Does Blockchain Technology Have Value for Islamic Finance?*

Sami Al-Suwailem

21 Oct, 2020

“Blockchain technology is going to change everything”. This claim was made many times over the past several years in many different forms. And we are still waiting to see the change. Skeptics, like Jesse Fredrik, argue that blockchain is a solution in search of a problem. The technology is yet to prove itself and deliver on the big promises it offered to the public. Except for the highly speculative Bitcoin, skeptics complain, no tangible product is seen yet.

It is always helpful to keep a reasonable margin of doubt, particularly for new technologies or products. This is not a closed-minded approach—it is the opposite. New technologies take time to prove themselves, and without strong incentives and perseverance, they might well fail and disappear.  

So, what kind of problems can blockchain technology help to solve? Those who are working in Islamic finance know a long list of challenges … How can we build efficient musharakah? How to overcome moral hazard? How to induce debtors to pay on time? There are skeptics in Islamic finance too, and their proposed approach is simply to follow the conventional model with minimum “cosmetic” touches. This suggests that if blockchain technology is a solution looking for a problem, genuine Islamic finance that reflects its moral and ethical principles might be viewed as a “problem” looking for a solution.


If we simply try to apply blockchain technology to common Islamic financial products, most likely we will end up adding another layer to existing structures. It is not clear how this would be helpful, particularly if these structures are complicated because of redundant commodities and inches-thick legal documents. The resulting structure might become too costly and impractical. For example, tokenizing Sukuk that are based on highly complex structures will add one or more layers of complexity. Using smart contracts for “Islamic derivatives,” as suggested by the recent report of the World Bank, will not reduce the legal complexity of such derivatives. If anything, it will compound it.

Blockchain technology is not just a tool. It is a way of thinking and analyzing problems and searching for solutions. So, before we try to apply blockchain or smart contracts in our products, we need to ask ourselves: How much value does the technology add to the stakeholders?

New technologies are not without costs. There is no free lunch, as economists like to say. While it is good to be open to all possibilities, we should be highly selective and creative when it comes to the application of these technologies in our business processes.

Good technologies tend to expose the inefficiencies in existing structures. If these inefficiencies are removed, the true underlying value of the products will become more visible and the impact more measurable. This would be a good thing if the value proposition of the product is helpful to the community. But this might not always be the case.


In September 2019, The Boston Review published an article titled “Perpetual Debt in the Silicon Savannah,” by Kevin P. Donovan and Emma Park. The article provides an in-depth analysis of digital micro-lending in Kenya. Kenya is praised for being a pioneer in embracing digital technologies for payment systems and financial products. It is considered by many as the tech hub of East Africa. The digital financial industry by many standards is quite advanced and is growing at remarkable rates.

The industry was able to reach out to a large segment of the un-bankable clients. Using artificial intelligence and big data, they were able to identify “reputational collateral” for borrowers who otherwise have no tangible collateral and thus could not have access to financing through the conventional channels. These are good innovative solutions. But what was the result of these innovations?

Unfortunately, these innovations did not make the community better off. Instead, they entrapped borrowers in perpetual cycles of debt. People are being driven into circuits of financial capital that are premised not—as the marketing would have it—on empowerment, but on the profitability of perpetual debt. It is financialization through digitization.

These developments force us to ask: What is the role of technology in finance? Does it facilitate the access of the community to finance? Or does it facilitate access to markets? These two are very different paradigms.

In an interest-based lending system, technology allows borrowers to access finance, but not necessarily markets. Lenders interested in maximizing their returns tend to prefer continuous debt cycles that bring a steady and increasing stream of interest income. They are not interested in empowering borrowers because this means they will break out of the debt vicious circle.

Islamic finance, in contrast, aims to assist beneficiaries in accessing markets. Access to the market is the first step on the road to empowerment. Islamic financial institutions are not supposed to earn income from debt traps. Instead, they earn income by sharing the wealth created by their clients in the real economy.

Hence, technology will make the final objective of the financial system crystal clear. This means we have to go back to basics and ask the essential question: What is the value proposition of our financial paradigm? What are the final goals it aims to achieve?

While embracing new technologies, therefore, we should not forget the underlying paradigm. Principles of Islamic finance are eternal and universal. They transcend tools and technologies. Observing these principles will guide the application of new technologies towards improving the welfare and prosperity of the community.

* This is an updated version of a speech delivered by the author at the 5th Islamic Finance Conference organized by Effat University, Jeddah, Saudi Arabia, December 2019.

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