Credit cards are prevalent and widely used by many Muslims today – but are they haram or halal?
Credit cards have their uses. With a credit card, you can effectively smooth your finances over the course of a month, or make a large purchase and stagger the payments over a number of months. You can also earn rewards and cashback as well as benefit from credit card payment protection in the case of faulty goods or if the seller goes bust.
But at the heart of a credit agreement is the interest-bearing loan that will start to accrue if you don’t make a payment on time. So, what is a Muslim to do?
Financing the Deal
Key principles of Islamic finance
There are various principles that define Islamic finance, but the most distinctive one is the prohibition of usury, which is called Riba in Arabic.
The literal translation of Riba is “increase, addition or surplus” and by this definition, the Sharia forbids any excess compensation without due consideration. It must be mentioned that under Islamic law, the time value of money is not included in the definition of “consideration.” The prohibition of Riba is based on various verses of the Quran, the holy book of Islam, and is further explained in the Sunnah, the sayings and living habits of the Prophet Muhammad.
Another key principle is the prohibition of Gharar, which is Arabic for risk, uncertainty, or hazard. Contrary to Riba, Gharar is not absolute, and thus Islamic law tolerates a certain degree of uncertainty because there is always some risk involved when doing business. In other words, Gharar is relative if the benefit of the contract is greater than the cost. Excessive Gharar and the case of fraud, on the other hand, are never acceptable and thus absolute. The Quran has defined Gharar as the prohibition of all business transactions that cause injustice of any type to any person.
Last but not least is the prohibition of Maysir, which can be interpreted as gambling or betting. The source of this principle comes once again from the Quran: “They ask thee concerning wine and gambling. Say: In them is great sin and some profit for men, but the sin is greater than the profit.” And: “They ask thee about intoxicants and games of chance. Say: In both these, there is great sin and benefit for men. But the sin of it is more serious than their benefit.”
The Two Views
Certain scholars (e.g. here) argue that credit cards are impermissible as one is entering into a fundamentally impermissible contract (as one is agreeing to pay interest in the case of a delay). Others (cautiously) deem credit cards permissible to the extent one does not actually borrow from the credit card company (e.g. see Pro. Monzer Kahf here and sh. Faraz Rabbani here).
I am inclined towards the latter view because of four reasons:
- The act of borrowing on a credit card is itself not haram
- We live in a society where interest charges for late payments are hard-wired into our every contract
- Credit cards come with additional benefits
- Credit card companies don’t just make money from interest
1. The act of borrowing is itself not haram
The act of borrowing some money from someone interest-free is not itself impermissible – so long as you’re sure you’ll be able to pay the money back at the end and before the interest kicks in. That intuition is simple enough.
However, the introduction of a complex financial instrument like a credit card muddies waters around this debate.
So, let’s take a step back. Say we just borrowed £100 off our neighbors and promised to pay him back within a month. In a month, Jeremy the neighbor comes and asks us for £100 but we fail to pay him back. What’s Jeremy going to do? He’s going to take you to court and sue you for £100 plus interest.
2. Interest payments for late payment are hard-wired into our economy
The “plus interest” is hardwired into our economy as a form of redress for late payment. If you pay your bills late you will find that in many of your contracts you will be required to pay interest on top of your bill. Technically that’s exactly the same contractual arrangement as the credit card – so if we were being even-handed in our approach, we would have problems taking out a simple utility agreement or even a mobile phone contract.
The point I’m driving at here is that we have to have a contextualized and real-world understanding of fiqh matters and appreciate the wider implications of the argument.
What I am not saying however is that Muslims must settle for this. No – we should draft our own contracts so that there aren’t interest penalties for late payment, and where we are dealing with a massive consumer, we should campaign on this topic as a united front. (Perhaps, if you guys think this is a useful idea, IFG could even write to some major utility companies and ask for a tweak to the contract for Muslims? Let us know if you think that is the best way to do it.)
“But you don’t have to take out a credit card. You do need to sign up to mobile phone, utility, and internet contracts though,” one might reply.
However, credit cards come with their own benefits that must also be taken into account: You get protection on purchases you make, which is particularly important in this age of online purchases and international trade (who’s going to track down a company that’s gone bust in the Philippines for your trainers?). Also, when traveling abroad most people will take a credit card along with them due to the lower costs and better exchange rates.
Also – let’s not forget the wider picture in which this debate sits.
What’s the alternative to a credit card? Using your debit card, right? However, what we sometimes forget is that when we deposit money into our account, we’re lending money to our bank (for them to lend onward and make a profit from interest). So, if anyone is truly serious about this position – they should keep their money in gold (not even cash – as that itself is an IOU!) and pay only in gold at the local shop. I suspect this might prove quite tricky (though perhaps not impossible: In an interesting twist, there appear to be new credit cards backed by gold. Would you guys like these to be covered in a future article? If so, let us know in the comments below.)
A credit card company charges businesses for purchase processing just like a debit card does, and so they have a separate revenue stream from each card in any case. So even for individuals who never go into debt, it is still lucrative for a credit card company. So, one can’t make the argument that “they’re only giving you a credit so you go into debt.” There’s some truth to that statement, but it is certainly not the full picture.
Have insights for Gold-Backed Debit Card
which is simply a glorified debit card but where you pay using gold, rather than borrow. If you borrowed, then you’d have to return the exact same amount – otherwise, it would be interesting.
Have insights for Islamic Credit Card