The research arm of Saudi Arabia’s Islamic Development Bank Group intends to develop a blockchain-based smart credit management system. The bank’s Islamic Research and Training Institute, or IRTI, has associated with the Samsung-backed blockchain provider Blocko. The collaboration is part of the E24P regional consortium launched by Blocko over the Middle East, Africa, and South-East Asia in April.

Curbing technical and economic challenges

As the Islamic finance industry is foretold to increase from $2 trillion to $3.78 trillion by 2022, Dr. Sami Al Suwailem, director-general of IRTI, states there still are several technical and economic difficulties that “prevent the industry from truly flourishing.”

Unlike traditional financial organizations, Islamic banks do not charge interest on loans or penalize loan defaulters. They instead charge a late fee that is purportedly donated to charity. 

Nevertheless, this approach is not without its problems, as it reduces the urgency for borrowers to pay back their loans. Additionally, such banks also encounter the problem of efficiently allocating the late fees to charity. 

The smart credit management system being produced by E24P and IRTI, which will be based on the Aergo hybrid blockchain, is anticipated to put an incentive mechanism in place that will promote timely repayments. It will also automatically provide the fees to insurance pools that cover loan defaults.

A more open, secure and transparent credit system

The blockchain credit system is said to support both Islamic banks and other financial institutions conduct credit assessments more securely and transparently, without compromising on the privacy of the involved parties. The CEO of E24P Phil Zamani said in a statement that the system would help banks “deliver a truly unique solution that has the potential to have a significant impact on the world of Islamic finance.”

It may moreover decrease the costs and operation difficulties by involving otherwise restricted financing functions like credit reporting, credit history, credit rating, and credit insurance.