Islamic banking can be benefited from blockchain implementation

10 Sep, 2018
by Fifi Arisandi
Islamic banking can be benefited from blockchain implementation

The Islamic banking can be benefited with the implementation of blockchain.

The Islamic banking practice these days is no longer limited to the Muslim countries, in fact, it has become more common in several non-Muslim countries, such as United Kingdom, China, Germany, China, and the United States, aside from the conventional banking. 

One of the most prominent economist and 23rd Governor of the Reserve Bank of India (RBI), Raghuram Rajan even suggested in his 2008 financial sector report that interest-free banking (Islamic banking) should be practiced on a large scale, as mentioned by Sofocle on their website.

The wide adoption of the Islamic banking, however, is not an easy thing. One of the reasons is because the Islamic banking "system" require higher transactional costs as the contracts are more complex than the conventional system, which lead to the increase of legal and administrative processes and eventually the cost of doing the business. 

In addition to that, in Islamic banking, all financial transactions must comply with the Sharia Law, for example, banks can only create debt when it's backed by underlying assets, such as gold. 

The blockchain technology, with its smart contract functionality, can be used to automate the entire contractual process in Islamic banking according to the encoded terms. This implementation will ease all the associated legal and administrative intricacies, as well as redundancies that follow in the Islamic banking or financial products. 

In short, smart contracts streamlines the processes in Islamic banking, thus reducing the cost, while eliminating the duplication and fraudulent risks at the same time. 

Furthermore, Bitcoin or any other cryptocurrencies are created through mining, which complies with the Sharia law that prohibits any involvement of "Riba", such as lending or debt in traditional banking. 

As a conclusion, blockchain technology is not violating the Sharia Law, in fact, it can improve the whole required process in Islamic banking. When implemented, it can increase a wider adoption of the Islamic banking by more financial institutions in more countries across the world. 

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