The research arm of Saudi Arabia’s Islamic Development Bank Group aims to develop a smart credit management system based on blockchain.
To achieve this, the bank’s Islamic Research and Training Institute, or IRTI, has partnered with Blocko, the Samsung-backed blockchain provider. The partnership is part of E24P, the regional consortium launched by Blocko in April across the Middle East, Africa and South East Asia.
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Reduction of technical and economic problems
As the Islamic financial industry is projected to grow from $2 trillion to $3.78 trillion by 2022, Dr Sami Al Suwailem, IRTI’s director general, says there are still several technical and economic challenges that „prevent the industry from really flourishing.
Unlike traditional financial organizations, Islamic banks do not charge interest on loans or penalize defaulters. Instead, they charge a late fee that is supposedly donated to charity.
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However, this approach is not without problems, as it removes the urgency for borrowers to repay their loans. In addition, these banks also face the difficulty of efficiently distributing overdue payments to charity.
The intelligent credit management system being developed by E24P and Immediate Edge, which will be based on the Aergo hybrid blockchain, is expected to establish an incentive mechanism to encourage timely repayments. It will also automatically contribute fees to insurance funds that cover loan defaults.
A more open, secure and transparent credit system
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The blockchain credit system is said to help both Islamic banks and other financial institutions conduct credit assessments in a more secure and transparent manner, without compromising the privacy of the parties involved. E24P CEO Phil Zamani said the system will help banks „offer a truly unique solution that has the potential to have a significant impact on the world of Islamic finance.
It can further reduce costs and operational difficulties by including otherwise restricted financing functions such as credit information, credit scoring, credit history and credit insurance.