The Rising Fintech Trends in Dubai: Opportunities & Challenges
The traditional concept of decentralized Finance (De-Fi) is based on leveraging blockchain technology to remove intermediaries and help standardize access to financial services. However, this traditional model of De-Fi conflicts with the basics of shariah-compliant finance due to speculative tradition and interest-based transactions. The blockchain model helps overcome this problem by ensuring compliance with Sharia law while also achieving the efficiency and security of a decentralized system
Improving Transparency and Risk-Sharing
Islamic De-Fi can benefit from the blockchain technology because instead of allowing its users to benefit from the interest-based profit, it helps share the risk and rewards equally amongst all the participants. This means that the blockchain records of transactions are permanent and can be easily accessed by the public to verify. The transactions are, therefore, easy to trace as well, which makes the financial activity transparent as well as secure in a way that upholds the ethical standards set out in Islam.
Facilitating Shariah-Compliant Contracts
Another powerful tool that the Islamic financial sector can access through Blockchain is the usage of smart contracts. Smart contracts have their terms directly written into the code and are considered to be self-executing. This technological tool provided by Blockchain can help lower costs and inefficiency to a huge extent by reducing the need for intermediaries. It can also help with upholding the concept of Islamic De-Fi because it can execute profit-sharing agreements (Mudarabah) and asset-based financing (Murabaha) without violating Shariah principles.
Introducing Shariah-Compliant Financial Products
Islamic De-Fi can further revolutionize the concept of shariah-compliant finance because these platforms are introducing financial products such as crowdfunding platforms and peer-to-peer lending into the market. With decentralised crowdfunding platforms provided by blockchain technology, people can invest more in projects without having to worry about compliance with shariah laws regarding finance. This can enable efficient cross-border transactions as well as offer micro-finance shariah-compliant solutions.
Final Thoughts
The incorporation of blockchain holds a lot of potential for the future of Islamic De-Fi. The ethical, efficient and transparent system that it can help create will not only make it a shariah-compliant form of finance but will also promote it on a global level.