Social Innovations with Islamic Finance – Part III: Integrating Islamic Contracts and Crypto-currencies for an economically integrated whole of communities

This is the last part of a three part series of articles on how the principles of Islamic finance could be applied for macro economic growth. (For first part, click here and second part here).

In the previous two articles, I briefly explained the progressiveness of Islamic finance and how Crypto-currencies sans the authority of the state or a trans-national group of states could help build an economically integrated whole of communities across the world.

This article is about integrating Islamic contracts with the Crypto-currencies for macro-economic growth in Greece. However, pl note that the points discussed here for Greece are to be seen as a basis for a dialogue towards an economic growth that respects the dignity of the human beings making up the economy.

As a native of India, I have great warmth and affection for the people of Greece, who have inherited a civilization spanning centuries of exploration of human mind – both in thought, as reflected by teachings of great Greek philosophers and action, as evident from the conquests of Alexander, the Great! And, not to mention of the origins of the greatest sporting event on this planet that we celebrate once in four years as one common humanity!

If we look at the September 2014 data from Eurostat here, Greece happens to be the 7th affluent country in European Union in terms of their Financial assets! For comparison, Germany is at 17th position!

The challenge it seems with these financial assets is monetization or in other words, liquidity of these assets.

An interesting article by Brian Kelly, an expert in global financial markets and digital currencies, suggests that these assets be grouped and deposited into a Trust, which pays the Greece government in Crypto-currency, like Bitcoin (although Brian speaks of a new Crypto-currency to be built with the block-chain technology).

While agreeing with Brian on the potential benefits of having a bitcoin-like solution for Greece situation, it seems to me that we can extend the benefits by using Islamic contracts. Here’s how:

  1. As mentioned in the first part of this series of articles, Islamic contracts are progressive, where human being through his/her capabilities is at the center of the process of wealth creation.
  2. Another important feature of Islamic finance is that it is not debt based! It is equity based. In other words, there is co-creation of wealth in partnership with the capital provider i.e. Islamic financial institutions.
  3. In our context, Sovereign government of Greece could raise international Sukuks (Islamic bonds/ investment certificates) through any of the Islamic contracts viz., Equity (Mudharabah/ Musharakah) or Lease (Ijara), which are backed with the assets owned by the Trust as noted above.
  4. For example, the central German state of Saxony-Anhalt has done through their 5 year Ijara Sukuk worth Euro 100 million.
  5. The investments made by the Islamic financial institutions are guaranteed and in case of disputes are settled through an adhoc arbitration court in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law or arbitration by the International Centre for Settlement of Investment Disputes.
  6. Islamic banks could start transacting using a portfolio of Crypto-currencies, like, Bitcoin. Here’s why:
    • As per the Forbes article here, Bitcoin is currently in Venture Capital phase and is moving towards Wall Street phase, where Institutional investors, banks, and broker-dealers begin moving money into Bitcoin!
    • Currently, market capitalization of Bitcoin as of this writing is nearly $3.3 billion per blockchain.
    • Since, the coins that could be in circulation are limited to 21 million and with it’s wider adoption and based on the laws of supply and demand, this value could potentially increase. Hence, it makes sense for Islamic banks to also start transacting in Bitcoins and other Crypto-currencies.
    • An article by Wences Casares in LinkedIn estimates that the value of each Bitcoin could be $1 million! – if Bitcoin achieves the same kind of wide use as we have seen with mobile phones.
  7. In the context of Greece, Islamic financial institutions could invest in Sovereign Sukuks of Greece and partly paying them from their portfolio of Crypto-currencies, like, Bitcoin, which can be traded freely across the private commodity exchanges in the world, sans the authority of a state or a trans-national group of states.