Blockchain is the underlying technology on which cryptocurrencies are developed. It has many use cases in many different fields such as supply chain, finance and healthcare. Islamic finance is an area that may benefit from the use of blockchain, and smart contracts specifically.

Smart contracts are basically programs on a blockchain. They are run without any intermediary or third party. They generally automate the execution of an agreement. A network of computers executes certain actions when certain actions are met. This type of contract may augment and improve the current Islamic financial ecosystem in several ways. These include:

Speed

Since smart contracts are digital there is no paperwork and documents needed. This may speed up transactions as no time will be spent reconciling errors and filling paperwork. This ensures that exchange of ownership is much easier, simpler and quicker. Speed is definitely something needed in Islamic finance as it often makes use of many different contracts involving different parties, unlike conventional finance. Aspects of takaful, sukuk and diminishing musharaka are some of the many mechanisms that are open to potential automation via the use of smart contracts.

Auditability

A shari’ah audit is when a qualified shari’ah professional ensures that a particular contract is within the bounds of the shari’ah. Since smart contracts are often publicly and constantly visible it will ease the process of auditing smart contracts. Not only will the contract be transparent, but the information will also be easily and equally accessible. A point of concern in many shari’ah audits is the precise sequence of transactions. A smart contract may indicate the precise sequence of transactions and cannot be tampered with.

Scalability

In many countries and communities, the market for Islamic finance makes certain products unfeasible. Additionally, these communities may not have the sufficient skillset to develop an extensive range of shari’ah compliant financial products. One way around this is to tap into the global shari’ah compliant market. Smart contract will use cryptocurrencies which may allow a much more efficient and cost-effective method of transfer across the globe. The increased transparency, security and immutability of a blockchain will make these cross-border transactions much more alluring. Smart contracts are often decentralized which means they are outside the ambit of government. This allows individuals to choose to transact on blockchains from around the world which suits their requirements

While the building blocks of blockchains are the same, there may be slight differences that make certain blockchains more conducive to the deployment of smart contracts. Precisely how shar’ah scholars use, certify, develop on or avoid this nascent technology remains to be seen. However, it is clear that it has immense potential for development in the field of shari’ah compliant finance.

Allah Knows Best

You can also read our articles on Developing trust in blockchains and Bitcoin: The new dinar.