A New Tool for Islamic Finance

Islamic Finance emphasizes equity, and risk-sharing. Bitcoin is a programmable asset that can be utilized to create Islamic financial structures, allowing them to be accessed by millions of people worldwide who would otherwise be unable to live according to their values.

Presented in partnership with Bitcoin Majlis

What is Islamic Finance?

There are nearly 2 billion people who identify themselves as Muslim in the world today. One of the fundamental principles of Islamic law, is the prohibition of riba – a term commonly translated as "usury," but which encompasses a broader spectrum of ethics in money and business. The tenets of Islam that relate to money matters are collectively known as Islamic finance. With delineated ethical, moral, and social obligations, Islamic finance is an alternative to what Westerners view as “conventional finance,” and is little known outside Muslim communities.

Deeply rooted in the principles of Sharia, the legal framework of Islam, and derived from religious precepts laid out in the Quran and Hadiths, Islamic finance has evolved over many centuries. It emphasizes partnerships, equity, and risk-sharing – concepts that not only align with Islamic teachings but also resonate universally.

Islamic finance eschews transactions involving riba (usury), gharar (uncertainty), and maysir (gambling). These prohibitions reflect a larger goal of maintaining justice and avoiding exploitation in economic activities. From its earliest form, practiced in the markets of Mecca and Medina, it has expanded to a global industry with a network of Islamic banks, investment firms, and insurance companies that offer a wide array of financial products and services designed to be Sharia-compliant.

Gold, given that it is a bearer asset and not a debt-based instrument, has played a key role in the history of Islamic finance, serving as a medium of exchange and store of value that doesn't depreciate over time. It embodies the principle of 'real assets,' which forms the backbone of Islamic financial transactions, as it is believed that every financial obligation should ultimately be backed by a tangible asset, thereby fostering productive economic activity and preventing excessive speculation.

Gold jewelry has played a traditional role in Islamic culture for centuries.
Gold jewelry has played a traditional role in Islamic culture for centuries. Image credit: Unsplash

Roots of modern Islamic Finance

Modern Islamic finance began to take shape in the late 20th century, despite its deep-rooted principles dating back to the 7th century. 

Many scholars and individuals have contributed to the development of Islamic finance over the years. Among them, Dr. Ahmad El Najjar, an Egyptian economist, is often credited with establishing the first Islamic bank in Mit Ghamr, Egypt, in the late 1960s, though it was not officially recognized as such. The model was based on profit-sharing and zero-interest in line with Shariah principles.

In the 1970s, the oil boom increased the wealth of many Islamic nations, and Islamic finance provided a faith-based context for the financialization of Middle Eastern states. The apogee of this era comprised formation of the Islamic Development Bank in 1975 by the Organisation of Islamic Cooperation.

In the subsequent decades, Islamic finance expanded rapidly, both in Muslim-majority countries and globally. Today, leading institutions in the field include the aforementioned Islamic Development Bank, Kuwait Finance House, Dubai Islamic Bank, and Al Rajhi Bank in Saudi Arabia. 

In non-Muslim majority countries, major global banks like HSBC and Standard Chartered have also established Islamic finance divisions. These institutions offer a range of products and services, from mortgages and personal loans to investment funds and insurance, all complying with Shariah principles.

Notably, several institutions like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) have been established to develop and promote standards for the industry. Their guidelines and certifications are widely respected and serve as a benchmark for best practices.

Major Shareholders in the Islamic Development Bank as of 2011.
Major Shareholders in the Islamic Development Bank as of 2011. Image credit: Wikipedia

Persistent challenges in the Islamic World

Contemporary Islamic scholars have made concerted efforts to reconcile the tenets of Islamic finance with the realities of the modern economy. This endeavor, however, is not without its challenges.

In some Islamic countries, unique financial products are developed to allow adherence to these principles. For example, "murabaha," or cost-plus financing, is a contract wherein the bank purchases a property and sells it to the customer at a marked-up price, paid in installments. Despite such innovations, the realities of global economic integration mean many Muslims still find themselves navigating a financial system at odds with their beliefs.

Though Islamic banking and finance have made strides in offering riba-free financial products, the reach of these services remains limited, especially in rural and low-income regions. Furthermore, these solutions often involve complex contractual structures that attempt to mimic conventional financial products without contravening the prohibition of interest. While these efforts are commendable, they still fall short of the equity-based economic system that Islam promotes.

Challenges in an age of global mobility

For Muslim immigrants moving to Western countries, their religious beliefs often clash with the prevalent debt-based economic system. 

Imagine a Muslim immigrant moving to the U.S. They are immediately faced with the necessity of participating in a financial system that is at odds with their faith. Buying a house, purchasing a car, or even starting a business usually involves taking on debt, something their faith explicitly prohibits.

It's in this context that the practice of community lending has found a role. Muslim communities have long been pooling resources to support each other, reflecting the Islamic principles of mutual assistance and shared responsibility. This is illustrated by the tradition of "Qard Hasan," a benevolent loan where the lender does not charge any interest and the borrower returns only the principal amount.

In countries where traditional Islamic finance is not practiced or recognized, Muslims often find innovative ways to adhere to their religious beliefs while also participating in the economy. Stories abound of Muslim communities pooling resources to help fellow community members purchase homes outright, avoiding the necessity of interest-bearing loans.

Enter Bitcoin

The emergence of bitcoin has offered a potential solution to this dilemma. bitcoin's monetary properties align remarkably well with the principles of Islamic finance. Here's how:

  1. No Riba (usury): Bitcoin is not debt-based, and transactions involving bitcoin do not involve interest or usury, a concept explicitly prohibited in Islam. Owning bitcoin is similar to owning a physical asset that is truly riba-free.
  2. Equity and risk sharing: Bitcoin, by its very nature, is a participatory form of finance where every participant owns a share in the overall system. This corresponds to the Islamic principle of risk-sharing. In specific instances of using bitcoin to finance a project or business, bitcoin makes it easy to create ad hoc equity-based financing arrangements.
  3. Elimination of Gharar (uncertainty or deception): While bitcoin's price volatility might be perceived as a form of gharar, its underlying technology and principles are transparent and don't contain hidden pitfalls, thus reducing the elements of uncertainty and deceit. With using the bitcoin network, there's no deception or uncertainty because everything can be verified mathematically.

Bitcoin's potential as a halal form of money has sparked a global conversation among Islamic scholars and financial experts. Sheikh Dr. Haitham al-Haddad, a prominent Islamic scholar in the U.K., has opined that bitcoin is permissible under Sharia law, seeing it as a form of digital asset.

As the West grapples with an economic crisis magnified by over-leveraged and debt-ridden financial systems, the principles of Islamic finance and the rise of bitcoin could offer an alternative path forward. As always, the dialogue between tradition and innovation continues – and it is within this dialogue that we might find our best path forward.

Reaching the Muslim Community with Bitcoin

There are several ways that the Bitcoin community can make inroads with those observing Islamic financial practices.

  1. Education and advocacy: Perhaps the most important task at hand is education. bitcoin enthusiasts, technologists, and financial experts must commit to educating the Islamic community about bitcoin. This includes not only explaining why and how bitcoin is halal, but also why crypto is rife with riba and should be avoided.
  2. Religious certification: Pursuing religious certification for bitcoin from recognized Islamic financial institutions could be an effective way to gain acceptance. This could involve presenting detailed research and analyses to Islamic scholars.
  3. Developing Sharia-compliant bitcoin platforms: There's a growing field of 'Islamic Fintech' that seeks to combine digital innovations with the ethical mandates of Islamic finance. Bitcoin technologists could collaborate with these initiatives to develop bitcoin platforms and financial products that comply with Islamic law. These could be anything from bitcoin-based mortgages to equity-based investment platforms.
  4. Engaging with Islamic financial institutions: Collaborations and partnerships with Islamic banks and financial institutions could be another way forward. By demonstrating bitcoin's potential as an asset class and a payment system that adheres to Islamic principles, these institutions might be more inclined to incorporate bitcoin into their financial offerings.
  5. Seminars, webinars and conferences: Organizing or participating in events that target Islamic investors and institutions could be an excellent way to spread awareness. These platforms can provide a robust discussion about the compatibility of bitcoin with Islamic finance principles and the potential opportunities that lie therein.

It is evident that the principles and values held dear by proponents of sound money, equity, and bitcoin coincide significantly with the core tenets of Islamic finance. Both philosophies advocate for fair and transparent economic systems, prioritize wealth preservation, and discourage predatory lending practices that take advantage of the less fortunate. Moreover, both share a deep respect for the concept of money as a stable and scarce asset. 

The correlation is striking and indicates an untapped synergy waiting to be ignited. By proactively addressing the concerns of Islamic communities and demonstrating the alignment of bitcoin's attributes with the tenets of Islamic finance, we can not only expand the adoption of bitcoin but also contribute to a more inclusive and ethical financial ecosystem.

As the world grows increasingly interconnected, the opportunity for these two communities – bitcoiners and Islamic finance innovators – to collaborate and co-create has never been greater. It's a prospect that holds immense potential for equitable economic growth and financial inclusion, aligning with the ethos of both sectors. The meeting point between Islamic finance and bitcoin may very well represent the next significant frontier in financial innovation.

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