Islamic banking and finance is a unique system built on Shariah law, which governs various aspects of a Muslim’s life, including finance.
One of the core principles in this system is the strict ban on interest, meaning Islamic financial institutions are not allowed to charge or pay interest on loans.
This stands in contrast to the foundation of conventional banking systems, where interest is a central component.
Instead of earning interest, Islamic finance operates through profit-and-loss sharing models. This means that when a lender provides funds, they don’t expect a fixed interest return.
Instead, both the lender and the borrower agree to share the profits or losses that arise from the venture. This structure encourages shared responsibility and reduces the risk of exploitation.
Another key aspect of Islamic finance is its emphasis on ethical investments. Shariah law allows Muslims to invest in intangible assets such as stocks, bonds, and even digital currencies like cryptocurrencies — but only if they have genuine value and utility.
For an investment to be Shariah-compliant, it must avoid harmful sectors such as gambling, alcohol, and tobacco. Investments must also be socially beneficial and not exploitative.
Transparency is crucial in Islamic finance. Every financial deal must be clearly understood and disclosed to all parties involved.
To maintain adherence to Islamic principles, financial activities are overseen by Shariah boards — panels made up of Islamic scholars and financial experts who ensure that the activities align with Islamic teachings.
There are various financial products and services offered under Islamic finance, including:
- Mudarabah (profit-sharing agreements),
- Musharakah (joint ventures),
- Murabaha (cost-plus financing),
- Ijara (leasing), and
- Sukuk (Islamic bonds).
These alternatives provide ways to finance and invest without violating the principles of Shariah.
What Makes a Cryptocurrency Shariah-Compliant?
Designing a cryptocurrency that follows Islamic law involves a collaborative effort from Islamic scholars, finance professionals, and tech developers.
This team ensures that the cryptocurrency’s foundation is built on profit-sharing instead of interest-based lending.
Investors in such coins share the potential risks and rewards of a project instead of receiving a guaranteed interest payment.
Before launching, the digital asset must be reviewed and certified by a Shariah advisory board. This board thoroughly examines the coin’s features and operational model to confirm its compliance with Islamic finance.
A real-world example of a certified Shariah-compliant cryptocurrency is Islamic Coin (ISLM), which runs on the Haqq Network. In June 2022, this coin was granted a Fatwa—an official religious ruling—confirming its compliance with Islamic law.
ISLM is based on a deflationary model, which limits the creation of new coins and helps prevent uncontrolled inflation.
Furthermore, every time new ISLM tokens are minted, 10% of the amount is donated to the Evergreen DAO, a decentralized organization that funds Islamic charities and socially responsible projects.
This mechanism aligns with the Islamic practice of zakat, which is a mandatory charitable contribution and one of the five pillars of Islam.
The Importance of Proper Design in Islamic Cryptocurrencies
Shariah-compliant cryptocurrencies are still a new and developing concept. Even though some coins claim to follow Islamic principles, there’s an ongoing debate among scholars about their authenticity and true compliance.
Andrey Kuznetsov, co-founder of the Haqq Network, explained that creating a Bitcoin-like ecosystem that fully respects Shariah law is a complex task.
It requires cooperation with governments, financial institutions, and other stakeholders to ensure that the currency is widely accepted and used in line with Islamic values.
A major concern from Islamic scholars is the high level of speculation involved in many cryptocurrencies.
In Islamic finance, transactions that involve excessive risk or uncertainty — known as gharar — are prohibited. For example, making profits through luck or chance, like in gambling or speculative trading, is not allowed.
Mohammed AlKaff AlHashmi, a co-founder of Islamic Coin, acknowledged this concern but emphasized that Shariah law is flexible and can evolve with technology.
He said that while Islam forbids transactions based purely on speculation, it allows commercial risks in legitimate business activities.
The key difference lies in the intention behind the investment — whether it’s for genuine utility or just for short-term trading profits.
In this regard, Kuznetsov pointed out that the architecture and purpose of a cryptocurrency are the main factors in determining whether it’s permissible under Islamic law.
Cryptocurrencies that are used for payments or long-term value storage are more likely to meet Shariah standards.
One type of cryptocurrency that fits well with Islamic finance is stablecoins, such as USDC or USDT, which are backed by tangible assets like the US dollar.
These coins offer stability and are based on asset-backed models, which aligns well with the principles of Islamic finance. Some coins, like OneGram, are even backed by gold — a traditional and trusted form of wealth in the Islamic world.
Kuznetsov concluded that although building Shariah-compliant cryptocurrencies is a challenge, it’s achievable with the right combination of knowledge, regulations, and technical innovation.
Expanding Financial Inclusion Through Shariah-Compliant Crypto
The development of Islamic cryptocurrencies opens up new possibilities for Muslims around the world, especially in countries where Islamic finance is prominent.
By offering digital financial tools that align with their religious beliefs, these coins can help bring more Muslims into the financial system.
According to AlHashmi, such cryptocurrencies can help Muslims who have limited or no access to conventional banking.
This can be especially useful in regions where traditional banks do not operate or where people avoid banks for religious reasons.
Moreover, introducing Shariah-compliant cryptocurrencies could attract more investments into Islamic finance.
As more Muslims look for ways to invest in accordance with their beliefs, the demand for ethical digital financial solutions is likely to grow.
This could lead to a stronger and more inclusive financial ecosystem that benefits not only individuals but also broader economic development.
In conclusion, as financial technology continues to evolve, it’s essential for Muslim investors to examine how these innovations align with the core principles of Islamic finance.
With proper guidance, thoughtful design, and community involvement, cryptocurrencies can offer new opportunities while still respecting the ethical and social goals of Shariah law.
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