In the name of God, the compassionate the merciful
Technology in general is good. It has a lot of benefits, despite the challenges that come with it. Some will also say that it is a tool, whether it is good or bad, depending on how it is used and its impact on individuals, society, and the environment. The evolution of blockchain technology began in 2009 as a platform for the transaction of Bitcoin. Even though there are some Shariah issues regarding this branch of fintech, it can still be used to enhance Islamic finance, especially in the area of distribution (easy access). Today’s write-up will look at how blockchain technology may assist in the enhancement of the work of Islamic finance institutions and their customers.
It is to be noted that Islamic finance and blockchain technology are two different entities, yet they have one thing in common, and that is; that they are both familiar with dispensing financial transactions. Thus, they are interconnected within the global financial landscape. Let’s explore each of these concepts and how they relate to each other:
Firstly, Islamic finance is a system of financial activities that comply with Islamic law, also known as Shariah. The core principles of Islamic finance include:
Prohibition of Riba (Usury/Interest): Islamic finance prohibits the charging or paying of interest on loans or any form of money lending. Instead, it encourages profit-sharing arrangements.
Prohibition of Gharar (Uncertainty): Contracts in Islamic finance must be clear and not involve excessive uncertainty or ambiguity.
Prohibition of Haram (Forbidden) Activities: Investments in businesses involved in activities like alcohol, gambling, pork, and other prohibited activities in Islam are not allowed.
Profit-and-Loss Sharing: Islamic finance promotes risk-sharing and profit-sharing between parties involved in financial transactions, such as Mudarabah and Musharakah contracts.
On the other hand, Blockchain is a distributed ledger technology that offers transparency, security, and decentralization. It works by creating a chain of blocks, each containing a set of transactions. Key features of blockchain include:
Transparency: Transactions recorded on a blockchain are visible to all participants, creating transparency and reducing the chances of fraud.
Security: Blockchain uses cryptographic techniques to secure data, making it difficult for unauthorized parties to tamper with transaction records.
Decentralization: Blockchain operates on a peer-to-peer network, eliminating the need for intermediaries like banks or payment processors.
Now let’s see how they can be interrelated and how blockchain technology may enhance the work of Islamic finance institutions and customers.
Smart Contracts: Blockchain technology can facilitate the creation of smart contracts that automatically enforce the terms of an agreement when predefined conditions are met. This aligns with the principles of Islamic finance as it ensures transparency, reduces ambiguity and enforces contract terms without the need for intermediaries.
Reducing Riba (interest): By using blockchain for financial transactions and smart contracts, Islamic financial institutions can create interest-free financial products and services more efficiently. This can help in reducing the reliance on traditional interest-based financial systems.
Enhancing Transparency: The transparent nature of blockchain can help Islamic financial institutions demonstrate compliance with Shariah principles to their customers and regulatory bodies. This transparency can build trust within the community.
Global Reach: Blockchain technology enables cross-border transactions without the need for intermediaries, making it easier for Islamic financial institutions to engage in international trade and investments while adhering to Shariah principles.
Asset-Backed Tokens: Islamic finance often emphasizes asset-backed financing. Blockchain can tokenize physical assets, such as real estate or commodities, and represent ownership in a Shariah-compliant manner.
However, it’s important to note that the application of blockchain technology in Islamic finance is still evolving, and regulatory bodies in Islamic finance jurisdictions are working to develop guidelines and standards for its use.
In summary, blockchain financial technology can align with the principles of Islamic finance by promoting transparency, reducing interest-based transactions, and facilitating Shariah-compliant financial products and services. As the technology continues to develop, its integration into Islamic finance may increase, offering new opportunities for the industry and its customers. All praise is due to Allah, in whose favor good deeds are accomplished. (Ibn Majah: 3803). And Allah knows best!
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
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