Islamic Credit Card Market Poised for Growth: Analyst

While the MasterCard Worldwide and Visa International business models have dominated the global credit card industry for years, Islamic credit cards — which operate with an entirely different business model — are starting to evolve, primarily in Middle Eastern countries, according to Brian Riley, research director for TowerGroup.

“There is a definite need [for card issuers] in this market,” said Riley, who pointed out that current worldwide followers of Islam exceed 1.5 billion, or a quarter of the world’s population. So Tower estimates that total assets based in Islamic-compliant banks will exceed $1 trillion by 2011.

The Islamic credit card market, in existence for slightly more than a decade, has yet to be “stress tested” on a broad scale. However, given that adherents of the Islamic faith represent 24 percent of the world’s population, there is significant opportunity for card issuers to build volume. But to do so, they would need to change their business models.

The Islamic banking model rejects the assessment of interest in favor of structured fees, Riley explains. Islamic standards also require that all participating parties comply with Sharia, Islamic religious guidelines. More than the product itself must comply with the guidelines; the end-to-end business process must also comply.

Over the past several years, many financial institutions have created units solely focused on the needs of Muslims borrowers. For example, Sharia-compliant home mortgages became popular during the housing boom in the U.S. The mortgages, rather than charge interest, carried fees that were roughly equivalent to a traditional mortgage’s interest costs.

CitiBank and a few other financial services providers have entirely separate financial units to handle this growing market, said Riley. Other participants include traditional banks converting to the Islamic model and Islamic startups.

As the market emerges, entrants must foster both a sustainable business model and the ability deal with such core issues as interoperability with global card companies, product design and processing venues.