The blockchain is the core mechanism for Bitcoin. BITCOIN Blockchain was first proposed in 2008 and implemented in 2009 to solve the double-spending problem (Nakamoto, 2008).
Blockchain technology and distributed ledgers are attracting massive attention and triggering multiple projects in different industries. However, the financial industry is seen as a primary user of the blockchain concept. This is not only because the most well-known application of this technology is the cryptocurrency Bitcoin, but substantial process inefficiencies and a massive cost base issue specifically in this industry also drive it. (Michael Nofer, Peter Gomber, Oliver Hinz, 2017).
Blockchain has numerous benefits, such as decentralisation, persistency, anonymity, and audibility. As a result, there is a broad spectrum of blockchain applications ranging from cryptocurrency, financial services, risk management, Internet of things (IoT) to public and social services. However, although several studies focus on using blockchain technology in various application aspects, there is no comprehensive survey on blockchain technology from both technological and application perspectives.
Blockchain technology can optimize the global financial infrastructure, enhancing the efficiency of current financial systems. Many banks are currently focusing on blockchain technology to promote economic growth and accelerate the development of green technologies (Luisanna Cocco, Andrea Pinna, Michele Marchesi, 2017). Wala Nouf, Khaked, Rajam Junaid, Mohammed (2019) also concluded that blockchain technology could provide transparent and secure data transactions, improve traceability, increase efficiency, and reduce the cost of various supply chain processes. International financial institutions could promote Blockchain applications in several sectors like agricultural lending. Blockchain technology is used in the supply chain to improve transparency and efficiency in farming and commodity production. (Davradakis, Emmanouil, Santos, Ricardo 2019)
Szabo (1997) introduced the concept of ‘‘Smart Contracts’’, which combine computer protocols with user interfaces to execute the terms of a contract. Due to the blockchain, Smart Contracts are becoming more popular since they can be utilized more efficiently by applying blockchains compared to the technology available at the time of their invention 20 years ago. This innovative approach might, for example, replace lawyers and banks that have been involved in contracts for asset deals depending on predefined aspects (Fairfield 2014). Smart Contracts can also be used to control the ownership of properties. These properties might be tangible (e.g., houses, automobiles) or intangible (e.g., shares, access rights). A prominent example of blockchain technology that treats intelligent contracts as well-recognized citizens is Ethereum, which is a decentralized system initially proposed by Buterin (2014). A taxonomy of decentralised consensus systems and an overview of different types of systems are provided by Glaser and Bezzenberger (2015). Ethereum can be seen as an extension of the Bitcoin blockchain to support a broader scope of applications. However, Satoshi Nakamoto included intelligent contract functions in Bitcoin blockchain, Bitcoin association and Bitcoin SV blockchain companies are optimizing the smart contract function of Bitcoin SV, which is empowered by big blocks and the same line with Bitcoin white paper written by Satoshi Nakamoto. Thus, blockchain technology allows to establish of contracts using cryptography and to replace third parties (e.g., a notary) that have been necessary to establish trust in the past. Blockchain might disrupt the entire transaction process by automatically executing contracts in a cost-effective, transparent, and secure manner (Fairfield 2014). The architectural components of blockchain technology, their interaction, and a framework for implication analysis of blockchain systems for digital ecosystems, are proposed by Glaser (2017). The financial industry is wondering if the blockchain might replace large parts of their current business. The payment process can illustrate this. If people pay for goods by credit card today, the settlement occurs after a delay of several days. Utilizing the blockchain, this delayed settlement would become redundant since the payment can be made in real-time by adjusting the ledger.
(Michael Nofer, Oliver Hinz, 2017). T. McGhin, K. -K. R. Choo, C. Z. Liu, and D. He (2019) stated that distributed ledger technology could transform health services. Blockchain can used for the traceability of drugs and patient data management. Drug counterfeiting is a significant problem in the pharmaceutical industry. Reports from the Health Research Funding organization revealed that 10%to 30% of the drugs sold in developing countries involve counterfeit (Glass, 2014). The WHO estimates that 16% of counterfeit drugs have the wrong ingredients, while 17%contain an imprecise level of essential ingredients. Therefore, these drugs can put a patient’s life in danger as they will not treat the diseases, rather can trigger secondary effects that can lead to death. From an economic point of view, drug counterfeiting is responsible for an annual loss of 10.2 billion euros for European pharmaceutical organizations. Blockchain can be a solution to address this issue because all the transactions added to the distributed ledger are immutable and digitally time-stamped, which makes it possible to track a product and make the information tamper-proof (Ahmed, Olov, Karl, 2019). Blockchain technology applications could improve supply chain performance, namely: traceability, transparency, sustainability, trust, and cost-efficiency (Luh, Gede, Mgakan Gusti, Gusi, 2020). In addition, using blockchains can advantageously help to achieve traceability by irreversibly and immutably storing data (Nikolaos, Theodoros, Evgenia 2020).
Blockchain technology will allow auditing to evolve in distinct ways directly linked to current gaps in audit procedures. In short, the comprehensive integration of blockchain into business practices and the business environment will enable the development of blockchain-enabled audit processes (Jun & Vasarhelyi, 2017). Considering that information stored on the blockchain is encrypted, approved by some consensus protocol, and readily available to all network participants will transform the audit process. Audit professionals possess a ready-made audit trail to examine with information that cannot be altered, leveraging the timestamp functionality and unique hash ID assigned to blocks of knowledge. Additionally, and converging toward a continuous and comprehensive audit concept, blockchain networks can store and secure financial and non-financial information equally as effectively (Sean 2018). The banking sectors can be categorized into individual and corporate, which require different products to fulfil their needs. Unlike the conventional banking system, Islamic banks and their clients are partners (Bujang Masli, 2010), whereby both sides of the financial intermediation are based on sharing risks and gains. The transfer of funds from the client to the bank (depositing) is based on revenue sharing and is usually calculated ex-post every month. In contrast, the transfer of funds from the bank to the clients is based on profit sharing (financing) either at a mutually agreed-upon ratio as in the case of mudharabah or at a mutually agreed-upon fixed rate (Imady & Siebel, 2006). Such ratios (revenue and profit-sharing) and rates vary between institutions and may also vary between contracts within the same institutions, contingent upon perceived business prospects and risk. Therefore, Islamic banking products are recognized based on contracts instead of commercial orientation. (Nooraslinda, Rohana, Rafidah, Mardiyyah, Dzuljastri, Zaharuddin, 2013).
Commodity Murabahah Programme (CMP) was introduced to facilitate liquidity management and investment purposes. CMP is designed to be the first-ever commodity-based transaction that utilises the Crude Palm Oil (CPO) based contracts as the underlying assets (Asyraf. 2007). CMP is also common for financing and deposit with corporates and consumers to facilitate liquidity management as well. CMP has gained wide acceptance from the market due to its inherent characteristics that offer similar features as the conventional structure. Nevertheless, tawarruq is exposed to a high degree of sharia non-compliant risk mainly because it involves a series of sale contracts in succession (Mahbubi, Rusni, 2016).
The modus operandi of CMP in Islamic banking is an essential discussion in jurisdictions like Malaysia, where most Islamic banks use CMP to structure Islamic banking products. It is contemplated that in this era of FinTech, CMP can is potentially offered using smart contracts. FinTech can be explained as the application of technology within the financial industry. Smart CMP structure will use blockchain technology and smart contracts reducing the costs of the transaction and the number of intermediaries involved with traceability to comply with Shari’a. (Faruq, Omar, Aihath, JinZi, Zakariya, Zabidi, 2020)
ISSUES OF COMMODITY MURABAHAH – THE LACK OF EFFICIENCY AND TRACEABILITY
The operational process is not discussed in-depth in any of the literature. In contrast, the Commodity Murabahah arrangement contains a series of transactions in which the risk of Shari’a non-compliance might arise in each transaction. For instance, the step-by-step procedure in trading and possessing the commodity among the contracting parties via systems and e-certificates, including the wakalah arrangement and the mustawriq involvement in the trading transaction, might trigger the risk of Shari’a non-compliance.
In essence, Commodity Murabahah can be a research topic by looking at the banking domain perspective, especially concerning the operational aspect. Any gaps that become apparent in the literature shall be closed in future research to promote prudent Islamic banking further. Perhaps this literature review might assist researchers in identifying exciting areas as well as the direction for future research (Nasrun, Asmak, 2014).
The lack of understanding and knowledge, inadequate control mechanism and reporting, ineffective functional structure, incompatibility of the system to the execution of Islamic products, improper document execution and sequence, and insufficient internal policies and governing rules are the key determinants of SNES in Commodity Murabahah based financing in Islamic banks in Malaysia (Mahbubi,Rusni, 2016).
Therefore, considering the issues above, the enhancement of efficiency and traceability of Commodity Murabahah should be explored going forward.
CHARACTERISTICS OF BLOCKCHAIN – EFFICIENCY
In conventional centralized transaction systems, each transaction needs to be validated through the central trusted agency (e.g., the central bank), resulting in the cost and performance bottlenecks at the main servers. Differently, a transaction in the blockchain network can be conducted between any two peers (P2P) without authentication by the central agency. In this manner, blockchain can significantly reduce server costs (including the development cost and the operation cost) and mitigate the performance bottlenecks at the central server. (Nikolaos, Theodoros, Evgenia 2020)
CHARACTERISTICS OF BLOCKCHAIN –TRACEABILITY
Blockchains can advantageously help to achieve traceability by irreversibly and immutably storing data. Blockchain technology creates a unique level of credibility that contributes to more sustainable food industry. Although assuring food traceability with blockchain technology looks promising, certain limits remain to be considered and addressed, including regulations, relationships between stakeholders, data ownership, scalability, etc. (Nikolaos, Theodoros, Evgenia 2020)
Since each of the transactions spreading across the network needs to be confirmed and recorded in blocks distributed in the whole network, it is nearly impossible to tamper. Additionally, other nodes would validate each broadcasted block, and transactions would be checked. So any falsification could be detected easily (Zibin, Hong, Xiangping, Huaimin, 2018) Since each of the transactions on the blockchain is validated and recorded with a timestamp, users can easily verify and trace the previous records by accessing any node in the distributed network. In the Bitcoin blockchain, each transaction could be traced to previous transactions iteratively. It improves the traceability and transparency of the data stored in the blockchain(Zibin, Hong, Xiangping, Huaimin, 2018).
BLOCKCHAIN AND BANKING
Osmani, Razmi, Nitham, Mrijn, Vishanth (2020) stated,” Financial technologies have created a new paradigm shift in driving innovation in the financial sector and Blockchain technology is a significant part of this transformation (Lee and Shin, 2017). While there has been a wide range of traditional banking products from payments to investment services, blockchain technology has challenged this through offering innovative, more secured, and faster transfers at lower costs (Lee and Shin, 2017). Blockchain technology can be explained as “A blockchain is essentially a distributed database of records or public ledger of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by the consensus of a majority of the participants in the system. Once entered, information can never be erased. The blockchain contains a certain and verifiable record of every single transaction ever made” (Crosby et al., 2016, p. 7). As such, this will help in eliminating centralised points of vulnerability, which cybercriminals can potentially exploit. At the same time, making data manipulation is exceptionally impracticable (Mason, 2017; Mearian, 2017). ”
Currently, the financial industry is experiencing extraordinary change with the introduction of blockchain technology (Lee and Shin, 2017). Blockchains are already transforming many traditional banking practices in several countries, offering benefits such as privacy, transparency, immutability, improved transaction security, and faster transfer of money at a lower cost at national and international levels (Lee and Shin, 2017).
Osmani, Razmi, Nitham, Mrijn, Vishanth (2020) concluded a need for a holistic understanding of the various aspects of cost, benefits, risk, and opportunities to create blockchain applications that work for the banking and finance sector.
BLOCKCHAIN AND AUDIT
Blockchains can have implications for developing appropriate audit procedures. A complete copy of the data is accessible at every node with blockchains, enabling auditors to test the entire population of transactions instead of relying on sampling. During completeness testing, auditors should trace transactions from the blockchain to the financial statements. For occurrence testing, the auditor may perform vouching procedures to verify that values on the financial information are directly associated with transactions in the blockchain. (Lee, Mautz, 2018)
BLOCKCHAIN AND ISLAMIC BANKING
Smart contract based on blockchain technology has great potential for Islamic finance and can transform their business models solving many issues faced by financial institutions and regulators. The adoption of this technology may vary from one country to another based on its regulatory framework, geography, and complexity of assets managed. Because trade settlement is still done through physical or electronic documents’ exchange, the smart contract represents an excellent opportunity to break away from this inefficiency by digitizing its operations and substantially cutting the operational costs, reducing error rates, and accelerating the speed of the trade settlement process (Volker, 2019).
A blockchain is a distributed ledger technique in which all the members are participating in the network share transaction information among themselves. As such, blockchain can be described, as a distributed database that maintains a constantly growing list of data records that cannot be tampered with and revised even by operators of the data store’s nodes (Bashir, 2017). Therefore, the blockchain is a distributed or peer-to-peer public ledger consisting of “blocks” maintained by a distributed computers network containing multiple verified transactions records without a central authority or third-party intermediary (Niforos et al., 2017). A peer-to-peer, commonly written as P2P, describes a decentralized communication model via computer software that enables the linkup of commercial and private Internet users to communicate or share resources with the same capabilities, and any party can initiate a communication session. (Faruq, Omar, Aihath, JinZi, Zakariya, Zabidi, 2020).