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