# **2 Experimental Design**

## **2.1 The Credit Card**

We design a natural field experiment with the universe of late-paying borrowers of Indonesia’s most popular Islamic credit card. The credit card is issued by one of the country’s leading Islamic banks, which offers credit cards as part of its portfolio of Islamic consumer finance products. Originally introduced in 2009, the card currently has approximately 200,000 customers.

The features of the credit card are designed to be compliant with the principles of Islamic _Shari’a_ law which, among other prescriptions, prohibits charging interest and investing in commercial activities that are considered contrary to the principles of Islam. In order to be consistent with Islamic law, the features of the card are based on a _fatwa_ issued in 2006 by the National _Shari’a_ Board of the _Indonesian Council of Islamic Scholars_ that lays out the guidelines under which Islamic banks can offer _Shari’a_ compliant credit cards. Following these guidelines, the credit card is structured as a so-called _Ijara_ fee structure contract. This means that customers pay a fee for the transaction services provided by the card, rather than a variable interest rate. Customers are charged fixed annual fees of Rp 120,000 (US$ 10) for a basic card, Rp 240,000 (US$ 20) for a gold card, and Rp 600,000 (US$ 45) for a platinum card, plus a monthly membership fee of 2.75% of the customer’s credit limit. This monthly fee can be partially or fully waived through a “cash rebate,” which is proportional to the customer’s available credit and can range from zero to the total amount of the monthly fee.<sup>19</sup> The monthly fee is waived if there is no outstanding debt.

There is a monthly billing cycle, with a billing date on the eighteenth day of each month. The minimum monthly payment, equal to either 10% of the customer’s total outstanding balance or Rp 50,000 (whichever amount is higher) plus eventual arrears and overdrafts, is due on the eighth day of the following month. Customers who do not meet the minimum payment by the due date receive a text message from the bank the following day. The bank grants late-paying customers a grace period of ten days, which ends on the eighteenth of each month (we refer to this date as the “deadline for repayment”). Customers who do not meet the minimum payment by this date are considered “delinquent” and are reported to the Indonesian credit registry, the _Sistem Informasi Debitur_ (SID), which all banks in Indonesia consult before issuing credit. On the same day, they receive a phone call from the bank. They are charged a nominal late payment fee ( _Ta’widh_ ) ranging from Rp 15,000 to Rp 35,000 and the card is automatically blocked. Once the customer makes the minimum payment, the card is immediately unblocked. If a customer’s minimum payment remains outstanding for more than 90 days after the due date, the card is permanently blocked and the account is closed. Accounts that remain more than 120 days overdue are sent to the bank’s collections department and, eventually, an outside collections agency. Figure 1 summarizes the

> 19The cash rebate is calculated as follows: _cash rebate = 2.75% × (credit limit - amount outstanding)_ . The net monthly fee is the monthly membership fee minus the cash rebate, that is, 2.75% _× amount outstanding_ .

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