Blockchain Technology - Arsenal for a
Shariah-Compliant Financial Ecosystem?
Richard-Marc Lacasse Université du Québec, Canada
Berthe Lambert Université du Québec, Canada
Nida Khan Université du Luxembourg, Luxembourg
To illustrate our thesis, let us begin by describing the archetype of Islamic banking opacity.
Islami Bank Bangladesh Ltd. (IBBL) was the first bank in South Asia to provide banking
services based on Shariah compliance. In December 2016, IBBL won the Bank of the Year
Award conferred by The Banker and Financial Times Group of London, the most sought-after
distinction of its kind, regarded as a sort of Nobel Prize of the banking industry. Mohammad
Abdul Mannan, Managing Director of the bank, received the award from Brian Caplen, Editor
of ‘The Banker’, with some four hundred notables and panjandrums from senior management
of over 120 banks across the globe attending the December 7 award ceremony.
Barely a month later, in January 2017, intelligence officers picked up Mr Abdul Mannan
along with IBBL’s chairman and a vice-chairman and asked for their resignations, and within
a few hours the bank’s board had selected their replacements and overhauled the audit
committee. Throughout the process, IBBL’s major shareholders, the Dubai Islami Bank, the
Islamic Development Bank (IDB) in Saudi Arabia and Kuwait Finance House, were kept in a
state of ignorance and could only complain helplessly. The IDB was given just a few days’
notice of a board meeting and was not able to attend. What lay behind the enigma of the fall
of The Banker’s heroes? Politics? Embezzlement? Shariah compliance? Nepotism? A naïve
question: Would Smart contracts and a blockchain monitoring system have tipped off the
majority shareholders and the London editor of The Banker to governance irregularities?
Despite the enigmatic governance of IBBL, demand for Islamic finance appears to be strong,
and growing: there are currently more than 300 Shariah-compliant banks across the globe, and
they are expanding at an annual rate of 19.7%, outpacing the growth of traditional banks
(World Finance 2017). Islamic banking industry, operating in over 75 countries, witnessed
sustained growth that resulted in its total asset size exceeding $3trn in 2017. A recent Ernst &
Young survey (EY 2017) showed that more than 50% of Islamic banks are currently investing
in financial technologies (Fintech). This move to digital presents an opportunity for Islamic
banks to address their stakeholders’ questions regarding the complexity, and transparency, of
the banks’ operations.
The article’s first challenge is to encapsulate key elements of the complexity of Islamic
financial institutions, despite the opacity of the sector. A second focal point, the analysis of
the agent’s agenda, is intended to help demystify agents’ behaviour and explain how they can
easily fall off the pedestal of altruism. In the Islamic banking industry, contributors mandate
intermediaries (agents) to transfer their contributions to social causes according to the
Shariah. An underlying assumption of agency theory is that agents attempt to maximize their
personal welfare and compensation; this behaviour may not always be in the best interests of
other stakeholders.
Concepts drawn from complexity theory could offer new ways to monitor the governance of
Islamic banks. A new version of Stacey’s complexity diagram plots issues according to the
level of agreement there is among stakeholders about the solution to social problem versus the
amount of certainty there is that a given intervention will have the desired result. If there is a
high level of agreement and a lot of certainty about an issue, the problems are simple, i.e., a
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right answer exists. When we move away from certainty and agreement, the issues become
political, complex and even chaotic; ethical and socio-economic problems usually lie in the
zone of complexity or chaos. In the article, the complex relationship between agents and three
key stakeholders (contributors, beneficiaries and regulators) is explored via a complexityaware
monitoring process. Contributors provide funds to an Islamic bank (agent), and in
return, the agent should be accountable to the contributors and shareholders, but the form and
degree of accountability can vary depending on the mission of the organization. There are
many unanswered questions regarding the monitoring process; one objective is to observe
whether the agent acts in the best interests of the stakeholders. The biggest challenge for the
future is the measurement of socio-economic return on investment of an agent’s interventions.
A critical question: Who is accountable for the traceability of funds and the socio-economic
return on investment?
The research team’s first challenge was to encapsulate the ingredients of a theoretical
business model despite the opacity of the Islamic banking sector. The model offers a better
explanation of the complex structures, processes and practices of organizations in that sector.
The article casts new light on the interactions among contributors, agents, regulators and
beneficiaries, and offers the researcher a plethora of new research avenues: How do Islamic
banks create value and what is their social impact? Who are the principals in an Islamic
bank? Are the regulators too indulgent with delinquent banks? Should the state assign
forensic accountants a more important role? How will smart contracts and blockchain
technology transform Islamic banking?
How can smart contracts be made legally binding?
How can automatic encoding of human readable legal contracts be put into machine-readable
smart contracts? Can blockchain technology be scaled to handle the current transaction rate of
a standard Islamic bank? Another important follow-up research question relates to the
governance of funds: in-depth organisational case studies based on interviews of boards of
directors could be an effective alternative method for assessing field interventions and
measuring the social impact of Islamic banking. A candid question: Should beneficiaries or
users be involved in the measurement of the efficiency and effectiveness of an agent’s
performance?
In the Tragedy of Hamlet, Marcellus says to Horatio: ‘Something is rotten in the state of
Denmark.’ Was something rotten in the Islami Bank of Bengladesh? In the coming decades,
poor governance could severely undermine confidence in the sector, which would damage
social welfare and economic development. Blockchain technology and smart contracts could
be strategic tools for the guidance and monitoring of Islamic banks
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