The rise of Islamic finance startups in recent times is increasingly opening the industry up to innovations, while scholars keep discussing the phenomenon with regards to Shariah compatibility.
On the surface, digital innovations in finance such as cryptocurrencies or digital exchanges seem to be on collision course with Shariah law, which emphasises real economic activity based on physical assets and does not allow monetary speculation. That said, the question remains whether processing of digital assets fall under the speculative category simply because bits and bytes are no physical assets.
Ziyaad Mahomed, associate dean at the International Center for Education in Islamic Finance in Kuala Lumpur and also chairman of HSBC Amanah Malaysia’s Shariah board, in a recent interview with The Edge Malaysia conceded that Islamic scholars around the world remain divided about the issue with opinions ranging from cryptocurrencies being permissible to something that requires caution to being prohibited outright. But he says owing to the huge potential that digital assets and cryptocurrencies represent for the global finance industry, and due to the fact that Islamic finance has become an integral part of it, a concord should eventually be reached.
“What is required is something called istilah, which means social concurrence or mutual agreement on digital assets [like the agreement to accept non-gold-backed paper banknotes as legal form of tender even though the paper as such has little to none intrinsic value]. It is determined using a concept called ta‘amul, which means exchange activity,” Ziyaad said.
But while the debate lingers on, there have been significant launches of new digital Islamic finance services in recent times that have considerable disruptive potential to the industry.
One is a new digital exchange set up on the European island of Malta – known for its attractive licensing regulation for cryptocurrency firms and fintechs –, that aims at attracting listings from Shariah-compliant financial technology startups and processing trades of digital assets, halal stocks and commodities, as well as list its own Shariah-compliant cryptocurrency.
The new exchange, launched in August under the name of “Huulk,” is backed by Dubai-based halal cryptocurrency firm OneGram, which last year created a gold-backed cryptocurrency compliant with Islamic law. According to OneGram’s CEO Ibrahim Mohammed, the Huulk exchange seeks to list around 20 Islamic fintech firms, some of which operate in Muslim-majority countries like Turkey and Malaysia, in addition to its cryptocurrency of which it has sold tokens worth more the $400mn over the past year.
”What we do is to modernise Islamic finance with cryptocurrency and blockchain at the heart of our processes,” Ibrahim said.
And he is not alone. In July this year, California-based Stellar Lumens, currently the seventh-largest cryptocurrency network worldwide, received official Shariah certification for conducting monetary transfers and transforming real assets into digital currency by the Shariah Review Bureau of the Central Bank of Bahrain, which said that it “did not find any provisions that are non-congruent to the principles of Shariah.” Stellar Lumens now plans to forge new partnerships with Islamic banks and financial institutions throughout the Middle East and Southeast Asia, the network said in a statement.
Another newcomer in the digital Islamic finance field is New York-based Wahed Invest, which operates the first-ever robo advisory geared towards Muslim investors on a Shariah-compliant platform which invests in sukuk, halal stocks and gold, and last month made the platform available to clients in the UK after receiving authorisation by the UK Financial Conduct Authority.
Wahed Invest is advised by a full-time Ethical Review Board, Mohammed Ibrahim Morshed, head of UK at Wahed Invest, said, adding that “Muslim and non-Muslim investors alike can now be completely confident that they are creating portfolios that are ethically sound.”