Is Bitcoin Halal: Sharia Rules and Interpretation
Cryptocurrency is a form of virtual currency that is based on blockchain technology. Cryptocurrency is a digital asset, and the vast majority of cryptocurrencies are based on decentralised networks. This means that the currencies exist outside of centralised structures such as governments and banks.
The blockchain technology makes it virtually impossible for the system to be duplicated, hacked, or cheated, and acts as a centralised ledger of the currency. Digital assets such as bitcoin are still relatively new assets on the global financial markets. Many Muslims are seeking clarity as to whether cryptocurrency is deemed to be halal and Sharia compliant from an Islamic perspective.
The mathematical value calculation of cryptocurrency coins is based on the algorithm of the blockchain itself. Blockchain technology is seen as being an efficient, safe, and undeletable system. This lends credence and transparency to the cryptocurrency market. The question of whether bitcoin and other digital assets are halal is one that has been discussed and debated in recent years.
The former Sharia adviser to Blossom Finance, Mufti Muhammad Abu-Bakr, compiled a report in 2019 that stated that cryptocurrencies, including bitcoin, should be deemed to be halal and permissible under Sharia law. Mufti Abu-Bakr's decision was made on the basis that all traditional (and permissible) currencies tend to have a speculative element and cryptocurrencies should therefore be permissible in Islam. Since his report, Muslims have considered investing, trading, and exploring bitcoin as a new way of transacting with others.
Scholars
In 2018, scholars from the Sharia Review Bureau in Bahrain stated that investment in cryptocurrency and coins such as Ethereum and bitcoins were permissible under Sharia law and halal. Their view was that bitcoin could be considered property (maal), and did not contain any form of interest.
Similarly, the Fiqh Council of North America has unanimously decided that bitcoin is permissible. Furthermore, the Sharia Advisory Council branch of Malaysia's security commission has advised that trading and investing in cryptocurrencies is permissible. This means that digital currencies can also be used to make zakat payments.
The Shacklewell Lane Mosque in London was one of the first mosques in the UK to accept cryptocurrency donations from Muslims. Most scholarly interpretations of digital currencies in the last few years have determined that cryptocurrencies are in fact halal.
Whilst many scholars have researched and reviewed the digital currency market, it is important for investors to undertake their own research before investing. In order to consider whether bitcoin is halal, we need to delve into the history of money from an Islamic perspective so that we can revisit the centuries-old Sharia rules relating to finance and investment.
This article will examine the historical perspective and apply the current interpretations in relation to bitcoin.
How Cryptocurrency Works
All cryptocurrency coins are virtual coins that exist in the crypto market, they do not have any physical form. The actual proof of legal ownership of the digital money is recorded on blockchain technology. The blockchain acts as a public record that records the digital growth of the coin, and the value of each coin.
Cryptocurrency works by recording transactions on a ledger and creating blocks. The ledger is available 24/7 and cannot be changed or overwritten. It is virtually impossible to counterfeit crypto, and all the computers that store blockchain technology have to 'agree' to comply with the accurate version of the ledger. When anyone purchases digital currency such as bitcoin they then own a private key that provides them with a code that authorises cryptocurrency transactions.
In the UK there are now cryptocurrency ATMs in London and further down south in areas including Plymouth and Penzance.
What Is A Bitcoin
Bitcoin was first created as a digital currency after the 2008 global market crash caused by the banks. At the time, there was a lot of interest in and demand for a decentralised system of money that was not controlled by banks and governments.Key features of bitcoin include the following:
- It is decentralised - there is no central power controlling it, instead is it based on sophisticated computer programmes
- It is transparent - everyone on the ledger can see the transactions undertaken
- It is non-repudiable - a buyer cannot claim they did not receive their coin if they did receive it
- It is easy and simple to set up
- The value of bitcoin is based on demand
- It is a trustable coin
- Anonymity - all bitcoin transactions are stored on a public ledger so there is very little secrecy
Bitcoins are traded through bitcoin exchanges. To send bitcoin to another investor you will need to use your private key to effectively 'sign off' on the transaction. Once the transaction is verified it cannot be reversed or revoked.
Islamic Perspective On The History Of Money
The history of money from an Islamic perspective can be traced back to the beginning of Islam. Islamically and under Sharia law, money is used for exchange rather than speculation or exploitation. This is one of the reasons that riba (interest) is strictly forbidden in Islam as it is seen as making a profit on money. The Islamic perspective of money and business rests on principles of social justice and non-exploitation.
Sharia laws relating to money state that to be used as a means of exchange the money should be safe, stable, and effective. The reason some Muslims are conflicted about the legitimacy of bitcoin and whether it is Sharia law compliant is that when the Quran was written there will obviously have been no mention of digital currencies as technology was not in the advanced stage it is today. This has meant that the permissibility of cryptocurrency has been open to judgement and interpretation by scholars.
Bitcoin And Islamic Finance
The question about whether bitcoin is deemed to be halal Islamically has been raised again and again as Muslims across the globe consider whether to invest in cryptocurrency. Cryptocurrency is based on supply and demand in the way normal currencies often are, and the coins themselves hold value based on the market.
Bitcoin heralded the birth of the free, transparent, global financial market. It is not surprising, therefore, that Muslims began to interact with this market. Islamic finance rules provide boundaries and regulations relating to financial dealings. Whilst cryptocurrency is still a prominent area of news and research for Islamic finance scholars and experts, what is clear is that the majority of scholars and Imams have interpreted that cryptocurrencies do not breach any of the Sharia rules relating to Islamic finance.
Bitcoin And Sharia Finance Rules - Key Principles
The main features of Islamic finance that need to be considered when it comes to bitcoin are:
- Interest (riba) - interest is prohibited in Islam
- Speculation (maysir) - speculative investment is deemed to be akin to gambling and is not permissible
- Profit-loss sharing - parties to a transaction must share the risks and rewards according to Islamic finance
- No excessive risk (gharar) - Islamic finance dictates that transactions that are uncertain or carry excessive risk are not permissible.
- Application of trade and commerce (al bai')
Examining the Islamic finance principles mentioned above, it is clear that there is room for digital assets within an Islamic finance portfolio. Bitcoin does not have an interest element, nor does it provide one party with excessive profits or losses, or excessive risk.
As the world of cryptocurrencies continues to evolve, so does the demand for Sharia compliant coins. Recently, the Caizcoin was developed in Germany and marketed as the first fully Sharia compliant digital coin. It is likely that there will be further developments of digital currencies that meet all the requirements of Islamic finance principles.
Interpretations
Although already deemed Sharia compliant by Imams and scholars throughout the world, the Islamic cryptocurrency finance market is evolving to ensure that Muslims are catered for when it comes to investing in cryptocurrency. In January 2021, CoinMENA, the Middle Eastern digital assets exchange was given the go ahead from the Central Bank of Bahrain to become a certified sharia compliant exchange.
Muslims are becoming increasingly involved with the emerging digital currency fintech market, especially younger Muslims who are moving away from traditional forms of investment and entrepreneurship.
Conclusion
Discussions around bitcoin and other forms of cryptocurrency will continue in the years to come. Although many Muslim scholars have determined that investing in cryptocurrencies is halal, there will be some Muslims who will want to adopt a wait and see policy. As long as the bitcoin investment does not include haram activities then bitcoin itself does not contravene any Islamic finance principles that regulate investment, money management and currencies. What seems clear is that conceptually, bitcoin and cryptocurrency as a whole do not appear to be impermissible according to Sharia law rules. The growth of the Islamic cryptocurrency exchanges and coins does mean that there is more clarity and regulation than ever before for Muslims looking to invest in digital currencies.
Receive insights on ethical financing and Islamic finance directly to your inbox.
Explore more news
Islamic Finance provides a financing mechanism without Riba (interest), Gharar (gross uncertainty) and Maysir (gambling). These three are the key to all economic oppressions, economic imbalances and instability. They give rise to micro and macro risks which impact the overall wellbeing of an economy. Islamic Finance offers alternative structures and products which are free from Riba, Gharar and Maysir. One of these products is Commodity Murabaha.
In minorities where it is difficult to get Shariah compliant working capital financing for SMEs, Commodity Murabaha is an alternative Shariah compliant product and financing mechanism. Commodity Murabaha is the most common Islamic money market tool that is used to provide liquidity in the short-term Islamic money markets. The AAOIFI Shariah Standards, the majority of global Shariah scholars and global Shariah boards approve of Commodity Murabaha if it is implemented correctly with the correct controls to overcome financing challenges. The classical jurists also approved of a Tawarruq or Commodity Murabaha structure. In fact, Mufti Taqi Uthmani has produced a detailed research paper on Commodity Murabaha outlining the views of classical scholars. Ibn Muflih from the Hanbali school, Imam Shafi’i, Ibn al-Humam and Ibn Abidin from the Hanafi schools have all permitted this product and narrate its permissibility from other classical jurists[1].
Working capital financing is used to cover a company's short-term operational needs and not to buy long-term assets or investments. Those needs can include costs such as payroll, rent and inventory and other costs associated with daily operations etc. Practically, business owners who are looking for shariah-compliant working capital financing to cover their short-term operational needs generally prefer entering a Commodity Murabaha Agreement where a fixed profit rate and corresponding deferred sales price instalments is specified in advance. This allows them to finance their growth at a lower cost of capital as compared to for example using profit and loss sharing (PLS) arrangements such as Mudarabah and Musharakah that result in a higher effective cost of capital. PLS arrangements are better suited for business ventures where there is a higher risk of loss. Profit and loss sharing refers to financing whereby parties enter into equity financing arrangements where the financier has a share ownership in the business.Furthermore, a stable business looking to finance their working capital might not want to dilute their ownership through equity financing. Stable businesses will not want to share their upside so would prefer debt-based financing. By doing so, they are happy to protect the financier from the downside and retain exclusivity to the upside. A PLS is favourable where there is greater risk of downside and therefore the business is happy to share the upside.
In the UK, the most direct and common way for a party to obtain working capital is to obtain an interest-bearing loan from a third-party finance provider. Since a conventional loan represents a purely monetary transaction—in essence, the use of money by a party in exchange for the payment of compensation based on the length of usage—this type of loan may not be given or received by Shariah-compliant investors. The Commodity Murabaha product allows Muslims to finance their working capital without being exposed to interest-based financing.
The Commodity Murabaha agreement has been conscripted to fill the void. A customer enters into a Commodity Murabaha transaction not to obtain a physical asset for its use, but to engage in a series of purchase and sale transactions that result in the customer obtaining working capital. In a basic Murabaha transaction, the customer receives assets in return for a deferred payment obligation, and then employs those assets in its business. In a Commodity Murabaha transaction, the customer takes the additional step of selling the assets to a third party for cash, which represents the working capital (or financing for an acquisition, as the case may be) required by the customer. Note that the customer would not necessarily be required to sell the Assets to a third party; it merely is allowed to do so, as owner of the assets. The sale of the assets to a third party is not an element required to make the Commodity Murabaha transaction a valid transaction under Shariah.
To ensure that this product is not a smokescreen for Riba (usury/interest), contemporary Shariah scholars have placed several controls. The AAOIFI Shariah Standard highlights these controls to ensure that Commodity Murabaha aligns with the principles of the classical jurists. These controls are as follows:
- Different brokers: The trades must involve the market and involve different brokers from the buy and sell side. This ensures that the trades are genuine and that the brokers are selling/buying the asset with an interest in the asset.
- Real asset :The trades must involve a real asset. A fictitious product cannot be sold. The asset transaction must impact the inventory of the seller and the eventual buyer.
- Real trades: All the Shariah requirements for trading must be met in terms of valid offer, acceptance, legal capacities of the parties, agreement on the commodity, agreement on price etc.
- True ownership: The traders should assume true ownership through true sales of the underlying commodity.
- Possession: The traders must assume possession; either physically, constructively or digitally. This possession must allow them to dispose of the asset or redeem the asset.
- Correct Sequence: The Commodity Murabaha must be performed in a correct sequence which further establishes and validates all of the above key elements.
- Discretion to not sell: The traders must have the discretion to not sell and hold. This ensures that the trade is not fictitious.
- Different agents: The financier should not be the sole agent for all the parties involved in the Commodity Murabaha.
By meeting the above principles, the Commodity Murabaha is a Shariah compliant, asset-backed financing mechanism which aligns with the principles of Islamic Finance. From a micro-economic perspective and for a Muslim minority in the UK context, this product provides a valid Shariah compliant alternative in a system where every corner and every offer are interest-based. An overview of the Commodity Murabaha facility used by Qardus for SME business financing can be found here.
You can contact Mufti Faraz Adam on sharia@qardus.com
[1] Uthmani, M.T. (1998), Buhuth Fi Qadhayah Fiqhiyyah Mu’asarah. Dar al-Qalam
Written by Ruby Hinchliffe on 5th August 2020
The UK is now home to a growing 27 Islamic fintechs, ahead of Malaysia, Indonesia and the United Arab Emirates (UAE).As of July 2020, IFN FinTech – a global network representing fintech’s Islamic segment – says it’s recorded 142 Islamic fintechs around the world.
Malaysia has 19 fintech start-ups, followed by the UAE with 15, Indonesia with 13, and Saudi Arabia and the US with nine.
The UK's Islamic fintech scene
The UK’s fintech start-up scene has seen some significant traction from Islamic-friendly – as well as focused – firms.My Ahmed, a sharia-compliant e-money platform, was accepted onto the Financial Conduct Authority’s (FCA) regulatory sandbox in July.
In the same month, Islamic peer-to-peer (P2P) lending platform Qardus launched its services in the UK. So did sharia-complaint gold trading platform Minted, which plans to launch a digital bank in 2021. As did Kestrl, a sharia-compliant ethical banking alternative.
Since January, Islamic banking app Niyah and sharia-complaint digital bank Rizq have also launched in the UK.
Capital at Risk. Returns are not guaranteed
August 5 2020, read the full article at Fintech Futures: https://www.fintechfutures.com/2020/08/uk-leads-the-way-in-islamic-fintech-ahead-of-malaysia-and-uae...
Green investments or sustainable investments are those that are deemed to be socially responsible with a positive impact on the environment and wider society. As a complete financial system, Islamic finance facilitates green investments and what this means for investors is an increase in sustainability growth. When green investment and Islamic finance come together they drive sustainable growth.
Islamic finance is growing in popularity and was a system devised many centuries ago. In comparison, the green industry is relatively new. Islamic finance's emphasis on economic justice and focusing on marginalised communities and organisations is the foundation of its principles.There are increasing collaborations between the green industry and the Islamic finance industry.
They complement each other and offer benefits for organisations, and both client and customer.
WHAT ARE GREEN INVESTMENTS?
Green investments are also known as socially responsible investments or sustainable investments. They are centred on those investments that positively affect society, organisations, and people.
Green investments range from renewable energy, to clean technology, sustainable agriculture, green bonds to impact investing.
Green investing aims to ensure that investors who want to align their financial transactions with their ethics can do so. That is not to say that green market investments do not provide good financial returns. On the contrary, like Islamic finance, green investing has proven to be revenue generating whilst also being eco-friendly.
Types Of Islamic Finance Based Green Investments
The kinds of Islamically compliant green investments are wide ranging. They cross various industries from agriculture, to environmental protection, to clean technology. Both Islamic finance and green investments focus on equity, regulation, risk management ,and understanding the needs of the parties.
ESG, that is environmental, social and corporate governance are all key considerations. Islamic finance is the financial tool that an institution can use to remain Sharia compliant and green focused.
With the alignment of both the green industry and Islamic finance, there are a great deal of products on the market now that are tailored to be green and Sharia compliant.
Let's have a look at some green products that are Islamic finance compliant:
- Ethical mutual funds: these kinds of mutual funds are managed in accordance with Sharia rules. When it comes to the actual investment, these kinds of funds only invest in projects and companies that meet both the Islamic finance and green criteria.
- Green sukuk: these sukuks are a type of bond that raise funds for projects that are environmentally sound and sustainable. The sukuks have to be Sharia compliant for them to be halal. Projects range from providing capital for clean water initiatives, decarbonisation, to renewable energy, technology, and agriculture.
- Real estate: green real estate funds invest in sustainable real estate projects and are financed by money that is generated and spent in accordance with Sharia rules. This means any loan comes without any interest payments being charged or paid. Often, ethical real estate investments take place in areas of crisis with a view to enabling local communities to transition away from the crisis in an affordable and ethical way.
- Microfinance: Islamic microfinance services and products are increasing in popularity. This is mainly due to them being regulated in the same way in the UK as other non-Islamic finance products (although, you must always do your own research - knowledge is key). Islamic microfinance can offer funding to SME businesses and individuals who are engaged in eco-friendly ventures and sustainable growth.
- Islamic stocks: if you look carefully you will see there are various Islamic stocks on the market that are green and sustainable. These stocks are usually in companies that are green focused and ethically sound.
- Islamic crowdfunding: when looking at sustainable and ethical finance models, then Islamic crowdfunding ticks all the boxes. For those with aspirations of raising funds for green projects, Islamic crowdfunding offers a great alternative for raising start-up funds.
Commonalities Between Islamic Finance And Green Investments
Both green investing and Islamic finance have many points of convergence and commonality. As models of investment, they complement each other. Both encourage and promote social responsibility and ethical investing.
It is important to remember that both green investment and Islamic finance have foundations in ethics, justice and social responsibilities. It therefore makes perfect sense that they are great partners in the financial world.
In addition, both Islamic finance and green investing principles share the following key principles:
- Prohibiting harmful activities and industries: one of the main rules of Islam is that we should stay away from harmful activities and industries. This means a prohibition in investing, managing or working in industries such as the porn industry, and the alcohol and gambling industries. Similarly, green investments tend to stay away from these industries as they serve no real green benefit to society.
- Sustainable development goals: Islamic finance and green investing play a significant role in promoting sustainable development goals. So, how is this achieved? it is done through the encouragement and support of economic growth, social wellbeing and environmental sustainability.
- Assessing the impact on society: both Islamic finance and green investments are focused on benefiting society as a whole. The aim is to positively impact society and sustainable development, whilst trying to ensure that wealth inequality is reduced and there is economic justice. Investing in industries that tackle climate change, poverty reduction, renewable energy, education, research, and innovation are referred over more profit based industries.
- Ethical screening behaviours and tools: in order to ensure that the investments are compliant with both Sharia laws and green principles, ethical screening is high on the agenda. Both the green investment industry and Islamic finance focus on ensuring that investments and industries are screened, their governance is clear, and policies are not exploitative.
HOW DOES ISLAMIC FINANCE RELATE TO SUSTAINABILITY?
Islamic finance is based on Sharia rules which provide the legal and financial framework within which to live, transact and behave. Islamic finance is more particularly focused on providing rules pertaining to the economy, business and finance.
Due to the very nature of the ethical way Islamic finance operates, this immediately irradicates the purely profit driven and interest based activities of conventional forms of finance.
Islamic finance has always been a key player in achieving and promoting sustainable development goals by:
- promoting poverty eradication
- promoting UN goals relating to sustainability
- Ensuring there is financial inclusion in all countries
- Holding banks accountable and insisting on interest free services and products
- promoting health and wellbeing including clean sanitation and renewable energy
- promoting better education and the eradication of interest based debt
- having strategies that focus on gender equality
- encouraging sustainable agriculture and food security projects
For anyone looking for green projects to invest in, in a halal way, then you must consult with financial advisors who are experienced and knowledgeable in both areas.
In the West investors are looking for more conscientious ways to invest. Neither green investment nor Islamic finance are taught at school or featured heavily in the news. However, the impact of the alignment of these 2 distinct industries is becoming more known in investment markets.
This strategic alignment is opening up major market opportunities for investors. ESG financing is expected to see huge growth in the next decade, as is investment in clean technology and net zero industries. There is clearly an appetite for financial products that are Islamically sound, but also sustainable and green.
Islamic finance, when coupled with green investment, is bridging cultures, finance models and inclusivity. It is an area of finance that is seeing exponential growth in major financial hubs such as London, Washington, Geneva, and Dubai.
Stay informed on finance
