The emergence of blockchain technologies and virtual currencies is expected to disrupt various economic sectors and this includes Islamic Finance. With blockchain trading activities, remittances and payments in Islamic Banking are going to be affected. Some of the benefits that Islamic Banking will get from blockchain technology includes the modernization of legal documentation via the use of smart contracts.
The speed of transactions is also expected to be enhanced as well as a reduction in the amounts that consumers pay in transaction fees. Providers will also be able to reduce operating costs. Managing counterparty risk fraud will be reduced or eradicated altogether.
While Islamic finance has in the past been responsible for some of the technical innovation, including for instance the check in the 9th century, it has recently lost its dynamism. Since 2010 the value of investments made in the financial technology sector across the globe has reached $50 billion per a report by Accenture, a consultancy firm. However only 1% of this amount has found its way to North Africa and the Middle East.
This is despite the fact that North Africa and the Middle East requires innovative financial services as nearly 80% of the population is unbanked. Besides the high level of an unbanked population, the region also suffers from a high cost of remittances. By some estimates the charges are up to 29% of the money being sent.
Islamic Development Bank
In the Middle East blockchain developments are being encouraged by major states and financial institutions. The Saudi Arabian IDB – Islamic Development Bank has hired a team which focuses on the research and development of blockchain-based products. Some of the areas this team is focusing on includes the management of counterparty risk as well as how to reduce settlement time and complexity, a common complaint with regards to financial agreements that are Sharia-compliant.
With the coming of smart contracts it will be possible to automate the entire contractual process with regards to Islamic institutions and this will alleviate the various legal and administrative redundancies and complexities that Islamic finance is associated with. One benefit that would come from this is that Muslim investors would be liberated and this would grow the sector. Additionally banking and insurance services that are socially acceptable would be made available in the 57 countries that the IDB has a presence in.
Last year in June the Emirates Islamic Bank disclosed that its paper checks would be incorporating blockchain with a view to enhancing the security of this method of payment. Towards this effort Emirates Islamic Bank will hand out check books that possess a unique Quick Response code on each leaf as well as a string of 20 random characters.
According to the bank’s chief operating officer, Suhail Bin Tarraf, incidences of check fraud will be significantly reduced by initiative. This is because each check’s random number will be recorded on the blockchain thereby ensuring that counterfeiting does not happen.
There are also other blockchain initiatives which are being explored and this includes a partnership with the Hyperledger Fabric technology of IBM.
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