The Islamic Development Bank’s (IsDB) research division has collaborated with Blocko, a blockchain technology company, to build a blockchain-powered credit system.
Sharia-compliant Blockchain Lending
According to a report by Construction Business News on Tuesday (June 16, 2020) IsDB’s Islamic Research and Training Institute (IRTI) together with Blocko, is developing a blockchain-based credit system for businesses. The proposed project plans to create a framework that minimizes the risks associated with credit finance in Islamic countries.
The charging of interests by banks is prohibited under Sharia law. However, financial institutions require safeguards to prevent loan defaulting. Islamic banks usually charge fees for late loan repayments which are usually donated to charities.
Both the IRTI and Blocko aim to leverage blockchain in incentivizing early loan repayments. The smart credit management infrastructure also includes a framework that will allow participants to contribute towards an insurance pool that provides coverage for loan defaults.
Islamic banks and other financial institutions participating in the project will be able to execute autonomous credit assessment for business clients. Smart contract protocols baked into the system will ensure these checks adhere to international best practices. Multiple banks will be able to function within a scalable network designed to assess the credit-worthiness of business clients across the Islamic world.
Commenting on the development, IRTI director-general, Dr. Sami Al Suwailem remarked:
“The Islamic finance market is growing rapidly, with projections of a rise from around $2 trillion to an impressive $3.78 trillion by 2022, yet certain technical and economic challenges have prevented the industry from truly flourishing. Our new partnership with E24P aims to address this by providing the infrastructure needed for the Islamic financial industry to deliver critical financing to both the developed and developing world.”
Crypto and Blockchain in the Islamic World
Blockchain technology is making inroads into Islamic financing. Back in 2018, Al Hilal Bank, an Abu Dhabi-based Islamic financial institution employed blockchain technology in an Islamic Sukuk transaction.
Lending is already a major market in decentralized finance (DeFi) which is one of the largest growing sub-niches in the emerging crypto landscape. Back in January, Money on Chain developed a crypto lending platform on Rootstock.
Financial institutions are also deploying blockchain technology in lending processes. Malaysian stock exchange, Bursa Malaysia announced plans to use the novel tech in the securities borrowing and lending market.