Exploring Shariah-compliant financial ecosystems: is blockchain the future of Islamic finance?

The international Muslim community is growing exponentially yearly, with a quarter of the world’s population identifying as Muslim. This growth has also led to the thriving of the Islamic financial sector.

Islamic banking currently accounts for 6% of the global banking market. By estimates, the value of the entire Islamic finance is under $3 trillion, projected to reach $3.69 trillion by 2024.

With the booming growth of the sector, its companies are starting to explore the scope 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: core differences

To get some context, let’s first picture the difference between conventional and Islamic finance. In Islam, every aspect of social, communal, and economic activities are governed by Shariat law – a religious regulatory system outlined by Islamic values and ethics. In short, it emphasizes transparent investments, minimizing risks for investors, and prohibiting interest.

First, all institutes are to maintain full transparency: e.g. by informing customers on how their assets are managed. Second, the prohibition of interest is based on the perception that in an interest-based financial system, the risks are not shared equally by the business and the consumers. Suppose a consumer — or an organization — is financed by debt with an obligation to pay interest. In that case, they end up taking the lion’s share of the risk compared to the service provider, creating an unequal economic system.

To get some context, let’s first picture the difference between conventional and Islamic finance. In Islam, every aspect of social, communal, and economic activities are governed by Shariat law – a religious regulatory system outlined by Islamic values and ethics. In short, it emphasizes transparent investments, minimizing risks for investors, and prohibiting interest.

First, all institutes are to maintain full transparency: e.g. by informing customers on how their assets are managed. Second, the prohibition of interest is based on the perception that in an interest-based financial system, the risks are not shared equally by the business and the consumers. Suppose a consumer — or an organization — is financed by debt with an obligation to pay interest. In that case, they end up taking the lion’s share of the risk compared to the service provider, creating an unequal economic system.

Although Islamic banking has established a somewhat limited framework, all these functions would more sustainably thrive in a blockchain environment.

Where blockchain meets banking Blockchain can be a solution to establishing an inclusive Shariah-compliant financial ecosystem in the digital space, which would also boost the growing global Islamic economy. It creates a great scope for Islamic investors to engage in the crypto space. As cryptocurrencies are on the verge of mass adoption, a Shariah-compliant blockchain can allow the Muslim population to join the ongoing tech revolution and reap the benefits of the new digital economy. How exactly will that be managed?

The Quran mentions gold and silver as examples of what should be used as means of transactions. Fundamentally, cryptocurrencies are comparable to these metals in some aspects. Conceptually, a Shariah-based token would be a cryptocurrency with a limited issuance that cannot be arbitrarily produced or supplied, thus devalued — which is also the core concept of decentralized finance