The international Muslim community is growing exponentially yearly, with a quarter of the world’s population identifying as Muslim. This growth has also led to the thriving of the Islamic financial sector.
Islamic banking currently accounts for 6% of the global banking market. By estimates, the value of the entire Islamic finance is under $3 trillion, projected to reach $3.69 trillion by 2024.
With the booming growth of the sector, its companies are starting to explore the scope of entering the blockchain space, building new projects around the values and ethics set by Islam. In this piece, we will explore how blockchain can contribute to the extension of Islamic digital finance by powering inclusive financial products.
Conventional and Islamic finance: core differences
To get some context, let’s first picture the difference between conventional and Islamic finance. In Islam, every aspect of social, communal, and economic activities are governed by Shariat law – a religious regulatory system outlined by Islamic values and ethics. In short, it emphasizes transparent investments, minimizing risks for investors, and prohibiting interest.
First, all institutes are to maintain full transparency: e.g. by informing customers on how their assets are managed. Second, the prohibition of interest is based on the perception that in an interest-based financial system, the risks are not shared equally by the business and the consumers. Suppose a consumer — or an organization — is financed by debt with an obligation to pay interest. In that case, they end up taking the lion’s share of the risk compared to the service provider, creating an unequal economic system.
Instead of interests, Sharia law establishes financing based on mutual sharing of loss and profits. There are several modes of financing in an Islamic economic system, as opposed to the core debt financing method of conventional finance: Mudarabah, a partnership-based financing method; Murabaha, a ‘cost-plus’ financing method; and others.
Also, Islamic financial projects are expected to generate value for the entire Muslim community, rather than just making profits for the investors and financiers.
Although Islamic banking has established a somewhat limited framework, all these functions would more sustainably thrive in a blockchain environment.
Where blockchain meets banking
Blockchain can be a solution to establishing an inclusive Shariah-compliant financial ecosystem in the digital space, which would also boost the growing global Islamic economy. It creates a great scope for Islamic investors to engage in the crypto space. As cryptocurrencies are on the verge of mass adoption, a Shariah-compliant blockchain can allow the Muslim population to join the ongoing tech revolution and reap the benefits of the new digital economy. How exactly will that be managed?
The Quran mentions gold and silver as examples of what should be used as means of transactions. Fundamentally, cryptocurrencies are comparable to these metals in some aspects. Conceptually, a Shariah-based token would be a cryptocurrency with a limited issuance that cannot be arbitrarily produced or supplied, thus devalued — which is also the core concept of decentralized finance.
The transparency of decentralized ledgers allows digital investors to ensure that their capital is only invested in Halal assets. At the same time, financiers can explore new avenues of transactions across the rapidly growing digital landscape.
To ensure that such digital currencies follow the Sharia law within the blockchain ecosystem, they have to be minted or issued by validators and stakers at a predetermined and publicly communicated rate. The validators of the network would not earn any profits beyond the rewards of their work. It means that a Sharia-compliant crypto project would not charge any commission and interest on the customer’s assets or transactions.
Blockchain also creates a sustainable solution for that. Sharia-compliant blockchain projects can donate a percentage of the minted tokens to non-profit DAOs for further investment into Islamic internet projects or charities.
That’s what, for example, the founders of Islamic Coin do. It is the native currency of Haqq community-run blockchain, dedicated to empowering an ethics-first Shariah-compliant financial ecosystem. 10% of each issuance is deposited into the Evergreen DAO for further investment into Islam-related ventures or donated to Muslim charities, bringing direct economic value to the community.
So, blockchain can not only uphold the values and principles of Islamic finance, but also create new digital financing opportunities for the entire community. In fact, the world’s leading authorities in Islamic Finance and scholars have issued a Fatwa outlining ‘no objection’ to a Sharia-compliant blockchain project, based on the above-discussed features.
In conclusion, Shariah-compliant blockchain networks can help the global Islamic economy to achieve new milestones. The Islamic financial system has been virtually untouched by the recent financial crisis due to its prohibitions on speculative transactions and uncertainty, as well as the attention it pays to fairness and risk-sharing.
So, blockchain networks based on such principles can bring much-needed sustainability and stability into the decentralized space. And lastly, with the global Muslim population rapidly growing, Shariah-compliant blockchain projects have the potential to promote wider adoption of new technologies across the globe.
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Author: Mohammed AlKaff AlHashmi, Co-founder of Islamic Coin.
Der Beitrag Exploring Shariah-compliant financial ecosystems: is blockchain the future of Islamic finance? erschien zuerst auf Crypto News Flash.
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