Shariah Compliant Blockchain Services to Be Introduced by IDB of Saudi Arabia

shariah compliant blockchain

It can be safely said that 2008 was the worst year in financial history. The collapse of the housing market and Lehman Brothers led to an international financial crisis where millions if not billions were lost. There was one particular form of banking and financing that grew while others recovered despite the odds; Islamic Banking.

Islamic banking follows the principles of the Shariah or Islamic law, which denies interest, usury and gambling of any sort (including outright speculation). An increasing number of statistics showed that Islamic banking assets grew 10% year-on-year from the mid-90s to the beginning of the 2010s. They were only US$150 billion back in the mid-90s.

What Drove Islamic Banking Towards Growth

One would say the growing Islamic population that is well educated and enjoys better employment opportunities as well as increasing purchasing power. The Islamic Banking sector is estimated to grow to $3.5 trillion by 2021. A supporting factor is the growth of financial engineering and innovation in the provision of Islamic products and services.

Islamic banking is not just centered on interest free bank accounts anymore. Its expansion has led to many different products being offered such as FOF multi-manager investments, hedge funds, exchange traded funds as well as real estate funds. Investor awareness in these products has also grown due to the introduction of these different products.

Financial centers and regulators are also to thank for the growth in this sector as they have understood its strategic significance in global banking and how it is structured.

The Middle East (Especially Dubai) Proliferation of Islamic Banking

The Middle East has played a large role in proliferating Islamic Finance. Dubai is the first country to have a recognized Islamic bank, the first Islamic stock exchange and the largest number of listed Islamic bonds, called “sukuks” (pronounced sookooks). It even holds the title for having the largest sukuks ever issued.

Dubai is also known for business clusters like the DIFC, which have helped in coming up with Shariah compliant products to meet the needs of sophisticated and diverse investors.

Saudi Arabia’s IDB Steps Up

Another Middle Eastern country that isn’t behind on venturing into the latest technologies that the world has to offer is Saudi Arabia. Saudi Arabia’s Islamic Development Bank (IDB) recently announced that they have decided to implement blockchain technology in the development of Shariah-compliant financial products in order to provide better service to its Muslim clients. It intends to have greater financial inclusion of its members.

The Islamic Research and Training Institute of IDB, located in Jeddah, partners with SettleMint of Belgium and Aeton, a local firm to create new Shariah compliant products which will use blockchain technology. They are all set to start with the first phase of the project: a technical feasibility study.

The IDB hopes that the nature of blockchain to keep track of transactions as a distributed financial ledger through secure network will allow immediate clearing and settlement of transactions as well as asset exchanges. Risks from third parties will also be reduced greatly, they hope.

The IDB’s move could also serve as encouragement to other fintech firms to include Islamic finance, potentially tapping into the lucrative Middle Eastern, African and Asian markets.

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