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05 November 2018

Islamic finance, blockchain, and the future of trade

Mufid Sukkar, Group Chief Strategy Office, Nest Investments writes about the blockchain future


Talk of blockchain is everywhere. Top insurers including Allianz, Swiss Re and AIG are collaborating on a technology initiative focused on blockchain in the insurance market. The Islamic Development Bank and SettleMint have agreed to build a blockchain-based financial product designed to support the development of the IsDB’s 57 member countries. Attendees at the most recent World Islamic Banking Conference considered how innovative uses of blockchain could improve customer satisfaction.

Blockchain provides businesses with a single ledger that records all transactions in a chain and is shared by a network. Users can transfer value without the need for a third party. The motivation for establishing these private chains in Islamic finance is clear: a company becomes able to record all corporate profiles and provide a full and accurate audit history of transactions themselves, removing the middle man by bringing the buyer and service provider closer together.

The technology represents a giant leap towards reducing operating costs and maximising efficiency. By cutting out the middle man, blockchain allows for increased financial autonomy for the companies that use it. Large and powerful transaction providers are replaced with internal data chains and therefore unable to profit unduly from weaker entities, creating a fairer and more ethical system.

Crucially, blockchain also provides a solution to a truly global threat – the cyber threat. With blockchain, there is no central database to hack, no obvious ‘weak link’ to exploit. If financial information contained within a particular ‘block’ is tampered with, it is immediately obvious because the code associated with other blocks would not match.

However, for all the promise blockchain holds, there is a need to separate hype from implementation reality. What still needs to happen for the blockchain dream of more trust and less admin burden to come true?

A recent Berkeley University blog described the technology as being “a bit like a web browser in 1994: an intriguing tool with promise, but no real utility.”

There is certainly a great deal to be excited about. And therein lies part of the challenge. The promise of blockchain and its likely impact is so far-reaching that it will take time for the opportunity to be fully understood. Consumers could see great benefit from it but how many really understand how blockchain really works today, let alone how they might interact with the technology in the future?

In order for blockchain’s potential to be fully realised, several things need to happen.

First, businesses need to work together much more closely to define international standards for blockchain use. The forums for such collaboration already exist in different sectors; indeed, we at Nest Investments have some direct experience of how they work in the insurance/reinsurance space through one of our group companies, Trust Re. The right basis for constructive dialogue is there but leaders must overcome their guarded approach to one another as competitors to make real progress.

Government regulators also need to get their act together and cooperate with the various industries as well as with each another more effectively. For the foreseeable future at least, blockchain is not at a stage where it can render traditional regulation obsolete. This means we need to understand where it fits into existing regulatory and legal frameworks, not to mention Shari'ah compliance. What happens if things do go wrong? What data protection and liability considerations come up? Is the system flexible enough to deal with some of those unforeseen real-world challenges that will inevitably spring up to complicate the best-laid plans?

The costs associated with blockchain adoption will also be a factor. Systems and processes will need updating to make them blockchain-compatible; staff will need retraining. Over a certain transitional period, both old and new systems might need to run, meaning additional expense and effort.

There is also the challenge of governance. Blockchain is being billed as completely secure, a system that prevents any possibility of malicious intervention, abuse or playing politics once and for all because of its highly mathematical nature. That would seem to imply that it could be the answer to all governance problems. However, Prof. Vili Lehdonvirta, a senior research fellow at the Oxford internet Institute points out that blockchain may be a perfectly impartial enforcer of rules but who exactly sets those rules? How much do we know about the way governance works in the bitcoin world?

In short, the benefits of blockchain technology does explain and justify the hype. However, the technology is less than ten years old and much remains to be worked through in terms of practical implementation and governance, particularly as the Gulf continues along its rapid economic and regulatory development trajectory. The blockchain revolution will have its advocates and its sceptics. Some have argued that blockchain’s real value will be in forcing organisations to take a long hard look at their current digital systems. That would be no small achievement in itself.

The real question businesses will have to answer is – do they want to invest in being a pioneer or do they want to wait and learn from others’ early mistakes? The benefits of being an innovator and leading from the front are obvious but there are also upsides to being the second mouse that gets the cheese, after the first mouse got caught in the mousetrap.





CPI Financial was established in Dubai in 1999 to meet the needs of an ever-expanding financial community, offering a comprehensive portfolio of market-leading products and services tailor-made for the banking and financial services sectors.

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