Blockchain technology allows Muslim parties to make safe, efficient transactions without infringing sharia law
Blockchain technology opens up new opportunities for businesses wanting to tap the huge and growing Islamic finance market, an industry expert said.
According to Pindar Wong, chairman of internet financial infrastructure consultancy firm VeriFi (Hong Kong) and head of the Belt and Road Blockchain Consortium, blockchain can be deployed to ensure banking and finance products and services are aligned with the principles of sharia or Islamic law.
“What businesses can do today (is to) go and service the Islamic world,” Wong said on the sidelines of the China Daily Asia Leadership Roundtable held on Aug 28.
With more than 1 billion Muslims globally, Wong said that “the big opportunity is for the world to cooperate on Islamic finance”.
The forum, which saw participants discussing the impact of blockchain on businesses, was organized by China Daily and the University of Hong Kong’s School of Professional and Continuing Education Executive Academy.
Blockchain is a decentralized ledger of all transactions across a peer-to-peer network. The “blocks” are linked using cryptography and the blockchain allows information or records to be transferred and updated by participants in a trustworthy, secure and efficient way.
Wong said Islamic bankers can use blockchain to draft “smart contracts” in line with the rules of sharia. This is especially crucial for the Belt and Road Initiative. He said one-third of countries along the Belt and Road follow the Islamic faith and will thus require sharia-compliant smart contracts.
These are self-executing contracts with the terms of agreements written in a line of code. They can be automatically executed by an autonomous system trusted by the signatories.
In order for any contract to be considered sharia-compliant, these contracts must adhere to two main principles of Islamic banking and finance.
The first is the prohibition of riba (interest), as Islamic law forbids the payment and collection of interest. Any form of financing must be based on the sharing of profit and loss.
Second, the bank can create debt only if it is backed by a real underlying asset, such as gold.
Wong said by deploying blockchain, which can be transacted through a fixed number of tokens, Muslim parties will be assured that the smart contracts will not infringe Islamic law.
In a separate interview, Nawazish Mirza, Dubai-based associate professor of finance at SP Jain School of Global Management, said blockchain technology can also reduce the cost of doing business in Islamic banks.
Mirza said sharia-compliant products would usually require numerous contracts for profit and loss sharing, agency arrangements, and partnerships that can lead to higher overheads for Islamic banks. But by using blockchain, an Islamic bank can cut cost and simplify the process of drawing up contracts.
“A digital architecture can handle multiple contracts and product lines simultaneously, which will enhance transparency while reducing contractual overheads and administrative costs,” Mirza told China Daily Asia Weekly.
Indeed, several banks and financial institutions in Muslim-majority countries already use blockchain to offer sharia products and services.
The Emirates Islamic Bank in Dubai launched Cheque Chain in 2017 to integrate blockchain technology into its customers’ checkbooks. These checks have unique QR, or quick response, codes to validate their authenticity and prevent fraud.
In Malaysia, fintech startup HelloGold offers sharia-compliant digital tokens. The tokens are backed by 99.9 percent investment-grade gold and can be transacted through the use of smart contracts.
The Jakarta-based fintech startup Blossom Finance offers bitcoins as a microcredit, helping promote entrepreneurship in Indonesia.
Apart from Islamic banking and finance, Wong from VeriFi said blockchain can also be used to enhance transparency and accountability in the supply chain for halal food processing.
By using digital tokens, he said traders can track the whole supply chain, promote accountability and ensure that the ingredients and manufacturing process are in line with Islamic law.
Halal food refers to what is permissible according to traditional Islamic law. Halal food must not contain ingredients that are considered haram (forbidden), such as alcohol, pork and other products. Halal food must also come from a supplier that slaughters animals in line with Islamic law.