Is blockchain sharia compliant?
The emergence and growth of blockchain and Sharia-compliant finance has led to a debate about whether blockchain is Sharia-compliant. Both Sharia-compliant finance and blockchain are based on the same central components of fairness, transparency, accessibility and decentralisation. These similarities have led to an uptake in blockchain from Muslim markets and businesses.
What is of critical importance for those wanting Sharia-compliant finance options, is that blockchain is compliant with the rules of Islamic finance and financial transactions.
WHAT IS BLOCKCHAIN?
Blockchain is a decentralised system where records of cryptocurrency transactions are maintained and linked. This form of digital ledger technology enables transparent and secure transactions across computers.
The ledger, or digital database, acts as a growing list of records (blocks) that are all linked together. Since Bitcoin and Ethereum became known worldwide, so too has recognition of blockchain platforms and their purpose.
Blockchain - Key Features
The key features of blockchain are:
- decentralised databases: no single entity controls the data and this means it is resistant to manipulation, fraud, and censorship
- Immutability: once a transaction is logged onto the blockchain it cannot be deleted or changed.
- Transparency: all the transactions that are recorded on the blockchain are visible and transparent to all the participants in the network. This enhances transparency and authenticity.
- Secure: as each digital transaction is verified by participants being they are added to the ledger this prevents fraud and unauthorised transactions.
- Smart contracts: blockchain includes smart contracts that self-execute and automatically enforce terms. This means the room for error or fraud is massively reduced when compared to traditional contracts.
Sharia Rules And Blockchain
For Muslims looking for Sharia-compliant financial solutions, blockchain is becoming a viable option. Blockchain technology offers Sharia-compliant finance that offers transparent and secure alternatives that are compliant with Islamic rules relating to financial transactions.
According to Islamic finance rules, blockchain technology is considered to be a fairly neutral database tool that stores records in a transparent and secure way.
Sharia rules as they relate to financial transactions require adherence to Islamic finance principles that relate to ethical conduct and social responsibility. Key elements of prohibition include a ban on interest, speculation and investment in haram industries and practices.
Blockchain technology, as a secure and decentralised ledger system, certainly meets the Islamic finance standards of transparency and security. However, when assessing if any technology is truly compliant with Sharia rules several factors should be considered including the nature of the financial transaction taking place, the underlying assets, and the consensus mechanisms.
WHAT MAKES BLOCKCHAIN SHARIA-COMPLIANT?
Sharia-compliant finance revolves around fairness, equity, transparency, and risk sharing. Any blockchain technology or service needs to comply with these principles and be free from interest and speculation.
The development of currencies that are Sharia-compliant and based on blockchain technology is fast-moving. For Muslims looking for adherence to Islamic rules, blockchain is quickly able to verify transactions with a clear and traceable ledger.
It is important to note that not every blockchain transaction will be Sharia-compliant. This is in the same way that not every bank, project, return, investment, platform, and digital asset will be Sharia compliant. The compliancy will lie in the type of transaction and nature of the deal.
Islamic Finance And Blockchain
The interplay of blockchain and Islamic finance is interesting. Not only does it present opportunities to transform and innovate the industry, but it also means that blockchain-based solutions can now facilitate Sharia-compliant transactions.
Blockchain facilitates fractional ownership, asset management, and efficient cross-jurisdictional and cross-border transactions. The transparent ownership and financial records and real-time settlement blockchain offers is compliant with Sharia rules.
Put very simply, blockchain technology and platforms support Islamic finance initiatives and businesses. This means Muslims can use blockchain to invest and transact.
Zakat And Blockchain Potential
For Muslims who want to comply with one of the five pillars of Islam, zakat, blockchain technology has a great deal of potential in enhancing and facilitating compliance with this pillar. Not only can blockchain enhance the administration of zakat money, but it can also help and provide value in the administration of zakat.
Blockchain technology streamlines the distribution of payments ensuring that zakat transactions are fast and transparent. By recording zakat on immutable ledgers that are visible to all participants, blockchain is being used more and more by Muslims across the globe.
People are easily able to trace and audit their payments and zakat transactions, tracing the flow of their funds. What's more, it is easy to check if your zakat contribution is affecting those in need in the most appropriate way. This greater visibility provides clarity and precision for donors.
Blockchain has the potential to revolutionise global zakat payments by using methodology that increases efficiency, transparency, and seamlessness. Donors are able to maximise their donations automation and traceability.
Supply Chain Management
When it comes to business operations and analysis of Sharia-compliant methods, blockchain provides immutable records.
For Muslim business owners and customers, making sure of authenticity is key when it comes to analysing the halal elements of any dealing.
Blockchain technology can validate halal certifications and methodology throughout the supply chain. This provides a verifiable audit trail and ensures that Sharia-compliancy can be checked.
Blockchain And Sukuks
Blockchain technology ensures that Islamic bonds (sukuk) are transparent, secure and fully Sharia-compliant. As blockchain enables real-world assets such as property and commodities to be tokenised.
Sukuk issuers can then tokenise the assets backing each sukuk, making sure that each token issued represents a percentage share of ownership. What this means in Islamic finance terms is that the sukuk is backed by tangible assets or services, making it compliant with Sharia rules.
In addition, each sukuk issuance and transfer is recorded on the digital ledger and this helps to verify authenticity along the chain of ownership and eliminate fraudulent or speculative activity.
When used properly, blockchain can be set up to automatically screen for Sharia compliancy for users. This screening not only screens for Sharia compliance, but also verifies participants.
This level of transparency is highly encouraged in Islamic finance transactions.
Islamic Finance Asset Management
Blockchain can be used to enhance Islamic asset management portfolios. By streamlining settlement of money, blockchain enables real-time settlements of transactions. Platforms dedicated to blockchain encourage peer to peer engagement and transactions and this eliminates the need for intermediaries and third parties.
What this means is that asset management becomes more transparent and more streamlined. The level of risk is reduced, and overall efficiency is improved.
Management Of Waqf
Waqf, Islamic endowment, is the act of dedicating or endowing a property for charitable, community, or religious purposes.Using blockchain, the management of waqf can be delivered in an easier and more efficient way.
This is done via platforms that provide traceability, authenticity and audit trails.
Ethical, Safe And Decentralized
Using blockchain properly means products and services can become more transparent and screened for Islamic adherence. Investors and organisations can use blockchain technology to enhance the efficiency, integrity, and accessibility of Islamic finance solutions.
Blockchain is emerging as a safe and ethical partner for Islamic finance products and services. The hybrid of modern blockchain technology, cryptocurrency, and long established Islamic principles of exchange is a welcome one for the finance world.
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In recent decades the landscape and number of small and medium-sized (SMEs) businesses has seen a huge transformation. Many of these businesses are formed and led by Muslim entrepreneurs such as Shahzad Younas (Muzmatch), and Ufuk Secgin (Halalbooking.com). With the growth of Muslim entrepreneurs comes an increase in demand for Islamic finance based lending solutions and strategies.
SMEs dominate the world business landscape. They account for approximately 60% of private sector employment. It therefore makes sense that SMEs will require funding options in order to sustain and succeed as a business. With close to 60% of SMEs failing in the first few years, ensuring they have access to adequate funding is critical.
SME lending has historically been centred on the traditional models of funding that are interest based. However, there has recently been a move towards SME lending based on Islamic finance principles.
In the UK, SMEs are considered to be firms that employ less than 250 employees. UK SMEs play a significant role in the UK economy, and the government is keen to ensure that they are sustainable and successful.
SURGE OF SMEs
SMEs account for a significant portion of the world economy. They not only contribute to employment and job creation, they also play a leading role in sustainability and community impact. In the UK a staggering 99.2% of the business population comprises of SMEs.
SMEs are considered to be major employers and they drive local economy growth.
Recent statistics found that the total value of loans to SMEs in the UK reached a whopping £65.1 billion in 2022. This was an increase of over 10% on the previous year and was the official highest on record.
New business lending in the UK totals in the region of £259 million. Demand from SMEs for inclusive and diverse lending options continues to grow.
SMEs AND SOCIAL IMPACT
SMEs play a critical role in society and our economy. Not only do they facilitate and generate employment, they also increase the flow of money from individuals to industries and through society.
At the beginning of 2023 there were estimated to be 5.5 million SMEs in the UK, an increase of 0.8% over the previous year. The professional, scientific, and technical industries accounted for 14% of all SMEs while another 10% are in the retail, trade, and wholesale industry.
Beyond contributing to the economy, SMEs can impact different areas of society. They encompass social development, community wellbeing, alleviating local poverty, job creation, innovation, and reducing income inequality.
SMEs also tend to be more forthcoming in embracing sustainable and ethical practices. They foster financial inclusion by providing local opportunities for local people.
WHY SMEs ARE THRIVING
There are 1 million SMEs in London and over 852,000 in the South East. These SMEs account for 34% of the UK business population. SMEs account for 60% of the employment in the private sector within the UK. They also account for over 50% of the employment in the UK.
As SMEs have grown, so has the need to provide lending that meets their particular demands. Many SMEs do not have the stellar trading history and records of large business.
SMEs therefore need an innovative approach when it comes to lending and funding.
SMEs can come with limited credit history and collateral but bags of entrepreneurial dynamism and innovation.
Distinct from larger businesses, SMEs have unique considerations relating to scale, financials, structure and characteristics. They may have limited access to capital markets, and therefore need tailored and bespoke financial solutions. A one size approach to lending does not meet the needs of SMEs that provide a range of services in the economy.
This is where Islamic finance really comes forth as a viable option for SMEs.
Sme Lending
SME's often demonstrate adaptability and resilience when faced with economic fluctuations, challenges and issues. SMEs are well placed to weather economic downturns and maintaining local communities through change. Lending to SMEs in the UK amounted to £4.8 billion in the second quarter of 2023.
In 2022 36% of SMEs used external funding and finance options. Over 69% of SMEs have stated that they turned to lending options due to cash flow related issued.
For SMEs, obtaining favourable funding options is not as easy as it is for big companies. Perhaps this is the reason more and more SMEs are turning to Islamic finance services.
Islamic finance is a great option of raising funds for SMEs for many different reasons.
For Muslim SMEs that want to avoid interest and want to be Sharia compliant, Islamic finance provides funding options not available in the wider banking sector. Islamic finance is able to adapt to the requirements of Muslim SMEs ensuring compliance and inclusion.
It is also worth mentioning that Islamic finance is based on a risk and profit sharing arrangement. This means that the funder and the SME share the profits AND the risks.
For SMEs, this is a huge benefit as it creates a sense of partnership with support for the new SMEs on the market. SME borrowing has a huge impact on their operations and customer base growth, so it is essential that the SME lending market continues to diversify and educate itself on the needs of SMEs.
Islamic finance is asset backed finance. What this means for the SME is that the financing is linked to tangible assets. In the long term, this is a more sustainable and stable form of financing for them.
Diversity In Business
The great thing about SMEs that often goes unnoticed is how impactful they are when it comes to inclusion and diversity.
In 2020, 16% of SMEs were led by women. Almost 24% of SMEs were equally led by men and women.
Workplace diversity is essential for SMEs as they often operate within diverse local environments. With Millennials currently making up 50% of the UK's workforce (and Gen Z accounting for 27% by 2025), businesses lacking diversity are missing out.
When it comes to investment for the future and the business operations of the SME, they need to ensure they recruit and retrain properly.
Empowerment Through Enterprise
SMEs are known to encourage empowerment through enterprise. This should be done at every stage of the SME process from project initiations, implementations, cost analysis, research, and education.
The result is that SMEs can ensure that they can recognise and eliminate barriers to growth. Enterprise enables SMEs to plan and prepare, ensuring they have the right insight into how to fund their operations and continue to succeed.
For Muslim entrepreneurs there are additional considerations relating to compliance with Islamic finance rules when partaking in financial services and considering lending options.
Why should Muslim SMEs focus on Islamic finance lending:
- Adherence to Islamic rules relating to financial transactions
- Interest free finance options
- Asset backed financing
- Profit and risk sharing
- Flexible finance structures and services
- Financial inclusion without compromising ethics and religious principles
- Community impact
- Flexible payment options
- Lending is not connected to an industry, product or service deemed impermissible by Islam (ie alcohol, gambling, porn)
Faith In Business
Those SMEs that are looking for ethical and sustainable models of finance and lending can find answers in Islamic finance.
Risk sharing, loss sharing, ethical considerations and non-exploitative practices all underpin Islamic finance and support SMEs in a way that traditional financial service cannot.
Non Fungible Tokens
NFT stands for non-fungible token. Essentially, and explained very basically, NFTs are digital assets that can be traded online. Non-fungible tokens are not interchangeable with any other item and are therefore unique.
Currently, NFTs are taking the collectible and digital world by storm due to their popularity. NFTs enable creators to represent ownership of their very unique assets. The NFT itself is a token of ownership with clear and identifiable ownership trails. This means that there is an indisputable copyright status, and royalty protection.
The uniqueness of NFTs lies in the fact that they cannot be replicated. There can only be one owner at any time and the record of ownership cannot be fabricated as it is secured on the blockchain technology. NFTs have their own unique identifying code and this means they create their own digital scarcity.
As NFTs are unique digitally this means that no two NFTs will be the same and their uniqueness provides for a great financial investment opportunity.
Examples Of Nfts
Some examples of NFTs include the following:
- unique digital artwork
- trainers in a limited edition collection
- digital collectibles such as the Lebron James 'dunking against the Houston Rockets' moment
- internet domain names
- Internet GIFS such as the recent Taco Bell series of GIFS
- In-game items
- Ticketing for events
NFTs have exploded onto the mainstream because big brands and celebrities have started to realise how useful and lucrative they can be. High profile company Adidas recently launched a collaborative NFT partnership with Prada, and even McDonalds have added NFT to their marketing and advertising strategy.
These latest collaborations have made the news and brought NFTs firmly into the mainstream spotlight.
HOW DO NFTs WORK?
In its very simple form, NFTs work on the basis that they are not divisible, interchangeable, or assignable. The Ethereum blockchain technology enables the NFT to be fully traceable and trackable. Information about the NFT is stored securely on blockchain technology and this gives investors peace of mind and reassurance.Similar technology that is used for cryptocurrency investments is used for NFTs to guarantee the uniqueness of the NFT. The blockchain technology is the digital ledger that contains the proof of ownership. This means that it is impossible to create duplicates of frauds. This in turn means the price of NFTs can rise based on their features.
NFTs can include anything from digital files, photography, music, art, and videos. Recently, there have even been tweets from web content that have been made into NFTs.
Although NFTs have been around since 2014, 2021 was a bumper year for the NFT economy as NFT financial transactions and sales increased massively with investors building and diversifying their portfolios.
Difference Between Nft And Cryptocurrency
Although NFTs are built using similar technology to cryptocurrency, they are actually very different from cryptocurrency. NFTs are traded and generated using cryptocurrency.
However, unlike cryptocurrency, NFTs can't be exchanged because no two NFTs can ever be identical. What you are purchasing when you buy an NFT is a unique code that will manifest itself as a unique digital item.
For example, if you have multiple £10 notes in your wallet, these are interchangeable. You can use any one of them to make purchases. These notes are fungible - they are interchangeable. In contrast, consider the NFT sale of Jack Dorsey's first tweet that he sold for $2.9 million. This tweet is original and cannot be interchanged or replicated.
HOW TO MAKE MONEY WITH AN NFT
Many investors treat NFTs as they would a stocks and shares investment. They profit from buying and selling NFTs.
For collectors, NFTs are a great investment as they act as digital assets with proof of ownership that cannot be replicated. Each NFT has a digital signature that makes it impossible for it to be exchanged with like for like. Cryptocurrencies, in contrast, are considered to be fungible assets as they can be interchanged with each other.
For creators, they can create and sell their NFTs on various platforms and websites online that act in a similar way to Etsy or Amazon. These websites hold all the data relating to the NFT securely.
For investors, you can sell or trade NFTs. Of course, as with any investment you will need to know when the best time to sell is and factor in any kind of appreciation or depreciation of your NFT.
For many people, NFTs represent a fun but lucrative investment.
INVESTING IN NFTs - THE FUTURE
Although it is difficult to predict the future of NFTs, they are here to stay and experts predict that they will only increase in value and popularity. If wealthy investors continue to invest the NFT market will grow and move beyond gaming and art realms.
Investors looking for long-term investments that are likely to grow in popularity are drawn to NFTs as they have the potential to increase in value, quickly.For investors the main benefits are that NFTs provide the following:
- Proof of ownership
- Exclusive access
- Certifiable authenticity
- Marketplace efficiencies
- Safe blockchain technology
- Facilitate diversification
From a Sharia point of view, scholars understand that NFTs are still very much in their infancy. Any investor needs to ensure that no Sharia principles relating to assets and Islamic finance are breached. For example, investing in NFTs that operate within haram industries such as gambling, alcohol, or porn would be deemed impermissible under Sharia rules.
An Islamic crowdfunding platform has launched in the UK, providing Shariah-compliant finance to small- and medium-sized enterprises (SMEs).
Salaam Gateway reported that Qardus, which is an appointed representative of Financial Conduct Authority-regulated ShareIn, provides unsecured loans of up to £100,000 in the form of a commodity murabahah, an Islamic financing structure in which the seller and buyer agree to the cost and mark-up of an asset.
The platform, which is open to both Muslim and non-Muslim investors in the UK and Europe, has a minimum investment of £100 and offers target returns of 10 per cent per annum.
Capital at Risk. Returns are not guaranteed
July 13 2020, read the full article at P2P Finance News: https://www.p2pfinancenews.co.uk/2020/07/13/islamic-p2p-lending-platform-launches-in-the-uk/
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