Islamic finance is the financing and banking field that follows the Sharia Law.Bank of London and the Middle East (BLME) is a sharia compliant bank that regulates and gives the outline of the rules that the Islamic finance products need to abide by. They discourage charging of interest, ambiguity and gambling in contracts or transactions. Islamic financial institutions that follow the Sharia Law must not invest in pork, pornography, alcohol or gambling related activities.
HISTORY AND EVOLUTION OF THE ANCIENT LAW
Islamic finance�s principles date back to 1400 years ago, around the 6th century and are said to be have been derived first from the Quran. They included the prohibition of incomes through interests, charity, consumption, wealth accumulation; unethical trade practices, communal development, social responsibility and moral directives in conducting business are a must. The Golden Age of Civilization is the period of the Middle Ages from mid 7th century to mid 13th century. This kind of financial transactions were said to have been started in this Golden Age of Islamic civilization. Islamic commerce based trade also began flourishing then with the trade routes of Gibraltar to the Sea of China being established. After England�s rule spread, the Islamic Empire and Economic principles vanished behind the western influence. But right back in the 20th century, the Islamic principles of Finance were begun to be revived again. Work officially started by the opening of the MitGhamr savings Bank in Egypt in the year 1963, which is the first modern Islamic Bank. In the same year, the Pilgrims saving corporation of Malaysia incorporated Islamic concepts into their rulebook.
In 1975 and 1979, the Islamic Development Bank opened in Saudi Arabia, which went international and the Islamic Insurance Company of Sudan, the first of its kind, was established, respectively. As the 90�s progressed, we saw the emergence of the Amana Income Fund, the Accounting and Auditing Organization for Islamic Financial Institutions, the Dow Jones Islamic Market Index. In the 21st century, to begin with, the International standard setting body for all Islamic institutions was decided as the Malaysia based Islamic Financial Services Board (IFSB). Around 500 Islamic institutions, 300 Islamic banks with 75 of these institutions operating in 75 non-Muslim and Muslim countries, have created their foothold in the Finance industry with an average growth of 14 percent per year.
THE ISLAMIC FINANCE MODEL
The basic principle of this model is that any kind of interest in forbidden, but risk sharing is allowed. The bank and the customer divide profits between them after the agreement has been made to share risk of any investments between them.
Categories of Islamic Finance:
A leasing agreement it is, where the bank will buy an item as per customer�s requirement and lease it for the specified period.
It is similar to Ijara, but here instead of just leaving it with leasing, the customer is allowed to buy that item as the contract comes to an end.
Sharing of profits, a financial expert suggests a special investment where the customer will be at the risk of losing money on an unsuccessful investment but will be charged by the bank only if the customer incurs profits.
A customer can make a purchase without taking a loan. In this form of credit, the bank will buy an item for the customer and will sell it on a deferred basis.
This is an interesting investment partnership where everything is decided beforehand- losses and profit sharing terms both are analyzed and fixed.
PERMISSIBLE INVESTMENTS UNDER THE SHARIA LAW
- Fixed income funds
Sukuk (Go back to Ijara for the background)- Though interests are forbidden, it is okay to fix the return rates for the renting of items bought by the bank in this lease-bond system. Sukuk is considered to be the modified version of the conventional lease bond system.
Retirement- Fixed income investments include riba (interests) which is obviously forbidden in Islamic Financial laws. This is the problem that retired people face. So, investments through real estates in direct or diversified are being suggested for retired people so that they can have a legal steady income.
Their law allows company share based investments under the strict rule that the companies are not involved in gambling, lending, tobacco, weaponry, alcohol or pornography. Some exceptions were made to some companies- they either needed to avail the debt to borrow or to invest excess cash. These investments can be done by direct manner or in shares. Companies that are in interest-bearing debt, have in hand impure income (defined by the Sharia Law) or receive interest, trade debts are filtered out of availing equities.
Insurance is not a popular concept in the Islamic Financial law concept. Rather, they offer cooperative insurance which is mutual and those who have opted for it have to pool into funds which are later invested under the regulation of the Sharia Law. Money from the funds is periodically withdrawn to pay the claims and unclaimed profits are distributed equally among the holders of this policy. Conventional insurance is not in existence under the Islamic Law, because it includes the usage of riba to satisfy liabilities and also that items are purchased even if they have an uncertain outcome. The cooperative insurance is thus the insurance vehicle for Muslims, if they want to secure themselves.
Islamic Financial Law and the establishment of financial institutions under them has been a blessing to the Muslims since they believe interest is wrong and forbidden. Till the reign of Islamic Finance for the Muslims, conventional bankers used to find it hard to satisfy both conventional customers and the Muslim customers, a source says. Now, with the Islamic institutions, everyone�s principles are being respected and the bank policies are available to everyone.
Do note that the Islamic Finance services are open to people of all religions. All FSA authorized Islamic banks function no different than conventional banks except for the laws that they follow.
Cryptocurrency in The Islamic World
Cryptocurrency is a form of currency which is digital in nature. It uses encryption techniques in order to regulate the generation of this digital currency and verify the transfer of funds. What catches most attention is the fact that it�s operational in full force without the authoritarian supervision of any central bank. Cryptocurrency is independent in its functioning. It may also be regarded as a type of software which is developed to meet the advancing needs of the world�s ever increasing population.
Well, this was the simplest and most comprehensive meaning of the term �cryptocurrency�. Though there are complex explanations as well, if you understand the aforesaid, you are good to go. That�s all you need to know at the moment. I�m sure that you must have heard heated arguments around you as well as on national television news channels regarding the use and acceptance of cryptocurrency. But, before you decide which side you�re on and join the herd, you must know the advantages and disadvantages of using cryptocurrency.
Cryptocurrency can also be understood as digital currency which has faced an immensely controversial reception from the masses. It�s revolutionary nature has left no stone unturned to awaken every self-proclaimed expert and comment on its uses and likely impact on world finance. This electronic medium of exchange is also referred to as virtual currency or alternative currency that employs consistent cryptography to function effectively and efficiently.
Features of Cryptocurrency
- A central bank does not supervise the actions or transactions. Unlike traditional currency where one bank (for example, Reserve Bank of India in case of India) guides all transfers and activities, cryptocurrency enjoys freedom from such unnecessary authority.
- Cryptocurrency is a type of system which ensures to maintain an overview of the digital currency and it�s respective ownership. This means that your digital currency is only yours and no one else has any claim over it. Thus, though a traditional central bank is missing from the scenario, it�s basic and primary task is always fulfilled.
- The generation of cryptocurrency units is regulated. This means that if there is chance for anyone to create extra cryptocurrency, then the circumstances of its origin and the place of origin are recorded. This is useful to know that who exactly is the owner of a cryptocurrency unit.
- . Ownership of a cryptocurrency unit can be proved only through one means, that is, cryptographically. There is no other medium to prove ownership. Thus, it is the sole method.
- Whenever cryptocurrency is transferred from one person to the other, or exchanged, the ownership of the unit is changed. This is very important. A statement is generated to clearly state the new owner and this is final. This is like evidence or proof of the successful transaction.
- If it ever happens that two different sets of information are entered to change the ownership of one cryptographic set, then the system is likely to act on only either of the two and not both.
Read ahead to know about the pros and cons of cryptocurrency and then reach a sound conclusion. An informed decision is way better than a hasty and impulsive one.
Advantages of Cryptocurrency
- Easy access − This means that cryptocurrency is readily and easily available to the common man and masses. The process is hassle free and anyone can be a part of the cryptocurrency network. The world has rapidly become digital and seems to advance at an even faster pace towards further development in terms of the cyber grid. There are no restrictions as to who can use cryptocurrency. This has led to the breakdown of barriers such as the affluent and not so affluent. It is very important in today�s time where this gap only seems to be increasing without any curative measures. Cryptocurrency is the solution. Almost anyone can make use of it. Also, since the system of currency in decentralised, without any authoritarian central bank, investors from every corner of the globe can easily make use of cryptocurrency. There is easy access for them as well. Other than the aforesaid, there is more for you in store. Well, it seems that you can also raise funds for your business or other work through cryptocurrency. The best aspect is that since any one can maketransfers and be a part of the cryptocurrency grid, they can also be a part of your project. This is bound to increase your project�s productivity and positive outcomes.
- Fast and simple payments − Making payments using cryptocurrency is very easy. It can be done without any difficulty in a matter of minutes or seconds. This is another benefit which is highly desired by several. There are many who do not have the time to wait in queues at the traditional banks or keep filling long forms all the time. This is when cryptocurrency works like a boon. It helps to do work quickly, without the waste of any time, resources or energy. Now, you must be wondering that what exactly is it that speeds up the process to such an extent. To answer that, the secret us that it does not need any lengthy details about the recipient. In fact, you are not required to feed in any credit card or debit card details either. Yes, you read it right. It is that simple. All that is needed to be put in is the address of the person or enterprise�s e-wallet. That�s it! Also please note that the speed of transaction depends on the crypto. It usually does not exceed minutes. This is not it. I hope you know that the traditional banks charge a high fee for transactions. However, this is not the case with cryptocurrency. The fees charged here is nil or negligible. This helps you to save on your money and spend only the exact amount that needs to be transferred.
- Quick Settlements − The greatest benefit of cryptocurrency is that you will not have to wait for days to receive or send your payments. There is instant clearance of dues. This leads to greater work ethics and also improved business relations. Money can be a driving force to ruin relations and morals. But, with the blessing of cryptocurrency, this can be done away with for good. It is highly imperative to note that the functioning of cryptocurrency depends on its base technology, blockchain. Blockchain is known to remove all delays. In fact, there is no third party whose approval may be needed to actually sanction your transfer and activities. What happens in the case of traditional physical banks is that several middlemen cause delays and you are held responsible for it. Cryptocurrency, on the other hand, represents quick settlement and it works on a peer-to-peer nature where there is no scope for a third party or middleman to intervene. You would be glad to know that cryptocurrency contracts are designed in such a manner that they fulfil their aim of eliminating all bottlenecks. What�s the cherry on the creamy cake? Well, as said before, the lower fees makes it highly desirable and sought after.
- Lower Fees −I�m sure it often happens with you that when you check your monthly bank statements, you see that it shows the subtraction of more than you actually spent. That�s what the banks charge you as service fees. There�s nothing you can do about it other than contemplate of all that you could have bought with all the extra cash that just got deducted from your account. Don�t worry, you�re not alone in this boat. Almost everyone faces this same issue as you. Other than the transaction fees that you are obliged to pay, you are also required to pay tax. Yeah, like the fees wasn�t enough. Also, note that these charges are not a small amount. That�s how all these credit card companies ride high on success, I suppose. But, it is not the same for cryptocurrency because the costs are nil or negligible. Please note that in case of credit cards and debit cards, the seller is the one who needs to pay a fee. But, it�s the exact opposite for cryptocurrency. In case of cryptocurrency, the buyer is needed to pay a fee. The piled up fees of traditional banks result in a hefty pocket pinch for you at the end of the day, rather month!
- Private− Cryptocurrency ensures that your privacy is maintained at all times and under all circumstances. You are not required to share details about your location or identity when you make transactions. This is one of the biggest achievements of cryptocurrency as well the technology that led to the birth of this revolution. There is high security and safety. You do not need to worry about your personal details getting leaked or landing up in the hands of wrong people. Minimal information is shared between you and the recipient and this is perfect for maintaining highly professional relations. Also, there is no external central bank to keep an eye on your activities. Thus, you are able to enjoy a sense of freedom while working. This allows you great liberty to work at ease, and just the way you want to. You are not under the pressure or rule of anyone else. Your free will gets to act upon it. It is truly decentralised since you do not need anyone else�s permission to get through with your transactions and payments. Thus, it is indeed highly secured. Each and every transfer is done on the basis of a NSA created cryptography. Also, this means that there is literally no possibility for any third party to intrude into your activities and money. It remains sealed between only two parties; the sender and the receiver. However, please note that there may be hackers out there to try and invade your privacy. But, what must bring relief to you is the fact that there are several ways
- Remain anonymous− As stated earlier, your personal details are safe and secure. But then you must be wondering that if only the recipient and you are are involved, then he will definitely get to know your basic details such as your name at least. Well, here�s the catch. This is the world of web. There are several masks which can be put on. And, this is exactly the case with cryptocurrency as well. Thus, you do not need to worry and can heave sigh of relief. You do not need to use your real name for the transactions. Yes, you read that right! You only need to choose yourself a name for the cryptocurrency platform and you are sorted. This helps you to conceal everything about you without the fear of any wrongdoing.
- Identity Theft − This means that there is no one who can steal private data about you from merchants. Thus, all your sensitive information is kept under wraps and protected at all times. You actually use a fake name or create a proxy ID on the cryptocurrency platform. This means that no actual information about you is posted online, or onto the world of web. This is another great benefit of cryptocurrency which has gained popularity and received a lot of appreciation from all over the globe. Your online identify is safe. You would be taken aback to know that the old credit card and debit card details that you use, make use of the pull mechanism. This means that each time you enter your details at a restaurant or a shopping mall or any other place, your details are �pulled� by the receiver. This literally leaves you with no privacy and this also, in a way, increases the chances of frauds. However, cryptocurrency works on a push basis. This means that only the relevant information is pushed to the receiver. No personal details are sent out but only the amount which actually needed to be transferred from one wallet to the other. This prevents hacking into your account and you can be assured of keeping all your assets safe. However, it is recommended that you must nor have a laid back attitude. On the contrary, you must take the necessary measures and precautions as well. Besides the aforesaid, cryptocurrency also ensures that your transaction history is not visible to others on the portal. And guess what? Cryptocurrency transactions are unique every time. This is irrespective of the fact that you use the same account for payments to the same party or different parties. That has no influence on your daily work.
- No chargebacks−This means that once you have made a particular payment and successfully gotten over with a transaction, you cannot be charged back. This is what makes cryptocurrency so preferred by top businessmen and all those who understand how important it is to move ahead with the changing times and advancing technology. This is the era of moving forward and cryptocurrency simply aids in the process. The scope of no chargebacks makes it very difficult for the frauds out there to prey on innocent victims who are unaware of their ulterior motives. What exactly is meant by a chargeback? Read ahead to know now. Well, a chargeback means that once a transaction is successful, it cannot be reversed. Now you must be wondering that why will anyone initiate it in the first place if they wish to reverse it. Well, the fact is that a lot of people first start off the process under the disguise of making payment and then simply take it back once done so that they can lie that payment from there end is made so they must be given the products and services. Yes, that sounds cruel hut it�s true and that�s just how a lot of people function out there. Thus, no chargebacks leave no scope for that. Payment once done is done for good and it cannot be reverse under any circumstances. On the contrary, you can file for chargebacks on the credit card transactions. This may not be a fact too many of the young users these days know. Please note that though this is an advantage at the moment, it may also turn into a disadvantage within no time. Just like every coin has two sides to it, each pro can also become a con if not handled well.
- No third party − This implies that you are the sole and only master of your money. You are free to spend it and manage it the way you wish to. There is no one else who has a say in it or can control it. As stated earlier, there is no external central bank of third party involved. This means that this is just like solely owning a company. In the sense, all decisions are taken by you. Thus, all benefits are yours as well as all losses. You do not need to trust the government or a central bank with your money and you can keep it or invest it just the way you prefer.
- Facilitate International Trades − It will be interesting for you to know that cryptocurrency transactions do not have a limit. And, that�s quite obvious and natural, given the fact there there is no controlling authority. Thus, obviously there is no rule defining body to put any restrictions on your activities. This limitless opportunity is great for all those who are on the cryptocurrency platform as it helps them to diversify their span of operations rapidly. Since this is beyond the control of any government or bank, it is least impacted by man-made borders between countries. In simple terms, this means that you can easily go ahead with international trade. You may be in one country, while your recipient may be in another country that is across the globe and it�s totally fine. Not only this, you�ll also be happy to know that the easy transfer of cryptocurrency across nations with the benefit of no extra taxes. Often international trade gets difficult and very expensive because of the taxes that are imposed by the government. But this is just not applicable in this case. Besides, it is not affected by exchange rates either. You wonder how? Well, the exchange rates are also set by the financial market and government. But if these two have no play in the entire scenario, exchange rates are also not applicable. Thus, cross-border relations and economy can also be improved through the use of cryptocurrency. It is absolutely hassle free and provides the chance to make local trade go international. If this is accepted world-wide, global economy is bound to improve rapidly and there will be no looking back.
- Easy Access −The cyber and thrilling world of cryptocurrency exists primarily due to one driving force, the internet. Nowadays, everyone has an internet connection. There used to be a time when people would have to wait for their turn at the cyber cafe to even read mails or anything on the net. But it�s no longer so. Nowadays, irrespective of educational qualification, everyone has a phone with an internet connection. Those who do not have a laptop at home, at least have one computer with internet or wifi connection. Each individual has come to recognise the use of internet as it is great in connecting instantly to every part of the world. Thus, the rapid popularity and availability of internet has made the cryptocurrency platform available and accessible for everyone. Gone are the days when anyone would prefer to stand in the queues at the banks. This is the age when even little things such as medicines, ice creams or groceries are ordered online. Thus, it�s no surprise that more and more people are switching over to cryptocurrency to reap several benefits. In fact. No business account of withdrawal software is needed to become a part of the cryptocurrency grid. All you need is a mobile phone and an internet connection to get started. This is a boon for all developing countries as well where there are huge gaps in the country�s economic states and the level of education of the citizens. In such a situation, cryptocurrency seems to be a great remedy to bridge this gap and bring about a sort of harmony.
- 1. Difficult to understand − Cryptocurrencies are relatively new in the market. This means that there is no expert course or anything for everyone to know all details about it. Also, there are several things to be kept in mind while engaging in transactions with cryptocurrency. This may not be easy for everyone to understand. Had everyone been of the same aptitude, there wouldn�t have been the need for experts. Thus, those who do not understand it, often incur losses instead of reaping the relevant benefits. This is a disadvantage which cannot be overlooked, no matter how great the system as whole is.
- Lack of knowledge − The world of cryptocurrency is great to rapidly earn and gain fame. But, there is always a risk of hackers intruding your privacy and account. Though there are several measures of preventing yourself from hackers, these are not known to all. This is what makes them vulnerable to hackers who are always on the lookout for the ignorant that can be looted.
- Not accepted widely − Well, this may not be on the top the list of disadvantages of cryptocurrency but it is definitely one of the major cons. This means that not all websites, companies and nations and yet open to the idea of dealing with cryptocurrency. Thus, you may be really rich in the cryptocurrency world, but if an enterprise does not accept payment in this form, it means that you will need traditional cash to carry out exchanges with the particular recipient. There is no solution to that yet. For example, India is a country where the central bank, Reserve Bank of India has clearly declined the acceptance of cryptocurrency. Though court cases regarding the same are pending and the future is uncertain, at the moment, cryptocurrency is not accepted there. Thus, you are recommended that before making cryptocurrency transactions, you must know if you will actually be able to put it to use in the long run and in real life. It is surely way behind in its motive of replacing all traditional banks and financial systems.
What is Sharia law and what does it state?
Now that we have an idea about what actually is a cryptocurrency we can easily understand why cryptocurrency is creating such a commotion under Sharia Law.
Sharia literally means a well-trodden path to water, and we know that water is the source of all life. Sharia is basically the Islamic legal law which, unlike other legal codes, regulates public as well as private behavior and even private beliefs of the people. This law, out of all the legal laws is the most restrictive law, especially against women. Sharia has been made popular by groups like Islamic State who wish to implement hard aspects of Islamic law. Sharia law aims to preserve these five elements of life -
This legal law which emerged from the Holy Quran prohibits the activities which involves riba (interest), gharar (uncertainty) and maysir (gambling). So, recently when an Islamic scholar declared cryptocurrency, which involves huge profit and loss as permissible under sharia law, it became a heatedly debatable topic amongst the people.
Is It Halal or Haram?
To understand whether Islam considers the usage of bitcoin as permissible, we can look at it from four different angles-
- value of money
- payment network method
- concept of gharar
- serving the real economy
For value of money, Islam states three elements - mal (wealth), taqawwum (legal value) and thamaniyyah (monetary usage). So when we look at the features of bitcoin, it tends to have both the features of wealth and legal value but not monetary usage. Hence, from the point of view of money in Islam, bitcoin is haram (not permitted). But if we look at it from the perspective of payment network method, bitcoin can be called as halal (permissible).
Bitcoin, based on proof of payment and not on debt which is unlike the fiat money. However, being changeable in the past leading to price ups and downs and with no central authority, elements of uncertainty do exist. This creates contradictions with one of the main laws in Sharia. Therefore, for bitcoin or any other currency to be considered as permissible or halal, there is a need for investors and users to understand the risks involved before purchasing any. Considering from the perspective of serving the real economy, bitcoin and cryptocurrency investments, taking the current uses, do not really serve the real economy or contribute anything to its real growth.
Notably, there is no consensus among Islamic scholars on whether cryptocurrency and bitcoin are in accordance with the Shariah law. There is still an ongoing debate on this matter. Although, the opinions stating that its usage is completely forbidden from an Islamic law, is not true to the core, the Islamic Banking and Finance Industry should consider its use in exchange useful until a more regulated and transparent option or framework gets established.
Acceptance of Cryptocurrency in Islam
With regard to acceptance, you�d be surprised to know that recently an , Islamic scholar declared that cryptocurrency is totally permissible and supported under the Sharia law. In fact, this has come on a blessing and a totally new world of opportunities to approximately 1.6 millions Muslims all over the world. It is a known fact that the Islamic do not do anything that goes against their religious laws and that is exactly why they had abstained from the use of this cryptocurrency world till date. However, this recent development bound to bring about a revolution. It is in fact a historic statement which has created buzz all over the world.
The publication which argued whether Bitcoin was halal or haram has gained rapid popularity. In fact, what goes to show the desire and preference of the masses is that within an hour of the public statement, the value of the cryptocurrency platform surged by more than 1,000 dollars. Now, that�s quite a sum and it is increasing day by day. Now, though it�s not clear if this surge was due to the publication or some other influencing factor, the publication is definitely being speculated as a contributor.
A mosque in the UK announced it is hoping to raise at least �10,000 in cryptocurrency donations in the month of Ramadan.
It has been pointed out that Bitcoin is accepted as a legal currency in Germany and that is why it qualifies as Islamic money in Germany. The Sharia laws are not different for countries is this is what truly stands for equality in the Islamic world.
A major chunk of the world population is Muslim and this cannot be overlooked. If such a block of the population stays away from this major cryptocurrency platform, then how is the world finance probably likely to improve? Thus, this recent development in this aspect is great. There are countries which has accepted Islam as their state religion. In these regions, no act against the religious law is permissible under any cost or circumstances. Thus, the fact that Sharia law is too keeping up with the 21st century and it�s ever changing demands is a great relief.
In fact, this may be the first time that a religion has gone public with such a revolutionary and advanced statement as well as acceptance.
It will be great to note if Muslim investors all over the world are able to understand this complex world of the web and cryptocurrency that has great advantages as well as cons. Not everyone is able to get a grip onto this online concept of money transfer and payments. Those who get into the hang of it are lucky enough and Muslims too are now in the league to make the most out of it.
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Islamic finance being a simple method of finance and banking is done in the same halal manner. It is considered good for humanity and is less painful for the people involved.