The
Islamic Research and Training Institute (IRTI) of the
Islamic Development Bank (IsDB) Group has partnered with the Samsung-backed Blocko to build a Blockchain-based innovative credit enhancement system.
IRTI works to develop innovative knowledge-based solutions and enhance
human capacity in Islamic economics and finance for the sustainable
development of IsDB member countries and Muslim communities in
non-member countries worldwide, while Abu Dhabi-based E24P is a collective of technology experts,
distributed financial services providers, state-level government
sponsors, and leading research institutes in the UAE and the UK working
with clients in high-growth economies and sectors across the Middle
East, Africa and Southeast Asia to deliver solutions in disruptive
technologies.
The IRTI-E24P partnership aims to leverage the E24P Blockchain teams'
deep expertise in deploying Blockchain systems to further the IsDB's
mission of enabling greater financial inclusion, alleviating poverty,
and accelerating the development of the Islamic financial industry.
Shari'ah law prohibits banks from charging interest on loans to their
borrowers. Islamic banks offer financing to individuals and businesses
through real economic transactions such as joint ventures, deferred
sale, and leasing agreements. In offering credit financing, Islamic
banks need a mechanism to encourage debtors to pay on time. A common
practice involves charging debtors with late fees which are then donated
to charity.
However, because Islamic banks are not
allowed to incur any profit and in turn any benefit from these
late-payment charges, they are not incentivised to collect these fees
and distribute them to charitable organisations in a timely manner. At
the same time, because debtors see these late fees as an act of charity,
their sense of urgency to pay their debt obligations on time might
diminish.
The
Smart Credit Management System minimises the risks
associated with credit financing to businesses and consumers through the
use of new economic incentive models and advanced implementations of
hybrid Blockchain technology. The new system being developed by IRTI and
implemented jointly by IRTI and E24P will feature a
novel incentive mechanism that encourages early repayment and
contributes fees to an insurance pool that covers involuntary credit
defaults. Such a system is not feasible through conventional
arrangements but is facilitated through Blockchain technology, specifically smart contracts on the Aergo Blockchain.
Highlights of the
Smart Credit Management System include:
- Ensuring that credit assessments are performed in a provably transparent and responsible manner, whilst keeping the data and methodology used appropriately secure and confidential based on zero-knowledge proofs.
- Allowing creditors to reduce credit default rates to improve overall business performance and accelerate efforts in areas of financial inclusion.
- Integrating siloed functions in the financing process including credit reporting, credit rating, credit history, and credit insurance to reduce costs and improve efficiency.
- Acting as an extensible architecture that can allow multiple banks to collaborate on a consortium network to manage credit and insurance in a decentralised, autonomous, and strictly-governed way.
"The Islamic finance market is growing rapidly, with projections of a rise from around US$2 trillion to an impressive US$3.78 trillion by 2022. Yet certain technical and economic challenges have prevented the industry from truly flourishing," said Dr Sami Al-Suwailem, Acting Director General of IRTI.
"Our new partnership with E24P aims to address this need by providing the infrastructure needed for the Islamic financial industry to deliver critical services to both the developed and developing world."
IRTI partnered with E24P because many Blockchain projects fail to move
past the initial proof-of-concept (POC) stage due to a lack of
end-to-end systems design knowhow that is coupled with practical
implementation of Blockchain technology in complex industrial
environments. The E24P team has the advantage of having already deployed
over 38 large-scale private and government blockchain solutions, and
this execution intelligence is needed to bypass cost, draw out POCs to
fast track to business value implementations.
Phil Zamani, CEO of E24P, said: "We are honoured to be working with IRTI to help them deliver a truly unique solution that has the potential to have a significant impact on the Muslim world. The implementation of Blockchain systems in complex processes like credit and insurance has long been sought after by financial institutions around the world. Forward-thinking GCC countries, such as the UAE and Saudi Arabia, have been especially progressive, implementing Blockchain projects to accelerate their digital transformation agendas and smart city innovation strategies."
The Islamic Development Bank (IsDB) Group is a multilateral development bank with over US$50 billion in assets under management, operating in over 57 member countries across Europe, Asia, and Africa. The IsDB works to promote shari'ah-compliant financing structures in Muslim countries, develop technology and innovation solutions that align with
UN Sustainable Development Goals, build partnerships between the private and public sector, facilitate greater degrees of skills and knowledge sharing among member countries, and foster collaboration between nations to support sustainable development.
