Looking at the Pakistani financial sector, the State Bank of Pakistan (SBP) has urged commercial banks and technology firms to join hands to accelerate the adoption of digital mode of payments. This is being done to reduce the size of informal economy, increase tax collection and support economic growth. The introduction of RAAST– a mode of fast-track digital payments – and Roshan Digital Account (RDA) for overseas Pakistanis are two examples of digitalization of Pakistan’s economy.[4]

Islamic Finance is differentiated from conventional finance by its unique characteristics. All Islamic finance transactions must follow Shariah principles. For Muslims, Shariah compliance has a wider purview. It encompasses all individuals’ actions, where religion and the concepts of ethics, morality and justice must be applied in every aspects of their lives. Fiqh Muamulat or Islamic Jurisprudence provides the set of rulings that govern all commercial transactions including financial structures and contracts. 

Shariah compliance being key, the general rule to understand is that all transactions are permissible unless there is a clear text that prohibits it. The same needs to be followed for all fintech related transactions or Muamulat. As a leading Islamic Finance and Shariah expert explains;

“…fintech application(s) and practices, as in traditional Islamic finance, should follow the principles of the Shariah by avoiding the prohibited elements in the transactions such as interest (Riba), gambling (Maysir), uncertainty (Gharar), harms (Darar), cheating (Tadlis), etc. It must be transparent with no hidden cost, irresponsible or unethical financing. Likewise, the practice of transactions in fintech application(s) should follow the rules of contract (Aqd) used in the transaction by observing the pillars (Rukn) and conditions (Shart) in the contract. In addition, fintech application should aim at achieving the objectives of the Shariah, namely to realize the benefits (Maslahah) and to avoid the harms and difficulties (Mafsadah and Mashaqqah)“.[5]

A very organic and promising application of fintech in Islamic finance is in Islamic Social Finance which is rooted in Islamic concepts of ethics, economic growth for the benefit of society, circulation of wealth and poverty alleviation. The digitalization of Zakat & Ushr, Waqf and Sadaqah would be a great way to use digital technologies for the benefit of society. Digitalization can help in collection of funds and also determine the ways in which the funds are utilized and where they are donated. For example, crowdfunding platforms for specific projects and missions, using blockchain platforms for collection and disbursement of Zakat and other charitable donations. The use of Blockchain enables the tracking of funds through the entire process lifecycle. [6] Transparency and traceability are characteristics that are most important in collection and disbursement of charitable funds and fintech can become a facilitator in this regard.

To elaborate further on the socio-economic benefits, take the case of Zakat. The many potential applications of digitalization of Zakat (and other donations) can be wide-ranging and impactful. These include i) online registration of Zakat applicants, ii) cross-verification of applicants via chat-bots, iii) introducing disbursal of staple foods to recipients through ATMs (Rice disbursement ATMs already in use in Malaysia and Indonesia), iv) measuring household poverty levels using Internet of Things (IoT) which would eventually enable Zakat giver to send funds directly to recipients without using an intermediary, v) introduction of crypto Zakat platforms, vi) using big data to collect, analyze and extract information on Zakat stakeholders and improve the administration process. [7]

As already mentioned, Blockchain technology enables individual transactions to be recorded in a specific manner making them impossible to steal, manipulate, alter or erase. This makes the technology capable of ensuring end to end Shariah compliance in transactions and can be considered “a boon to the Shariah requirements of transparency and disclosure”[8]. Cryptocurrencies are based on Blockchain and can allow decentralization and deregulation of transactions as they are considered digital mediums of exchange and a store of value. While cryptocurrencies have advantages (such as being a cheaper, direct, secure, anonymous, and minimal way of making transactions), there are several disadvantages. The deregulated and anonymous and speculative nature of cryptocurrencies is a cause of concern.  In Islamic finance, the permissibility, use and trading of cryptocurrency has been met with different considerations by Shariah scholars. 

The article “Crypto Mania: The Shariah Verdicts” [8] provides a very comprehensive summary of the current views held by different regions/scholars (see box below).