Is Blockchain relevant for Shariah compliant banking products?

Over the last two years, we have seen banks and other financial services organisations conduct prototypes and proof of concepts using Blockchain. There have been several consortium led use cases that emerged over the last two years, yet we haven’t see many successful production roll outs from these attempts.

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While the ICO wave has had a bit of a shock with the recent crypto correction, I still believe most of the smart contract use cases of blockchain – especially the ones within some parts of banking like trade finance, have legs.  In a discussion with a Shariah compliant Fintech firm we explored the usage of Blockchain for Shariah products. The more we discussed the topic, the more I was convinced that this is an area where the smart contracts use case of Blockchain could be extremely relevant.

Islamic Fintech, as I have explored before in several of my posts, is based on the principle of doing banking products that are sustainable. Receiving interest (Riba) on a financial product is a definite NO. Any debt that is underwritten for a customer will need to have an asset (product or a service) to back it.

This has remained a challenge for Shariah compliant products to compete with the Banking products of the rest of the world. In a standard banking loan, the paper work is simpler because, it is just a contract between the bank and the borrower on a loan where interest is charged. But a typical Shariah compliant product has multiple contracts such as Profit Sharing agreements, Agency arrangements and partnerships. So where there is one contract to be executed in a conventional banking system, the customer and the bank need to go through three different contracts in the Shariah banking system.

This is not just an overhead when you are trying to sell a product in a competitive landscape, but also adds to operational inefficiencies and administrative costs. However, these steps are necessary to avoid interests, and ensure there is no speculation involved with the product.

This is a space where the smart contract use case of Blockchain can add immense value.  A digital contracts engine that can scale functionally (looking at multiple product lines), and non-functionally (performance, throughput), would solve a lot of contractual overheads in Shariah banking. Smart contracts are verifiable, immutable and secure, and near real time settlements mitigate counterparty risks.

The Islamic Development Bank (IDB) of Saudi Arabia is currently researching the use of Blockchain in shariah complaint products.  Since Q4 last year, the Islamic Research and Training Institute has been working with two startups – Ateon and SettleMint, to understand the feasibility of the technology for Islamic banking products.

Blockchain should be able to deliver the efficiencies needed to make Islamic finance more competitive. More importantly, Blockchain also supports the core principles of Shairah such as transparency, trust and the fairness.


Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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