It is widely accepted that if Islamic finance is to continue to grow, the adoption of the latest financial technology, or fintech, will be necessary if it is to keep pace with rapid developments in conventional banking. And the blockchain revolution that has made possible cryptocurrencies such as bitcoin and ethereum provides the perfect technology for Islamic finance to move into the future.

Fintech has been rapidly overhauling the way conventional finance works, but according to management consultancy Accenture only 1 percent of the $50 billion total investments in fintech since 2010 have been in the Middle East and North Africa. Yet new fintech players offering Shariah-compliant, low-cost crowdfunding platforms to small and medium-sized enterprises have shown how innovative technology can eliminate some of the costs and complexity of raising finance, and blockchain technology provides the perfect opportunity to push this advance still further forward.

Blockchain is a global ledger of financial transactions shared among the world’s computers somewhat in the manner of the world wide web rather than existing in one central location. It allows all kinds of financial transactions to be performed and stored securely without having to go through any centralised financial body. Where conventional, centralised databases are at risk of compromise by lone hackers, blockchain’s decentralised network depends on cryptographic mathematical algorithms that are impossible to break into. And just as the world wide web revolutionised communication, so blockchain promises to revolutionise the world of finance by similarly decentralising and speeding up financial transactions.

Opportunity to remove added costs of Shariah-compliant products
For Islamic finance, this presents an opportunity to remove some of the hindrances and added costs of Shariah compliance when compared with conventional finance.

One major challenge Islamic finance must overcome if it is to compete with conventional finance is the issue of contracts. A conventional financial contract is a relatively simple affair between two parties. But under Shariah laws, payment and collection of interest, or riba, is forbidden, so contracts instead involve more complex agreements among sometimes several parties to create profit-sharing partnership contracts. The complexity and expense this engenders is naturally a hindrance to Islamic finance when compared with the much nimbler conventional contract.

It is here that blockchain can make a big difference by means of smart contracts. These are computer software that automatically enable, execute and enforce contracts, which besides making Shariah-compliant contracts much simpler and cheaper, meet other Shariah obligations such as avoidance of uncertainty, or gharar.

Blockchain also provides other opportunities for Islamic finance. By making everything so much easier and cheaper, Islamic finance could use blockchain to boost the take-up of financial services by the large numbers of as-yet unbanked Muslims across the developing world. As an example, peer-to-peer financing and crowdfunding through restricted mudarabah profit-sharing contracts are beginning to make low-cost finance easily and quickly available to small and medium-sized entrepreneurs. Ernst & Young has estimated that FinTech products could attract 150 million customers to the Islamic banking sector by 2021.

Islamic institutions looking into blockchain’s possibilities
The use of blockchain smart contracts can also improve the efficiency, transparency and accountability of Islamic charitable endowments, or waqf, and by thus increasing confidence that money will go to the desired places, greatly increase contributions. And, on the other side of the ethical coin, it has been suggested that by using blockchain a debit or credit card could even be prevented from paying for non-halal goods and services such as alcohol, pork, pornography or gambling.

The potential for blockchain to boost Islamic finance hasn’t gone unnoticed and a number of innovation centres have been opened in the Middle East to look into its possibilities. Major Islamic banks including ICICI Bank and Emirates NBD began researching blockchain's ability to reduce costs in 2016, and in 2017, Dubai-based Emirates Islamic became the first Islamic bank to use blockchain technology, for fraud prevention. The Global Islamic Economy Summit scheduled in 30 and 31 October 2018 in Dubai is expected to unveil more fintech ventures within the Islamic finance space.

In July this year, a platform to enable blockchain-based smart contracts linked to automated legal systems for Islamic financial products was launched by blockchain company Arabianchain Technology and financial ‘innovation firm' Curiositas. The Wethaq platform is intended for use by financial institutions, fundraisers and investors in the pre-sale, issuance, management and secondary trading of sukuk, or Shiariah-compliant bond, products.

In May, Kuala Lumpur-based Hada DBank launched as the world’s first blockchain-based Islamic bank. The bank will offer a maximum liability to asset ratio of 1:3 in line with Islam’s strictures against risky ventures. Savings will be backed by real assets such as precious metals, and will be fully insured in line with Islamic values. The bank will offer a full range of services and not charge fees on transfers or remittances of funds, whether in fiat or cryptocurrency.

Blockchain is still very new and the seemingly endless possibilities it provides makes its future as hard to predict as the internet’s would have been thirty years ago. But what is clear is that blockchain provides the perfect medium for Islamic finance not just to rid itself of its disadvantages when pitted against conventional finance, but even by technologically providing for attractive qualities like profit-sharing and prohibitions against the use of money as a commodity in itself, even non-Muslims might begin to opt for Islamic financial services.

The Global Islamic Economy Summit (GIES) is the world’s largest and most comprehensive forum dedicated to the Islamic economy. It is organised by the Dubai Chamber of Commerce and Industry and Dubai Islamic Economy Development Centre (DIEDC) and strategically supported by Thomson Reuters.

Any opinions expressed here are the author’s own.


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© Opinion 2018