An Overview of La-Riba Card of Al-Arafah Islami Bank Limited
An Overview of La-Riba Card of Al-Arafah Islami Bank Limited (AIBL) Prepared For Md. Yousuf Harun Assistant Professor Department of Finance Banking Faculty of Business Studies Jahangirnagar University Prepared By S. M. Golam Morshed ID 20163011 Batch 16th EMBA Program Date Department of Finance Banking Jahangirnagar University Chapter-1 BACKGROUND 1.1 Introduction With the objective of achieving success here hereafter by pursuing the evergreen state directed by Allah and the path shown by His Rasul (salla-llahu-alayhi-wa-sallam), Al-Arafah Islami Bank Ltd was established (registered) as a private limited company on 18 June 1995. So far there are 8 full-pledged Islamic banking company operating in this country along with its conventional counterparts. There are many other conventional Banks who are providing Islamic financial services either through establishing Islamic banking branches or windows. The countrys financial sector is however dominated by conventional banks and Islamic banks here are competing with conventional banks in terms of offering services. To provide financial services to the customers according to their needs, Islamic banks are offering almost all the services parallel offered by conventional banks through shariah compliant ways. Islamic credit card is a new product relative to conventional credit cards. It is not until 2001 when banks from Malaysia and Bahrain introduced the concept of Islamic credit cards to cater the needs of Muslim Populations who demanded shariah compliant credit cards. Credit card is a plastic card that can be used instead of hard currency or cash that make life easier and provides an easy payment mechanism. But its major role as the name suggests is providing credit that can be paid in latter. A grace period is normally given within which the amount can be paid without any addition. After the grace period, interest is calculated on the outstanding amount. Credit as a mute asset in Islam cant generate income. Therefore, Islamic banks cant duplicate the conventional credit card mechanisms to earn profit. Muslims are prohibited to sign a contract having interest clause in credit cards. Due to the demand of shariah compliant credit cards, different models and practices were developed. The practices and different model used by Islamic banks throughout the world for structuring Islamic credit cards are highly criticized by the Shariah expert. Besides its structure, several studies found that Islamic credit cards are not also free from promoting consumerism and debt accumulation like conventional credit cards. AIBL as one of the largest Islamic Banks in Bangladesh also issued an Islamic credit card namely La-Riba card. Given the backdrop, this research is mainly undertaken due to three main motives, (i) to explore the structures or models used in La-Riba card and whether it is shariah compliant or not (ii) to explore whether the credit card selection factors of La-Riba Cardholders are different than that of conventional credit card holders (iii) to determine whether La-Riba credit cards are associated with debt like conventional credit cards. 1.2 Objective of The Study The research aims to explore the various Islamic credit card models or structures, issues raised by shariah experts in these structures and whether these issues exists in La-Riba card or not. The research also aims to examine the effect of credit card as a debt instrument on La-Riba card holders and whether the effect of La-Riba card as an Islamic financial instruments is different than conventional credit card or not. The research also aims to examine the factors that influence La-Riba card holders to choose the La-Riba card and whether the selection factors are different from that of conventional credit card holders. In particular, the research aims to two things, (i) to explore the La-Riba card underlying structures (ii) to find out whether the La-Riba card holders behave in more religious ways than conventional card holders hence less negative effect of using credit card. In attaining the following aims, the following objectives are developed. The first objective is to explore the shariah aspects of La-Riba card and whether La-Riba card is free from the issues raised by the shariah experts on different Islamic credit card models used by Islamic financial institutions. To attain this objective, several sub objectives are also developed stated below. Different structures are used by Islamic credit card issuers and some of them highly criticized because of their structural model that resemble the conventional credit cards. Therefore, it is one of the objectives of this research is to identify the structures used in La-Riba card. Experts have differed about the underlying contracts in credit cards. Some say it is Wakalah, other say it is kafalah. There are others who say it is Hawalah. The experts also provide different opinions on whether the credit card is based on single contract or a combination of many contracts. Therefore, it is one of the objectives of this research is to find out the underlying contract in the La-Riba card that exists between La-Riba cardholders and AIBL as a card issuer and whether the underlying contract permits the issuer to charge a fee for the contract. It is also one of the objectives to examine whether the La-Riba card is shariah compliant product or not. AIBL earns from La-Riba card through charging different fees and charges. Another objectives of this research is to examine whether the La-Riba card earnings are shariah compliant or not. La-Riba card as a credit card is a debt instrument. It is necessary to see the position of debt in Islam. This is also an objectives of this study to examine the position of debt and debtholder in general that is relevant to any debt instrument in Islamic finance. It is expected that religious factor influences the La-Riba card holders to choose La-Riba Card. The second objective of the research is to examine whether the selection factors of La-Riba card holders are different than that of conventional credit card holders. To achieve the objectives, several research questions are developed as stated below. The third objective of this research is to examine the impact of La-Riba card as a debt instrument on La-Riba card holders and to see whether the impact is same for La-Riba cardholders like that of conventional credit card holders. To achieve the objectives, the research questions formulated are stated below. 1.3 Research Question To attain the objectives, several research questions are developed as stated below Q-1. What is the model used in structuring La-Riba Card Q-2. What is the underlying contract between La-Riba Cardholders and AIBL Q-3. Can AIBL charges fees for underlying contracts Q-4. Is La-Riba Card a Shariah compliant product Q 5. Are La-Riba Card earnings Shariah compliant Q 6. What is the position of debt in Islamic legal rulings Q-7. What is the initial factor that leads the customer to choose a credit card Q-8. What features of credit card are valued by customers Q-9. How can La-Riba cardholders different from others in the above matters Q-10. Are La-Riba Cardholders transactors1 or revolvers2 Q-11. Is La-Riba Cardholders debt increasing because of credit card Q-12. Are La-Riba cards free from less negative impacts on Cardholders 1.4 Significance of the study The significance of the research comes from the fact that there is no research undertaken on La-Riba Card from any aspect. In fact, there is only one research undertaken on Islamic credit card issued by Islami Bank Bangladesh Limited. There are lots of research done on conventional credit cards by various researchers from various aspects. There exists also few researches on Islamic credit cards. Most of the researches have been done either on the context of Malaysia or on the context of Middle East. Bangladesh as a fourth largest Muslim country in terms of population, where 86.6 profess the religion of Islam3, didnt carry much attention of the researchers in this regard where a vast market of Islamic finance exists. This research fills this gap and touches every aspects of Islamic credit cards and specially focuses on La-Riba credit card of Al-Arafah Islami Bank Limited. This research also shows the attitude of credit card holders in Bangladesh and the impact of credit cards on cardholders in the context of Bangladesh that have not been done in any prior study. This study offers a wider and comprehensive literature on Islamic credit card in the context of Bangladesh. The study uses structured questionnaire for bankers, economists and shariah experts to complement the qualitative research on shariah aspects of La-Riba card and the findings from survey questionnaire on credit cards. The study also analyzes the OIC Islamic Fiqh Academy Resolution on Credit Cards and relate the resolution to La-Riba Card. 1.5 Organization of the research 1Transactors here means those who pay the outstanding amount in grace period and dont revolve the outstanding balance. It is deemed that they use credit cards not for credit facility. 2 Revolvers revolve their outstanding balance of credit cards for next month and pay the amount with interest in installments basis. They utilize the credit features of credit cards. 3The information is taken from Bangladesh Government Website, HYPERLINK http//www.bangladesh.gov.bd/site/page/812d94a8-0376-4579-a8f1-a1f66fa5df5d/E0A6ACE0A6BEE0A682E0A6B2E0A6BEE0A6A6E0A787E0A6B6E0A695E0A787-E0A69CE0A6BEE0A6A8E0A781E0A6A8 http//www.bangladesh.gov.bd Accessed on 28th July, 2018 CHAPTER 2 REVIEW OF LITERATURE 2.1 Introduction This chapter aims to introduce credit cards, what it is and the history of its developments and the available literatures on credit card. The shariah stand on conventional credit cards and the position of debt in Islamic legal rulings are also discussed as a relevant topics to credit cards. 2.2 Credit Card Definition The easy or practical definition of credit card is buying first and paying later. OIC Fiqh Academy defined credit card as, a document given by its issuer to a mutual or juridical person on the basis of a contract between them enabling it to buy goods or services from a vendor who approves the document, without paying the price immediately as the document includes the issuers commitment to pay.4 Kahf Mohomed (2016) highlighted that the definition of credit card given by OIC Fiqh Academy in 1992 should be updated as the practice of credit card has been changed. The price is now paid immediately by the card issuers usually within 48 hours in the merchant account and it is the cardholder who delays the payment to the card issuer. According to Bangladesh Bank guidelines for credit card operations, The term Credit Card generally means a plastic card issued by Scheduled Commercial Banks (SCBs) assigned to a Cardholder, with a credit limit, that can be used to purchase goods and services on credit or obtain cash advances.5 2.3 Surveying Empirical Literature on Credit Cards In this section, we will review some of the available literature on credit card especially relative to Islamic credit card. We are going to discuss the definition provided by the authors and researchers, the usage, history of credit card, and the type of underlying contracts among the parties of credit card, the existing models used by different Islamic financial institutions, the matters of consumerism and indebtedness and some of the new models suggested by different researchers. 2.3.1 Shariah Aspects of Credit Card Credit card is a debt instrument through which the card holders get immediate credit. Though the debts are not encouraged in Islam, however permissible with three conditions namely (i) the borrower should be determined to repay the debt (ii) the borrower must have the capacity to repay (iii) the debt should be for something permissible in Islamic shariah (Kahf Mohomed, 2016). Noor and Azli (2009) confirmed that Islamic credit card was recognized as a shariah compliant product by the shariah advisory council of Bank Negara Malaysia. OIC Fiqh Academy also in its resolution on Credit Cards states that credit cards can be issued without the condition of imposing interest on debt (Islamic Development Bank Islamic Fiqh Academy, 2000). There are two dominant views on the shariah permissibility of conventional credit cards among the shariah experts and scholars. One side says it is not permissible because of interest clause and another side says it is permissible with two strict conditions. The conditions are that the cardholder must pay the outstanding balance within the grace period and avoiding any cash withdrawal as it triggers interest (Kahf Mohomed, 2016). Council of Islamic Fiqh Academy of OIC in its resolution on credit card states that is not permissible to issue or use conventional credit cards. (Islamic Development Bank Islamic Fiqh Academy, 2000). Credit card is a mute asset that cant generate income. Any increment outside sale, lease and sharing mechanism are not shariah compliant. As a mute asset, credit cards debt securitization practiced by many is the violation of shariah requirements. (Kahf Mohomed, 2016). However, commission from the merchant in credit card is permissible in shariah (Noor Azli, 2009). There are many models developed to meet the demands of customers who demand shariah compliant credit cards. The ujrah model involves Kafalah and Qard al-hasana contracts. Any fee charged based on these two contracts are not permissible in the shariah and thus non-shariah compliant (Bilal Meera, 2015). Bai al-Inah model and Tawarruq model are also used as shariah compliant credit cards. Shariah advisory council of Bank Negara Malaysia approved the usage of bay al-Inah model in credit card structure and stated it was permissible in shariah. The jurists from different schools analyzed Tawarruq and Inah, some jurists permitted this kind of trade and other considered it was not permissible. The preferred view in all schools of fiqh is that tawarruq is permissible and this is the view of AAOIFI also. OIC Islamic Fiqh Academy disallowed the organized tawarruq in its 17th meeting. Ibn al Qayyim stated in Ilam al Muwaqqin about Inah and Tawarruq where he said that Tawarruq is sister (as same as) Inah. Inah and Tawarruq models are subject to much criticism and organized tawarruq is disallowed by majority of the jurists (Noor Azli, 2009). HSBC issued credit card-I in Malaysia based on the concept of ujrah, hence called ujrah model. Noor and Azli (2009), after analyzing the model, questioned the justification for fee charges on the cardholders who partially pay the outstanding amount where the person who fully pay the outstanding amount enjoy management charge free. High management fees in ujrah model benchmarked with conventional credit card charges dont reflect actual fees. Business model should be reviewed from time to time to make it more shariah compliant and opined that managing credit card transactions is not the best way to generate profit in Islamic framework (Noor Azli, 2009). 2.3.2 Impacts of Credit Card Credit card is the promoters of consumerism and indebtedness. The matters of consumerism and indebtedness as a direct result of credit cards. It was found that the credit card debt per U.S. household rises to 7,154 at the end of 2014 from 6,887 at the end of 2013 (Kahf Mohomed, 2016). Prelec and Semister (2001) conducted a research to determine whether credit card affect the users willingness to pay. The previous studies called this phenomenon as credit card premium, if credit card boost willingness to pay, the authors said. The results revealed a large credit card premium though the effect was not always present, the author said. It implies that the willingness to pay is increased when customers are instructed to pay with credit cards rather than cash. King (2004) tried to find out the effects of credit card holdings on money demand. The author conducted a research on previous data set and found whether the credit card used as a means of borrowing or convenience payment or alternate payment system. Money demand was presented through checking account balances as a proxy. The results suggest that there is a negative relationship between checking account balances and credit card holdings and positive relationship exists between credit card holdings and savings account balances. This implies that people use credit card as an alternative payments system the results less need for keeping idle money on checking accounts that give no interest. The data on revolving balance suggest that people use credit cards as a means of borrowing also. Crack and Roberts (n.d.) discussed the credit card indebtedness with the parable of banana. The authors explained how a person could, especially youth got caught in debt mount through the credit cards. The authors explained the phenomena by using TVM calculations and presented two case study to represent the phenomena. The authors commented that if the cardholders paid the minimum amount every month and kept a revolving outstanding balance, he would carry out his debt almost throughout the life. 2.3.3 Selection Factors of Credit Cards Amin (2012) identified the factors to determine the behavioral intention to use islamic credit card by Malaysian customers. The author used Theory of Reasoned Action (TRA) model in his research and found that attitude, subjective norms and perceived financial costs significantly influence the users intention to use Islamic credit card. Then the author mentioned some available literature and quoted that lower and middle income people were prone to use credit card and shopping, bulk purchase, concept understanding were the key factors determining the satisfaction of Islamic credit card users. The author shown a diagram of TRA model in his paper and commented that TRA model establishes links between beliefs, attitudes, behaviors and intentions. The author modified the TRA model used by previous researchers and added subjective norms and attitude as well as perceived financial costs in his study. Then the author tested three hypothesis related to subjective norms, attitude, perceive financial costs and intentions. The study was conducted on 257 Malaysians. The findings was that there was a positive relationship among the intentions to use Islamic credit cards and attitude and subjective norms. However, negative relationship exists between intentions and perceive financial costs. The R2 was 0.654 means 65.4 of the variation in intention can be explained by these variables. Dali, et al.(2015) conducted a research to find out the factors that determine the selection of credit cards. The conventional credit card users and islamic credit card users are compared based on four factors namely convenience, costs, takaful or insurance and reward points. The authors commented that islamic credit card issuers have to raise customer awareness of its products and build positive attitude towards its products. The authors divided credit card users into revolvers who carry outstanding balance from one month to another and transactors who normally pay all the outstanding balance in full. The authors then said that the previous studies on this issue have shown revolvers are less satisfied than transactors. The cost of service is more significant for the conventional credit card users than islamic credit card users, the authors quoted from pervious study. The islami credit card users have higher level religious education and tend to be transactors rather than revolvers. Takaful or insurance by credit card issuers is not significant in influencing credit card types. The research findings are that conventional credit card users emphasize more on convenience and reward points programme. On the other hand, islamic credit card users were satisfied with the costs factors. Jamshidi and Hussin (2013) used Innovation Diffusion Theory to determine the conceptual framework for the adoption of Islamic credit card. Some key determinants in adoption of innovation are relative advantage, complexity, compatibility, trial ability, observability. The authors used only relative advantage, complexity and compatibility as a determinants in the adoption of Islamic credit cards as they are constantly linked to innovation adoption in different context. The authors commented that complexity is an inhibitor in adoption of innovation. It was a quantitative research where the researchers used regression analysis, factor analysis and tested seven hypothesis on credit cards and various factors. 2.4 The Position of debt in Islam The position of debt in Islam should be discussed in the context of credit card literature. It is evident from the available literature on credit cards that credit cards promote consumerism, indebtedness, and extravagance. One is promoted to live beyond ones means. Islam doesnt promote this theme as Allah states in the Quran to eat and drink but not to be extravagance. And those, who, when they spend, are neither extravagant nor niggardly but hold a medium way between those (extremes). AlQuran 2567 Debt is permissible that doesnt incur any interest as Allah states in the Quran, O you who believe When you contract a debt for a fixed period, write it down Al Quran 2282. This verse states about the permissibility of the contract of debt. Prophet Muhammd (s.) on one occasion purchased a commodity from a jew on credit. Ayesha narrated, The Prophet once bought some food from a Jew and he mortgaged his shield with this man till he would pay him.6 Lending is deemed as a benevolent and charitable act in Islam as Allah states, and lend to Allah a goodly loan Al Quran 7320. Prophet Muhammad (s.) said, No Muslims lend a loan to another Muslim twice but it will be like giving it once in charity.7 It should be noted that there Qard (loan) and Dayn (debt) is not name, loan is a one type of debt. The term Dayn or debt has broader dimension than loan or Qard. Though giving loan is considered as a charitable acts and is promoted but taking loan unnecessarily is not promoted as it leads to indebtedness and debt accumulation. Prophet Muhammad (s.) refused to offer funeral prayer for one who had died owning debt.8 It was also narrated that Prophet (s.) sought refuge with Allah from being in debt.9 As debt is narrated as a barrier to enter paradise10, Muslims shouldnt take debt without necessity. 4 The definition was provided by OIC Fiqh Academy in its seventh session, resolution no. 63/1/7 5 Guidelines of credit card operations of banks issued by Bangladesh Bank 6 Bukhari and An-Nasai 7 Ibn Majah, 2430 8 Related by Ahmad in his Musnad, Prophet Muhammad (s) refused to offer funeral prayer for one who had died owning two dinars, until Abu Qatadah promised to pay it off for him. When he saw him on following day and said, I have paid it off, the Prophet said, Now his skin has become cool for him. 9 Bukhari related that, Aisha said The Messenger of Allah used to make dua while performing solat, and used to say Oh Allah I seek refuge with Thee from sin and from being in debt. Someone asked him How often, O Messenger of Allah do youseek refuge from being in debt He said When a man is in debt he speaks and tells lies, and he promises and breaks the promise. 10 Prophet (s.) said, Whoever dies free from three things – arrogance, cheating and debt – will enter Paradise. (al-Tirmidhi,1572) CHAPTER 3 DATA AND RESEARCH METHODOLOGY Credit Card Survey Questionnaire If you have credit card or you are the user of credit card in Bangladesh issued by Bangladeshi or Non Bangladeshi bank or any institutions, you are requested to fill the form. Please provide your sincere opinions. You dont need to give your name or mail address. Age (in years) ( Below 20 ( 21-30 ( 31-40 ( 41-50 ( 51-60 ( Above 60Religion ( Islam ( Hinduism ( Others The issuer of your credit card ______________________ ______________________Which type of Credit Card do you have ( Islamic ( Conventional ( BothDo you think Credit Card is a necessity ( Yes ( NoDo you think Credit Card leads to overspending ( Yes ( NoThe most typical monthly payment of your credit card bill. ( Entire Balance / Full Payment ( Between minimum and entire balance ( Minimum Balance ( Less than Minimum BalanceDo you think there should be Islamic credit cards ( Yes ( No ( No OpinionDo you understand the Islamic Credit card structures like Tawarruq, Inah, Ujrah etc ( Yes ( No ( No Opinion Please state your opinion on the following statements according to your experience. Here 1 Strongly Disagree, 2 Disagree, 3 Neutral, 4 Agree, 5 Strongly Agree Strongly Disagree (1)Disagree (2)Neutral (3)Agree (4)Strongly Agree (5)I have difficulty without credit cards.(((((I have difficulty in paying my credit card bill in full.(((((In general, my credit card debt has increased over time.(((((I do not understand the charging structure of credit cards.(((((I am encouraged to incur more debt due to an increase in credit limit.(((((2.2 The The most important factor that has influenced you to possess a credit card. ( General card advertisements such as newspapers, television, Internet,pamphlets ( Card salesmen ( Personal preference because of convenience factor ( Personal preference because of financial reasons ( Relationship with the existing bank ( Work environment ( Family and friends ( Others How important are these factors to your credit card selection Please provide your opinions. Here 1 Highly Unimportant, 2 Unimportant, 3 Neutral, 4 Important, 5 Highly Important Highly Important (1)Unimportant (2)Neutral (3)Important (4)Strongly Important (5)Internet purchase Online payment.(((((Wide acceptance locally/abroad.(((((Safer to carry than cash.(((((Zero installment interest facilities.(((((Facilities paying bills electronically and access to statement.(((((Automatic payment in full by direct debit from my account.(((((Provides immediate credit.(((((Possibility of Cash Advance.(((((Paying debt according to budget/affordability.(((((Special discount in selected outlets.((((( Section 1 Introduction Section 2 Credit Card Impacts Section 3 Credit Card Selection Factors Y, dXiJ(x(I_TS1EZBmU/xYy5g/GMGeD3Vqq8K)fw9
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