Blockchain and Its Shariah-Compliant Structure

Islamic finance is gaining popularity around the world. Regardless of religious beliefs, it is widely acknowledged as a form of funding around the world. In the past, the development of Islamic finance was gradual. At the start of its growth, Islamic finance was more concerned with Shariah’s compliance with transactions and contracts. As a result, the emphasis has shifted to Shariah harmonization in terms of juristic perspectives and Shariah governance. Islamic banking adheres to Islamic religious principles such as the prohibition of usury or interest, gambling, uncertainty, and open speculation.


Organizations of Islamic Cooperation are becoming increasingly interested in blockchain technology. Several Islamic financial establishments are intending to use blockchain technology to get the benefits that it provides. Dubai’s officials have revealed their plan to use drones in 2020. Blockchain technology is being used in both the public and private sectors. Unsurprisingly, even the government is demonstrating an interest in digital currencies.


Blockchain technology has the potential to have a substantial impact on the Islamic economy. The success of Islamic banks and financial institutions will surely be aided by the blockchain in Islamic finance and banking. Without having to worry about interest rates and other such difficulties, the Islamic banking system will be able to run more efficiently.


What Is Blockchain?

A blockchain, in its most basic form, is a connected chain that stores auditable data in units called blocks. Many online discussions begin by comparing a blockchain to a Google document spreadsheet in which multiple authors can contribute due to the locking mechanism.


Blockchain is more complicated than that example, and it has certain qualities that make it an appealing tool for identifying, storing, and tracking anything of value. Bitcoin was one of the first and most widely used blockchain systems.


From banking and payments to big data and smart contracts, blockchain has the potential to alter many data-focused elements of daily life. Blockchain and bitcoin are not synonymous; bitcoin is built on blockchain technology, but blockchain technology can be applied in contexts far beyond bitcoin or cryptocurrencies.


Types of Blockchain


  • Public –Public blockchains have no single owner, their consensus process is open to all, and they are completely decentralized. The public blockchain is an open-source project in which anyone can participate without requiring authorization. Anyone can download the code or software from such a platform and begin running a full node on a local device. Bitcoin, Ethereum, and Litecoin are instances of public blockchains.
  • Private – A private blockchain is a platform that is administered by a single or centralized organization and has a limited number of nodes within that organization.
  • Hybrid – Only a small number of people have access to these blockchains. The consensus process is managed by trusted, privileged servers who follow a set of rules that have been agreed upon by all participants. The blockchain is only distributed to authorized parties, hence the network is only partially decentralized.


Blockchain and Islam

As an alternative and ethical financing strategy, Islamic finance allocates funds to impact-oriented actual economic operations, thereby utilizing economic and financial resources to meet the material and social needs of all community members. The asset-based structure of Islamic financial instruments, as well as the equity-based nature of risk and profit-sharing, are the main pillars. Each of these financing categories has a critical role to play in expanding financial inclusion and attracting potential capital from Islamic capital providers and sources, as well as attracting potential capital from Islamic capital providers and sources


Due to its primary characteristics, blockchain has a lot of promise for usage in Islamic finance:


  • Control: access to permissioned networks is limited to identifiable users
  • Security: once the data is input, the digital ledger cannot be edited or tampered with.
  • Real-time information: when information is updated, it is updated for everyone in the network at the same time, making fraud less likely and easier to detect.


Islamic finance is based on Shari’ah, the Islamic rule that governs many elements of Muslim life, including religion, politics, economics, banking, and commerce, as well as legal issues. Shari’ah-compliant financing aims to mold financial processes and supporting legal instruments into those that are compliant with Islamic law.


A restriction on interest, a bar on uncertainty, adherence to risk-sharing and profit-sharing, promotion of ethical investments that benefit society and do not violate Qur’anic prohibitions, and tangible asset-backing are all major Shariah financial concepts.



Islamic banking finance includes the following principles:


  • The inability to take or receive interest 
  • Investments in enterprises that deal with alcohol, gambling, narcotics, or anything else are prohibited
  •  Anything else that the Shari’ah believes to be illegal is considered undesirable 
  • Beyond pure, unrestricted profit, capital must serve a social and ethical purpose


However, there are other issues, including inefficiency, a lack of transparency in terms of how monies are gathered, managed, and disbursed, and differing viewpoints among Islamic scholars on how these judgments or fatwas should be dealt with.


However, the power and potential of blockchain and smart contracts are being recognized across the business and political spectrum. While it may take some time for authorities to catch up, widespread use will result in rational regulation.


Is Blockchain and Islamic Finance Compatible with Each Other?

The response is yes, but with a stipulation. It is up to Islamic scholars to provide a suitable response to this situation. Islamic banking is about enforcing righteous behavior, and blockchain is about „coding“ those behaviors onto a whole AI system, ensuring that they are followed autonomously and without the intervention of a third party. It thus becomes a platform that is „self-enforcing,“ „self-regulating,“ „self-correcting,“ and „self-performing.“ If all of the preceding statements are correct, the answer „a definite probability“ is correct. (Hasni bin Wan Sulaiman, 2017)


There are several intriguing blockchain applications in Islamic finance that can provide a variety of benefits:


1.Smart Contracts

Islamic banks can use smart contracts to assist them to void rapidly rising interest rates. It will assist in the reduction of doubt and conjecture. In Islamic finance, several forms of contracts can be used to govern profit-sharing agreements, agency arrangements, and partnerships. Muslims are urged to put contracts in writing in the Quran (Surah Al-Baqarah: 282–283) to ensure fairness and accountability. As a result, for accounting and accountability, Muslim traders rely on an Islamic legal and institutional framework, while Muslim scholars define legal norms and serve as mediators in commercial disputes.


 Written records are essential for trade efficiency and transparency, as well as for monitoring trade and agreements. Islamic law is the basic institutional structure of Islam, and its intrinsic legal system regulates, among other things, commercial ethical values, laying the groundwork for trust, equality, and fairness.


2.Cloud Storage

The most appealing aspect of blockchain in Islamic banking is that it will provide banks with cloud storage. 6 It will help customers retain their relationships by reducing all forms of conflicts. To avoid any problems, it will keep all vital data that banks and clients can access. The cloud storage data model outlines how digital data is stored and accessed across several servers in potentially various geographical locations that are managed by a hosting provider.


3.Digital Currencies

There are various forms of digital currencies accessible, but developing digital currency is not as straightforward as it appears. To handle the services, a comprehensive methodology is required. As a result, such currencies provide benefits such as better security and various mining rewards.


4.Zakat Collection

The charity zakat is another Islamic financial product ready for blockchain disruption. Blockchain allows individuals to see where their money is going and why. Zakat collection has become an institution in many Muslim countries. The respective religious authorities promote, collect, and distribute zakat by Shariah regulations. 


According to study articles, there are various challenges. Inefficiency, a lack of transparency in how monies are gathered, managed and distributed, different views of Islamic scholars on how these should be dealt with, and enormous bureaucracy are among them.


5.Enhancing The Utility of Waqf

Waqf is a type of charity that is given voluntarily, permanently, and irrevocably to Allah (SWT). Waqf might be in the form of goods, immovable assets, or currency. Using blockchain to improve the utility of waqf, which in Arabic means a charitable endowment. In some aspects, the concept of waqf is similar to that of blockchain in that the gifts are immutable and not owned by any specific institution. In truth, they are intended to be analogous to the western concept of „trust,“ but in God’s name.


Bottom Line

In terms of Islamic Shariah, Blockchain technology provides a more secure and innovative means of doing business. Blockchain transactions are more transparent and visible to all users. Furthermore, smart contracts can be a beneficial mechanism in all financial transactions, and the process of monitoring and regulation can be reduced to simply writing a smart contract. The cryptocurrency has been a revelation, and Muslim countries must conduct further research and build a cryptocurrency that is totally compliant with the sharia principle.




What Is the Shariah Ruling On Blockchain?

The concept of blockchain is still developing. As bitcoin becomes better known, Shariah’s rulings are expected to become more educated and definitive. When it comes to the current Shariah status of bitcoin, most scholars agree that it is permissible.


What is the number of intriguing blockchain applications in Islamic finance?

There is a number of intriguing blockchain applications in Islamic finance that can provide a variety of benefits such as Smart Contracts, Cloud Storage, Digital Currencies, Zakat Collection, Enhancing The Utility of Waqf, and many more.



Share on facebook
Share on twitter
Share on linkedin

Schreibe einen Kommentar

Deine E-Mail-Adresse wird nicht veröffentlicht. Erforderliche Felder sind mit * markiert

Latest Post

Hot Topic

Translate »