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INSTITUTE OF BUSINESS AND TECHNOLOGY
Prospects of Islamic Credit Cards in Pakistan
Prepared By
Shazia BashirBM-25069
Sadaf OadBM-25088
Asad MazharBM-25065
Course Code : MKT-606
MBA (Banking and Finance)
FACULTY OFMANAGEMENT AND SOCIAL SCIENCES
SPRING - 2011
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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 CONVENTIONAL CREDIT CARD AND ISLAMIC CREDIT CARD
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
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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 FINANCIAL ANALYSIS OF ISLAMIC CREDIT CARD
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 56
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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 Sadaf Oad
Asad Mazhar
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INSTITUTE OF BUSINESS AND
TECHNOLOGY
ABSTRACT SUBMITTED BY: Shazia Bashir
Sadaf Oad
Asad Mazhar
DISCIPLINE: MBA (Banking and Finance)
TITLE OF PROJECT REPORT: 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.
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1. INTRODUCTION
1.1 Introduction
Credit card in general also termed as plastic money has become an essential
mode of payment in today’s 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), that’s 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.
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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 Bank’s Library, library of other
universities. Our primary research would start by questionnaire filled by
respondents.
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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 today’s 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.pdf2
http://www.islamicmortgages.co.uk/index.php?id=287
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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 fatwa’s the rulings of Islamic
scholars.
According to Ill ham Reza Freidan 3(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
3
http://staff.ui.ac.id/internal/060603200/publikasi/200808IAEIConference_IslamicCreditCard.pdf
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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 4
www.ijbssnet.com/journals/Vol._2_No._2;_February_2011/20.pdf
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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.
5
www.ccsenet.org/journal/index.php/ass/article/download/4544/3877
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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.
6
http://homepages.nyu.edu/~jac614/nyny/credit-card-history.html
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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.
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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
customer’s 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. 7
www.mbs.unimelb.edu.au/home/jgans/papers/interchange.pdf
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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 today’s 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
http://www.halaljournal.com/article/1899/evolution-of-islamic-credit-card9
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 Bai-
Al-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-Al-
Inah 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 bank’s 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.
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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 fiancé) 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 the left behind balance gets
10
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 11is 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 interbank’s 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
11
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
eighty’s 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 un-
Islamic 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 institute’s 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 non-
Muslims, 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 14are 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
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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 Bai-
al-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 customer’s 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 client’s 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 constabulary15(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 it’s 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 fatwa’s. In adding
to that there is an global association of Islamic bankers which is an self-
governing body supervising the working of individual shariah boards while its
supreme religious board scrutinizes the fatwa’s 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 agent’s (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 bank’s 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 principal’s 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
manfa’s (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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Prospects of Islamic Credit Cards in Pakistan
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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.
Istisna’a (commissioned manufactured): Istisna’s (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
world’s 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§ion=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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Prospects of Islamic Credit Cards in Pakistan
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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 Frequency Percent
male 130 65.0
female 70 35.0
Total 200 100.0
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Figure 1 chart sexual category Wise
Table 2 Frequency age wise
Age Frequency Percent
19-25 64 32.0
26-30 52 26.0
31-35 28 14.0
36-40 21 10.5
41-45 22 11.0
46 & above 13 6.5
Total 200 100.0
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Figure 2 Graph showing age
Table 3 Frequency according to monthly income
Monthly Income Level Frequency Percent
Rs.0-25000 65 32.5
Rs.25001-700000 89 44.5
Rs.700000 &
above46 23.0
Total 200 100.0
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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
Total19-25 26-30 31-35 36-40 41-45 46 & above
gender male 38 30 18 15 17 12 130
female 26 22 10 6 5 1 70
Total 64 52 28 21 22 13 200
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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
Figure 5 Cross Tabulation age and monthly income
Monthly Income
Total0-25000 25001-70000 70000 & above
Age 19-25 22 29 13 64
26-30 32 17 3 52
31-35 5 15 8 28
36-40 2 13 6 21
41-45 2 11 9 22
46 & above 2 4 7 13
Total 65 89 46 200
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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 Percent
yes 115 57.5
no 85 42.5
Total 200 100.0
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.
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1) Types of Credit Card Owner-Ship.
Table 7 Type of Credit Card Owner-Ship
Frequency Percent
0 85 42.5
Conventional 88 44.0
Islamic 21 10.5
Both 6 3.0
Total 200 100.0
Figure 7 Type of Credit Card Owner-Ship
Type of credit card owner-ship
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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 N Mean
19-25
awareness of Islamic
credit cards64 1.753
26-30
awareness of Islamic
credit cards52 1.567
31-35
awareness of
Islamic credit cards28 1.46
36-40
awareness of Islamic
credit cards21 1.681
41-45
awareness of Islamic
credit cards22 1.645
46 & above
awareness of Islamic
credit cards 13 1.7138
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Figure 8 Knowledge of Islamic Credit Cards according to age.
1.3
1.35
1.4
1.45
1.5
1.55
1.6
1.65
1.7
1.75
1.8
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 N Mean
0-25000 awareness of Islamic
credit cards65 1.7862
25001-70000 awareness of Islamic
credit cards89 1.536
70000 & above awareness of Islamic
credit cards46 1.542
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Figure 9 Graph showing Knowledge of Islamic credit card through Monthly
income.
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 Percent
Yes 141 70.5
No 9 4.5
I don’t know 50 25.0
Total 200 100.0
1.4
1.45
1.5
1.55
1.6
1.65
1.7
1.75
1.8
1.85
Rs.0-25000 Rs.25001-70,000 Rs.70000 & above
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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 N Mean
willingness to own
Islamic credit card130 1.11
Female
willingness to own
Islamic credit card70 1.32
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Figure 11 Graphic information to Own Islamic Based Credit Card Willingness
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.
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
Males Females
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Prospects of Islamic Credit Cards in Pakistan
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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
bank’s 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
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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
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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:
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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/200808IAEIConference_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
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Prospects of Islamic Credit Cards in Pakistan
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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§ion=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