Smart contracts and halal lending- A technical and religious examination

Businesses are adapting to change their means of access to finance and capital these days. One innovative approach some businesses are exploring is halal crowdfunding software. Rather than going the traditional way, even large companies and MNCs are looking forward to new means of capital. For instance, they are considering online crowdfunding. 

It is a highly unique means that gives access to lenders and investment companies to share their risk of borrowing money to businesses and startups. The growth of crowdfunding has been across all forms of business areas with no regard to religion or cultural beliefs. 

However, there are some unique differences. These differences exist between a normal crowdfunding portal and halal crowdfunding software. In this blog, we are going to give you a detailed idea about a halal crowdfunding portal. We will explain what its compliance entails. We will explain the use of smart contracts and blockchain in halal investment lending platforms. Also, we will find out the benefits and see how both parties get a fair deal using such norms. 

How does Islamic finance work in crowdfunding?

Even in the Islamic religion, businesses are adopting crowdfunding as a new means to gain access to business capital. Companies are adopting Islamic Dencentralized financing or DeFi as an ethical means to fund business ideas and lend money for growth to companies. 

However, there is a basic difference between normal crowdfunding portals and halal investing. You see, in the Islamic religion, finances are based on Muslim laws. These laws are defined under the Sharia. 

Sharia laws are a set of beliefs and transparent business principles that are used by Muslims when doing business. Any kind of organisation that is lending, borrowing, or investing money has to abide by this set of laws to ensure compliance and regulation. 

Core principles under Sharia laws and Halal investing

There is a strict framework and tight regulations for the companies to abide by. This set of laws applies uniformly to any company, however large or small. It ensures parity for business growth and ensures equal opportunities for all. 

Here are some key concepts that you need to understand in the halal investment regime-

Prohibition of Riba or interest

You see, the Sharia laws prohibit any form of earning in the form of interest while investing money. This means that the lender does not have to pay any interest, normally like other loans. The halal laws under the Muslim religion believe it is a sort of exploitation.

Avoidance of Ghahar or uncertainty

Any type of financial transaction that is based on Ghahar or uncertainty is prohibited under the halal laws. 

To develop smart contracts that are halal-certified and compliant, you need to invest the pool of money from investors. These investments should be in areas backed by tangible assets. Such investments have to be openly shared with the public or the investor group. This sharing must occur as and when needed.  

Prohibit Maysir or debt and investments for gambling and speculative trading

Using investor or lending money into speculative areas for gambling and stock market derivative trading is also strictly biased and considered sinful under the Sharia laws. As we told you above, if you have to develop any crowdfunding software, you need to invest it in areas with real and tangible assets. 

This is to prevent the risks of defaults. It also ensures that every investor has a certain guarantee on their investment value. 

Sukuk investments under halal crowdfunding

In simple terms, Sukuk investments are a form of borrowing money. You can consider it similar to a bond in Western finance ideas. Sukuk is a form of Islamic financial certificate. It is a set of terms and conditions of lending from an investor. 

Sukuk does not include any riba or interest, as Sharia law strictly prohibits it. However, it is backed by a tangible asset and issued by the borrowing entity.

The investment company gains access to the tangible asset or shares and gains access to an interest or ownership in the borrower’s business. 

The issuer, which is the borrower in this case, makes a contract with the investor company to buy back the sukuk at a later date at a pre-agreed-upon price. 

Sukuk represents undivided shares backed by a tangible asset and uses the borrowed capital to meet business needs and support expansion.

The introduction of Sukuk and halal lending to crowdfunding

To your surprise, there is a unique form of similarity between smart contracts using blockchain and halal lending principles. The basic set of pillars that these two financial frameworks have been built on the same parameters, like-

• Transparency
• Immutability
• Decentralization

To develop crowdfunding software using a halal investment strategy, you have to feed the conditions into the programming code. Once fed, the smart contracts will automatically execute themselves. This process only involves using tangible assets, without riba or interest. 

It allows for the transparency of transactions

The use of halal lending is based on the idea of providing complete transparency for both parties. And the smart contracts under blockchain also ensure total transparency. This transparency is easily verifiable. Stored as blocks of data, investors or lending parties can cross-check the transaction details at any time. They can do this with the use of a public key. 

Use of decentralized servers to increase privacy

Islamic DeFi and the use of smart contracts are gaining a lot of traction these days. With the use of decentralized servers, it is almost impossible to track data outside the network and to be able to spy on it. When used in the Islamic crowdfunding model, it also reduces the risk of all investors gaining access to sensitive data. 

Final thoughts

So, as you can see, the use of halal lending incorporates well within the core principles of DeFi and smart contracts. As per the latest data, more and more Islamic investors and companies are willing to use halal crowdfunding software for ease of regulation and ensure parity to reduce business risks.