A crypto native solution for the Islamic financial industry

Key takeaways:

• DeFi presents a unique opportunity to build products for the Islamic finance industry.
• New innovations in DeFi can provide a playing field for Islamic financial institutions to build products.

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Islamic finance is an industry where people participate in markets according to Islamic beliefs. Several countries have dedicated regulators for the industry. The Islamic Finance industry is worth $2.2 trillion globally. It is expected to grow by 12% in 2022. Of note to consider are some of the key principles of Islamic finance:

• Wealth must be generated from trade and investment, not speculation
• Investments should have a social and ethical benefit to society
• Harmful activities should be avoided

In essence, it is a unique form of socially responsible investing. Hundreds of Islamic banks have been opened up over the last few decades in Muslim dominated countries. With crypto becoming mainstream, there are huge innovations that can be of benefit to this industry. Below is a list of a few:

Tracking financial flows:

If a financial institution wants to introduce a successful Islamic financial product, it must be able to track the flow of funds with little or minimal cost. This means understanding where the money is flowing and how and where it is being used. In order to provide value for customers, it must also be able to show this flow of money as easily as possible. With a Defi based solution, people will be able to see where the money is going. It would also them to check whether organisations receiving it fall into the socially responsible category.

Naming Services are a great innovation useful for such a situation as well (For example — Ethereum Naming Service, which is a protocol for human-readable crypto wallet addresses). Imagine if ethical businesses and Islamic banks registered their ENS names and displayed these on their websites. This would be similar to how they display their trade license number within certain jurisdictions. It would allow for customers to easily be able to verify whether funds are being invested in socially responsible businesses.

Web3 style apps:

Recently the STEPN app, which brands itself as a “Web3 lifestyle app”, has become popular. The app lets users earn rewards in the form of tokens by having a more active lifestyle. The app is also popular because it pulls together a community of people. The same could apply to an Islamic finance app. It could pull together people who would be concerned about where their idle money is invested in. This community could receive benefits and rewards in the form of the app’s native tokens. Partner organisations could also tap into the community of people.

Moving to DAOs:

The community of the app could vote on product direction and incentive alignment by moving to a DAO model. The model would also allow the community to have qualified financial advisors. The advisors could then suggest proposals to the community to vote on as to where to invest people’s money. Of course there are regulators for the purpose of vetting financial products too. However, having a DAO would allow a community to be more specific on their choices.

Conclusion:

There’s a massive market for building financial products tailored for specific communities. The Islamic financial ecosystem is just one example, but there can be several others. Provided regulations are friendly, there’s incredible room for growth in crypto-native startups in the Islamic finance and other communities.