RFi Group Insight - EMEA: Building an effective card proposition for Islamic Banking

By MOBASHER ZEIN KAZMI, RFi Group

The global retail banking industry today is in a state of rapid transformation as new channels and products shape and influence how customers conduct their financial transactions and have their core needs met. Banks are struggling to identify new sources of income in an increasingly low interest margin environment, a complex compliance regime and emergence of fintech players seeking to disrupt traditional business models. The nascent Islamic banking industry is no exception to these undercurrents as it looks to position itself as an alternative lender of choice that balances the needs of its business while being grounded to its participatory and ethical foundation.

A step in this direction has been the introduction of Islamic credit cards the first series of which were introduced in Malaysia in the early noughties. The idea at the time was to provide an offering to the market that enabled Islamic banks to remain competitive, while structuring a product that conformed to the principles of Sharia. Islamic cards were designed to operate comparable to their conventional cousins albeit with a few nuances, the core of which is built around interest-free banking. Another differentiating factor was that Islamic cards did not include compounding fees that would be applicable in cases of non-payment of outstanding balances.

Instead the fee model of most Islamic banks is built around Ujrah or service fee that is applied to card holders as issuing banks are providers of payment mechanisms. Keeping aside how customer default should be addressed from a compliance perspective, I believe the bigger challenge awaiting the industry is reimagining a conventional product that conforms to the spirit of fairness and transparency, while enabling ease of use. It is this premise that will help Islamic banks in converting the myriad of banking relationships its customers have towards main bank status, while widening customer share of wallet (SOW) and ultimately cementing top of wallet status.

RFi Research validates the importance of issuers having Sharia compliance as part of their overall card proposition and is considered a necessary driver of satisfaction among Islamic banking customers, whether they be in markets in South East Asia (such as Malaysia and Indonesia) or the Middle East (UAE or Egypt). What is also coming through is a desire to move beyond simply having a structured product that conforms to one that has the additional add-ons such as rewards, discounts and opportunities for cashback. Interestingly, the desire for compliance becomes less of a factor as we examine drivers of satisfaction especially with the mass affluent segment.

It is perhaps in this context that brand reputation and service offering becomes a deal breaker for many customers in choosing the right credit card. How the Islamic card is positioned and what marketing messages are communicated is critical in building acceptance of its use and permissibility. In some markets overcoming resistance to credit card adoption requires highlighting the beneficial application a card brings as a facilitator of payment transactions. Perhaps, lesser emphasis is needed on the peripheral features that are considered standard of most traditional card schemes or a nice to have. Instead, highlighting the value in the use of cards as a means by which customers can realise important spend objectives on permissible goods and services would be prudent.



In that respect, RFi Research shows a steady but consistent build-up of compliant credit card penetration across key markets in South-East Asia and the Middle East. UAE stands out with almost 1 in 2 holding an Islamic credit card indicative that the offering has begun to register traction across key demographics including Emiratis and Arab expatriates. Fundamentally, it also demonstrates the opportunity which exists for lenders in introducing offerings that facilitates payments in a permissible manner and encourages competitors to innovate further in terms of product development.

To be certain the other aspect around a successful cards campaign is the pricing component that needs to be rationalised as per industry best practice and as established by the Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI) that explicitly prohibits a revolving credit facility. Effectively, cardholders are exempt from any interest payments and are not required to pay off debt in instalments; rather fees are centred on membership, renewal and replacement. Similarly, a flat service fee is charged for cash withdrawal of amounts limited to funds available or based on an existing agreement with the issuer.

However, when looking at the pricing structure of various credit card propositions in a relatively mature Islamic banking market such as Malaysia for example, we do see the application of “profit rates” that fall mostly within the 15-18% per annum range. Arguably analogous to interest payments these cards are structured based on a sale (with an embedded profit) by the bank where the cardholder can make the purchase transaction on a deferred basis albeit within a pre-agreed payment period. While this sequence of transactions may have enabled compliance by avoiding interest, in terms of the spirit of the law it may appear to fall short. 



The opportunity to cross-sell credit cards for banks in Malaysia remains strong despite the existing pricing regime. RFi Research indicates that product bundling would prove to be an effective approach with tangible results awaited through a combined current account and credit card offering given that almost 2 out 3 Islamic banking participants hold those products. The net advantage to the bank is ensuring a much stickier relationship while consolidating main bank status.

Finally, perceptions do matter and when Islamic banking is positioned as being fairer, more equitable and participatory how can such a fee structure be utilised that penalises non-payment and applies a tiered pricing regime to defaulters? While it does make sense to screen card applications for eligibility and credit review, Islamic banks would be well advised to rethink their proposition in the marketplace.

Business pressures aside the intent of the Islamic banking construct should be on providing real alternatives to customers and not simply mimicking conventional products wholesale. Where you do not want to be is in a position where Sharia compliant products are considered fundamentally more expensive and lacking in authenticity - this is precisely where you will lose your core customer.

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