As a divine religion and a complete code of life, Islam offers guidance in all aspects for humans to help them achieve prosperity in this world and the hereafter.
Islamic law or Shari’a provides a comprehensive set of rules and principles encompassing contracts and commercial transactions. However, instead of being too restricted in such matters, its main focus is to determine the prohibited factors while leaving the door of permissibility open for certain practices.
From the prime sources of Shari’a, scholars have deduced many legal Islamic maxims that convincingly reinforce this idea, for example:
The basic principle about public dealing is permissibility until evidence indicates that it is forbidden. The basic principle in contracts and conditions is permissibility and validity.
To clarify further, if a transaction does not entail any prohibited elements, it is permissible as per the Shari’a law. So, the pertinent question is regarding the prohibited elements that we should avoid in a transaction. Some of the major ones are:
- Interest (riba): any unjust excessive value stipulated in a contract. It includes lending- borrowing and sale-based transactions too.
- Excessive risk (gharar): any excessive uncertainty within the pillars or the main components of any contract.
- Enabling (qimar/maysir): any transaction that involves a zero-sum game and a game-of- chance. The outcome of such a transaction is an increased risk.
- Contract-Specific Prohibitions: Some prohibitions are specific to a transaction; one should avoid them to conclude a valid contract.
In addition, Islam also strongly encourages people to maintain high social and ethical values in their transactions. For example, one of the legal maxims stipulates avoiding a harmful transaction. The harm can either be to the counterparties or society in general. Another maxim suggests that one should not inflict self-harm nor mistreat others.
Islamic finance, leveraging on a strong ethical and social foundation, began taking shape in the early 1980s as an alternative to conventional finance.
Current Islamic Finance Industry and COVID-19
The four-decades-old Islamic finance industry has come a long way in recent times. The current global assets of the industry sit just below US$3 trillion, with a remarkable double-digit YoY growth until 2018. While the growth stagnated in 2019-21 due to the global pandemic, expectations are that it will resume its trend with a 5% average growth in the coming years. Given this estimate, the global assets could reach US$3.69 trillion in 2024.
The industry’s major regions include the GCC, Southeast Asia, the Indian subcontinent, and Turkey. However, all these economies are currently suffering from economic recession due to the ongoing pandemic. For these reasons, the traditional Islamic finance industry needs a boost through FinTech, particularly blockchain and crypto.
Decentralised Finance (DeFi) Phenomenon
DeFi is the recent movement in the blockchain and crypto space that promotes decentralised networks and open-source software to create multiple types of financial services and products. The idea is to develop and operate financial decentralised applications (DApps) in addition to a transparent and trustless platform, such as permissionless blockchains and peer-to-peer (P2P) networks.
As of January 2022, the market capitalisation of DeFi was US$160 billion, out of which US$96 billion is the total value locked (TVL) in the DeFi products. The TVL has shown a 300% increase from US$32 billion within one year.
This fact alone shows the immense potential of DeFi, whereas many experts consider that DeFi can become 100 times larger in the next five years.
Unfortunately, the DeFi sector is presently conventional and Islamic finance is yet to decide its place within this sector. Though there are a few ideas to initiate Shari’a-compliant projects in the DeFi space, they are yet to deliver an actual product. Except for MRHB DeFi, one of the world’s first Shari’a-compliant DeFi ecosystems, it would require a lot of tenacity to bring Islamic ethics and social values into the DeFi sector. But before taking a glimpse of the project, it is appropriate to understand “Islamic DeFi” first.
Combining Islamic Finance and DeFi
Islamic DeFi refers to decentralised Shari’a-compliant and P2P financial products and services. It is a complete ecosystem consisting of DeFi products, tools, and processes governed by Islamic principles and rulings.
Islamic DeFi can adopt two approaches for further expansion: (1) Shari’a compliance of existing protocols and projects; and (2) developing new Shari’a-compliant projects. These projects may include Islamic DEXs, Shari’a DAOs, governance mechanisms, savings, investments, asset management, staking, tokenisation, stablecoins, DeFi takaful, and halal NFTs. It can surely bring innovations, tech advancements, and Shari’a robustness in the traditional Islamic finance industry.
Furthermore, it can solve crucial industry problems, like, liquidity mismanagement, insufficient investment venues, old payments, and fund transfer systems.
The Case of an Islamic DeFi
MRHB DeFi is a new project that aims at building an ethical ecosystem to provide an all-in-one solution with a range of DeFi products. It promises to deliver a comprehensive set of Shari’a-compliant financial products and services in a decentralised way.
It addresses the major issue of financial exclusion by bridging the gap between the DeFi world and the
Islamic finance industry. Due to its unique model, it attracted huge traction from various communities, venture capitalists, and strategic partners, raising more than US$5.5 million in its initial stage of pre-launching and launching MRHB tokens.
In the first phase, MRHB DeFi is planning to roll out four major products. One is a crypto wallet, called “Sahal Wallet”, which acts as a crypto deposit and fund transfer product. It is also considered as the gateway to other products and features of the MRHB DeFi ecosystem. The second is “Souq NFT”, which is a digital marketplace for non-fungible tokens (NFTs). “Liquidity Harvester” is the third product, which provides crypto investment opportunities to Islamic finance users. Lastly, the fourth product is a decentralised exchanges aggregator, that efficiently facilitates crypto exchange.
In the second phase, MRHB DeFi plans to introduce a decentralized autonomous organization (DAO) for implementing a democratic governance structure. The second phase also includes a crypto lending-borrowing product. A zero-knowledge (ZK) philanthropy protocol is also under consideration. Lastly, this phase is also eyeing to initiate a launchpad to facilitate other Shari’a-compliant crypto projects for introducing their unique ideas.
Conclusion
Islamic DeFi is a new concept that has great potential to take the whole Islamic finance industry to the next level. MRHB DeFi is a practically viable direction to choose. However, this novel idea needs further attention from the Islamic finance think tank.
It requires fundamental research from the Islamic finance fraternity and deep interest from the DeFi community alike. This way, we can have more serious work done and see further projects strategically positioning themselves in the Islamic DeFi space and contributing to the expansion of this niche sector. Islamic DeFi has a long way to go, but the journey has already begun.
