Blockchain for Islamic Finance

Research prospects

I am putting together an e-book (same title as above) for:

  • Islamic finance professionals and customers with an interest in blockchain and cryptocurrency
  • technologists new to Islamic finance (for a deeper dive, I will recommend other books and online materials)

2020 Update! Online now: islamicfinance.github.io

A New Kind of Contract

Islamic finance has developed a set of standards and contracts comparable to conventional finance, especially after a resurgence in the 1970s. Regulatory approval and enthusiasm for Islamic finance varies between countries, so these banks do not cover all Muslims, nor are they limited to Muslim customers. The key distinction is a ban on interest, with investors getting returns through equity, bonds, profit-sharing, or fees defined by contract.

To outsiders, cryptocurrency seems like a runaway train that enriches a few and scams others, and Islamic finance appears as a conservative movement separate from new technology. You can’t be blamed for wondering, how can two polar opposites come together? But as Islamic finance grows, it has embraced entrepreneurs and innovators to help modernize. Since I first wrote about this crossover in 2017, cryptocurrencies started presenting at Islamic finance conferences, blockchain payments appeared in Jordanian refugee centers, and exchanges have sought Sharia certification (currently covering Bitcoin, Ripple, Stellar, and ‘stablecoins’ backed by gold and/or national currencies).

I believe that there is unrealized potential for Islamic finance on the blockchain:

  • to automate processes, reducing overhead and fees
  • to make accounting and contract-management transparent to investors
  • to operate globally, reaching populations who are unbanked or without access to Islamic financial services

Example One: Profit-Sharing

A smart contract would define the expected inputs and outputs in computer code. Last year I posted an outline with code for a mudaraba contract on the Ethereum blockchain. Profit-sharing requires businesses to maintain accounting books (possibly for the first time). If a mudaraba account can send and receive payments, its record on the blockchain would serve as a transparent ledger, and it would never have a negative balance.

Example Two: Asset Ownership

It is essential that the commodities in the contract are real and assessed at their actual value. Using tokens on a blockchain, a bank could track ownership of their inventory, and prove the price for an asset (i.e. the lumber continues to sell at the stated price and hasn’t rotted or otherwise depreciated). Transparency is possible without a blockchain, but internal IT and in-person visits could be replaced with one platform for sale, inventory, reporting, and repayment.

Objectives for the eBook

  • Explanation of popular technical terms and trends (blockchain, cryptocurrency, exchanges, ICOs, smart contracts, tokens, stablecoins)
  • Overview of existing Islamic-finance-oriented projects in blockchain and cryptocurrency
  • Smart contract code which implements common contracts from Islamic finance in Ethereum (also potentially NEO blockchains)