The common advice in many personal financing books is to dispose the credit card as most people tend to suffer from impulse purchasing behaviour. We end up buying the things we don’t need because of easy access to financing through our credit cards. The debts keep mounting along with soaring interest rates in credit cards, and as a result many have been declared bankrupt. Last year, 1,598 Malaysians were declared bankrupt due to credit card debts.
An interesting advice to circumvent the problem of impulse purchases is to use ice glass method, which is to put the credit card in a glass of water and leave it to freeze.
Whenever we decide to use our credit card, we would need to wait until the ice melts. This ‘cooling off’ period will help us evaluate our buying decisions and gives an opportunity to control our impulse behaviour. However, this method may be outdated and not effective to all as people often carry their credit cards with them.
Another intriguing way is proposed by Dan Ariely, a well-known and published MIT and Duke Professor of psychology and behavioural economics, who suggested a self-control credit card as a way of enabling people to restrict their spending.
Here, the cardholders could decide in advance how much money they want to spend in grocery, entertainment, etc each month. In the case they exceed the limit which they had imposed on themselves, they can select their own penalties for such lapses. Ariely suggested several penalties such as “they could make the card get rejected; or they could tax themselves and transfer the tax to Habitat for Humanity, a friend, or long-term savings. This system could also implement the “ice glass” method as a cooling-off period for large items; and it could even automatically trigger an e-mail to your spouse, your mother, or a friend”. Such self-control credit cards will enable cardholders to engage and interact with the bank more meaningfully.
Islam discourages taking unsustainable debts. It is only appropriate to take on debt to fulfil one’s needs where there is a reasonable expectation of the ability to repay the debt. Thus, Islamic banks could innovate their credit cards and build this process to help customers take control of their financial health.
What is in it for Islamic banks you might ask? Why would Islamic banks want to forego profit made through impulse purchasing behaviour of their clients? With this innovation, Islamic banks can differentiate themselves from conventional banking and follow not only the letter of the Islamic law but the spirit of it too. This will attract many more clients towards Islamic banking. This innovation is also in line with the Bank Negara Malaysia’s (The Central Bank of Malaysia) agenda on Value-Based Intermediation. Furthermore, banks do not want clients who default. Hence, this innovation will potentially reduce bad debts and subsequently help clients to take control of their financial health, thus creating a true win-win situation for both clients and banks. This process innovation is easy to implement and will have much larger impact on the bank’s profitability, brand and society at large.
But the question remains:
ARE ISLAMIC BANKS READY TO DISRUPT THE CREDIT CARD MARKET?
