The international Muslim community is growing exponentially every year, with a quarter of the world’s population identifying as Muslim. This growth has also led to the prosperity of the Islamic financial sector.
Islamic banking currently accounts for 6% of the global banking market. According to estimates, the value of all Islamic finance is less than $3 trillion, and is projected to reach $3.69 trillion by 2024.
With the booming growth of the industry, his companies are starting to explore the possibility 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: key differences
For context, let’s first imagine the difference between conventional and Islamic finance. In Islam, every aspect of social, community and economic activities is governed by Shariat law, a system of religious regulation outlined by Islamic values and ethics.
In short, it emphasizes transparent investments, minimizing risk for investors and banning interest.
First, all institutions must maintain full transparency: e.g. informing customers about how their assets are handled. Second, the ban on interest is based on the perception that in an interest-based financial system, risks are not shared equally between business and consumers.
Suppose a consumer (or organization) is financed with a debt with an obligation to pay interest. If so, they end up taking the part of the risk with respect to the service provider, creating an unequal economic system.
Instead of interest, Sharia law establishes financing based on mutual sharing of profits and losses. There are several modes of financing in an Islamic economic system, in contrast to the mainstream debt financing method of conventional finance:
– Mudarabah, a partnership-based financing method
– Murabaha, a “cost-plus” financing method; and other
Furthermore, Islamic financial projects are expected to generate value for the entire Muslim community, rather than just making profits for investors and lenders.
While Islamic banking has established a somewhat limited framework, all of these functions would most sustainably thrive in a blockchain environment. That is why to enter this system it is necessary to start acquiring cryptocurrencies through reliable systems such as bitcoin was trading platform.
Where blockchain meets banking
Blockchain can be a solution to create an inclusive Shariah-compliant financial ecosystem in the digital space, which would also boost the growth of the global Islamic economy.
It creates a great chance for Islamic investors to engage in the crypto space. As cryptocurrencies are on the verge of mass adoption, a Shariah compliant blockchain can enable the Muslim population to join the ongoing technological revolution and reap the benefits of the new digital economy.
How exactly will it be handled?
The Quran mentions gold and silver as examples of what should be used as a medium of transaction. Basically, cryptocurrencies are comparable to these metals in some respects.
Conceptually, a Shariah-based token would be a cryptocurrency with 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, lenders can explore new avenues of transaction in the rapidly growing digital landscape.
To ensure that such digital currencies follow Sharia law within the blockchain ecosystem, must be minted or issued by validators and stakers at a predetermined and publicly disclosed rate.
Network validators would not earn any profit beyond the rewards of their work. It means that a Sharia-compliant crypto project will not charge commissions and interest on client assets or transactions.
Blockchain also creates a sustainable solution for this. Sharia compliant blockchain projects can donate a percentage of minted tokens to non-profit DAO for further investment in Islamic internet projects or charities.