BLOCKCHAIN technology could offer Islamic finance greater standardisation and transparency which have been crucial to its growth. Yet, guidance from regulators and Shariah experts on the compliance of financial technology (fintech) solutions emerging in the conventional banking sector is needed to support the development of Islamic fintech.

1.How Blockchain Challenges Islamic Banks

Blockchain-distributed ledger technology, which is the core of smart contracts and crowdfunding platforms, is a challenge for Islamic banks.

Self-executing smart contracts create an issue for Islamic bank lending through a murabaha contract, since this type requires an explicit offer and acceptance for each single transaction under this agreement. Clarity on the rules is also needed in the use of smart contracts in a decentralised autonomous organisation (DAO) for musharakah partnerships and crowdfunding.

Islamic Financial Services Board (IFSB) argues that Shariah experts should clarify whether a smart contract is a permissible contractual innovation even if it doesn’t meet formal requirements of classic contracts and actual practices in Islamic banking. Alternatively, a stop mechanism can be incorporated, which eliminates its smartness.

2. Tailored Regulation, Clarity on Rules Aid SME Fintech Outlook

Crowdfunding and peer-to-peer (P2P) financing could be a game changer in Islamic finance, giving wider reach and potential to close the gap for small and medium-sized enterprises (SMEs). SMEs generated about 60% of the United Arab Emirates’ (UAE) gross development product in 2014, while Saudi Arabia’s 2020 vision seeks to boost SME contributions to its economy.

Dubai’s financial regular introduced the first tailored regulation for crowdfunding in the Gulf Cooperation Council. Islamic banks need to have a clear digital strategy to upgrade their capabilities and match conventional banks’ offerings.

Counterpoint: Halal crowdfunding and P2P require tailored infrastructures and advice from Shariah experts to ensure the use of funds and contract code are in line with Islamic finance rules. The use of DAO in a musharakah partnership could be challenged by Shariah due to DAO partner rights, obligations and majority voting.

3. Malaysia, UK Active in Halal Fintech, Yet Saudi Arabia Lagged

Malaysia, followed by the UK and Indonesia, are large Islamic fintech hubs. The US appears on top, close to UAE, based on Islamic Finance News findings. Though Saudi Arabia lagged behind, this may change this year with the launch of its first Fintech Lab.

The number of Islamic fintech startups is still modest, but this is likely to change as banks start to realise the need to change mindset and work closely with fintech startups to offer costand time-efficient Shariahcompliant products for SMEs, wealth management such as robo advisory, microfinance, crowd and P2P lending and takaful insurance.

Crowd and P2P funding makes up a large part of the Islamic fintech market. A successful example of crowdfunding is the Yielders UK property platform, which last year became the first fully Shariahcertified fintech in the UK.

4. Adapt New Technology or Die by Disruption

Islamic banks should increase investments in fintech and work with startups to reinvent Islamic banking products. Three Islamic banks — Kuwait Finance House, Al Baraka Banking Group and Bahrain Development Bank — recently set up a consortium that supports the development of Shariah-compliant fintech products.

Islamic banks that adopt fintech are better positioned to navigate technology disruption. The EY 2016 report on banking in emerging markets estimated those embracing fintech may boost customers to 250 million from 100 million by 2021.

There have been a limited number of Islamic fintech solutions: Wahed Invest in the US is a robo-advisor focusing on wealth management; Yielders in the UK offers a propertybased equity crowdfunding platform; and CBX Unit, which is an Islamic digital currency backed by commodities.

5. Halal Fintech May Help Revive Saudi Arabia, UAE Gold Demand

New opportunities to invest in gold integrated by Islamic fintech blockchain technology may revive the metal’s appeal, lifting demand. Consumer demand for gold in Saudi Arabia and the UAE fell by 5% in 2017 (versus 2016) to 104 metric tonnes, according to Bloomberg Intelligence. Thisisa 36% drop from the 2013 peak, based on World Gold Council and Metals Focus data.

Development of Shariah-compliant gold-backed financial pro-ducts following the introduction of the 2016 Shariah Gold Standard may encourage investors to park their money in gold, seeing it as a safe-haven metal, as the IFSB predicts that Shariah-compliant assets will expand by 261% versus 2015 to represent US$6.5 trillion (RM25.61 trillion) by 2020.

Companies impacted include Barrick Gold Corp, AngloGold Ashanti Ltd, Goldcorp Inc, Kinross Gold Corp, Gold Fields Ltd, Agnico Eagle Mines Ltd, Sibanye-Stillwater, Randgold Resources Ltd, and FreeportMcMoRan Inc, who are top global gold miners. — Bloomberg Intelligence