Islamic Banking Sector Working to Integrate Blockchain in their Ecosystem

By Ravindra Chagetha

As the cryptocurrency industry gains momentum, more and more Islamic banks have joined the train. Major Islamic banks like ICICI and Emirates NBD began exploring possibilities in the sector to reduce their transactional costs as early as 2016. Emirates Islamic became the first Islamic bank to use the blockchain technology, namely to prevent fraud. A study was conducted by Blossom finance, which concluded that the functionality of bitcoin was in accordance with that of the Islamic definition of money, which was later ratified by an Islamic scholar when he declared bitcoin permissible under Sharia law.

Islamic banks follow the concept of riba which doesn’t allow them to collect interest. They are only permitted to give loans only along with goods and services. Which means that they have to be given against an asset, like gold. The transactional costs shoot up when banks comply with these rules and that is why blockchain is gaining appreciation in this sector. It brings down the transactional cost significantly. They have also started using smart contracts automate the contractual procedure and reduces middlemen while enforcing it.

The main principle behind blockchain is the decentralization of banking, which creates doubts not only for the government authorities but also for a normal user. Islamic banking could provide that verification to the industry. The reduction of costs does away with the hindrances which usually end up dissuading investors. Moreover, it has had adapted itself to the guide in accordance with the Sharia law.

In order to comply with the Sharia law, Dubai’s OneGram and Malaysia’s HelloGold have started to back every cryptocurrency unit with some quantity of physical gold. And many Islamic scholars have approved these firms.

And the cherry on the top is the fact that both these firms still maintain the congenital advantages of the blockchain technology. The cost reduction, increased automation, and reduced redundancies, along with increased flexibility could make it very lucrative.