With blockchain’s rising notoriety, a new question is developing for many in the Muslim community: can blockchain be utilised for financial transactions that adhere to Shariah?
Blockchain cannot be considered a legitimate technique of making money because it is based solely on speculation. The main financial difficulty faced by Muslims is highlighted by ongoing discussions about whether digital currencies should be permitted as a form of commerce under Islamic law.
However, Islamic finance remains increasingly interested in blockchain, with relevant organisations investigating the advantages of blockchain implementation.
The first Shariah-compliant cryptocurrency, Islamic Coin, debuted in May 2023 on the Haqq Blockchain, following Dubai’s announcement in 2020 that it intended to apply blockchain technology to both the public and private sectors.
Blockchain-based financial services are on the way, but what problems do Islamic financial institutions have to deal with and why is this new technology so well suited to driving this sector forward?
Muslims and Global Finance: Key Challenges
Around 1.8 billion Muslims worldwide face obstacles when trying to obtain financial services, especially in countries with non-Muslim majorities where there are few such services available.
The regulatory environment for the Islamic financial ecosystem varies from nation to country, and financial platforms often do not offer Shariah-compliant services and products, which causes confusion and erodes consumer confidence.
The lack of affordable financial services, such as savings accounts, lending infrastructure, and insurance choices, in many areas with a majority of Muslims makes it evident why Muslims need an alternate source of finance.
On the macroeconomic side of Islamic finance, Muslim investors typically look for investment possibilities that align with their moral principles. However, it can be difficult to locate reputable Shariah-compliant investment possibilities, particularly in sectors with a global reach like technology, healthcare, and renewable energy.
Due to its inherent transparency, ease of Shariah compliance retooling, and growing connectivity to conventional financial institutions, blockchain offers a potential solution to these problems. In order to handle complicated financing terms, halal transactions, and Islamic alternatives to traditional insurance, Islamic financial platforms are increasingly utilising blockchain technology.
Innovations in Islamic Blockchain
Shariah-compliant innovations like the launch of Smart Sukuk, which differs from traditional Sukuk in a number of ways, continue to surface as blockchain adoption continues in the Islamic financial sector.
In Islamic finance, sukuk markets—or Islamic securities—are highly favoured. In the digital domain, Smart Sukuk aims to offer established efficiency, transparency, accessibility, and cost reduction.
These features might make it possible for associations, social impact initiatives, and small and medium-sized businesses (SMEs) to issue their own Sukuk, thereby encouraging accessibility and financial inclusion.
By reducing the cost of transaction processing, the transparency and security features built into blockchain technology help eliminate factors of uncertainty (gharar) and guarantee low costs (ujr). The immutable ledger on which all transactions are recorded makes it difficult for malicious parties to alter or fabricate false data.
Financial Inclusion and Smart Contracts
Blockchain makes financial inclusion possible for migrant workers by providing the protection they need to transmit money to their relatives back home on a regular basis. Remittance transactions become more dependable by utilising the secure blockchain processing technique, fostering confidence between all parties while remaining Shariah-compliant.
Smart contracts are another advancement made possible by blockchain technology, and they transform the way insurance (takaful) companies and their clients manage claims.
The system makes it possible to handle claims in a transparent, rapid, and irrefutable manner. Takaful policies, terms and conditions, and potential claims can all be stored on the blockchain for irrefutable validation.
This guarantees that legitimate claims are processed while fraudulent claims are denied. Multiple claims for a single error can be found using the blockchain.
