Credit cards have long been a staple product in the banking portfolio. While it has remained essentially unchanged over the decade in essence, it has evolved and taken multiple forms to suit the wide and varied needs of different target customer groups.
One of the most vital and unique credit cards available in the UAE are Islamic Credit Cards. These cards were developed because ribaa (the Arabic word for interest) is forbidden in Islam. Historically this has been one of the prime reasons that credit cards were not endorsed by those who preferred Shariah (Islamic law) compliant products and services over their counterparts. Islamic Credit Cards were developed to fill this important gap in the banking sector. By creating Shariah compliant credit cards, banks were able to better serve a larger customer base.
Conventionally, credit cards earn money through interest rates and vital service fees ranging from late payment of dues to cash withdrawals and over-limits. Because interest is forbidden in Islam, Islamic credit cards work differently from regular credit cards.
This post attempts to acquaint you with the workings of Islamic credit cards, increasingly preferred by a lot of Muslims as well as non-Muslims across the UAE.
1. Islamic credit cards are developed on the basic concept of Tawarruq. These cards operate on a profit rate and not interest rate. Simply put, when you make a purchase using an Islamic credit card, the bank purchases that item from the seller at a particular price, and sells it you at a slightly higher price which is their profit.
2. Another type of Islamic credit card has been developed on the basis of a fixed fee concept. This means that if there is any outstanding amount on the card, the cardholder must pay a fixed fee irrespective of how high or low the balance amount is. This makes the card Shariah compliant. This type of Islamic credit card is extremely beneficial to those who pay their bills in full every month.
3. Certain Islamic credit cards offer cash advances and charge a fixed fee based on the Tawarruq concept. These advances are given out as Qardhs, or interest free loans.
Click here for a comprehensive list of Islamic credit cards available in the UAE. You can compare the options available to you in order to find the card most suitable to your needs.