Author: Mohamed Hamza Ghaouri, Intern at FINTERRA
Throughout the history of Islam, various Islamic social finance institutions proposed by Islamic law are playing a vital role in sustainable economic development in a Muslim society. These institutions manage mainly Zakat, Waqf and Qard Hasan funds. The whole social ecosystem was an integral element of the financial empowerment program of the people which actively contributed to financial inclusion and poverty alleviation. However, recently, such essential institutions have been widely criticised for their inability to make a substantial impact.
For this reason, many researchers call for building social finance ecosystems to tackle social problems. These ecosystems include different stakeholders, from governments to businesses and investors. This collaboration can strengthen the social impact of different initiatives. The association between this multiplicity of actors faces various challenges that could be solved by technological innovations such as Blockchain.
The recent phenomenon of blockchain technology has unlocked new opportunity in raising capital through a process called “Initial Coin Offering” (ICO). This process that uses the concept of crowdfunding involves funding a project or business by collecting many small sums of money from a large number of people, usually through the internet. This modern model of crowdfunding is generally based on three types of actors: the initiator of the project who proposes the development idea or the project to be financed, individuals or groups who support the idea, and a moderating organization (the platform) which brings the parties together.
Blockchain technology is one of the main innovations developed in digital services. It is defined as a distributed ledger managed collectively by a peer-to-peer network offering a high level of governance at a lower cost compared to traditional technologies. Although the primary use of blockchain is in cryptocurrencies, blockchain technology has many applications. The uniqueness and advancement of blockchain technology can be used and embraced by any institution, including Zakat and Waqf institutions, to manage raised funds in a more responsible, effective, efficient and transparent manner.
Recognizing the potential of Blockchain to improve governance, reduce transaction costs and increase trust, FINTERRA, a leading technology-based company, is providing blockchain-based Islamic applications. It is a new technology provider company that connects various stakeholders using Blockchain and create smart contracts linked to specific Waqf projects. Its main role is to provide the technology and to link between different stakeholders.
Through Waqf Chain, a Waqf based Blockchain launched in 2019, FINTERRA is involving six Islamic Banks and the State Islamic Religious Council in managing Waqf funds in Malaysia. This initiative presents to the contributors in Waqf projects the opportunity to choose between different arrangements that can mainly be classified as giving Cash-Waqf or making an investment.
- Cash-Waqf Model
Is a donation-based crowdfunding platform. In this model, donors can select the project to which they wish directly to contribute. Some projects will use the collected funds directly (to build mosques, schools, hospitals, etc) others will use it indirectly. Accumulated funds will be invested and the revenue generated from investment will be channelled to selected projects (scholarships, food security, etc).
In both cases, donors will not receive any profit or monetary gains from their donation but they will receive updates, regarding the progress of the projects to which they have contributed, easily through the platform. The donation process is facilitated by the institution. No registration or papers are required for small donations. However, donors who wish to contribute on a larger scale should contact the institution directly.
The Finterra Waqf Chain platform allows any participant in the world to offer the development of any project on top of Waqf properties that required capital. When the project is accepted and all the required elements are fulfilled, the project proposal will be allowed to enter the platform, individuals or financial institutions can join to finance these project proposals.
In this model, initiators can create project proposals to develop or redevelop endowment properties. Each waqf project has its own attached digital token and this token will be placed into a smart contract which can only be initiated once the project has passed all due diligence requirements. From their side, donors (quasi-investors) follow a regulatory procedure to make the investment. This financial arrangement allows individuals and institutions to contribute in the Waqf and, at the same time, generate income.
To sum up, Blockchain technology and Islamic social finance are a perfect match. Their combination increases the social impact by improving trust, governance and transparency between stakeholders. When used in the Waqf sector, the impact of this technology is astounding. Poorly managed Waqf assets are used innovatively but most important more effectively.
Mohamed Hamza Ghaouri
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