transaction therefore the element of usury (interest) in conventional money lending is eliminated from this card . The research has tried to identify insight about the prospects of Islamic credit cards in Pakistan. 1.2 Purpose of Study The purpose of this research is how an Islamic credit card functions, what are the differentiating factors which makes an Islamic credit card different from a conventional credit card. The religious grounds on the basis of which the Islamic credit cards were permitted to be launched and the current as well as the future customer usage of Islamic credit cards. 1.3 Research Objectives The objectives of this research are as follows 1. To provide a detailed insight so as to how does an Islamic credit card function. 2. To enumerate the distinguishing factors which make Islamic credit cards different from conventional credit cards. 3. To analyze the acceptability Islamic credit card in global market and especially in Pakistani market. 4. To identify that what is the opinion about Islamic credit cards that carry surrounded by Pakistani masses. 5. To identify the level of awareness among the customer.
Institute of Business and Technology 1
1.4 Research Methodology A mix of both primary and secondary research would be used in order to obtain the required information. Our research is combination of both primary and secondary research we first started our research by collecting information through secondary data available online such as research journals, literature review, different study conducted in different parts of world, more over we will be collecting the information available at State Banks Library, library of other universities. Our primary research would start by questionnaire filled by respondents.
2. LITERATURE REVIEW
2.1 Literature Review According to Nuradli Rizwan Shah Bin Mohd1 (2007) credit card mostly use as a fundamental mode of payments in todays society. Generally people wish to use credit card for certain reasons for e.g. to acquire credit facility, easy payments, cash advance, charge card and as a prestige. Islam allows the use of the credit card if there is no contribution element of usury at the same time it does not go against with rule of Shariah. Islamic credit cards offer minor penalty rate, more value of money; free bonus point looks much fancier and gives annual fee waiver. To use the credit card or not two distinctive processes and those persons who hold the credit card have Islamic base credit card or not. Through this interprets that generally choosing of Islamic based credit card are government staff as compared to private sector staffs. The actual and a absolute frequency to use credit card for the purpose online purchases and it has increase the factor of choosing Islamic based credit card but it does not increases the chance of having credit card. Islamic based credit card holds some attractive features for the purpose of online purchase to attract and encourage people to use this product. According to Adil Manzoor Bakhshi2 (2006) Islamic finance is under Islamic law (or shariah) principles. Shariah fundamental source is Quran and Sunnah which are followed by the mutually consensus of the Jurists and interpreter of Islamic law. The main features of the Islamic finance system are the prohibition of the receipt and payment of interest or Riba. Islam disapproves the role of interest and as we can see that there is a vital role of the interest in the present banking system by adopting this act of commercial banking system Muslim thinkers thinks that commercial banking could be structured on the basis of interest free system. So that for the Muslims Islamic
1
www.kantakji.com/fiqh/Files/Finance/ICC.pdf http://www.islamicmortgages.co.uk/index.php?id=287
credit card becomes a main source of controversy in recent years. Conventional card becomes a question of great concern for Muslims that can we use them or not? There is a lack of Islamic characteristic in I conventional credit cards basically it is connected with an interest. The law of Shariah comes from a combination of the Quran the holy book of Muslims and the Hadith the saying of Prophet Mohammad and fatwas the rulings of Islamic scholars. According to Ill ham Reza Freidan
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(2008) the hottest banking
convenience is credit card. With no carrying hard cash it facilitates people basically the issuer of the credit card pays on behalf of the buyer. Through this goods and services are able to buy through online and from outlets. Two point five to three percent on average pays as processing fee. The convenience of credit card is too much that is the main reason not only conventional bank as well as Islamic banks is also interested to issue credit cards. Islamic credit card meet up minimum three criteria of Islamic principles the first one is the card meet shariah requirement on lending which is different from region to region the three mandatory ban on Islamic finance are Riba, Maysir and Gharar. Riba is illegal in Holy Quran; if the user is not on time in payment Islamic credit are not permitted to charge any interest to payment. Gharar or uncertainty in the practice of Islamic credit card ought to be avoided by not including a charging scheme where the monthly service charges are up-and-down based on a number of factors. Maysir or gambling is also prohibited because Islam condemns and prohibits gambling. Secondly an Islamic credit card has to be accepted broadly it has to use global payments schemes, such as master card or visa. It also provides facility that is not available on debit cards such as CVV numbers for card not present transaction and hold amounts. Further the trade charges and issuers fees should not be withheld. Thirdly an Islamic credit card should not give
http://staff.ui.ac.id/internal/060603200/publikasi/200808IAEIConference_IslamicCreditCard.pdf
confidence that is considering Haram. Malaysia Bhd has issued a shariah compliant credit card called Bank Islam card (BIC). In Malaysian market first Islamic credit card issued to accomplish the necessitate of Muslim community. Also the first credit card in South East Asia region following the euro pays master card visa (EMV) smart card with the chip technology. It has all features as payments an instrument on the other hand profit rate is only charged to clients who fail to pay back the minimum repayment within the twenty day grace time. Indonesia started Islamic credit card through the issuance of fatwa that connecting to Syariah card by the Dewan Syariah National Majelis Ulama Indonesia (National Syariah Council). First Islamic card in Indonesia called Dirham Card a joint product between bank Danamon and Master Card. According to Mohammad Hanif4 (2011) interest is prohibited by all religions and charging of interest is Haram (unlawful) for Jews, christen and Muslims. It is clear from the above records that dealing in interest is Haram and design of conventional bank is based on interest. Commercial bank significant role cannot be rejected in present financial system so change in the thinking and design of commercial banking is required to meet the religious responsibility. Shariah compliant products represent that modes of financing where return of financier is already pre determined and fixed but with in shariah constrains. The tool which relatively balancing the operations of Islamic financial system by conventional banking includes Murabahah, Ijara, Bai Salam, Bai Muajjal, Istasna and diminishing musharaka are all shariah compliant products. Shariah based transactions mean the financing modes adopted by IFIs on profit and loss distribution basis as well as Musharaka (partnership in capital) and Mudarba (partner ship of capital and skill). Modes of financing beneath shariah based returns of financier are not prearranged in advance to a certain extent it depends upon the outcome of the project. Despite the fact that loss is shared according to capital contribution. Islamic financial institutions are working in the same society
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www.ijbssnet.com/journals/Vol._2_No._2;_February_2011/20.pdf
where conventional bank are working and performs all functions which are expected from financial organization. Credit card provides twice facility to consumer including financing as well as facility of plastic money where consumer can fulfill his necessity with no carrying hard cash. According to Noorudin Mansoor 5(2009) credit card are mainly lines
of credit that one time establish depending on the terms allows an entity to use certain permissible amount of money and payback the amount either in monthly or full amount. An intensified interest in the promotion of credit cards not only through out the state other than that in the greater part of the countries in the world. This is for the reason that most of credit card issuers normally grant higher credit limit amongst the higher income group. The richer card holders on the same and lot of times wish to use credit card in their purchasing transactions. The core target of credit card issuers is higher income groups. The general supposition recommended that when consumer seeks for resolution to credit card problems it might not be trouble to the higher income group other than the evidence confirmed that education and socio economic standing be the main determinants for the credit card usage. Credit card in metropolitan areas where the average wages is a lot higher than those living in rural areas.
www.ccsenet.org/journal/index.php/ass/article/download/4544/3877
3. CONVENTIONAL CREDIT CARD AND ISLAMIC CREDIT CARD

3.1 History The system of credit card 6was primarily originated within the United States of America in the form of credit documents created from cards. After that in the twentieth century Western Union and other banks started using embossed metal addressograph plates to recognize customers and record the detail of their account. In 1947 the Flatbush National Bank introduced its Charge-it plan which was a monthly charge account that limited clients to pay the amount owed in a definite period. In 1950 the first modern credit card was issued when Diners club launched the travel and entertainment credit card. On the other hand in 1951 Franklin national Bank became the first bank that issued credit cards to (Lindsey, 1980) followed by American Express in 1958 which provided clients with a credit period between expenditure and settlement but had no facility for roll-over credit or paying a portion of their exceptional balance. The idea of National credit card was introduced in the year 1966 while Bank of America licensed its credit card to other banks in United States and out of the country. This give in the direction of a great achievement to an extent that other rivalry bank joined hand with Bank of America and created a competitive system under the name of Inter Bank which after that was named Master charge and then its name was altered to MasterCard. By seeing its triumphant outreach Barclays in the year 1966 made agreement with Bank of America to issue credit in United Kingdom as well. The full process was imported by Barclays and required changes and alteration were made in the computer program that was needed to use program for United Kingdom purpose only.
http://homepages.nyu.edu/~jac614/nyny/credit-card-history.html
3.2 Nature of Credit Card Credit card is an tool on which loan is advanced with no any security taken by the issuing bank from the consumer it has an interest free of charge grace period as a free short term period loan. The payment time is not specified by a ordinary Credit card agreement but it is commonly said that if the amount owed is cleared within thirty days no interest is charged by the bank on the amount out standing. From the time when bank do not get interest on the amount outstanding for thirty days so in order to cover up this expense bank typically charge high rate of interest. More over the funding of the industry wishes to be made by shorter period first choice with higher interest rates due to which the rate of the credit card are higher then the regular card. Credit cards offer card holders safe and convenient spending pattern as credit card are approximately acceptable any where in the world which gives customer easy right of entry to marketplace etc. The consumer under two groups according to their usage first one are ease user who pay the credit card bill on due date that is when ever whenever payment comes due they clear their account and use credit card just for payment reason for that particular point in time and do not pay interest for the reason that of paying on time. The second type of user is revolver who on the payment date pay part of the amount due and rest is carried forward. For issuing bank revolvers are more beneficial than convenient user for the reason that banks earns from revolvers simply in the form of interest and more over the interest free grace period of the convenience user is also financed by revolvers. Another classification of credit card consumer is according to the risks level and are classified as liquid or illiquid customers. Seller may possibly offer low price in selling on cash than with credit card due to commission and extra charges. So customer who buy goods on hard cash are provided cash discounts on the other hand customer who prefer using credit cards because there is a risk associated with customer using credit cards.
3.3 Credit Card System Visa, Master, American Express and Diners Club are authorities which give a back up against all credit cards and provide an easy flow of transaction whenever and wherever a credit card is used by the customer. These authorities by and large allocate a limit to the customer for his card usage. Furthermore there are retailers who accept cards with these authorities so it provides an easy flow of cash without hard cash being involved. All credit card transaction7 follows four steps
When the customer uses a credit card to make payment. The issuer (bank) who supplied the card to the customer operates the account from which payment is made.
The retailer (or merchant) who exchange goods or services for the customers card details and consent to make the payment.
The acquirer acts as a facilitator between issuer and retailer and gives the detail of cardholder and collects money from the issuer on behalf of retailer and then transfer the money to the retailer.
www.mbs.unimelb.edu.au/home/jgans/papers/interchange.pdf
A Credit card also transaction involves four parties the issuer, who is bank in this case, the acquirer, the facilitator between issuer and retailer, customer who is buying or using a service and the retailer who is selling goods or services. The operation of the credit card starts by means of a customer who decides to buy some goods from a retailer as a given price. Now the customer has two options either he pays throughout cash or if he owns a credit card can use it to make the payment. The credit card has been issued by an issuer (bank). As mentioned on top of there are instance when the retailer charges higher or does not give a discount when a customer purchases good through credit card due to risk level. After the customer has decide to pay through a credit card of visa, Master card or dines club etc and the similar is accepted by the retailer the customer gives his card detail to retailer and confirms his identity through signature etc. For a number of transactions the retailer may be required to seek authorization form card issuer (bank) to check that the card is not stolen or the customer is not more than his credit limit assigned to him. The retailer then sends transaction detail to the merchant acquirer who acts as facilitator between retailer and issuer. Once the transaction detail has been sent to acquirer, the acquirer then forward this information to the relevant issuer online. The merchant acquirer pays the retailer price less a fee knows as a merchant service charge. The issuer on the other hands pay the acquirer the retail price less a further fee know as an interchange fee. The payment period from issuer to acquirer is determined by authorities such as that of MasterCard, Visa etc. The final stage is when the issuer charges the customer account of the amount for which the goods were purchased initially plus any fee specified in the term of accounts. The issuer will provide the customer a monthly statement stating the detail of his transaction through a credit card. Once the whole transaction is completed the customer ends up with goods for which he has paid the retail price plus any fee imposed by the issuer. The retailer
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receives the retail price less merchant service charge; the acquirer on the other hand receives the merchant service charge less interchange fee. The income of the issuer is generated from two sources one is through the annual fees and interest payment received from the cardholder, secondly from merchant acquirer in form of interchange fee. 3.4 Conventional Credit Card Credit card also termed as Plastic money8 has become an vital form of payment in todays society there are large number of economies which are dependent on this plastic money and this had played an significant role in the fall of major economies of the world today. A credit card is just a system of payment name after a small thin plastic card issued to users of the system. It is a thin plastic card of rectangular shape (ISO 7810 standard9) similar to the size of a common business card, the cards contains information such as a signature or photo, and authorizes the person name on it to charge purchases or service on his account charges for he will be billed periodically. All the information of card owner is stored on microprocessor built into the card itself in which information is stored in form of secret codes called cryptography. A credit card is used by a customer to pay for goods or services that he has purchased or rendered to an amount that has been allowed to him through his credit limit which is assigned to him by the issuing bank. The card holder is then required to pay back the amount along with interest on the amount for which the card was used to pay the bill in accordance with the terms and condition of the credit card agreement. A credit card is different from debit card, in a debit card whenever a customer uses his card the amount for which the card is used would be drawn from his account at the time of transaction whereas in credit cards the cash is not removed from users account after every transaction, instead the customer is allowed to pay the amount any time according to his choice. The idea that promotes the conventional card is that
8 9
http://www.halaljournal.com/article/1899/evolution-of-islamic-credit-card http://en.wikipedia.org/wiki/Credit_card
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buying first and paying later on due to this it facilitate cardholder in spreading out of the payments for large purchases. That is the normally significant reason that credit card offers convenience to the customer. Conventional credit card can be use at any where for paying the meeting either it is for the pure Halal reason or it can be use for the not halal activities such as alcohol beverages bars or in night clubs. The insurance that offered to the conventional credit card holder is conventional insurance which is not fulfilling according to shariah. Withdrawal of any for of cash from auto teller machine or bank from outlets can be treated and interest must be paid over it which is not allow in Islam but in conventional it is permissible. To avoid interest payment credit card holders have to pay the outstanding payments with in the appropriate date that is allow in conventional but not allow in the Islamic shariah. Conventional credit card system is not allowed in the Islamic system. People own and use credit card for a variety of reasons such as to get credit facility, hard cash in advance, easy payment and prestige. It has become a status sign for people as it shows the wealth status of a person, but the purpose of credit card is much more then just a status symbol. It is most usually used in e-commerce business and is accepted approximately every where in the world. Plastic payments credit cards, debit cards have quietly revolutionized that how we pay on behalf of goods and services. They also revolutionized that how we coordinate the timing of when purchase commodities and services and what time we pay for them. Among all these cards much focus on credit cards which give confidence people to use beyond their income and be mired in debt. On the other hand, credit cards have enabled many more of us to attain a better and better standard of living. The credit card is a changeable line repayment card which offers a line of credit to the card holder who knows how to use up to the pre arranged maximum amount level. The extended credit must be settling with in a specified period or else interest will be charged on the left behind balance.
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3.5 Islamic Credit Cards Islamic credit card was introduced in Malaysia these cards were issued using the Shariah concept of Bai-Al-Inah followed by other principles such as Ijarah and tawarruq. According to some religious scholars and economists, credit cards are allowed on the basis of only two shariah contracts, which are BaiAl-Inah and tawarruq. According to Taqi Usmani a renowned scholar gave his fatwa on the use and approves the shariah compliance of the credit card structuring He agree to to the make use of credit card by a purchaser and declares that is permissible in shariah, no matter whether the card is issued by a banking organization or some other company. He argues that the permissibility or impermissibility of a contract depends on the actual terms and conditions upon which it is based. From above discussion it is clear that Islam allows the use of credit cards as long as the element of usury is eliminated from it, but what are the principles on which the banks issue Islamic credit card? According to mufti Mohammad Abu Bakar Siddiqui al Qadri some bank for solving the problem of interest based credit cards have applied different method and issued their credit cards according to different shariah concepts such as ijarah, Bai-AlInah and tawarruq. Al-Ijarah Bases card: This card is based on Ijarah or service charge. Incase a yearly service charge is levied depending upon the credit card type while granting loans generates the funds. Al-Bai-al-Inah Card: This card is based on Bai-Al-inah principle. Bai-Al-inah comprises of two agreements in the first agreement the bank agrees to sell an item to the customer at a pre-determined price and the second agreement states the customer selling back the same item at a lower price. The different between the selling price and purchasing price is consider as banks profit on the transaction and is a predetermined amount. The percentage repayments that the customer is making does not mean that he paying off interest rather
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that a certain percentage of this amount is use to retire his outstanding balance. Tawwaruq Based Card: Tawwaruq become a legal source of funds by combining two separates sale and purchases transaction. As individual who is in need of funds purchase a commodity on the basis of deferred payment from a seller and then sells the same commodity in the market in order to obtain cash the bank then create promise (wadiah) principle a guarantee deposits accounts for customer money safety. 3.6 Islam and Credit Cards Credit cards used today in most cases contradict with Islamic shariah principles. A conventional credit card charges interest on outstanding balances and allows the credit card holder to go on borrowing as long as he is within his credit limit. When the customer uses the credit card beyond limit he is allowed grace period during which he is not requires paying interest. After the grace period interest is imposed on outstanding balance resulting in the huge indebtedness. When credit card imposes interest on delay payments, it will not comply with shariah requirements due to which use of credit card is termed as Haram. Islamic permits use of credit card as long as it does not involve the element of interest and at the same time does not contravene with principles of shariah. For example if the withdrawing cash advances from credit facility back will result in payments of an interest, it is prohibited. Hence, if the credit card is used the same as a charge card where you just pay the principle amount that you use plus the service charge it is allowed. Dr Monzerkahf in live fatwa on Islam online 08-august-2001 he said that By signaturing the credit card agreement and using it in a way that generated payable interest is treated Haram. Signing the contract, using it, as well as making the payments within the grace period and making no cash withdrawals whenever cash with drawls generates interest is allowed because the amounts to a contract that gives you a option to deal or not to deal with the interest.
4. ROLE OF ISLAMIC CREDIT CARD IN PAKISTAN

4.1 Islamic Credit Card in Pakistan Saadiq Standard charted bank limited is the first bank to launch Islamic cards in Pakistan10. Saadiq visa credit card is the nation first shariah compliant Riba or interest free credit card which is permitted by an independent shariah supervisory committee. The basic aim introducing Islamic credit card is to facilitate Muslims who would like to use credit card facilities in accordance to the laws of shariah as they keep away from conventional credit cards due to the reason of religious preferences. The card also aims to facilitate those customers who are not satisfied with paying interest for their usual conventional credit cards. The Islamic credit cards operates on Ujrah (Islamic mode of fianc) concept that is based on the fee structure which means that there is only fixed fee will be charged to the consumer. The Islamic credit card would not include any floating percentage fee depending on the outstanding balance. An international team of Islamic financial expertise who ensure shariah compliance of the card develop Saadiq credit card. Of the initial team two international shariah advisors cleared the authenticity of the Islamic credit cards in accordance to shariah.The customer of the Islamic credit cards would have the option of paying amount less than the total outstanding balance while keeping minimum five percent of the balance or fixed amount whichever is higher. The remaining balance outstanding after the payment would be transferred to service account as fixed monthly fees. Saadiq VISA Credit Cards is provided that you the choice that moreover paying the entire outstanding amount at once or pay only a least amount of the outstanding balance by the payment due date. Incase you have alternative to pay any amount a smaller amount than the total outstanding balance then
10
the left behind balance gets
http://abuusamah.wordpress.com/2007/12/08/shariah-compliant-credit-cards/
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transfer to the Service Account which is a non-interest and non-profit manner account, linked to your Saadiq Credit Card. A fixed monthly safeguarding charge will be levied just only for the month the Service account is used and it reflects an outstanding balance. Saadiq Credit Card in Pakistan its first shariah compliant card with world wide reliability and services. It operates on Ujrah concept which is based on a structure of fixed fee mans that to the customer only fixed fee will be charged. The card would neither be levied with any of the floating percentage fee depending upon the outstanding balance. 4.2 Islamic Banking History in Pakistan Islamic banking in Pakistan
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is increasing day by day with full speed. The
serious effort took place in since 1979 to Islamize the financial system in this regard State Bank of Pakistan introduces twelve mode of financing to replace the instrument on interest based. Council of Islamic ideology in 1980 advised to State Bank of Pakistan to interchange the money market discount rate with the help of arrangement through this State Bank of Pakistan become empowered to finance the banks on the basis of profit and the loss sharing. Other suggestion to put up on interest free is common pools of funds on cooperation basis to replace the existing interest bearing government securities. Towards the development drastic steps took place by the State Bank of Pakistan and financial instrument implementation is totally based on Islamic principles. Afterword the process is comes towards decline side. No serious effort had been taken towards the removal of interest from interbanks transactions, inter government transaction and foreign currency accounts. In 1999 Supreme Court of Pakistan asked the government to take serious step for the elimination of the interest for the economy in this regard a meeting took place under the supervision of President of Pakistan in this meeting they have decided to permit Islamic banking sector to operate equivalent to the
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islamicbankingzone.com/e-library/1-islamic%20banking.pdf
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conventional banking system and also conventional banks to offer and allow Islamic banking service through dedicated windows. So right now Six Islamic banks and thirteen conventional banks with overall network of two hundred branches are offering Islamic banking services and their products as well. Non banking financial institution such as Takaful and Islamic mutual fund industries, Mudaraba companies house building finance corporation are also active participants. Some efforts also took place for the development of Islamic sukuk bond. Islamic banks and conventional banks to maintain cash reserve of five percent and salutatory liquidity requirement eight percent requires State Bank of Pakistan. Conventional banking sector is increasing rapidly as compare to Islamic banks they are far behind. State Bank of Pakistan has built Islamic banking unit to give focus and attention to that area a shariah board is also in place at State Bank of Pakistan having number of panel of experts to guide Islamic banking industry. Growth of Islamic Banking in Pakistan: Pakistan was created as an independent state on the basis of Islam. All the structure of Pakistan was prepared on the basis of Islam so the main objective of the state of Pakistan policy was subtraction of Riba (interest)12 .The founder of Pakistan Muhammad Ali Jinnah in his dialogue at the time of an occasion of an opening ceremonial of State Bank of Pakistan he addressed that his wish is for developing Islamic banking structure in Pakistan. Islamic banking appears in Pakistan should fulfill the requirement of both economic and religious needs. To the period of 1970 the main effort was to remove Riba (interest) from economy and most of the concrete steps taken place in 1980 it was very bold and complete exercise. In the world three countries including Pakistan trying to execute interest free banking structure at the nationwide level. Many steps were put to initiate Riba (interest) free banking formation in Pakistan. Banking and other related laws State Bank of Pakistan acts were revised to help out interest free
12
www.sbp.org.pk/about/speech/.../Islamic-Banking-11-Sept-07.pdf
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banking structure as well as industry was given certain time line to change them into Islamic system. New rules and regulation were equipped to fixing the methods of investment, returns sharing mechanism for deposits, State Bank of Pakistan financing facility which represented ground work for islamization of financial system. The important effort was in the mid eightys in the expansion of Islamic banking structure in the nation. As technically it was main advance structure for expansion of Islamic banking in Pakistan as compared to any other structure in the world which was being practiced at that time. In 1980 practical efforts were taken to Islamize the economy at nationwide level and believe as establishing work in the Muslim world which also becomes important reference stuff for other countries which started the pathway towards introduction and institution of an Islamic banking system. In the beginning of 1990s the total practice was challenged in Federal Shariat court and in second last month of 1991 the Federal Shariat Court declared that all the methods apoted is unIslamic which was established in Pakistan banks since 1st July 1985. The system was typically based on mark-up procedures with buyback measures. The Shariat Federal Court affirmed that variety of requirements of laws held repulsive to the commands of Islam in its conclusion dated 14th November 1991 would come to an end to have effect as from 1st July 1992. On 4th September 2001 a meeting conducted under the chairman ship of President of Pakistan, official of ministry of finance and law, Governor State Bank of Pakistan chairman and some member of the council be presented at and it was sure that the move towards interest free economy would be made in gradual and phased wise mode and without reasoning any interference. State Bank of Pakistan offered three institutional decisions; setting up subsidiaries by the commercial bank for the idea of conducting Shariah compliant transaction, specify branches by the commercial banks completely selling an Islamic products with all safeguards to make sure honesty and clarity of Islamic banking process, setting up a new full fledge profit-making bank to fulfill completely banking
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business based on proposed Islamic products. Due to this effort as a end result in 2001 an Islamic banking separation was established in the banking policy department at State Bank of Pakistan. Concrete efforts were prepared by State Bank of Pakistan to undertake Islamic banking in its correct spirit also keeping in sight the period from the experience of Bahrain, Saudi Arabia and Malaysia. A consumer Perspective; Islamic Banking in Pakistan: Islamic bank ideology13 is still focal point in these days. Islamic organization and as well usual banks are opening further branches to focus this Shariah based financing products and services. How immense they are Islamic still consumer perplexed. Pakistan followed Bahrain and Malaysia as a role model for Islamic banking. Government organization and their authorities still not judge their nature whether they proved their self or not while consumer does. The main services provided by the Islamic bank a common consumer of Islamic banking sector in Pakistan they have the uncertainty in their state of mind whether it is according to Shariah based or not. In the market Islamic financial organizations that already have many other competitive existing in shape of commercial banks. Islamic financial organization is skilled to make their considerate and status in the economic world and can offer Islamic bank services in non Islamic markets like United Kingdom, Australia, Singapore they can plan to enhance an emergent consumer base of the local resident in Pakistan. Some of who may reason themselves from dealing with usual financial organization because of the use of interest. The customer believe the fact that lack knowledge about basic concept of Islamic banking service in Pakistan would not accept Halal product banking because of
apprehension they fell that what will happen if credit facility were taken away. Sharing profit not losses is the concern. Many of the consumers they are using Islamic banking service are not aware about the loss
13 http://islamicfinanceupdates.wordpress.com/2008/08/04/islamic-banking-in-pakistan-a-consumer-perspective/
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sharing. This would assign that some economic organization have been assuring profits actually it break the fundamental law of Islamic financing structure that is relating compensation to the risk on investment without risk. Any kind of money earned is simply profit happily than profit. Islamic structure makes a differentiation among profit and interest they have to come across at the dissimilarities in financial beliefs. In capitalist theory where the first identity acquires interest and the second identity is allowed to get the profit. It is understood that interest is fixed return to offer capital and profit can only be produced after allocate the fixed return toward land, labor and capital. Islamic monetary system does not consider as entrepreneurs and capital as separate identity of production. It accepts as true that each person who puts in capital in the form of money to a business enterprise assumes the threat of loss and as a result is allowed to a proportional share in the actual profit. System is caring by the entrepreneur, who in a capitalist economy would have to make predetermined interest repayments even when the business enterprise is building a loss. Capital has a fundamental feature of entrepreneurship, until now the risk of the industry is anxious and for that reason, somewhat than a fixed return as an interest, it develops profit. Profit as a great deal one earn of the business, the extra come back on capital. Profit would be advantaged if there are no fixed interest repayments. The profits produced in this by the currency making activities in the public are uniformly detached among all those who have given capital to the organization. An incorporation in this way of social liability and additional Islamic standards in rewarding consumers desires to be worthy of ultimate consideration as it signifies an excellent and basic favoritism between conventional and Islamic banking systems, and to push Islamic banking potentially competent to better pinnacle in securing consumers gratefulness and response. In the area of Islamic Finance Top
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researchers have affirmed that assurances prepared by organizations that customers will take delivery of a set rate of return without having to acquire losses are illegal and immoral. Hence not only financial organizations continuing this practice but government societies in Muslim nations are as well contributing venture openings with certain income. Taking that consideration that the Muslim management is responsible for the supervision of the structure in order to fight the illegal practices of the financial institutes, by giving definite returns the governments seen to be overlooking the performance of the monetary organizations. In the short run Even though these proceedings may assist Islamic Banks develop, but in the long run overall cost will prevail over the profit in form of damage to the repute and legitimacy. Progress such like also offer ammunition to the detractors of the system who are previously questioning whether the structure is not anything more than an interest based system operating under guise of profit. By the past behaviors the most essential information discovered that consumer satisfaction is over and over again is directly related to the quality of service that is offered by the Islamic banking sector. Excellence of services comprises of factors as like taking care of customers with respect and appreciation workforce capability to put across faith and self-assurance; efficiency and effectiveness into managing any process; and well informed and attention in offering clarifications and answers relating to the services and products of an Islamic bank. Therefore, only at marketing strategy Islamic bankers can no more rely of pulling religious and holy consumers towards them who might only worry about Islam city of banking services. Some important insights accepted on the basis of dissimilar thoughts of customer banking selection criterion entails the requirement for Islamic banks to improve its excellence of services which is at the present calculated as an significant success factor that have a result on an institutes competitiveness. Variety of a bank selection criterion, some of these without a doubt transform accordingly of people having turned out to be further aware of the culture of Islamic
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banking. For instance, advertising on media would be likely to have a tremendous good impact on Muslims. Muslims aspiration to be compensated a high rate of interest have to decrease If in case of nonMuslims, media advertising may turn out to be well rated accordingly of being uncovered to illuminating bank promotion. An additional considerable subject besides this, which needs awareness, is the need to community strengthens learning and understanding towards the unique features of Islamic banks and how it may helpfully go away with the distress of customers in their financial transactions. Customers who are concerned with the legality of the ability from Islamic perspective Islamic banks have latent of being advertised to different sectors of and those who try to discover for service value, skill and disciplined business. Customer knowledge programs are for that reason if they are to amplify the level of consumer realization about the typical features of Islamic banking and the variety of services and products offered by it. In general after consumers have been uncovered to the ethnicity of Islamic banking, it would be expected that customer knowledge of what Islamic banking engages would improve their opinion towards this category of banking should differ. Change would be estimated to be much bigger in local customers. Likewise with the standing of the different banking selection criterion. Shifts would be likely, likewise with extra predominant with banking consumer through out the country. 4.3 Islamic Vs Commercial Banks in Pakistan Conventional and Islamic banks
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are facilitating their consumers in
Pakistan. Uncertainty and due to constant lack of unbalanced policy Pakistan baking sector have faced a very pathetic position since 1950. In 1974 Pakistan banking sector has moved towards nationalize by doing this they showed a very poor performance. They have offered
14
www.iub.edu.pk/jer/JOURNAL/BRM_Research_Article.pdf
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substandard product and services which causes and effected the whole banking system and as a result of this in the year 1992 Pakistani banking sector move towards privatization. Meezan bank in year 2002 launched as full fledge Islamic bank in the territory of Pakistan at this time Islamic banking sector was the new entrant in the Pakistan and it requires complete check and balance and the facilities they are provided that to their customer as contrast to conventional banking system. Both of them Islamic banks and conventional banks has created a competition among the banks to make happy the customer needs, and accomplish their expectation and provide long term impacts to the financial system. The conventional bank and Islamic bank usually discriminated on their goal. Islam banking follows shariah laws means Quran and Sunnah and conventional banking not following this practice. Islamic banks and conventional are distinguish as an interest free based banks. Islamic banks have captured large number of customers to beat conventional bank by offering product and services as compare to conventional banks on interest free basis mean there is no involvement of interest in Islamic banking products. This is also a reality that Islamic banking sector have lower power to catch the attention of the customer as compare to conventional banking sector in Pakistan. Most of the Conventional banking sector has also started partial Islamic banking they have made separate window to provide Islamic banking facility. Islamic banking has shown a good growth rate and on every passing day it is increasing. Basically Islamic banking sector are influenced by religious factor by obeying religious order and have good understanding on Islamic rules.
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5. KEY BENEFITS OF ISLAMIC CREDIT CARD

5.1 Structuring of Islamic Credit Card Islamic shariah has defined two structures for credit cards, that is Bai-al-inah and Tawwaruq. Bai-al-inah is used in South East Asia and Tawwaruq is used in Gulf countries. Bai-al-inah is defined as back to back sale and purchase transactions whereby in the first transaction the bank sells its assets to the customer on a deferred payment basis at selling price (cost plus profit). In the second phase, the bank will repurchase the same asset from the customer at purchase price, which is lower then the selling price, on cash basis (cards limit) where the purchase and the selling price different is the bank ceiling profit. There are a lot of controversies on Bai-al-inah as it is suppose in golf countries that this structure is not a strong basis for issuing credit card as a sale transacted in this manner is counterfeit and used just as a mask to cover interest, so credit card which use this structure are criticized of being wholly shariah compliant. Tawwaruq the other structure of Islamic credit cards is referred to as a classical case of hayal or legal stratagem that has been allowed by scholars under certain conditions. Tawwaruq has become a source of funds by combining two separates sale and purchase transactions, any individual who is in need of cash purchases a commodity on a deferred payment basis from a seller and then sells the same commodity in the market to convert the commodity into cash. This is said to be hayal where the individual has as such no real intention of selling or buying the goods. He involves in the transaction to realize cash. Credit card also works on both the theory as well as defined below. According to some religious scholars and economist, credit cards are allowed on the basis of two shariah contracts which are Bai-al-inah and Tawwaruq. According to Taqi Usamani a renowned scholar gave his fatwa on the use and approves the shariah compliance of the credit card structuring. He permits the use of credit card by a purchaser and declares that is allowing is shariah no matte whether is card is issued by the banking institution or
issued by some other companies. He argues that is wrong to assume that all contracts involving three parties are invalid and prohibited; rather the permissibility or impermissibility of contracts depends on the actual terms and conditions upon which it is based. The two functions on which credit card functions are as follows Bai-al-Inah: Numerous credit cards offers in Malaysia are working on the Baial-inah principles these cards are prepared on shariah principles that covers stallment repayments over a fixed period. Cards holder are charged a certain percentage per month on the outstanding balance and nothing is required to pay if minimum payment requested is paid on time. The Bai-al-inah principle works on two akad agreements. The first contract is made by the bank to sell an item to the client at a decided price and with second contract is done stating the client selling back the same item at a lesser price. The difference between the selling price and purchasing price is banks profit on the transaction and is predetermined amount. The percentage repayment that the customer is making does not mean that he is paying off interest rather than a certain percentage of this amount is use to retire outstanding balance. Many banks identify collectives or individual assets owned by it because the market value of assets it owns should be equal to the credit facility. For example if the credit facility is Rs 10k then the value of the identified assets must be equivalent of Rs 10k as well. The Islamic shariah defines the way the assets or the subject matter is taken into consideration such as: The subject matter is supposed to exist at the time of the agreement exceptions are given in case of Salam, Istisna. The seller (bank) should legally own the asset. Both the parties should be benefitted from transaction Subject matter should possess from transaction.
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After that the bank will sell the identified assets to the customer. The selling price charged to the customer is the sum of cost and profit (which is normally quoted is percentage). The next contract will be executed when the same bank buys back asset at cost and cash will be given to the client. Client will then utilize this money to obtain goods and services using the credit facility provided. Although of so many objections by some scholars which has Bai Inah transaction not considered as usury? The reason is that the mark up price is based on trade and service not loan. According to shariah any transaction backed by assets is permissible. Therefore, an Islamic credit card is not based on lending but rather in trade and services where banks sell and buy back at lower cost for profits.
Structure of Bai Inah
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Activities involved in the transaction of Bai Inah are as follows: A. Client is need of amount X sells product A to bank for a price of X on cash basis. Client buys product A back at price X plus the inflated price (I) Lying on deferred payment basis. B. Client pays the amount X+I on the maturity to bank. Tawwaruq: Tawwaruq is an additional financing product that is still facing legal difference between different scholars in the world but has been prevailing in Gulf countries. Tawwaruq becomes legal source of fund by combining two separates sales and purchase transactions. An individual who is in need of money purchases a commodity on a deferred payment basis from a seller and sells the same commodity in the market in order to obtain cash. The bank then creates a promise (Wadiah) principle a guarantee deposit account for customers money safety. Tawwaruq contracts are considered as a legal trick, because the individual troubled have no real intention of buying or selling the goods. He engages in these purchases and sales transaction for realization of cash.
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Structure of Tawwaruq
The activities involved in the transaction of Tawwaruq are as follows 1) Client approaches the bank to get required amount of cash 2) Bank purchases product A of the value equivalent to clients need. 3) Bank sells product A to client on the deferred basis. 4) Bank as the agent of the client sells A back to the vendor at a certified amount on cash basis. 5.2 Islamic Finance Background: Islamic finance is constituted under the Islamic constabulary
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(Shariah) point of view. The basis of shariah is the Holy Quran and the
Sunnah then comes the agreed verdict by the jurists and the scholars of Islam jurisprudence known as Ijma. The fundamental uniqueness feature of the Islamic financial system is the prohibition in the Quran of the payments and
15
www.freshfields.com/publications/pdfs/2006/13205.pdf
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the receiving of (Riba). The strong repugnance of interest by Islam and the significance of the same in modern commercial banking forced Muslim thinkers to discover ways and means by which commercial banking could be molded on an interest free basis. Development: Islamic financial institution are not that an old developments. In Egypt first Islamic bank was made in the year 1963. Islamic development bank was also established in 1975 which gave momentum to the Islamic banking. It was the first time in modern Muslim history that an international financial institution undertook to conduct its activities in conformity with the shariah. The bank was authorized to levy a service fee to cover its administrative expense instead of working on the basis of interest. Since the creation of Islamic development bank a number of Islamic banking institution have been established all over the world and some countries have taken the necessary action to manage their banking system along Islamic lines. Dubai Islamic bank the first Islamic private Commercial bank was founded in the year 1975. The Shariah and the Shariah Board: The religion Islam discusses values covers all aspects connected to human life including political and social economic issues. The body of Islamic law is famous as shariah which means a clear pathway or way to be followed and observed. The shariah is not a imperfect body of law its a form of law capable of adaptation change development and interpretation. The shariah does not point out general canons of law instead it deals with specific case or transactions and set out principles that govern them. The shariah developed out of four main Islamic juristic schools and is based from two primary sources the Holy Quran (the holy book of Muslims) and Sunnah (the living tradition of the prophet Mohammad S.A.W) in addition to two dependent basis Ijma (consensus) and ijtihad/qiyas (individual reasoning through analogy). One very important of the recent Islamic banking movement is the function of the shariah board which created an integral part
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of an Islamic bank. A shariah board is the own which keep an eye on the process of the Islamic bank and every new transaction that is subject to doubt from a shariah twelve stand point has to be approved by it. These boards include some of the most respected and well-regarded scholars of shariah and the decision of such board are expressed in the form of fatwas. In adding to that there is an global association of Islamic bankers which is an selfgoverning body supervising the working of individual shariah boards while its supreme religious board scrutinizes the fatwas of the shariah boards of member banks to determine whether they are according to shariah. Shariah laws are open to interpretation and Shariah board open have different views on key issues. In this regards there sometimes arise a great confusion or there is no practical guide as to what makes up a religiously acceptable Islamic financial. A document or structure may be approved by one shariah board but rejected by a different shariah board. Islamic banks must set up a religious committee comprised a high caliber religious jurists. The shariah board has both monitoring and counseling duty to ensure that the banks operation is in conformity with the shariah. The Islamic bans on all sources of unjustifiable multiplications and the prohibition of undertaking those transaction or financial deals that constitutes excessive risk or speculation are among the most crucial teachings of Islam in marinating justice and eradicating exploitation in business transaction. Accordingly Islamic scholars have derived three injunctions from the shariah that from the benchmark of Islamic finance and that distinguish Islamic finance from its conventional opposite. Principles of Islamic Finance: The main injunctions of Islamic finance include are as follows. The prohibition of dealing in interest both receiving and paying the most essential characteristics of Islamic banking is that it is free from interest. Islam prohibits Muslims from paying or receiving interest (Riba) irrespective of the rates at which
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interest is charged. Riba literally refers to an augmentation addition multiplication expansion or growth. However it is not in every increase or growth which has been banned in Islam. In shariah Riba technically refers to the premium or margin that must be paid by the borrower to the lender together with the principle amount taken as loan as a must condition for the loan or for an extension in its maturity period. In this Riba has the same meaning and implications as interest in congruence with the mutually consensus of all fuqaha (jurists) with no any exception. This prohibition of unjustified increment and financial benefits is in line with the most crucial teachings of Islam in maintaining justice and eradicating exploitation in business transaction. The prophet Mohammad S.A.W condemned not only those who give Riba but also person who take Riba as well and even those who record transaction or become witness to it. The ban of interest (Riba) is the most significant tenants of Islamic finance. Riba denotes a prominent source of unjustified benefits. All Muslim scholars are strict that this prohibition covers all forms of interest and that there is as such no difference between interest bearing funds for the purpose of consumption or investment because shariah do not consider money as a commodity for exchange instead shariah takes money as medium of exchange and a store of value. The capital having an ethical and social objectives beyond pure undue return investment in business ventures dealing with alcohol or any alcoholic products gambling, drugs or any thing else that the shariah deems unlawful are considered
undesirable and prohibited a prohibition on transaction involving maser (speculation or gambling).
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A prohibition on Gharar or improbability about the terms of contracts and subject matter his include a prohibition on selling something which is not prior owned. Any transaction that has Gharar involved (that is uncertainty and speculation) is prohibited. Parties to a contract must knowledge of the subject material of the agreement and its implications. An example of an agreement fraught with Gharar in contract to sell commodities that have previously been lost. Because of the prohibition investments which earn interest Islamic bank must yield their earnings through fee based returns or profit sharing investment. When loans are given to business purpose if the lender wants to make a legitimate profit under the umbrella of shariah should be the participant in the risk as well. If lenders do not taking part in the risk his receipt on any gain over the amount he made as a loan is classified as an interest. Islamic financial institutions also have the adoptability to involve into lease transactions and dealings including leasing transactions which has purchase option.
Loss and profit sharing financing is a form of partnership where partners share profit on the basis of their capital share effort provided unlike conventional finance there is no guarantee of the rate of return on investment. Islam advocates the view that Muslims do not act as creditors in any investments but as a partners in the business.
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5.3 Islamic Contracts Islamic scholars have approved certain basic type of contracts as being complaints with the principle of Islamic finance16, which Islamic bank can use to attracts funds and provide financing in Islamic way. Mudarabah (finance by way of trust): Mudarabah is a form of partnership in once one partner (rab-ul-maal) provides the capital required for a project whiles the other partner (mudarib) act as agent/manager and manages the investment using his or her expertise. It is similar to the partnership but a proper company is not needed to be formed as long as profit for both the parties is determined separately. Profits generated through investment are distributed according to the fixed and a pre determined ratio. In case if there is a loss on the investment the partner who has provided the capital bears all the loss unless it is proven that the loss was due to agents (mudarib) negligence misconduct etc. Mudarib may be conducted between an Islamic bank as provider of funds on behalf of its depositor as a trustee of their funds. The banks pay its depositors all of the profits from the investment, after the deducting of its intermediary fees. So it may also be conducted between a banks depositors as a provider of the funds and an Islamic bank as a mudarib. Musharka (finance by way of partner ship): Musharaka is similar to normal partnership contracts in which two or more partners come together invest capital and obtain profit. The difference of musharaka with normal partnership contract is that every partner decides the ratio of their profit on the total profit that would be earn by their investment not on the amount of capital invested as is the case in conventional partnership. Moreover in case of loss in musharaka loss is bear by the partners in proportion of their investment. It is different from mudarbah as in mudarbah only one partner invests and the other manages the money by acting principals agent and other hand in
16 http://www.iflr.com/Article/1984844/Channel/193438/The-three-principles-of-Islamic-finance-explained.html
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musharaka both partner invest and manage the money towards profit maximization. Murabahah (cost-plus financing): Murabahah is mainly famous type of Islamic financing. Within a Murabahah contract, the bank agrees to buy an assets or goods from a third party at the request of his client, and then resell the same goods to its client with a markup profit. The client purchases the goods either paying on spot or on deferred payments. In this case the bank specifies its margin above to the cost which is allowed in Islam. The mark up is not connected to the time as if the client not able or fails to pay a deferred payment on time, the mark up do not raise due to delay and remain as pre agreed. Most importantly the banks own the goods between the two sales and so assume the title and the risk of the purchase goods pending their resale to the client. Ijara (leasing): Ijara is defined as the renting out some thing or sales of manfas (that is, the right to use goods) for a specific period. Ijara is contract under which a bank buys an assets and leases out the same required by its client for rental fee. During a predetermined period, the ownership of the assets remains with the lesser (which is the bank) who is answerable of its maintenance so that it may continues to give service on behalf of which it was rented. The lessor assumes the risk of the ownership and in practice seeks to minimize risk by insuring the asset in its own name. In an ijara contract the lessor has the authority to re-negotiate the terms of the lease payment at every agreed interval. This is to make sure that the rental remains in line with the market leasing rate and the residual value of leased asset. Beneath this contract, the lessees (i.e., the customer) do not have any option to buy asset at the end or during of the lease term because this is measured under the shariah to be tainted with uncertainty. However this object may possibly be achieved by means of related type of agreement identified as ijara WA iktina (hire purchase). In the situation of a hire purchase the commitment on the part of the lessee to by the asset at the end of rental
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period, on an agreed price (with the rental fee paid up to the point of sales constituting part of the price) is built at the outset. Salam (advance purchases): Salam term is defined as a forward purchase of specified goods for full payment made on spot this contract is generally used for financing of agricultural production. Istisnaa (commissioned manufactured): Istisnas (order to manufacture) is a process that basically offers the future structuring possibilities for trading and financing. The payments can spot or deferred, one party buys the goods other party undertakes to manufacture them, according to the agreed specification. Islamic bank use istisna transaction to finance construction and manufacturing projects. 5.4 Transition from Conventional to Islamic Credit Card The potential growth of Islamic credit card in the Middle East, Far east Asia and south Asia where by the market could cater 250 million customer17. He believes the population of this region has awareness about the change in the worlds technologies like the emergence and benefits of plastic and electronic money where a huge section of population have access to all sort of credit, debit or charged cards. The study about the potential card holder suggests that the high probabilities of Islamic credit card customer are government staff as compare to private staff. Beside the study found that these users find benefits of using Islamic credit card for online shopping because of its attractive features. The banks that are offering Islamic credit cards attracted majority of Gulf population as it is shariah. Compliant and provide existing offer to customers due to fierce competition. The battle of the Islamic credit cards will hot up as more issuer streams in and then the penetration and success will depend on how transparent the Islamic banks are about the
17 http://archive.arabnews.com/?page=6&section=0&article=19231&d=7&m=10&y=2002&pix=business.jpg&category= Business
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structures and shariah compliance and the cost competitiveness. In Pakistan however there is no such competition in Islamic credit cards as only standard charted is offering its Saadiq credit card. Pakistan market has the potential as usage of credit card itself has not reached a saturation level. 5.5 Islamic Credit Card Controversy The competition between Islamic banks has got intense over offering shariah compliant cards18, which was once a controversial subject among Islamic jurists. However the popularity of Islamic credit cards is also accompanied by consumer complaints that the expensive costs is charged by some of Islamic banks that offer them, infact these credit cards have become even more expensive comparatively than that ones offered by the conventional banks. Customers have reported that they were astonished to discover about the charge fees required to get the Islamic credit cards offered by Islamic banks and which the shariah committees of the banks have approved. The Islamic credit cards customers are been exploited by middle eastern banks which have rejected the prevailing concept of Bai inah in Malaysia and using the concept of south Asia like in Malaysia , for example are following Bai Inaah concept which the banks in the gulf have rejected on the basis that there is flimsy line which is masking Riba. This statement contradicts the customers points of view in Saudi Arabia, Islamic credit card offered by banks entail usury and even resort to interest in some transactions moreover the bank practice the concept of Tawwaruq and sell commodities on behalf of the consumer receive payment for them and then pay the accrued interest onto the cards if the customers continues to pay remaining installments on the card. The Islamic Fiqh academy IFA has recently criticized the Islamic banks in Muscat on approving and endorsing these cards. Islamic finance criticized the policies of some banks are misleading and that resort to usury in their practice and it causes great injustice to the credit card customers and are not shariah compliant. Most banks are offering
18 http://www.asharq-e.com/news.asp?section=3&id=13869
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credit cards with the objectives of acquiring interest that is strictly and is unequivocally prohibited in Islam. Shariah committees however believes that the administrative fee charged by the banks are their rights since they need to make a profit and thus do so without resorting to Riba like conventional banks but aggress that most of the local banks in Saudi Arabia charge exorbitant fee. Some believes that there is no such thing as non shariah compliant credit cards and upholds that customers have a choice to either accept the terms and authorizes the banks to sell commodities through Tawwaruq on their behalf. 5.6 Difference between Islamic and Conventional Credit Card Islamic credit card do not involve in any money lending transaction since the structure of Islamic credit card19 is based on Bai or trade, therefore the element of usury (interest) in conventional money lending is eliminated from this card. In Islamic credit card there is no compounding of profit the profit margin of the card holder is fixed for a tenure of three and five years and the actual profit is based on the total outstanding amount of a particular month. Convention credit card can be used for any purpose such as to use them in nightclubs, bars, purchase of beer etc. Islam prohibits such activities and regards them as Haram on Muslim so an Islamic credit card cannot be used for the transaction of such Haram activities namely, paying bills at bar, discos nightclubs, beers, escort, and massage service and gambling. In Islamic credit card the financial charges are applied on the par value for which the card was used as a medium of payment and there is no compounding factor is involved on unpaid amount due to this factor Islamic credit cards are also becoming popular in non Muslims.
19
Islamic Credit Card in Practice By Prof. Dr. Mohd. Masum Billah
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5.7 Islamic Credit Card Benefits Credit card is useful for number of reasons not just for purchasing things when one is out of money but for mail orders20, internet payments, hotel booking or car hiring which require extra charges above the initial amount. A conventional credit card is not permitted an any case, even if the user of the card pays his dues to the bank in the time limit because he has entered into the contract with the bank that he is obliged to pay the interest if he delays the payments. Islamic bank pays all due steps to meet the needs of the customer by providing the facilities of Islamic credit cards. Islamic credit card are popular among Muslim because in this type of credit card system they are not required to pay any interest rather pay a fees or service charge on principle amount for which the card was used. Paying fees on the principle amount rather than on compounding amount is the one of the reason that has attracted non Muslims towards Islamic credit card as well. In order to classify the Islamic credit card ethical it has to meet the shariah requirements on lending which differs region to region. Therefore the model of Islamic credit cards must avoid the three essential prohibitions in Islamic finance, which are Riba, Gharar and Maysir. The concept of riba (interest) is known in the light of Quran and Sunnah, as prohibited so an Islamic card cannot apply interests to payments even if the user is late in paying. Gharar (uncertainty) is open to interpretation but Islamic cards should not involve a charging scheme where the monthly repayment or service charges are variable based on number of factors. Maysir (gambling) is also prohibited, so apart from preventing access to sites such as online gambling, Islamic cards need some other form of insurance cover. Islamic credit card must wok through accepted international payments schemes, such as master card, visa and provide facilities that are not available on debit cards like pin number for card not present transaction and
20 http://www.bpcgroup.ru/information_items_property_2359.pdf
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hold amounts. Moreover an Islamic credit card should not encourage any act that is consider Haram (prohibited). The category of Haram includes all manner of forbidden behaviors and transaction of an inappropriate nature must be declined immediately by a shariah compliant processing system. Islamic credit card being shariah compliant is shown through the transaction schemes by the Islamic banks. A transaction could be executed only by use of the customers own funds that is providing the money against a saving account to exclude the risk of the percent accrual. The main problem with this product is that they are not credit card at all but they are practically used as debit or charged cards. The customer is getting short term loan which is guaranteed against his account and it debited completely at the end of credit period. Another ways is to base the Islamic credit card on service charge. In this case an annual service charge is levied depending on credit size. The Islamic credit works in a similar way to the conventional credit cards however with no interest charged. It only charges an annual fee which is payable quarterly installments.
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6. FINANCIAL ANALYSIS OF ISLAMIC CREDIT CARD

6.1 Findings 1. Owner-ship of Credit Card. 2. Knowledge Of Islamic Credit Card 3. Encouragement of Islamic credit card v/s conventional credit card. 4. To own Islamic Based Credit Card Willingness 6.2 Demographics
Table 1 Frequency sexual category Wise
Gender male female Total
Frequency 130 70 200
Percent 65.0 35.0 100.0
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Figure 1 chart sexual category Wise
Table 2 Frequency age wise
Age 19-25 26-30 31-35 36-40 41-45 46 & above Total
Frequency 64 52 28 21 22 13 200
Percent 32.0 26.0 14.0 10.5 11.0 6.5 100.0
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Figure 2 Graph showing age
Table 3 Frequency according to monthly income
Monthly Income Level Rs.0-25000 Rs.25001-700000 Rs.700000 & above Total
Frequency 65 89 46 200
Percent 32.5 44.5 23.0 100.0
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Figure 3 Graph according to monthly income
Our mostly answerer belongs to the income category 250001-70000 which mean out of 200, 89 in that category and then we have found 65 people in category 0-25000 and as well as we have found 46 people in category 70000 and above.
Cross Tabulation Table 4 cross tabulation Gender and age
Age 19-25 gender male female Total 38 26 64 26-30 30 22 52 31-35 18 10 28 36-40 15 6 21 41-45 17 5 22 46 & above 12 1 13 Total 130 70 200
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Figure 4 Graph Gender and age
The total answerer were 200 out of which we have found 130 male from age group 19-25, 30 answerer we have found in the category 26-30, 18 answerer from age group 31-35, we have found 15 peoples the age group 36-40, we found 17 peoples category 41-45 and we found 12 from 46 and above. If we talk about female answerer role we found 25 from 19-25 category, we found 22 from 26-30 category, we found 10 from 31-35 category and we found 6 from 36-40 and also we found 5 answerer from 41-45 and 1 answerer from 46 and above.
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Table 5 cross tabulation age and monthly income
Monthly Income 0-25000 Age 19-25 26-30 31-35 36-40 41-45 46 & above Total 22 32 5 2 2 2 65 25001-70000 29 17 15 13 11 4 89 70000 & above 13 3 8 6 9 7 46 Total 64 52 28 21 22 13 200
Figure 5 Cross Tabulation age and monthly income
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There were 6 age levels between ages ranging from 19-46 and above. The first levels of 19-25 had 22 answerers who earned between Rs.0- 250,00, 29 were such who earned between 25001- 70000 and 13 were such out of a total of 64 who earned Rs. 70000and above. The second age levels was of 26-30, had 52 answerers in all of whom 32 were such who earned between Rs.0-25000, 17 were such who earned between 25001- 70000 and 3 were such out of a total of 64 who earned Rs. 70000 and above. The third age level was of 31-35 had 28 answerers in all of whom 5 were such who earned between Rs.0- 25000, 15 were such who earned between 25001- 70000 and 8 were such out of a total of 64 who earned Rs. 70000 and above. The fourth age level was of 36-40, had 2 answerers in all of whom 13 were such who earned between Rs.0- 25000, 6 were such who earned between 25001-70000 and 3 were such out of a total of 64 who earned Rs. 70000 and above. The fifth age level was of 41-45, had 2 answerers in all of whom 11 were such who earned between Rs.0- 25000, 9 were such who earned between 25001- 70000 and 3 were such out of a total of 64 who earned Rs. 70000 and above. The sixth age level was of 46 & above, had 2 r answerers in all of whom 4 were such who earned between Rs.0- 25000, 7 were such who earned between 25001-70000 and 3 were such out of a total of 64 who earned Rs. 70000 and above.
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6.3 Findings Analysis

1) Owner-Ship of Credit Card Table 6 Type of Credit Card Owner-Ship
Frequency yes no Total 115 85 200
Percent 57.5 42.5 100.0
Figure 6 Type of Credit Card Owner-Ship
Out of 200 answerers 115 individual owned credit card while 85 answerers did not own any type of credit card.
47
1) Types of Credit Card Owner-Ship. Table 7 Type of Credit Card Owner-Ship
Frequency 0 Conventional Islamic Both Total 85 88 21 6 200
Percent 42.5 44.0 10.5 3.0 100.0
Figure 7 Type of Credit Card Owner-Ship
Type of credit card owner-ship
48
Out of 200 answerers as we have mentioned earlier 85 answerers did not own any type of credit card on the other hand 88 answerers owned conventional credit card, 21 were those answerers who owned Islamic credit card and 6 were answerers were those who owned both conventional and Islamic credit card.
2) Knowledge of Islamic Credit Card Table 8 Detail information of Knowledge of Islamic Credit Cards
Age awareness of Islamic 19-25 credit cards awareness of Islamic 26-30 credit cards awareness of 31-35 Islamic credit cards awareness of Islamic 36-40 credit cards awareness of Islamic 41-45 credit cards awareness of Islamic 46 & above credit cards 13 1.7138
N 64
Mean 1.753
52
1.567
28
1.46
21
1.681
22
1.645
49
Figure 8 Knowledge of Islamic Credit Cards according to age.
1.8 1.75 1.7 1.65 1.6 1.55 1.5 1.45 1.4 1.35 1.3 19-25 26-30 31-35 36-40 41-45 46 & above
If we talk about the awareness level in terms of age the survey shows the people from age group 19-25 are most unaware of Islamic card followed by the respondent above age 46. Respondent with the age group 31-35 are more aware as compare to the other age group. Answerers with in this age group own the highest number of credit cards so they are aware of Islamic cards in the market. The initial age group do not own credit cards there fore they have lesser knowledge about Islamic credit card the graph also gathered detail analysis.
Table 9 Detail information of Knowledge of Islamic credit by Monthly income.
Monthly Income 0-25000 awareness of Islamic credit cards 25001-70000 awareness of Islamic credit cards 70000 & above awareness of Islamic credit cards N 65 Mean 1.7862
89
1.536
46
1.542
50
Figure 9 Graph showing Knowledge of Islamic credit card through Monthly income.
1.85 1.8 1.75 1.7 1.65 1.6 1.55 1.5 1.45 1.4 Rs.0-25000 Rs.25001-70,000 Rs.70000 & above
Those people who are from lesser income group they are lesser responsive of Islamic credit card relatively to the higher income level because lesser income earners cannot afford the to own credit card most of the times.
3) Encouragement of Islamic credit card v/s conventional credit card. Table 10 Encouragement of Islamic credit card v/s conventional credit card
Frequency Yes No I dont know Total 141 9 50 200
Percent 70.5 4.5 25.0 100.0
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Figure 10 Encouragement of Islamic credit card v/s conventional credit card
Most of the answerers were answer that Islamic credit cards are really low in promotions when it comes to comparison to other credit cards which are conventional in nature. Probably this is the main reason of most of the people not knowing about Islamic credit card availability or even existence.
4) To Own Islamic Based Credit Card Willingness. Table 11 Detail information to own Islamic Based Credit Card Willingness
Male willingness to own Islamic credit card Female willingness to own Islamic credit card N 130 Mean 1.11
70
1.32
52
Figure 11 Graphic information to Own Islamic Based Credit Card Willingness
1.35 1.3 1.25 1.2 1.15 1.1 1.05 1 Males Females
This shows that males are more interested rather then females to have possession of Islamic based credit cards that mean that while making promotional movement the Islamic cards companies should take this factor into thought that so as to which gender is to target more.
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7. CONCLUSION AND RECOMENDATTIONS

7.1 Conclusion Our research study shows that most people have severely low knowledge regarding Islamic credit cards, be it about their existence or about their functions or operations in Pakistan. Thus companies offering Islamic credit card should take in to consideration the factor due to which knowledge and understanding is lacking in Pakistan people of which might have contributed to the low awareness is the extreme lack of promotional campaign by the banks for Islamic credit cards. Though Standard charted banks Saadiq which is the only Islamic credit card opening in Pakistan exist but people hardly know about that. And if even if we suppose there are people who have knowledge about their existence is unaware how these cards function and hence they perceive that there is hardly any difference between the Islamic and conventional credit cards. Our study also proves that when the perception analysis comes out to be on the negative side for most our respondent. Our study also suggests that most of the respondent are either to enthusiastic about Islamic credit card or switch to one who already hold conventional cards. 7.2 Recommendations Banks should come with such promotional campaign that can highlight the basic structure on which Islamic credit card is based and their benefits. Also bank should develop the structure of these cards on criteria that is across the world accepted so that more people can go for Islamic credit cards. Moreover other bank should also come with Islamic credit cards as there is huge market for these cards in Pakistan since it is Muslim country and people would prefer to go to for the products that are shariah compliant and backed by Islamic principles. Our study also suggests that most of the respondent is either to enthusiastic of Islamic
54
credit card or exchange to one whom already hold conventional cards. If we forces several bank to coming up with Islamic credit cards and launching them in Pakistani market not only we can expect their business to thrive but we can expect a more grown-up and develop market after that.
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8. REFERENCES
1. Abu Usamah (2007) Islamic Credit Card Saadiq Shariah compliant credit card Review: http://abuusamah.wordpress.com/2007/12/08/shariah-compliantcredit-cards/ 2. Bruckhaus.G (2006) Islamic Finance Basic Structures and Principles Review: www.freshfields.com/publications/pdfs/2006/13205.pdf 3. Dr. Noor Ahmed Memon (2007) Islamic Banking Present and Future challenges Review: http://islamicbankingzone.com/e-library/1-islamic%20banking.pdf 4. Dr. Shamshad Akhter (2007) Pakistan Islamic Bank Past present and Future Review: www.sbp.org.pk/about/speech/.../Islamic-Banking-11-Sept-07.pdf 5. Hourani.H (2006) The Three Principle of Islamic Finance Explained Supplement of Islamic Finance international Financial Law Review: http://www.iflr.com/Article/1984844/Channel/193438/The-threeprinciples- of-Islamic-finance-explained.html 6. IIham Reza Ferdain (2008) The Practice Of Islamic Credit Card: A comparative look between Bank Danamon Indonesia Dirham card & Bank-Islam-Malaysia-BI-card-Review: http://staff.ui.ac.id/internal/060603200/publikasi/200808IAEIConferenc e_IslamicCreditCard.pdf 7. James Massey (2007) Islamic Credit Cards Operates Under the different Structures in Different Countries unlike Conventional Card Review: http://www.bpcgroup.ru/information_items_property_2359.pdf 8. Js-Gams (2008) Credit Card System Review: www.mbs.unimelb.edu.au/home/jgans/papers/interchange.pdf 9. Lokesh Gupta (2008) Evolution of Islamic Credit Card Review: www.halaljournal.com/article/1899/evolution-of-islamic-credit-card
10. Masum Billah.M (2004) Islamic Credit Card in Practice Review: www.islamicmortgages.co.uk/index.php?id=262 11. Mohammad Azhar Sheikh (2010) Islamic Vs Conventional Banks in Pakistan Review: www.iub.edu.pk/jer/JOURNAL/BRM_Research_Article.pdf 12. Mohammad Hanif (2011) Difference and similarities in Islamic and Conventional Credit Card Review: www.ijbssnet.com/journals/Vol._2_No._2;_February_2011/20.pdf 13. Mushtaq Parker (2002) Battle of Islamic Credit Card to Hot Up Review: http://archive.arabnews.com/?page=6&section=0&article=19231&d=7& m=10&y=2002&pix=business.jpg&category=Business 14. Nooruddin Mansoor (2009) Islamic Credit Card: Are demographic Factor-a-good-indicator?-Review: www.ccsenet.org/journal/index.php/ass/article/download/4544/3877 15. Nuradii Rizwan Shah Bin Mohammad Dali (2007) A Study on Islamic Credit-Card-Holders-Review: www.kantakji.com/fiqh/Files/Finance/ICC.pdf 16. Obaidullah.M.(2005) Islamic Financial Services Review: http://islamiccenter.kau.edu.sa/english/publications/Obaidullah/ifs/ifs. html 17. No Author (2008) Islamic Credit Card Controversy Review: http://www.asharq-e.com/news.asp?section=3&id=13869 18. No Author Credit Card History Review: http://homepages.nyu.edu/~jac614/nyny/credit-card-istory.html
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