The research arm of Saudi Arabia’s Islamic Development Bank Group is aiming to develop a blockchain-based smart credit management system.

To achieve this, the bank's Islamic Research and Training Institute, or IRTI, has partnered with the Samsung-backed blockchain provider Blocko. The partnership comes as a part of the E24P regional consortium launched by Blocko across the Middle East, Africa, and South-East Asia in April.

Curbing technical and economic challenges

As the Islamic finance industry is predicted to grow from $2 trillion to $3.78 trillion by 2022, Dr. Sami Al Suwailem, director general of IRTI, says there still are various technical and economic challenges that “prevent the industry from truly flourishing.”

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

However, this approach is not without its problems, as it eliminates the urgency for borrowers to pay back their loans. Additionally, such banks also face the difficulty of efficiently distributing the late fees to charity. 

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

A more open, secure and transparent credit system

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 on the privacy of the involved parties. The CEO of E24P Phil Zamani, said that the system will help banks “deliver a truly unique solution that has the potential to have a significant impact on the world of Islamic finance.”

It may further reduce the costs and operation difficulties by including the otherwise restricted financing functions such as credit reporting, credit rating, credit history, and credit insurance.