What can blockchain offer to Islamic finance: Opportunities and challenges?
- Nihat GÜMÜŞ
- 826 defa okundu
Blockchain as a distributed ledger system enabling the transactions between two parties to take place without any need of third party assurance has been on the innovation agenda of companies from different sectors ranging from financial intermediation and automobile industry to health care and food. In a survey conducted by PwC across 600 executives from 15 territories, 84% of the respondents expressed their companies to some extent engage in blockchain activities. Leading sectors in applying blockchain-based projects include financial services, industrial products and manufacturing, energy and utilities, healthcare, government, retail and consumer, and entertainment and media.
Besides the commercial usage, blockchain also provides enhanced solutions for social good. A recent study by Stanford University Graduate School Business covering 193 cases where blockchain is utilized for creating social impact pointed out to the fact that social initiatives on health, financial inclusion, energy, climate and environment, philanthropy, aid and donors, democracy and governance, agriculture, and land rights are among examples where blockchain is deployed to increase the social impact of the projects.
Blockchain as a system of recording and verifying the transactions is widely used for payments and money transfers, to provide digital identities for communities such as refugees, in setting platforms and marketplaces, to facilitate the functioning of supply chains, and for smart contracts. Main benefits attained through blockchain are the increased efficiency and reduced transaction costs. In addition, the nature of the system is expected to reduce the risk of fraud through enhanced transparency.
Given those advantages, Islamic finance practitioners on both commercial and social sides have been investing in blockchain. On the commercial side, Emirates Islamic Bank from UAE has been the first to use blockchain for fraud prevention in cheque-based payment process. In 2017, the UAE’s Emirates Islamic became the first Islamic bank to use blockchain technology, namely for fraud prevention. Following Emirates, al-Hilal Bank from UAE has organized the first Sukuk transaction through blockchain technology. Islamic Development Bank Group (IDBG) has been another major player that recently invests in innovative products developed via blockchain. The Islamic Corporation for the Development of Private Sector (ICD) from IDBG has invested in Fintech firms in member countries to support liquidity management and commodity transactions. Another area where the deployment of blockchain technology seems to be relevant is the Halal certification process. Based upon smart contract logic, there are applications designed to issue Halal certificates.
As respect to Islamic social finance, initiatives are taking place to facilitate the transfer and governance of Zakat, Sadaqah, and Waqf. For instance, Blossom Finance, an investment and crowdfunding firm in Indonesia offers to the community to pay Zakat through blockchain-based solutions. Aid Tech, an Irish platform providing global payment application for philanthropic activities. In cooperation with the International Federation of Red Cross and Red Crescent (IFRC), the platform developed digital IDs for the Syrian refuges living in Lebanon and Jordan. Using digital IDs, the refugees are provided with their basic needs. Regarding the utilization of blockchain technology for Waqf purposes, a Singapore-based platform called Fintara enables the donors to contribute to the renovation and development of Waqf properties.
Despite the momentum in the market for integrating blockchain into different business functions and social projects, the experience so far has displayed that there are significant risks and challenges. According to the 2018 blockchain survey by PwC, regulatory uncertainty and lack of trust among users are the biggest challenges hindering the blockchain-based solutions. In additions, ability to bring the blockchain network together and the existence of separate blockchain that cannot work together creates risks associated with the success of the projects. There are concerns about the scalability, intellectual property rights, and audit of the operations. Given the rather infancy of blockchain, those challenges are not easy to overcome. In fact, a recent study by the China Academy of Information and Communications Technology (CAICT) found that of over 80,000 blockchain projects ever launched just 8% is still alive today. The average life for a blockchain project is expected as 1.22 years. In addition, fraudulent activities reported in some cryptocurrency offerings intensifies the reservations about blockchain.
In case of Islamic finance, different opinions declared by different Scholars on the permissibility of cryptocurrency-based transaction brings about some additional risks in case of applying blockchain infrastructure to Islamic finance. For instance, while a scholar from Blossom Platforms in Indonesia has expressed his opinion about the permissibility of cryptocurrency-based transactions under Islamic jurisprudence, Turkish Religions Affairs Department has put forward that transacting with cryptocurrencies cannot be regarded as permissible due to excessive uncertainty and speculative activity in cryptocurrency markets.
To sum up, blockchain technology has the potential to become a turning point for economic, social, and legal aspects of life. However, it also faces the challenge of turning out to be a hype given the huge ratio of failed projects. The success seems to depend upon how effectively the challenges are handled. In fact, it is the governments and their regulatory approaches towards blockchain and cryptocurrencies that will play the most critical role in future shaping of the sector. As regards Islamic finance, blockchain technology can provide some opportunities both for commercial financial services and for Islamic social finance tools. Nevertheless, the initiatives intending to utilize blockchain technology have to deal with not just the challenges that are common to all types of projects but also they should built necessary trust regarding the Sharia compliance of their offerings and operations.
Ibn Haldun University Management Department.