How Islamic Credit Cards Work

As Islamic banking continues to increase in global penetration, there are undoubtedly many questions about this alternative form of banking. One concept of Islamic finance that has been around for over a decade is the Islamic credit card. We take a look at the different types of cards available from Islamic banks.

Firstly, it is important to understand that under Islamic law, interest is forbidden whether it is being received or paid. So how does this effect credit card transactions? Greatly, the business model for conventional banks relies upon being able to charge interest for balances that go unpaid.

One type of Islamic credit card uses the concept of profit rate instead of interest. These Islamic cards are usually based on the controversial concept of Tawarruq, in which paper transactions occur in the background to buy and sell commodities every time the card holder makes a purchase. For all intensive purposes, these products function in the same way as conventional credit cards that charge interest.

A second type of Islamic credit card consists of a fixed monthly fee. If the borrower has any unpaid balance at the end of the month, they must pay a fixed fee, no matter if the outstanding balance is AED 1 or AED 10,000. These fixed fee cards are great for customers who typically pay the entire outstanding balance each month. bayzat even allows individuals to search for these fixed fee Islamic cards.

In an effort to compete with their conventional counterparts, Islamic banks continue to develop credit cards that offer the same features as interest-bearing ones. In fact, many non-Muslim residents in the UAE now bank with Islamic financial institutions to take advantage of the best credit card deals.

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