Decentralized Islamic Finance
Brief History of Islamic Finance
An experiment that started in the late 1970s currently sits on a market cap of over $2 trillion in 2022.
Islamic Finance started as an experiment in Egypt. It grew at 100% per year in the first three years of operations as it provided Muslims with financial returns without investing in interest-based financial products that are against Islamic beliefs.
Although Islamic finance is a centuries-old practice, it was only formalized in the 20th century.
What is Islamic Finance?
Islamic finance is the practice of managing money and implementing financial plans following Sharia (Islam's moral teachings), which establishes guidelines for lending, investing, and saving. The concept of risk sharing is central to Islamic banking and finance. Understanding the role of risk-sharing in capital formation is critical. Furthermore, Islamic finance requires that riba (usury) and gharar be avoided (ambiguity or deception).
Why Islamic Finance is Important?
Islamic finance aims to promote inclusivity in the financial services sector. Many Islamic teachings establish boundaries, restrictions, or constraints on financial issues, such as the types of income or business methods that are permissible. For example, it is illegal to finance or invest in a betting company, alcohol, or any other haram commodity because these items are detrimental to the development of a state.
These practices may be incompatible with non-Islamic financial instruments in some cases. As a result, a set of Islamic financial principles and financial system organizations cater to Islam’s recognized financial practices to prevent a group of people from being excluded because of their religious beliefs.
The global Islamic financial business is rapidly due to the result of significant investments in Halal industries, infrastructure, and Sukuk, particularly through electronic channels in all goods and services.
Massive development opportunities in the thriving Islamic industries are driving the market forward.
As the global economy recovers from COVID-19 and other economic downturns, Islamic banking is expected to become the largest sector of the Islamic finance industry by 2024, accounting for 69% of the industry’s assets, or $1.992 trillion.
Decentralized Finance
Decentralized finance (DeFi) is a cutting-edge method of providing financial services that eliminate traditional centralized intermediaries in favour of automated protocols. DeFi participants are part of a peer-to-peer network based on a public blockchain that allows for automatic asset transfers (via smart contracts).
Decentralized Islamic Finance
Despite receiving acclaim for developing a "theoretical" into an industry with a $2 trillion market cap. Over the years, the Islamic finance sector has come under fire for ignoring its fundamental ideology and heading in the wrong direction.
This has happened first by the sidelining the original finance method advocated by promoters — risk-sharing finance — in favor of fixed-markup finance of purchases (particularly murabaha), and then by distorting the rules of that fixed-markup murabaha, effectively delivering conventional cash interest loans following conventional interest rates, but disguised with “ruses and subterfuges” and burdened with “higher costs, bigger risks”
— Wiki: Challenges in Islamic Finance
Finance is moving toward decentralization. It is only prudent for Islamic finance to use a decentralized strategy to provide Islamic financial assets.
Smart contracts can be used to codify and execute contracts such as Mudharaba, Musharaka, Sukuk, and other contracts in Islamic Finance. This broadens access to these products because anyone on the blockchain can invest in them and be assured that the contract terms adhere to Islamic finance fundamentals.
These contracts can be available on blockchains dedicated to Ethical Finance such as Qitmeer's BlockDAG, where everyone can see and confirm that they adhere to the fundamentals of Islamic finance.
I look forward to merging decentralized protocols and the Islamic financial ecosystem.
A Decentralized Islamic Finance will make the difference. The Islamic Financial Industry has long sought to distance itself from conventional financial ideas that go against its core principles.
References
- https://en.m.wikipedia.org/wiki/Islamic_banking_and_finance
- https://en.m.wikipedia.org/wiki/Challenges_in_Islamic_finance
- https://alizzislamic.com/Knowledge-Centre/Overview
