Blockchain And Islamic Banking Are Working Together, And Everyone Stands To Benefit

More and more banks in the Islamic world — a community of nearly 2 billion people worldwide — are adopting blockchain technology and cryptocurrency. As early as 2016, major Islamic banks such as ICICI Bank and Emirates NBD began researching blockchain’s capabilities to reduce transactional costs, according to Coindesk. In 2017, the UAE’s Emirates Islamic became the first Islamic bank to use blockchain technology, namely for fraud prevention. In April, an Islamic scholar declared bitcoin permissible under Sharia law after a study conducted by Blossom Finance, an Indonesian investing firm, investigated the functionality of bitcoin and similar cryptocurrencies, and found that they were congruent with Islamic definitions of money.

Different Islamic scholars can have varying rulings on what is Sharia-compliant, with some schools rejecting cryptocurrency while many others have approved. Indeed, blockchain and cryptocurrency could bring about many benefits for Islamic banking, and vice versa. Their recent collaboration is creating potential new markets and new business opportunities. And investors of all types can take advantage, with the right approach.

Benefits, Boons and Win-Wins With Blockchain and Islamic Banking

Blockchain offers an ideal solution for Islamic bankers because it reduces costs involved in transactions and processes. Although this is something all banks must deal with, the issue is particularly acute for Islamic financial institutions. To understand why, you first must learn some of the key principles guiding Islamic banking.

One is the Islamic concept of riba forbids the payment or collection of interest. Two, Islamic banks are only allowed to create debt when it is backed by goods and services; specifically, transactions must have “material finality,” meaning they must be connected to a real underlying asset, like gold. This stipulation rules out options, futures and most derivatives, which naturally makes working with Western financial firms tougher.

In themselves, these principles do not prohibit or inhibit doing business with non-Islamic banks. But abiding by these principles in practice creates higher transactional costs than most non-Islamic firms are used to. Why? Contractual relationships are very important to Islamic banks, more so than to others, with deals typically involving three or more contracts, several parties, and an emphasis on averting uncertainty, speculation, and interest. As a result, there are more legal and administrative processes, and redundancies, which raise the cost of doing business.

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