• Book Title:
 Modern Islamic Banking
  • Book Author:
Natalie Schoon
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Application of Islamic Products in Retail Finance

Retail financial services for Islamic banks are typically offered in the same way as for conventional banks. Islamic banks have banking halls, automatic teller machines and offer debit cards, credit cards and cheque books with current accounts. Modern means of banking such as telephone and online banking and text messaging services are also considered to be part of the package.

Retail clients are not only those who are served by the banks that are referred to in the UK as “high street banks”, but equally encompass high net worth individuals who have requirements for similar types of products.


One of the basic banking requirements for retail and corporate clients alike is the current account, which allows a client to receive and pay funds and is usually the entry point into a banking relationship. Although the total offering varies from bank to bank and from country to country, current accounts tend to be accompanied by additional facilities such as debit cards, credit cards and cheque books as well as online and telephone banking facilities and other features of modern current accounts.

In Islamic finance, current accounts are mainly offered using either of the following structures:

  • qard al hassan; or
  • amanah or wadia.

Qard al Hassan

The qard al hassan is an interest-free loan, historically provided for charitable purposes. Often the qard al hassan is intended to assist with matters such as the payment of school fees, weddings or the purchase of land to build a home.

The loan has a charitable intention, but even though the recipient does not have to pay a return on the funds, he is morally obliged to repay the principal in full. The provider of the loan is not compensated for inflation.

When applied to current accounts, the client is lending funds to the bank without any requirement for interest or any other form of return. The bank is under all circumstances mor- ally required to repay the capital, but while the funds are held by the bank, they can be freely invested to fund any of the bank’s day-to-day operations.

Amanah or Wadia

The words amanah and wadia literally translate as “trust”, and in the context of finance this is deemed to represent safe keeping. When a bank accepts money in trust for the client these funds cannot be commingled with other deposits or the bank’s own capital and cannot be used by the bank to apply to their day-to-day operations.

The bank may request the client for authorisation to use the funds in their day-to-day operations, but can only do so if the client expressly approves this. Amanah and wadia are closely related to the original duties of safe keeping that temples and early bankers used to provide.

Due to the fact that the sole purpose is safe keeping, the bank has the moral obligation to repay the capital under all circumstances, even if the client authorises the bank to use the funds.

General Features

Both types of account have an implicit obligation for the recipient of the funds to guarantee that the capital is paid back in full, but without any further compensation.

Overdrafts are generally not allowed, but in the event that a client accidentally goes overdrawn, the bank may charge an administration fee, which is equivalent to the operational cost of remedying this situation. A penalty in proportion to the size of the overdraft may not be charged.

Historically, the qard al hassan has been a popular tool for current accounts, and remains so in the Middle East and Europe. In Asia, however, the amanah or wadia instruments are rising in popularity, which is probably due to the fact that the qard al hassan is originally associated with charitable purposes contrary to the purpose of a current account.

In most countries banks are legally required to guarantee deposits for conventional as well as Islamic current accounts.


Credit cards are currently probably one of the most popular methods of payment when it comes to consumer transactions. From an Islamic finance perspective, credit cards generally have one major drawback in that they charge interest on the outstanding balance. Although clients could rely solely on debit cards and cash, this does not give them the flexibility of the payment options associated with a credit card. In addition, a credit card is widely accepted, especially when it comes to online payments, and provides a level of security against bankruptcy of the supplier prior to delivery of the goods or services.

Different types of Islamic credit cards are offered in the market, typically around the

following structures:

  • Periodic service charge. In this structure, the card issuer charges the card holder a monthly or annual charge, which is generally a fixed fee per period. Additional charges can be included, for instance, when the card issuer allows the client to only pay off part of his balance. Periodic service charges can be structured by means of ujra transactions, which allow for the payment of a fee for services rendered.
  • Deferred payment sale. In this structure, the card issuer allows the customer to use his card to pay for a good or service under a murabaha type transaction. The sequence of events is as follows:
    • The client uses the card to pay for a good or service.
    • The card issuer becomes the owner of the good or service, and takes responsibility for the payment to the merchant.
    • The card issuer immediately sells the good or service on to the client at the original purchase price plus a mark-up for payment at the end of the period.
    • The client pays the original purchase price plus a mark-up to the card issuer at the agreed future date.
  • Lease purchase agreement. In this structure, the card provider is the owner of the asset until the card holder makes the final payment. The client can be charged a rental fee.
  • Prepaid credit card. In this structure, the client deposits an amount of money on his card and uses the card to pay for goods and services. Due to the nature of the card, the client cannot pay for goods in excess of his debit balance and credit balances do not occur. Hence any interest type charges are easily avoided. The card issuer can invest the excess balances to generate a return as long as the investments are Sharia’a compliant.

Variations on these structures are available and include, for instance, loyalty programmes.

Contrary to conventional credit cards, where the card issuer charges interest on any out- standing balance, Islamic credit cards do not attract any interest. In addition, the card issuer cannot charge the client a penalty for late payment although an administration fee may be charged to cover any costs involved with recovering the debt. In the event that the card issuer charges a penalty in excess of their costs, the difference will be donated to charity.

Islamic credit card issuers often require collateral such as cash deposits to reduce their exposure, and share any profits from the investment of these amounts with the client.

Islamic credit cards cannot typically be used to purchase non-Sharia’a compliant items.


Unlike current accounts, where clients do not necessarily expect a return, savings or deposit accounts do offer a return on capital. Deposit accounts are typically offered as investment accounts, which are governed by wakala, mudaraba or murabaha contracts between the bank and the client.

When applying wakala or mudaraba transactions, the depositor is the rab al mal and the bank is either the wakil or mudarib, depending on the type of transaction. Graphically these

structures can be depicted as in Figure 5.1.

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