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The most important components of the Islamic financial system that can be improved with blockchain

Islamic finance is an extensive concept that includes many terms, technical processes and features, which are more than enough to confuse an unprepared person. There are courses that you need to take just to get a basic understanding of the fundamentals of this economic sphere of relations that has existed in Islamic countries for many decades. To talk about them, or at least give a general idea of what Islamic finance is, would take a lot of time and hundreds of pages of text. In this article, we will consider only a number of the main components that work to preserve the functionality of the system and its relevance in the modern financial world. And at the same time, let’s look at how they interact with modern digital technologies and how they can be improved with the help of blockchain and cryptocurrencies.

Islamic finance is undoubtedly an impressive sector with huge potential. In 2020 and 2021, the cumulative annual growth rate of Islamic finance was 10.5%, while the growth of financial (including credit products) in traditional banking did not exceed 4%.

Despite the fact that monetary and material relations in the Islamic world have existed for a very long time, the very concept of Islamic finance arose and formed all over the world in the first half of the 20th century as “financial activity conforming to Islamic law and Shariah law.” When it comes to Islamic banking, accepting deposits and financing institutions that commit themselves to the implementation of Islamic laws should be such that they meet the needs of Muslim clients and investors. These institutions, investors and clients can be full-fledged Islamic banks, Islamic subsidiaries or branches of an ordinary bank, but must strictly adhere to the principles of Islamic finance.

What is included in the basic concepts and requirements for organizations engaged in financial activities in the field of Islamic finance?

1) The absence of financial products in the portfolio in which interest is expected to be charged.
This is the basic and most important principle underlying Islamic finance. Interest is considered usury and is a riba (prohibition), since the exploitative nature of the entire modern financial system is manifested through the collection of interest.

2) Investing in enterprises that engage in prohibited activities (haram).
Such activities include: the sale of pork and alcohol, as well as many other actions incompatible with Islam.

3) Speculation (maysir)
Gambling is prohibited by Shariah law, and therefore Islamic financial institutions cannot be involved in contracts whose ownership depends on an uncertain future due to speculation.

4) Uncertainty and risk (garar)
Investments of Islamic financial banks in risk and uncertainty.

In addition to the above prohibitions, Islamic finance is based on two other important principles. Each transaction must be related to a real underlying economic transaction, thus have material completeness, and each party must participate in the distribution of profit/loss, while not having a superior share in any of them.

There are three types of agreements within the framework of Islamic finance:
1) Profit and Loss Sharing Partnership (Mudarabah); 2) Joint venture with profit and loss sharing (Musharakah); 3) Rental (Ijarah).

When two parties agree on a Mudarabah transaction, it means that they agree on a share in the profit/loss division. One partner (financier or rab-ul-mal) provides capital, and the other partner (mudarib) provides labor, and is also responsible for capital management and investment.A joint venture with profit and loss sharing (Musharaka) implies that the partners contribute capital and distribute profits and losses proportionally. Musharak’s deal continues to function as long as all parties agree to continue operations.

Ijarah (leasing) involves the transfer of property or assets for rent and is based on the rules of legal ownership adopted in Islam. Essentially, the tenant pays the rent and makes payments to the landlord who owns the property, eventually becoming the owner of the property.

Takaful, in fact, is an Islamic insurance. Takaful was created on the basis of mutual cooperation and common welfare. Takaful is an important part of the Islamic banking system and financial relations.

What can modern blockchain technologies provide to improve Islamic banking and Islamic finance as a system of interaction between the parties to transactions?

Firstly, it is, of course, the use of smart contracts. The technology of their work consists in the introduction of digital self-executing contracts between the parties without human intervention by using a distributed registry. As the entire financial sector strives to maximize the benefits of new technologies, Islamic finance also strives to follow the trends of the digital world. For example, in the context of Islamic finance, the parties involved in mudarabah contracts (an investment contract based on equity participation) can derive great economic benefits. The mudarabh contract can be significantly improved technologically, operationally and from the point of view of compliance with Shariah law through the use of smart contracts.

The credibility of Musharak’s contracts can be ensured by the proper anonymity of the mechanism, which is applicable to all smart contracts where their implementation is in high demand. All information is securely and accurately stored in decentralized blockchain systems and is immutable. As part of the work of smart contracts in Musharak transactions, remuneration is received by the parties only on condition of making a profit.

When making transactions, Ijarah blockchain opens up prospects for creating tokens that can be used when buying and renting real estate, not limited to obtaining loans. With the help of blockchain, it is possible to create systems related to credit scores (or creditworthiness).

Takaful is undoubtedly one of the areas of application of Islamic finance, built on the principles of mutual assistance, that need the use of blockchain. Taking into account the wide range of advantages offered by the Takaful model, distributed registry systems are able to provide the highest level of data security by encoding insurance conditions. As a result, no third party can decipher or manipulate the agreed terms.

Blockchain and cryptocurrencies in Islamic financial system

The HAQQ blockchain can be used in the implementation of projects when making transactions based on the principles of Islamic finance. This blockchain network fully complies with the rules of Shariah, has its own digital currency and a Fatwa issued by well-known Shariah scholars.

The Evergreen DAO Fund, funded by the issue of Haqq base tokens and managed by network participants, is designed to support innovative projects for the international Muslim community. High bandwidth makes Haqq an ideal tool for implementing digital crowdfunding campaigns.

Blockchain and cryptocurrencies in Islamic financial system

Islamic Coin is a digital currency conforming to the norms of Islam and Shariah, functioning in its own blockchain Haqq, which means “Truth”. Already at the stage of closed sales, IslamicCoin aroused huge investor interest and was able to raise more than $ 200 million in just a few weeks. Unlike technically outdated Bitcoin and Ethereum, which have a lot of problems, IslamicCoin uses the full power of the most progressive blockchain technologies and is based on the most fair and reliable ideology and rules of conduct.

Successful investors choose ideologies, technologies and prospects based on something more than minor fluctuations in price charts. For almost 20 years of the existence of a new type of digital money, cryptocurrencies have not brought a drop of real value into this world, have not made people free, independent and happy. And this means that it’s time for a new type of finance based on responsible choices and new values!

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