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Jakarta Post

Islamic finance and blockchain: Can it bring greater impact?

  • Gratiyana Ningrat


Jakarta   /   Sat, November 24, 2018   /   11:57 am
Islamic finance and blockchain: Can it bring greater impact? A blockchain is essentially a distributed database of records or a public ledger of all transactions or digital events that have been executed and shared among participating parties. (Shutterstock/File)

The 2030 agenda, interconnected universal goals that promoting sustainable, inclusive development for all to end poverty, protect the planet, peace, and more sustainable future for generations to come was adopted by 193 countries under the United Nations in 2015.

“Poverty eradication is at the heart of the 2030 Agenda, and so is the commitment to leave no-one behind,” said Achim Steiner, United Nations Development Program (UNDP) Administrator about Sustainable Development Goals to address the issues of billion people in the world who lived on less than US$2 per day.

The global agenda for poverty alleviation is aligned with maqasid al-shariah – objectives of shariah, the philosophical framework from many classic Islamic scholars such as al-Ghazali and al-Syatibi, to explain the wisdoms behind rulings not only about developing consciousness of God but enhancing social cohesion.

The maqasid has an important aspect to developing Islamic economics which is maslahah or public interest. Money in Islam performs a “social-role,” that is why the main goals of Islamic finance are to distribute wealth efficiently, promoting socio-economy justice, and ensure the prosperity and well-being for all.

Meanwhile, the gap in financing for SDGs is currently estimated at $ 2.5 trillion every year. According to Thomson Reuters' projections, Islamic finance assets are projected to grow to $3.2 trillion by 2020. It depicts Islamic finance potentials to support the SDGs by providing innovative financing solutions.

Compared to individual contribution, giving zakat or sadaqah through formal institutions, investing in Islamic bonds, can increase outreach, targeting the people in need, and providing a more strategic and sustainable solution.

However, there are several challenges, inefficiency, a lack of transparency in terms of how the funds are collected, managed, distributed, and the differing views of Islamic scholars on how these should be dealt with the rulings or fatwa.

Blockchain technology can address those problems. In short, blockchain is a decentralized ledger that may be continuously growing as a list of records, transactions, value, and/or programs in a transparent and immutable manner.

It has ability to track where your transactions are going, when they arrived, and where they were used to govern the organizational inefficiency and corruption, means that greater transparency and accountability as the main concern of zakat contributors.

The International Centre for Education in Islamic Finance (INCEIF) is developing a blockchain application for zakat. It is presented options for sadaqah (charity) or zakat, madhab or the school of thought of user follow — Shafi’i, Maliki, Hambali or Hanafi, the choices of project, and then user complete their payment.

After zakat payment has been made, it is registered on a node in the blockchain. Zakat payers will receive the notification of the utilization and project’s scorecard credibility. It will gain more confidence among payers that their zakat has reached intended recipients.

Not only to track transactions, the technology has developed to benefits society in digital identities, smart contracts, food supply, fraud detection, and will continue to grow.

More example, smart contracts can be used for Islamic Bonds. Blossom Finance leverages smart contract in blockchain technology to increases the efficiency by standardizing and automating the process of issuance.

What differs with the conventional offerings is how it hasten the legal and accounting process, and payment overheads which lead cost reduction. In addition, it does not require institutions or recipient to add cryptocurrency to their balance sheet as the product supports the issuance in local currency.

Another blockchain project called HARA, a blockchain based decentralized agriculture data exchange. Due to profit and risk sharing principles, the problem on the ground is there are no reliable income statements to assess risk and return for the potential Islamic equity investors.

One of the reasons why they gather farmers’ cultivation and market traders’ data is to develop Islamic financing products and improve the transparency of agriculture ecosystem’s financials with data empowerment.

Those features would be a huge leap for Islamic finance to reach more potential users and establish more efficient commercial akad or contract based transaction with blockchain smart contracts such as mudharabah, bai’ al salam, musharakah, and the list goes on.

How is it for Indonesia? The largest Muslim population, a nation home to 12.7% of the world's Muslims has unparalleled potentials in realizing the SDGs using Islamic finance and funds.

According to BAZNAS the amount of zakat collection in Indonesia, only in formal institution, is reached Rp5 trillion in 2016. Yet, BAZNAS (Badan Amil Zakat Nasional) found that the potential of zakat fund is around Rp286 trillion ($19 billion) in 2015 with extrapolation method to GDP. A huge gap indeed.

"BAZNAS looks at the SDGs as a tool to achieve progress Indonesia, aligned with the vision, namely the welfare, alleviating poverty, improving quality human resources, encourage public health and all other aspects of empowerment", says Ir. Nanan Mintarti, one of the commissioners of BAZNAS.

Therefore, BAZNAS and UNDP Indonesia strengthen their partnership where Indonesia can take the lead for providing innovative financing, including Islamic finance and funds in SSMART (South South Cooperation) platform for SDGs.

On above mentioned, Indonesia can be the powerhouse of Islamic finance movement in achieving SDGs. It will bring greater impact if supported by blockchain technology.

Living in the midst of industry 4.0, an unprecedented technological revolution, the development policy should ceaselessly ensure that no-one left behind. The utilization of technology must be parallel with the global movement on realizing the SDGs.

Although the blockchain technology can disrupt Islamic finance, it is not as easy as flipping a coin.

Collaboration between private and public sector to ensure its implementation to pave the way of SDGs realization is essential.


The writer is Islamic finance and economics, middle-east and Islamic studies master’s student at school of strategic and global studies, University of Indonesia.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.