How can blockchain technology help the Islamic economy?

For the Islamic economy, blockchain technology has the potential to make a significant impact. Experts say that, in addition to reducing fraud and risk, it can bring down the high costs associated with Islamic finance.

“The cost of processing Islamic financial products is higher than regular financial services products, so blockchain is a very effective tool to bring down the cost in the back-end processing systems of Islamic finance companies,” Devie Mohan, founder of Burnmark, a fintech research and data company, told a panel discussion at the Global Islamic Economic Summit 2018 that was held in the last week of October in Dubai.

She said that the smart or automated contracts in blockchain are a good way to ensure that any product or service is Shariah-compliant, and it allows the integration of any contract terms and conditions, either with the customer or the third party, into the blockchain.

“The blockchain also allows you to track every single element of your service, reducing fraud and risk,” she added. By allowing allstakeholders to know the underlying risks and assets beforehand, blockchain aligns easily with Shariah concepts.

Blockchain does away with the need to maintain multiple ledgers across the value chain. Under the traditional system, one bad player could affect the entire supply chain, but as a distributed digital ledger, blockchain can be viewed by everyone at the same time. It presents a single view and allows each stakeholder to trace every item to the beginning. It also offers immutability, meaning that entries cannot be modified.

USE CASE: CHEQUE CHAIN

Given its natural fit with Shariah principles, more and more use cases in the Islamic economy are already emerging. Last year, Emirates Islamic, the Shariah-compliant unit of Dubai-based lender Emirates NBD, introduced blockchain technology into its cheques as a fraud prevention measure.

As part of the “Cheque Chain”, the bank issues cheque books with a unique QR code on each page along with 20 random characters. Each cheque is then registered on the bank’s blockchain, enabling it to validate a cheque’s authenticity at the source.

According to Mohan, the global market for blockchain-related products and services is predicted to reach $60 billion by 2024 from around $200 million at the end of 2017, with 60 per cent of all investment in blockchain today going into the financial sector, especially fintech.

USE CASE: SMART CONTRACTS

Referring to “smart contracts”, which are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code, Matthew Joseph Martin, founder of Blossom Finance, which uses ethereum to help Muslim entrepreneurs and small businesses by offering microfinance services, said that his company has started using them in the sukuk space to significantly lower costs.

“In the traditional sukuk space, you have many parties involved that take a fee, which could go from $100,000 a year to $2 million a year. By using a smart contract, all of those parties can be removed from this equation,” he said.

In addition to lower costs, ethereum offers the benefits of added traceability and ease of use. The smart contract can register the sukuk subscription, track who owns the coupon, facilitate trading of that coupon on the secondary market and over the counter, as well as facilitate automated payment from the issuer back to the coupon holder.

STANDARDISATION REQUIRED

Harris Irfan, Chairman of the UK Islamic Fintech Panel, an independent group of Islamic finance and fintech practitioners launched this January, said that cryptocurrencies’ teething problems will be ironed out over time, but this would require Shariah scholars to first understand the system.

“The financialisation of the global economy means we trade money with each other; we buy and sell bonds and other people’s debt, which we know is not acceptable in Shariah,” he said. “But some types of cryptocurrencies are offering an alternative, which is a ‘good’ form of currency and has all the features to be Shariah-compliant. However, our scholars, particularly ones that are famous on social media, call this ‘haram’.” 

“I think there is a future for cryptocurrency within the Islamic economy,” he said. “I want scholars to come forward and sit on technical panels, understand the technicalities of the global monetary systems from each stakeholder’s perspective, and then give their rulings.”

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