In order to understand how Islam and principles of Islamic finances can relate to cryptocurrency, we first need to consider such economic notions, in which, Islamic economic model works and approved by the rules of Sharia:
Islamic stock markets
Crowdfunding as a tool for business financing as told by Sharia
There are plenty of Islamic exchange funds in the world, including Kuala Lumpur exchange fund, Dubai exchange fund, Khartoum exchange fund. Moreover, there are also some Islamic fund indexes, just like S&P 500 ShariahIndex, S&P Europe 350 Shariah, KHARTOUM Index, KualaLumpurSyariahIndex(KLSI) and so much more.
According to the “Islamic norms for stock screening. A comparison between the Kuala Lumpur Stock Exchange Islamic Index and the DonJones Islamic Market Index” research, principles of Islam are present in the foundation of following exchange functions. Such as: the ban of usury, the compliance of operations to the norms of Sharia, the ban of speculations and shared risks.
KLSESI in Malaysia, as an important product of ICM, was established in 1997, in order to give Muslim investors an opportunity to participate in investments of ownership equity based on the Sharia norms. Due to 26th October, 2006, shares of 642 out of 811 companies, trading on the exchange, were approved by SAC SC as an allowed securities. According to SC, SAC adopts standard criteria as a managing principles to detect if the primary assets of a company are allowed to invest in, by the Sharia norms. Activities are banned, if:
Business operations are based on usury, such as : commercial or trading banks, financial companies;
Operations, that are related to gambling;
Operations, related to the production or distribution of alcohol, pork, or other banned goods;
Operations, with elements of gharar (uncertainty), as in insurance companies
Basic company operations must not be controversial to the principles of Sharia, stated in previous 4 points.
Mass perception and company image must be good.
Interests, coming from fixed deposits in financial institutions and other investments to accounts, do not exceed the norms, allowed by SAC
The development of stock market-is a good indicator of economic development of a country. This is easy to track with the examples of Malaysia.
Stock market is the right place for Islamic investors, in order to avoid threats and risks of inflation. Inflation, in turn, may be the index of an economic growth of the country. For instance, Malaysian KLSI index, including company shares, which is compliant with Sharia norms and allowed to trade by Consultative Board of Sharia and Security and Exchange commission , is in fact, related to economic growth in Malaysia.
“Macroeconomic Variable sand Malaysian Islamic Stock Market: A Time Series Analysis” research considers the relation between the Malaysian GDP and the growth of primary index funds. Correlation is substantial, and shows the GDP growth in relation to fund indexes, at the same time the decrease of indexes lead to the decrease in GDP.
As a result, investments on the exchange is allowed from the Sharia point of view, but with some limitations. International expertise and practice proves it.
In the research of the World Bank-Islamic Development Bank Policy Report “LEVERAGING ISLAMIC FINANCE FOR SMALL AND MEDIUM ENTERPRISES(SMs)”, published in 9th October 2015, crowdfunding is considered as an option to business financing in accordance with Sharia norms.
Here are some types of crowdfunding:
Crowdfunding on the basis of donations. Usually, sponsors support the business initiative with donations, without expecting anything back.
Crowdfunding on the basis of rewards. Sponsors receive tokens for the initiative support, maybe samples of developing products or services. Reward based crowdfunding is the great online space to pre-sale the products and using that revenue to manufacture products and services.
Crowdfunding on the basis of debt. Whereas, previous types of crowdfunding were philanthropist by their nature, debt crowdfunding is an investment tool, with the help of which, crowd-investors give debt to start ups and small enterprises to support their companies, and pay the debt back as an interest payment.
Crowdfunding on the basis of equity. Like a debt based crowdfunding, crowd-investors support start ups and small/medium enterprises for the financial benefit. In equity based crowdfunding, investors get an equity in the company, it may be considered as an agreement of sharing the loss and profit. This type of crowdfunding is a parallel to venturing.
Out of all above types of crowdfunding, only debt based crowdfunding is not allowed by the Islamic rights. Other types of crowdfunding are compliant with Sharia norms, and actively used in Islamic finances. Let’s see some examples of crowdfunding platforms, working on the basis of Islamic rights:
1.Liwwa, electronic crowdfunding platform, based on Jordan, was launched in September 2013. It helps small enterprises to raise capital by engaging some investors, as a result, making monthly payments to cover the funding.
Shekra, crowdfunding platform, based in Egypt, launched in November 2012. It solves the problem of the deficit of financing for start-ups, which are too big for incubators, too small for venture capital funds and too risky for banks. Start up financing ranges from $20 000 to $200 000. In order to fulfill the needs of start ups,small/medium enterprises with “Shekra” platform , companies can get a financing of “Musharaki” or smaller “Musharaki”.
From the Islamic finances point of view, crowdfunding based on ownership equity has a major opportunity to meet the expectations from Islamic finances by merging the pros of social development and investment opportunities, based on dividing the profit and loss for the broad circle of investors and entrepreneurs.
In todays world, financing perspective start ups and small/medium enterprises all around the world must lean on the alternative sources of financing, based on innovative financial services, which increase the availability of financing and pros of tech developments to fulfill the needs of entrepreneurs from all over the world.
The advantages of crowdfunding from the Islamic finances point of view, go as following:
· Working on the base of loss and profit sharing
· Allows the access to capital for broad range of entrepreneurs, minimizing the deficit of financing
· Opening a new class of assets for small/medium enterprises
· Creating more working spaces
· Supporting the increase in numbers of enterprises for the future IPOs in new sectors
In order to track the compliance with Sharia norms, Islamic crowdfunding must follow these conditions:
· Platform should be executed by Sharia Board
· Investments must be socially responsible
· Start ups must work based on principles, in accordance with the Sharia norms, and must not bring the income from the sources not compliant to Sharia norms
As practice shows, crowdfunding is working based on Sharia norms, and actively used in the practice of project financing.
Summarizing all of the above, we can conclude that, crowdfunding as an option of project financing in crypto market, is compliant with the norms of Sharia. However, in order to close the deals in crypto market, one must be properly investigate all the cryptocurrencies and exchanges.
Most of the cryptocurrencies do not work in an accordance with Sharia laws, and Muslim people should be really careful getting a deal with them. At the same time, there a many projects that work in accordance with Sharia laws, and need more attention.
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