In one of our previously published works, we analyzed the Islamic financial market: trends and contradictions, the motives of the participants, and its importance for the global economy. The time has come to analyze how Islamic finances are integrated into digital reality.
The first example is Saudi Arabia. Four months ago, the kingdom’s financial regulators were skeptical about the development of the virtual asset market. The Standing Committee on Trade Information on Unauthorized Securities on the Forex market warned that cryptocurrencies, including bitcoin, were not approved as official means of payment in the kingdom, and neither citizens nor organizations had a license of regulatory authorities for operations with digital coins. The Committee also warned about the high risks of illegal use of cryptocurrencies, which, as the information letter stated, may be sent to "unknown recipients".
However, shortly before the bitcoin crash, the head of the Innovation Department of the Saudi Arabian Monetary Authority (SAMA), Mohsen Al ZAHRANI, said that at the beginning of the following year, the financial authorities of the kingdom, together with the Central Bank of the United Arab Emirates, planned to issue their own digital coins. It is assumed that at the initial stage, they will not be used as a means of payment or savings. Tokens have one task: to become a tool for transferring money between banks. The head of the Central Bank of the United Arab Emirates, Mubarak Al MANSURI, emphasized that “digital currency will not replace physical money,” and with this statement, he partially revealed the plans of the Arab states regarding the development of the digital market.
In the discussion of Islamic finances and crypto-economy, one fact cannot be ignored: from the Shariah point of view, everything that people agree on can be money. According to legend, the caliph Umar ibn al-Khattab proposed to somehow make money from camel skins. His associates did not support the bold initiative, as they were afraid that the use of such a carrier of value would, using the word of the day, lead to the high volatility of both the currency and camels. Simply put, Islam does not see the difference between the material and the digital world, and therefore, cryptocurrencies can also be quite legitimate means of payment. There are three reasons for the dichotomy of Saudi regulators regarding the adoption and use of virtual assets.
The first one is to prevent competition between the digital financial market and the fiat market. Where European and American economists see antagonism, Arab economists see interaction and integration. The Islamic traditional financial sector is growing at a good pace.
“The size of the Islamic financial market in 2018 is approximately $2,630 trillion. With an average CAGR of about 8% per annum, by 2023, it should reach a $3 trillion bar,” said Vladimir MALENKO, the head of the Islamic finance department of a large European bank. – “For the moment, Malaysia dominates the Islamic financial market. In our sector, we use the GIEI indicator - a comprehensive index of the global Islamic economy. Now, Malaysia’s GIEI is 127 points, the United Arab Emirates has 89 points, and Bahrain has 66 points. The three leaders in the Islamic finance look something like this.”
As we can see, Saudi Arabia is not included in this top three. But, probably, it is really eager to join it, because, on the one hand, it is the leader in oil reserves in the Persian Gulf and in the number of the riches living in its territory (1,360 people with the total fortune of $285 billion), on the other hand, the kingdom is in desperate need of economy diversification. Petrodollars can no longer cover the rapidly growing budget expenses, but the control over the Islamic financial sector will help solve the problem of the budget deficit and take the fitting first place among equals.
The second reason is the crucial differences between Islamic banking and American or European one. Probably, ethically oriented finance is gaining popularity because they lack two main drawbacks of the ordinary banking system: unprincipled profit orientation and publicity of private information for regulators and intelligence services. Islamic banks really do not have the right to use interest on loans, conduct risky financial transactions, and disclose information about their customers, because of which, by the way, they often have misunderstandings with FATF. However, all global financial communications, such as SWIFT, are controlled by non-Islamic structures.
The creation of a joint digital transaction infrastructure of Saudi Arabia and the UAE will allow local Islamic banks to get rid of communication dependence. And again, this project should be implemented as soon as possible, because Iran has recently announced the possibility of creating a similar system.
The third reason is the popularization of the Islamic financial sector itself.
“The greatest disadvantage of Islamic financing is the lack of knowledge of its proposals,” our expert believes. – “Even Muslims sometimes have no idea what there is on the market. And this is despite the fact that some cryptocurrencies have already been declared Shariah-compatible and, thus, acceptable within the framework of Islamic finance. The supply is clearly outrunning the demand.” However, any mention of a project, a corporation, or a country in the context of the digital economy adds hype. This rule works even now, against the background of the crash in the value of digital assets.
The future will show whether we are right in our estimations. But one thing can be stated with complete confidence - the Islamic world disproves stereotypes and is not going to remain on the sidelines of civilization.
In the following published works, we will analyze the cryptocurrency projects of Turkey and Iran.