Blockchain, Fintech, and Islamic Finance. Building the Future in the New Islamic Digital Economy

Hazik Mohamed and Hassnian Ali

Blockchain, Fintech, and Islamic Finance

Hazik Mohamed and

Hassnian Ali

Blockchain, Fintech,

and Islamic Finance

Building the Future in the

New Islamic Digital Economy

ISBN 978-1-5474-1712-4

e-ISBN (PDF) 978-1-5474-0096-6

e-ISBN (EPUB) 978-1-5474-0098-0

Library of Congress Control Number: 2018962039

Bibliographic information published by the Deutsche Nationalbibliothek

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;

detailed bibliographic data are available on the Internet at http://dnb.dnb.de.

© 2019 Hazik Mohamed and Hassnian Ali

Published by Walter de Gruyter Inc., Boston/Berlin

Printing and binding: CPI books GmbH, Leck

Typesetting: MacPS, LLC, Carmel

www.degruyter.com

Advance Praise for Blockchain, Fintech, and

Islamic Finance

The authors are to be congratulated for this book. It is an important pio￾neering effort. The work is on the frontier of knowledge in the new area of

Fintech. As is well known, the financial sector is suffering from low levels

of trust in a trust-intensive industry. Islamic finance too is facing a low-trust

environment that has denied it the use of the strongest of its characteristics:

risk-sharing. As a result, it has resorted to debt-based financing. Blockchain/

smart contracts provide potentially powerful tools to address the low-trust

challenge. The authors have done a great service to Islamic and conventional

finance by producing a book that should be read by anyone interested in

finance and economics.

̶̶ Prof. Dr. Abbas Mirakhor, Holder of the First Chair of Islamic Finance at

INCEIF; retired Dean of the Executive Board of the International Monetary

Fund (IMF), Washington D.C.

This is an important contribution by the authors to two emerging fields—

Islamic finance and FinTech. In this respect, it touches two frontiers as this

research could pave the way for the development of both fields. FinTech

offers great potential for reaping the benefits of Islamic finance and this

book provides an excellent overview of the issues and applications. I am

confident that researchers, policy-makers, and practitioners would benefit

from this important work.

̶̶ Dr. Zamir Iqbal, VP Finance and Chief Financial Officer (CFO) of Islamic

Development Bank (IsDB), Jeddah; former Head of World Bank Global

Islamic Finance Development Center, Istanbul.

In this digital era, new technology has proven to bring agility, scalability,

innovation, and efficiency in operations and means of doing our work. This

book argues, persuasively, that the Fintech and Blockchain applications are

not only the channels of fusing technology with Islamic finance; it also lays

the foundation for new Islamic digital economy, while keeping in view the

Maqasid Al-Shariah. This book is a first-of-its-kind contribution to the litera￾ture on constructing the Islamic digital economy.

̶̶ Dr. Hussain Mohi-ud-Din Qadri, Patron, International Centre of

Research in Islamic Economics (ICRIE) Minhaj University, Lahore.

DOI 10.1515/9781547400966-202

vi  Advance Praise for Blockchain, Fintech, and Islamic Finance

While the growth of fintech firms has already become a game changer in the

conventional financial sector, its application in Islamic economy is still in

an incipient stage. The authors of this pioneering work deserve appreciation

to not only offer a historical perspective on these exciting developments but

also suggest ways to building Islamic digital economy with the use of these

tools, especially distributed ledger technology. I would recommend this book

to all those who are interested in building a trusted, just and efficient Islamic

digital economy.

̶̶ Zahid ur Rehman Khokher, Assistant Secretary General of the Islamic

Financial Services Board (IFSB), Kuala Lumpur.

The authors hit the mark; blockchain needs to become part and parcel of

economics, finance and policy across Muslim-majority countries. It is crit￾ical for the leadership to understand what blockchain is and its potential

application. Islamic economies need to carefully consider the adoption and

the potential institutionalization of blockchain across various facets of their

economics. The authors lay the groundwork in this book, and it is a must￾read for the broad audience whose desire is to focus on a next generation

technology, its adoption and implications.

̶̶ Omar Rana, Director of Strategy and Finance at Finalytix, Toronto, and

former Chief Investment Officer for a US$500M private family

office in the GCC.

Dr Hazik Mohamed:

I dedicate this book to my daughters, Aliya and Nadrahuda. And to all their

cousins, young and old—Syazwan Hanif, Mohamed Hasif, Abdul Hadi, Haris,

Abdul Rahman and Abdul Rahim.

This book contains the shifting trends of the world that you’re growing up

in. Prepare your contributions for the world to come … and the Hereafter that

awaits.

Hassnian Ali:

First, to the most devoted and conscientious person in my life, no one else,

my late father Ghulam Hussain.

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DOI 10.1515/9781547400966-204

Acknowledgments

All praises to Allah, the All-Compassionate, the Most Merciful, without Whom

nothing is possible. Blessings upon our beloved prophet Muhammad and

upon his family and companions.

We acknowledge the advice and recommendation extended by Professor

Abbas Mirakhor and Nick Wallwork in regards to the manuscript.

We also want to express our appreciation to Jeffrey Pepper and his team

for their responsive actions in making this book a reality within the seemingly

impossible schedule that we had proposed.

Hassnian would like to express his profound gratitude to his mother,

Muniran Bibi, and his late father. Their forbearance, guidance and support has

been exceptional, and he would not be who he is today without them. Hassnian

also acknowledges his dear sister, Rakhshinda Parveen, his elder brother, Arfan

Ali, and especially his twin brother, Muhammad Saqlain, who understands and

encourages him to achieve great things.

Dr Hazik recognizes his family for being the heart of inspirational support,

especially his wife, Anisa Hassan; his siblings, their spouses and his in-laws for

their generosity and prayers; and his beloved parents (deceased) who laid the

foundation of belief, endeavor, fairness and justice.

DOI 10.1515/9781547400966-205

Foreword

If you have yet to delve into the world of blockchain and fintech and how they

are connected to Islamic finance recently, this book is the most comprehensive

and practical book ever written on the topic. It looks deep inside the working

protocols of both blockchain and fintech. Interestingly, this book covers all the

relevant and interconnected topics, making it a must-read book on the subject of

blockchain and fintech.

When I was asked to write a few words reflecting on my thoughts about this

book that was sent to me, I immediately felt the vibrancy of this book, even by

merely looking at the table of contents. The content coverage and selected issues

and sub-topics reflect well the intensity of the authors’ knowledge and exposure,

as well as their intuition. As everyone has been looking for a master key for this

most timely knowledge, I am confident this book will prove to be useful and timely.

It may surprise you to know that this book’s algorithm fits perfectly well with

the issues presented in it. This makes this book special, as everything and any￾thing mentioned in this book is essentially framed by cutting-edge knowledge

of blockchain, fintech and, to a considerable extent, the digital economy. This is

not an easy task to accomplish, unless the authors are exceptionally articulate

in explaining these concepts. They have proven themselves to be masters in this

field of knowledge and practice.

This book is equally informative with regard to Islamic finance, covering

aspects of the Islamic capital markets, Islamic investment, retail banking, takaful,

trade financing and sukuk. I would like to believe that this is the most striking

contribution of this book toward the further development of Islamic finance via

smart technology. It appears to me that Islamic finance has no other option but to

embrace this up-and-coming way of doing banking, insurance, investment and

fundraising. If Islamic finance does not choose to be agile and scalable, as well as

innovative, Islamic finance is obviously destined to face constraints and obsoles￾cence, due to stiff competition on many fronts. As the saying goes, life is not the

art of avoiding, but is the art of adapting and improving.

The era of digitalization and platform has finally arrived. Nevertheless, this

brings less benefits and credence to Islamic finance if Islamic finance refuses to

embark on further refinement, enhancement and perfection via blockchain and

fintech. This is one of many insights that the authors of this book are trying to

impress upon the readers. You will find all these aspects of this books both chal￾lenging and yet promising.

How will your knowledge be transformed after reading this book? I have

taken the liberty to pose this question in your early journey embarked upon

with this book. I have a gut feeling that any reader—of course with an inquisitive

DOI 10.1515/9781547400966-206

xiv  Foreword

mind—will unlock not only the real potential of Islamic finance in the fourth

Industrial Revolution era, but also, more importantly, discover the logic and

power of smart technology to accomplish more things smarter, quicker and safer

than an average man is capable of, given the same time allocation and complex￾ity of the tasks at hand.

For all intents and purposes, we can’t compete with technology, more so

smart technology. We have to come to terms to these new technologies. It is rea￾sonable and logical for humankind to embrace these developments and use all

sorts of technologies to increase production and efficiency. At some point in time,

we need to believe in technology as the savior for some of the complex, compel￾ling problems and crises faced by humanity, even in the space of human sciences.

In all honesty, I could be a bit biased in my future outlook about smart tech￾nology, and that includes blockchain, fintech and artificial intelligence—given

the fact that I am also a hardcore practitioner of smart technology in some of my

initiatives—but of course, I did not conjure up this sentiment out of thin air. The

world has long been moving toward perfection and precision—at least in some

areas of life. Any and every evolution in this world started from humble begin￾nings but it will strike hard when it is the right time. The only problem is that

we don’t know when is the best time for everything. A quote from Martin Luther

King may shed some hope. He once said, “There is always the right time to do

what is right.”

Obviously, I am not in a position to say for sure when is the right time for this

new and smart technology. However, I am confident that this book has emerged

at the right time for the readers to be enlightened with comprehensive, trendy and

impactful insights about almost everything that is connected with the themes of

blockchain, fintech, digital economy and Islamic finance.

Finally, I am extremely pleased and delighted to introduce this book to you

and I hope you will enjoy reading it as I did.

̶ Datuk Dr. Mohd Daud Bakar,

Chairman of the Shariah Advisory Council at the Central Bank of Malaysia

and the Securities Commission of Malaysia

Contents

Chapter 1: Introduction  1

The Rationale for Financial Disruption  1

Ethics and Technology  2

Digital Transformation and Development  4

Shifts in Customer Behavior  6

Changes in Engagement and Purchasing Behaviors  8

Structure of the Book  8

Chapter 2: Fintech—Definition, History, and Global Landscape  13

Introduction  13

Definition and Concept of Fintech  13

Evolution of Fintech  15

Fintech 1.0 (1866–1987)  17

Fintech 2.0 (1987–2008)  18

Fintech 3.0/3.5  21

Global Landscape of Fintech  22

Fintech Investment  23

Fintech in Major Regions  24

Cryptocurrencies and Initial Coin Offerings  28

Cryptoexchanges  35

e-Wallets  37

Fiqh View on Coins and Tokens  40

Progressive Importance of CyberSecurity  43

Chapter 3: Importance of Fintech and Its Applications  49

Introduction  49

Financial Innovation within the Financial Services Industry

Perspective  50

Payments Industry  50

Crowdfunding and P2P Lending  52

Neo-Banking  54

Asset under Management  55

InsurTech  56

Fintech within the Technological Perspective  57

Blockchain and Its Applications  57

Cloud Computing  58

Big Data Analysis  59

Internet of Things  60