Blockchain projects have been emerging across the Muslim world recently, promising more transparent government and greater access to Islamic finance. His Highness Hamdan Bin Mohammed Bin Rashid Al Maktoum, the crown prince of Dubai, has declared that Dubai will be the first smart city to use blockchain tech. He’s brought in ConsenSys and other advisors to push the local government towards innovative ID, tax, and registry systems. Saudi Arabia last spring held a blockchain bootcamp to encourage new dapps for public policy. And the Islamic banking world, traditionally very conservative, has begun to embrace distributed ledger tech as a way to get ahead. Suddenly, blockchain seems poised to democratize Islamic finance, in a potent combination of fintech and religious devotion.

The market for blockchain-based Islamic finance is huge: one in four people on earth is Muslim (including 3.5 million Muslims who live in the United States). Their views on the importance of Sharia vary. According to research from Pew, in some countries, such as Pakistan, as many as 80 percent of Muslims believe Sharia law is the divine word of God, as revealed to the Prophet Mohammed, while in other countries, such as Albania, three-fourths of Muslims believe it was devised by man, based on God’s words. Many Muslims do not even know the rules regarding Sharia and finance, says Matthew Joseph Martin, founder of Blossom Finance, a blockchain and Islamic finance focused company in Jakarta.

Nonetheless, there’s a proven sizable market for Sharia compliant financial products. Deloitte estimates that the market accounts for 1 to 2 percent of global investments, and is growing at about 18 percent per year. More than 750 Islamic investment funds globally manage about $600 billion, and Deloitte estimates that there are $3.4 trillion in total assets in Islamic banking systems right now.

That’s a lot of fiat cash that could lead to powerful disruptions if it were put to work in digital assets on distributed ledgers. In the last few years a number of forward thinking financial companies have used blockchain’s immutable ledger and smart contracts to simplify some complex Islamic financial instruments that have historically been the province only of the very wealthy, or governments and institutions.

“We’ve already talked to all the top sharia compliant banks in Indonesia. And they are very eager to participate,” says Martin, of Blossom Finance.

Islam is not monolithic. Two branches, Shia and Sunni, dominate, and there are other sects in all corners of the world. As with all religions, nations and cultures interpret and enforce the rules in different ways. But all Muslims, in theory, are subject to Sharia, which includes prescriptions on how to live, worship and work, as well as definitions for what money is, and how it can be used.

Sharia laws don’t always jibe well with standard-issue capitalism. For instance, riba—lending or borrowing money with a fixed rate of interest—is considered haram. This applies to home loans as well as credit cards, and all forms of “reserve” lending, where money is lent based on money that doesn’t actually exist. This is a common practice in western finance, where banks don’t back the full value of their loans with actual property or currency.

Muhammad Abu Bakar, a mufti (Muslim legal expert) who advises Blossom Finance, says riba is prohibited in Islam because it exploits the poor and increases poverty. He cites western payday loans, which target poor people with interest rates as high as 400 percent annually, as an example of riba gone haywire. Islamic finance emphasizes partnership over interest payments. Rather than charging interest, a lender earns profit from actual ownership of an asset. The fractionalized ownership made possible by crypto and blockchain opens many doors for these types of partnerships, allowing small investors to participate.

As well as forbidding riba, sharia requires that contracts must be unambiguous, which potentially makes the algorithmic smart contracts allowed by blockchain attractive. Sharia also defines money in specific ways that seem suitable to crypto. Traditionally, sharia defined money as something tangible, such as gold, barley, or other commodities, meaning it couldn’t be based on “reserves.” That definition evolved to include money that had the following three qualities: it could be owned; it was useful; it could be spent for goods and services.
While several Islamic clerics and judges have determined that bitcoin and ether qualify as money under Islamic law, it’s the use of the coins or tokens that most determines its sharia compliance. If the token represents an asset, it’s compliant; if it represents an equity investment, similar to a share of a stock, it is not. Given that each cryptocurrency is recorded and tracked on a blockchain, you always know whether or not the money exists. Bitcoin and ether and some other coins also fulfill the last two requirements: that they be useful and can be exchanged for goods.

Some altcoins designed specifically for Sharia compliance are just now entering the market. Noorcoin (noor means light in Arabic) hopes to be a widely used sharia compliant utility coin following its projected release in November 2019.

An altcoin called Lumens (XLM), was recently authorized as Sharia compliant by the Shariyah Review Board, which is licensed by the Central Bank of Bahrain. Developed by Stellar Development Foundation, XLM is the sixth largest cryptocurrency in the world, with a market cap of more than $4 billion. Other sharia compliant coins are bound to follow.

There’s even speculation that Iran is developing a national cryptocurrency that will help them trade and invest with outsiders under the recently reinstated US sanctions. Another politically motivated currency has recently been proposed. According to Turkey’s Andalou Agency news service, Erol Yarar, who chairs the Muslim-centric International Business Forum (IBF), is advocating for Islamic states to join together in a common cryptocurrency system designed to help the Islamic world circumvent the US sanctions, reduce money transfer costs, and detach from crises generated by manipulation of the US dollar. While the declaration earned a lot of press, there’s no evidence that a cross Islamic digital currency built on blockchain is in the works.

In Indonesia, Martin, of Blossom Finance, has big plans for the Islamic finance market. Martin is an American convert to Islam who describes himself as an entrepreneur, geolibertarian, and bitcoin fan. He founded Blossom in Silicon Valley in 2014, when he saw the difficulties Muslims in California faced trying to finance businesses without borrowing funds that came with forbidden interest payments. In 2015, he moved Blossom to Indonesia in search of a larger market than existed in the US.

Blossom offers a collection of Sharia-compliant financial instruments for raising money, saving money, and sharing costs and ownership, according to centuries-old Islamic precepts. The company uses sharia compliant ether to support its micro-finance operations, which distribute crowdsourced funds to medium and small businesses. Using crypto helps reduce transfer and transaction fees. But more importantly, it is a halal, or approved, risk, because profits are shared through investment ratios. Blossom claims that investors earn returns of 6-8 percent based on the business earnings of the portfolio—there is no interest payment involved.

“We have a really solid pipeline of deals lined up,” says Martin.

Blossom also offers Indonesians something called a smart sukuk. A sukuk is a sharia compliant financial certificate that resembles a bond, though it doesn’t offer returns in the form of interest. Instead, investors purchase a certificate from an issuer, who buys an asset, such as real estate or a business, with the money. The investors benefit as the asset increases in value and is, ultimately, sold. Sukuks are very complex structures, with sometimes a dozen participating gatekeepers and middle agents, each taking a cut. For this reason, only governments and large corporations traditionally have invested in sukuks. But, using blockchain, Blossom is hoping to open up sukuks to more retail investors.

“Blockchain makes the process faster, cheaper and more straightforward,” says Martin. “Because it was first developed for governments, efficiency was never taken into consideration. You have a calculating agent, a transfer agent, a pay agent, a registrar, trustees and more. Each of them might take $100,000. Which is fine if you are doing a $5 billion sukuk. We’ve found that, fortunately, the Ethereum blockchain can let us do away with at least 10 of those agents. All the tracking, accounting, all of that happens automatically, with smart contracts. This makes the functions of the transfer agent, the registrar, and at least eight other intermediary parties redundant, because their work can be accomplished by the using the distributed ledger with smart contracts.”

Martin says the sukuk market in Indonesia was $46 billion at the end of 2017. Malaysia’s market was $422 billion, even though the entire population of Malaysia could fit into the city of Jakarta.

“That reflects a huge disparity of investment per capita right now in Indonesia.” says Martin. “The government is encouraging us to bring foreign capital into the country’s Islamic finance market. Digital sukuk is important to that.”

Another Islamic financial product ripe for blockchain disruption is the charitable zakat. Helping the less fortunate, which is one of the five pillars of Islam, is embodied in the zakat, which obligates Muslims to donate 2.5 percent of their earnings to help the poor, free people from slavery, and fund other good causes. Blockchain helps people know where there money is going, and to what purpose.

During the recent holy period of Ramadan, Blossom offered to let Muslims pay their annual 2.5 percent Zakat charity payment using cryptocurrency on a blockchain, for no fee. The money would eventually go to help Indonesian orphans and widows in Sumatra and Central Java. Blossom accepted the crypto payments via the blockchain and then converted the crypto into Indonesian Rupiah which it donated to nonprofit partners in rural areas.

Blockchain made the process trackable, auditable, and immutable, all of which are essential qualities of any successful charitable raise. The service was inspired by pious Muslims who wished to use their cryptocurrency for religious payments, but had no outlets that appealed to them.

“We aren’t trying to usurp the other great organizations that collect zakat; we’re trying to offer a crypto alternative for those who want it,” says Martin. “We work with a fantastic group of nonprofits in Indonesia with good zakat programs, and we connect them to people who want to spend crypto,” he says.

Dr. Ziyaad Mahomed, associate dean of executive education and e-learning at the International Centre for Education in Islamic Finance (INCEIF), has led the effort to devise an app, based on blockchain, to make paying Zakat easy. The app lets Muslims select their sect of Islam and what they want their donation to accomplish, such as for water, education, sanitation, or helping specific charitable groups. Dr. Mohammed and his team are developing a social enterprise rating system for organizations that want to be listed on the app, so users have an idea of how their money is spent. Dr. Mahomed expects the app to be released in 2019.

In Singapore, Finterra PTE, is using blockchain to improve on the utility of another Islamic financial concept, called wakaf, which is Arabic for giving an endowment to a charity. In curious ways the concept of wakaf parallels that of blockchain, in that the gifts are immutable and aren’t owned by any particular entity. In fact, they are meant to be similar to the western concept of a “trust,” but in God’s name.

In the distant past, this Sharia precept was used throughout the Muslim world to improve societies and reduce poverty. Yet, according to Dr. Farrukh Habib, of the International Shari’ah Research Academy for Islamic Finance, many contemporary wakafs are poorly managed, and thus have little impact on poverty. The key to improving trust in Wakafs is good governance, and transparency with stakeholders, said Sultan Nazrin Muizzuddin Sha, the Sultan of the Malaysian state of Perak, in a recent presentation about Wakaf to the Higher Education Forum in Kuala Lampur.

Finterra’s founder and CEO, Hamid Rashid, decided to modernize the structure of wakafs. Finterra is launching Endowment Chain, an Ethereum blockchain based system to track transactions. ItThe system will use smart contracts and tokens to make it cheaper and easier to raise funds and manage ownership, by opening the process to smaller investors and reducing transaction costs. He says the goal is a platform that is viable for wakafs, and that complies with government regulations, as well as sharia. To ensure sharia compliance, Finterra employs in-house sharia experts, and also consults with the Islamic Council of Malaysia, where the company does a lot of business.

“Finding sharia compliant finance for the average person still isn’t easy,” says Martin. “But demand is increasing across the Islamic world, and, fortunately, so are the options using blockchain.”