The trajectory of the modern Islamic banking and finance ‘both in letter and spirit, came into existence’, more than half-century ago. In 1974, the Islamic Development Bank (Read: IDB) was set-up by the Organisation of Islamic Countries. The primary focus of IDB is to release funds for development projects in member countries and its operations are interest-free based on Shariah principles. Second: in 1978, the Islamic Banking System, also called Islamic Finance House was instituted in Luxembourg. This establishment was an early attempt to introduce Islamic Banking in the West. Years later, the Islamic Bank International of Denmark, in Copenhagen, and the Islamic Investment Company in Melbourne was founded.
Islamic finance is an age-old practice. Always, the key factor in the sector is that it is interest-free. There is no scope for any interest-based transaction: whether it is in the guise of payment or collection. There are strictures between what is permissible (Read: halal) and what is non-permissible (Read: haram). The financial principles are translated under an assortment of interpretations which originally stemmed from Islamic law.
Tim Lea, CEO of Veredictum and cryptocurrency expert, writes: “In fact, several Islamic scholars hold the view that Bitcoin is more Halal than fiat money (e.g. US dollars) in use today. For example, in Islamic literature, money needs to have intrinsic value. This is not true for paper-money in use today, but is true for Bitcoin because its value comes from the proof of work protocol…”
It is clear that Islamic finance wants to create new reforms that encourage the community to operate their ethics in a futuristic financial ecosystem. The sector’s guiding vision to welcome a future founded on centurial values is quite possible if it harmonises with innovation.
The quintessence of innovation here is blockchain. The mechanism of blockchain allows people to collaborate with each other; by eliminating the existence of a central authority. Designed as an open ledger system, the technology has garnered human interest and has established trust in people “not by powerful intermediaries like banks, governments, and technology companies, but through mass collaboration and clever code,” according to Don and Alex Tapscott, who wrote the book Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business and the World. The technology provides access to all parties to track information—without necessitating on third-party verification. Each block is robust. The log of transactions is firmly secured against tampering or revision. It is unimaginable to break or modify parts of the blockchain without an official disclosure.
Blockchain ‘is still in a stage of infancy’. It is entering a new phase, as tons of financial institutions across the Organisation for Islamic Cooperation countries are vowing to rely on solutions related to it. The Saudi Arabian Islamic Development Bank has instructed its staff to research and develop blockchain-based products, which are Sharia-compliant. The Jeddah-based Islamic Research and Training Institute has signed an agreement with a local firm Ateon and a Belgium-based firm SettleMint to attract Muslim investors. Firms in Canada and Indonesia have already received Sharia-compliant certification for their financial products.
Last June, Emirates Islamic Bank had announced its plan to integrate blockchain with cheque payment. In fact, the cheque system was first invented by the Islamic world around the ninth century: a sakk which was used as an international cross-border cheque. The build of such financial inclusions centuries ago has found its way back to the current period of time. Today, the Emirates Islamic Bank is the first in the sector in the UAE to make headway in securing the cheque payment method. The initiative is termed Cheque Chain. The Bank will issue new cheque books with a unique Quick Response code on each page in addition to twenty random characters. The intent to register the cheque on blockchain might prevent fraudulent acts and limit the possibility of bad transactions.
As part of this regime, the Islamic world is forming a niche community in blockchain adoption. Founder of IFCC Zareen Roohi Ahmed spotlights the opportunity for Islamic finance using blockchain—how the technology can help to smoothline transactions. For example: when a pious Muslim visits a restaurant serving pork and alcohol, it obstructs him from using an Islamic credit card—although his food or beverage consumption is purely halal. Uncertainties during similar transactions can be smoothed over using blockchain.
“Addressing the digital revolution that is happening right now will foster competitive advantage for the Islamic Finance industry,” said Hazik Mohamed, PhD, Islamic Finance. “Digital revolution in financial services is under way, and digital disruption has the potential to shrink the role and relevance of today’s banks, while simultaneously creating better, faster, cheaper services that will be an essential part of everyday life in the new economy.”