Is blockchain the future of Islamic finance?

The international Muslim community is growing exponentially every year, and a quarter of the world’s population identifies as Muslim. This growth has also led to the flourishing of the Islamic finance sector.

Islamic banking currently accounts for 6% of the global banking market. According to 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, companies are beginning 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 expansion of Islamic digital finance by driving inclusive financial products.

Conventional and Islamic Finance: Core Differences

To get some context, let’s first visualize the difference between conventional and Islamic finance. In Islam, all aspects of social, municipal and economic activities are governed by Sharia law – a religious regulatory system outlined by Islamic values ​​and ethics. In short, it emphasizes transparent investments, minimizing risk for investors and prohibiting interest.

First, all institutions must maintain full transparency: for example, by informing customers about how their assets are managed. Secondly, the interest ban is based on the perception that the risk in an interest-based financial system is not shared equally by businesses and consumers. Assume that a consumer – or an organization – is financed with interest-bearing debt. If so, 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 the mutual sharing of losses and profits. There are several methods of financing in an Islamic economic system, as opposed to the core debt financing method of conventional financing: Mudarabah, a partnership-based method of financing; Murabaha, a “cost-plus” method of financing; and others.

Also, Islamic financial projects are expected to generate value for the entire Muslim community, rather than just making money for investors and financiers.

Although Islamic banking has established a somewhat limited framework, all these functions will thrive more sustainably in a blockchain environment.

Where blockchain meets banking

Blockchain can be a solution to establish an inclusive Shariah-compliant financial ecosystem in the digital space, which will also boost the growing global Islamic economy. It creates a huge space for Islamic investors to engage in the crypto space. As cryptocurrencies are on the brink of mass adoption, a sharia-compliant blockchain could allow the Muslim population to join the ongoing technology revolution and reap the benefits of the new digital economy. How should it be administered?

The Qur’an mentions gold and silver as examples of what should be used as means of transaction. Basically, cryptocurrencies are comparable to these metals in some aspects. Conceptually, a Shariah-based token would be a cryptocurrency with a limited issue that cannot be produced or delivered arbitrarily, and 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 transaction avenues across the rapidly growing digital landscape.

To ensure that such digital currencies follow Sharia law within the blockchain ecosystem, they must be minted or issued by validators and actors at a predetermined and publicly communicated rate. The validators of the network would not earn any profit beyond the rewards of their work. It means that a Sharia-compliant crypto project will not charge any commission and interest on the client’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 in Islamic Internet projects or charities.

For example, the founders of Islamic coinage do. It is the native currency of the Haqq community-driven blockchain, dedicated to empowering an ethics-first Shariah-compliant financial ecosystem. 10% of each issue is deposited into the Evergreen DAO for further investment in Islam-related businesses or donated to Muslim charities, providing direct financial value to society.

So blockchain can not only uphold the values ​​and principles of Islamic finance, but also create new digital financing opportunities for the whole society. In fact, the world’s leading Islamic finance authorities and scholars have issued one Fatwa outlines ‘no objection’ to one Sharia Compliant Blockchain Projectbased on the above functions.

To conclude, Shariah-compliant blockchain networks can help the global Islamic economy achieve new milestones. The Islamic financial system has been virtually untouched by the recent financial crisis due to its prohibition of speculative transactions and uncertainty, as well as its emphasis on fairness and risk sharing.

So blockchain networks based on such principles can bring much-needed sustainability and stability into the decentralized space. And finally, with the global Muslim population rapidly growing, Shariah-compliant blockchain projects have the potential to promote wider adoption of new technologies worldwide.

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Author: Mohammed AlKaff AlHashmico-founder of Islamic coinage.