With the coronavirus continuing to ravage the world and close to a fifth of the world’s population — or 1.5bn people — being asked or ordered outright to stay home and work remotely as new virus infections soar, the importance of digital technology for our lives in the current situation has become clear even to the technically most uninclined.
There has been a boom in digital services as that the virus is forcing us to use the Internet as it was always meant to be used, to connect, share information and resources and come up with collective new solutions. Applications some of at least the older generations might not even have heard of such as WhatsApp, Instagram, Zoom, Skype, Periscope, Spaces or Oculus found their way in thousands and thousands of households, while schools introduced digital home learning and companies virtual co-working, while personalised businesses such as real estate agencies, gym trainers, cosmetic studios, healthcare services, financial advisers and many others and have turned to virtual reality to stay connected with customers. Even many religious services are now being held via online livestreams rather than in person. All this means that a new digital culture has been established that will likely not go away after the coronavirus has.
What does this mean for Islamic finance? It means that digital innovation will be of massive importance in the future and now is the best time to start focusing on it. There is already a growing number of fintech start-ups in Islamic finance, but most are creating non-core applications such as group lending or equity crowdfunding schemes, charity ecosystems, merchant platforms or certain digital banking services.
However, the most effective innovation in fintech, and also for Islamic finance, is the revolutionary blockchain technology because of the multitude of potential applications, many experts agree. Based on peer-to-peer topology, blockchain is a distributed ledger technology that allows data to be stored globally on thousands of computers and makes the history of any digital asset unalterable, unforgeable and transparent through the use of cryptographic methods, all of which makes it a perfect application for the finance industry. Blockchain has indeed already found its way into Islamic finance, first in a loose relationship through blockchain-based Halal certification schemes or blockchain-powered zakat systems, but the technology as of late has also been identified as an excellent method to automate the execution of Shariah contracts — of which there are plenty in Islamic finance schemes — and minimise the risk of procedural errors. Other uses have been found for the issuance of so-called smart Sukuk and for improving traceability and transparency of zakat and Sadaqah funds in complex humanitarian settings.
One success story is the world’s first primary sukuk issuance on public blockchain through the “SmartSukuk” platform of Indonesia-based fintech startup Blossom Finance by Indonesian microfinance institution BMT Bina Ummah last October. The trial micro sukuk used blockchain-based smart contracts, in which all records, assignments, calculations and payments related to the sukuk are managed, leaving an indelible audit trail at every stage of the issuance.
“Our experience with issuing this small trial sukuk on Blossom’s platform was very positive and we are already working on our next smart sukuk issuance which should be a considerably larger transaction with a longer tenure,” said Ibu Ely Heni, general manager of BMT Bina Ummah.
Other examples of blockchain-based Islamic finance services are, among others, Stellar, a California-founded decentralised payment system that has been certified as Shariah-compliant, another global payment system called Ripple (California), which has already been deployed by a number of large Islamic banks, as well as Waqf Chain, a blockchain-backed crowdfunding system for investments in development projects for existing waqfs developed by Malaysia-based fintech Finterra. There are also a couple of Shariah-compliant, blockchain-based gold trading platforms such as Goldmoney (Canada), OneGram (GCC), HelloGold (Malaysia) and Emergent (California), while a rising number of Islamic banks globally are deploying blockchain solutions to improve security standards in banking, particularly to combat cheque-related fraud. Moreover, the Islamic Corporation for the Development of the Private Sector, a division of the Islamic Development Bank, is developing a blockchain-based platform to facilitate real-time commodity murabaha transactions mainly for trade finance purposes, while the Switzerland-based International Federation of Red Cross and Red Crescent Societies are working on a blockchain application that seeks to improve the traceability and transparency of Islamic social financing.
What blockchain innovations still need, however, is better clarity about their Shariah compliance. Currently, there is no general consensus in the industry on the Shariah qualities of different types of blockchain-based financial assets, and it is left to Islamic banks whose Shariah committees may recognise certain types of blockchain applications as Shariah-compliant or not. Most industry observers say that this fact will continue to pose challenges to Islamic regulatory authorities in the foreseeable future.
