The Role Of Blockchain Technology In Islamic Finance

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Islamic Finance is an increasingly popular form of banking in the Middle East and Asia. But the Islamic tradition can sometimes contradict conventional financial markets’ core principles.

It’s estimated that 80% of global trade will be conducted using blockchain technology by 2030.

Blockchain technology can potentially transform the entire financial sector of a nation. In this article, we will discuss the role of blockchain technology in Islamic Finance.

With the world increasingly becoming aware of blockchain technology, there has been a lot of talk about it and its potential to revolutionize different industries, including Finance and Islamic banking.

Islamic Finance, otherwise known as ‘Fiqh,’ is the practice of borrowing and lending money within an Islamic framework. It has been practiced for centuries in Muslim countries across Asia, Africa, and Europe, and many of the world’s top banks and financial institutions are already involved in Islamic Finance.

Blockchain technology is a distributed database designed to record and secure data in a way that allows access to anyone. While it was developed for the cryptocurrency market, it has recently become a hot topic in the financial world.

What is Blockchain Technology?

Blockchain technology, or Blockchain, is a new way of creating a database (or ledger) that allows people to communicate without having to rely on a third party or trusted third party.

The technology is decentralized and distributed across all participants. So there’s no single point of failure, and no company or individual can alter the ledger or control the flow of transactions.

It was originally developed to allow Bitcoin, a digital currency, to operate securely. But it is quickly being used for many other purposes, including creating a trusted network of buyers and sellers.

There are thousands of blockchain technology applications, and many focus on the financial sector. But blockchain technology is more than just a buzzword that applies only to financial transactions. A set of distributed ledgers, or public databases, can track ownership of items and confirm transactions (such as purchases) in real-time without needing a third party (like a bank).

Blockchain technology has recently gained much attention because it allows financial institutions to conduct transactions without third-party interference.

What is Islamic Blockchain?

In today’s modern world, many of us are accustomed to the concept of cashless transactions. However, according to a recent study by the World Bank, 1.6 billion people live without access to basic banking services. There are several ways that Blockchain can address this issue.

This includes financial inclusion, digital identities, and remittance. The technology behind Blockchain is designed to provide greater transparency and security in the areas of finance and government. Islamic Blockchain is the ideal blockchain-based platform for those interested in learning more.

Islamic Finance, a subcategory of Shariah-compliant finance, provides an alternative to conventional banking institutions, offering more flexible and tailored products and services to its clients. At its core, the technology used in Islamic Finance is the same as other blockchain-based technologies. It’s the very reason why the industry is moving away from using the term ‘blockchain’ and focusing instead on using the term ‘distributed ledger technology.

Is Blockchain a new technology that has yet to mature? No, it is simply a method for transferring money, and this is what it is being used for the last few years. People have been trying to find ways to transfer value and information from one place to another without needing an intermediary, and Blockchain seems like a perfect fit for this kind of task.

DLT(Distributed Ledger Technology):

Islamic Blockchain uses its decentralized public ledger to store its cryptocurrency, the ICN (Islamic Community Network). The network works as follows: first, a node is registered.

Then a user is assigned a set of data called the transaction log. When users want to make a transaction, they select a node from the list and send the transaction data to that node. The node then adds the transaction to the transaction log.

If the transaction is not valid, the node will delete it from the log. The node will add the transaction to the log if the transaction is valid. The advantage of using blockchain technology is that the transactions are recorded on the network, so they cannot be tampered with or deleted.

Another advantage is that there is no need for a central authority. The disadvantage is that it can take time to validate a transaction and may require a lot of computing power.

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How is Blockchain used in banking and finance?

The role of blockchain technology in Islamic Finance can be seen in multiple areas, such as transparency, trust, security, speed, etc. Since several Islamic finance products are designed to adhere to Sharia Law, which is based upon Islamic principles, they could potentially utilize blockchain technology to ensure the following: 

Transparency: Sharia law encourages transparency by requiring that all transactions and contracts are recorded and publicly available. In addition, any disputes must also be resolved by a third party.

Trust – As mentioned above, the concept of transparency is an important factor in Islamic Finance. Without transparency, the parties involved may not trust each other, so transactions may not occur. 

This is why Islamic Finance is so heavily based on trust. There are many benefits to Islamic Finance, and the general public must know that it is suitable for Muslims and non-Muslims.

Blockchain technology is transforming how companies use distributed ledgers to streamline business processes and cut down transaction times across their supply chains, from logistics to manufacturing. In banking, digital assets have become an increasingly popular form of payment. However, many banks still see cryptocurrencies as risky investments due to the volatility and lack of regulation surrounding the space. However, that could change as blockchain technology matures.

How does Blockchain influence Islamic Finance in the future?

The Blockchain is an immutable ledger for all transactions stored in its memory. This makes it possible for the parties involved to verify the transactions without having to rely on a third-party intermediary, which has been a common practice in Islamic Finance, to do so. The Blockchain can help create a level playing field for the institutions involved, which benefits consumers and businesses. There is scope to use this technology to develop and improve new products and services that would otherwise be impossible due to high transaction costs.

Blockchain technology has been applied to several industries, such as supply chain management and banking. It has increased the possibility of the adoption of Blockchain in the Islamic finance industry. The development of digital currency is also possible to be implemented in the Islamic finance industry.

It will be difficult to determine the real benefits of applying Blockchain technology in Islamic Finance. However, the Islamic finance industry can benefit from this technology in various ways, including developing its digital currencies, providing financial services such as loans, insurance, and remittance services, and building a distributed database for the transfer of assets between banks for payment processing.

The combination of Blockchain technology with Islamic Finance is not just beneficial but necessary because this technology can improve efficiency and eliminate unnecessary costs in the Islamic finance sector.

In a recent study published in the Journal of Financial Econometrics, researchers at Universiti Teknologi Malaysia (UTM) analyzed the effect of blockchain technology on Islamic Finance. They found that Blockchain could help financial institutions reduce operational costs, enhance security systems, and create transparency.

In addition, they found that banks using Blockchain had a high return on investment.

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