Could Blockchain bridge the gap between Shariah-compliant products and traditional banking?

Throughout the last couple of years, we have seen banks and other financial services conduct prototypes and proof of concepts using Blockchain. There have been multiple attempts to explore the smart contract use cases of Blockchain into Fitech services. One of the kind is Shariah-compliant Fintech firm, where the smart contract use cases of Blockchain has helped their banking products and financial services.

A standard banking loan is just a contract between the bank and the borrower where interest is charged, with lot of paperwork involved. With Shariah-compliant banking products, the customer and the bank need to go through 3 different smart contracts like Profit Sharing agreements, Agency arrangements and partnerships. This is a space where the smart contract use case of Blockchain can add immense value.  Blockchain’s smart contracts engine can scale up functionally (looking at multiple product lines), and non-functionally (performance, output), and also would solve a lot of contractual overheads in Shariah banking. Smart contracts are verifiable, immutable and secure, and near real-time settlements mitigate counterparty risks.

The Islamic Development Bank (IDB) of Saudi Arabia is currently researching the use of Blockchain in Shariah-compliant products.  Since Q4 last year, the Islamic Research and Training Institute has been working with two startups – Ateon and SettleMint, to understand the feasibility of Blockchain for Islamic banking products. After a thorough feasibility study the IDB declared that Blockchain could be the perfect fit for Islamic finance.  From an operational perspective, it should be able to deliver the efficiencies needed to make Shariah-based products more competitive, with Blockchain’s solid values of transparency, trust and the fairness also run parallel to the core principles of Shariah.

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