How Islamic banks offer payment cards

Cards present a particular challenge for Islamic banking. Conventional credit cards are typically structured around a revolving loan, with the issuing bank charging interest when the customer does not settle the outstanding balance in full. Given the prohibition of usurious interest in Islamic transactions, Islamic banks cannot simply replicate this model in its conventional form. At the same time, customers need convenient means to obtain short-term finance and make payments within clear Shari’a and legal parameters.. The industry’s response has been to develop alternative structures, including fee-based cards and Murabaha-based covered cards.

The first Islamic payment cards were generally debit cards, allowing customers to spend funds they already held. Debit and charge cards were relatively straightforward from a Shari’a perspective because they did not involve interest-bearing lending. The more difficult question was how to provide a Shari’a-compliant alternative to short-term financing associated with a conventional credit card.

One early model relied on combining interest-free financing in the form of Qard Hasan with fees charged for additional services. The bank would make an interest-free financial facility available to the customer within an agreed limit, while charging a monthly membership fee for services such as airport lounge access, valet parking, and travel-related benefits. If the customer settled the outstanding amount in full, the bank could waive the fee.

However, this structure raised certain reservations where the fees charged were not reasonably proportionate to the services and benefits provided. If the fees increased in reference to the value or duration of the facility rather than reflecting genuine services, the arrangement could move closer to deriving a benefit from the provision of funds. These reservations led some Shari’a scholars and supervisory boards to review the structure and encourage banks to link fees more closely with the services actually provided.

The industry later moved toward developing the covered card, a structure based on Murabaha. In this model, the bank purchases a Shari’a-compliant asset (such as commodities, shares, or Sukuk) and then sells it to the customer wishing to obtain the card on a deferred Murabaha basis. The customer may authorize the bank to act as their agent, after the true ownership of the asset has vested the customer, to sell the asset to a third party and use the resulting liquidity to fund the card facility. The Murabaha profit is agreed in advance, with the bank’s receivables linked to the customer’s actual use of the available facility.

This structure addresses a fundamental requirement of Islamic finance: that the return should not arise merely from lending money or extending the payment period, but from a sale that satisfies its essential elements and conditions and complies with Shari’a principles. However, this model also demonstrates the complexity of developing Islamic products. The bank must acquire and take possession of the asset before selling it, the price, profit, and term must be clear, and any subsequent sale must be executed in a manner consistent with the applicable Shari’a requirements.

The regulatory and legal framework in the United Arab Emirates reinforces this distinction, as Islamic banking products and services are subject to Shari’a-compliance requirements and the supervision of the competent authorities. In general, Islamic financial institutions may not charge customers interest or additional profit merely for late payment. Any amounts associated with delay should be limited to what is permitted under the applicable Shari’a standards, laws, and regulations, such as actual and direct expenses where established, or charitable donation amounts stipulated in certain approved structures, without constituting usurious income for the bank.

The evolution of Islamic covered cards demonstrates a broader lesson. Islamic banking is not about simply removing interest from conventional products. It requires financial institutions to rethink how a product works and identify a legitimate commercial structure that meets the customer’s underlying need. Cards remain a challenging area, but the industry’s efforts to develop Shari’a-compliant alternatives demonstrate its continuing capacity for financial innovation.