January 03, 2019 | AtoZ Markets - The latest tech reports in the financial field reveal that the Islamic financial institutions are increasingly using blockchain technology nowadays for complex financing terms, Sharia-compliant transactions and Islamic and sharia-compliant alternatives to conventional insurance. Blockchain can assist in the KYC procedure, back-office automation, and underwriting of micro-insurance.
Emirates Islamic, part of the UAE’s Emirates NBD banking group, was reported to be the first Islamic bank to test implementing the blockchain solutions. As early as 2017 the bank started to use the technology, integrating it into “cheque-based payment processes”, which reflected in strengthening their authenticity and minimizing the potential for fraud.
The UAE-based Al Hilal Bank became the world’s first Islamic Bank to complete a sukuk transaction on the blockchain, at the Abu Dhabi Global Market Financial center. “Sukuk” is an Islamic financial certificate, that meets the Islamic Sharia religious law.
Smart contracts are a pillar in how blockchain works
The system which is based on the Ethereum blockchain, is developed by the Dubai-incubated fintech startup Jibrel Network, which provides services of currencies, equities, commodities, and other financial assets as standard ERC-20 tokens on the Ethereum blockchain, as per the company’s description.
“We are proud to be the first bank to launch a ‘smart blockchain Islamic sukuk’,” said Alex Coelho, CEO of Al Hilal Bank, highlighting blockchain’s “cost efficiency, robust Shariah-compliance and the unlocking of new opportunities.”
The certification procedure on the blockchain technology may make halal certifications simpler, as explained, where smart contracts can be made use of, for publishing the halal certificates.
“halal” is the Arabic term in Islamic law for “permissible”, that says doing/having something is allowed.
Food that is classified as halal as per the Islamic laws, has to be certified in terms of several Islamic guidelines.
“Blockchain technology, together with Islamic principles, will digitally encrypt the Halal Certificate in its PDF format, and verify the Halal Certificate on the blockchain,”, as per the founder Shabeer Shaik Abdurahaman, being well-acquainted with the Islamic fintech.
Blockchain may improve the Islamic banking system
Further than food certification, Islamic financial institutions are using blockchain for managing profit sharing agreements, agency arrangements, and partnerships, using smart contracts, in addition to making use of the technology in verifying the Islamic financial transactions for banks and customers to avoid conflicts, and facilitate client partnerships and increased transparency, and “integration with mobile technology in countries lacking legacy banking infrastructure”, as per media reports.
Blockchain has recently started to be considered in banking and transactions through smartphone apps, along with maintaining traceability and transparency of banking deals for retail clients.