Is Crypto Lending Halal: What You Need to Know

With a total population of over 1.8 billion worshippers, Islam is the second most practiced religion globally. Like many other religions, Islam requires worshippers to follow its religious laws in every aspect of their lives. These religious codes fall under Sharia law.

Specific countries like the US have laws and regulations for the financial industry. Sometimes these laws and regulations are in place to simply monitor and control the sector, and other times countries enforce outright bans.

However, there are also religious laws and codes such as Sharia, which are designed to regulate and govern the everyday life of Muslims. As a result, these religious laws guide fundamental life decisions like health, hygiene, finances, and investments.

In recent times, there have been divergent views within the Islamic community on the suitability of the crypto industry for Muslims. Some Islamic scholars, banks, and financial institutions believe that the vast majority of the crypto industry is mostly halal (lawful). However, many others believe that certain aspects of the crypto space are haram (unlawful) and unacceptable for Muslims.

Having a clear consensus on Islamic views regarding the crypto industry and its subsets can have an enormous impact on the growth of that industry. An optimistic view can see a massive increase for various crypto products due to the number of Muslims worldwide.

This article will help you identify aspects of the crypto markets that follow Islamic banking practices. Additionally, we will examine crypto lending, a growing sector within the crypto space. We aim to assess whether crypto lending is suitable for Muslims under Islamic law.

First, we will discuss the meaning of the Arabic words: Halal and Haram. Also, we will review some Sharia laws that apply to financial practices.

What Do Halal And Haram Mean?

Halal and haram are two Arabic words with opposite meanings. In simple terms, halal means lawful or permissible, while haram means unlawful or forbidden.

When applied to the crypto industry, halal refers to legal or acceptable crypto services that Muslims can engage in or invest their funds into. On the other hand, haram denotes unacceptable and forbidden crypto-based services that are not permissible under Islamic law.

Understanding Sharia laws On Popular Financial Services

As previously stated, laws and regulations under Sharia are designed to regulate all aspects of Muslim life, including their finances. An understanding of Sharia finance laws is necessary to determine financial practices that are suitable for followers of Islam.

It is important to note that Islamic scholars can not constitute financial advice on their own without first ensuring that their views are Sharia-compliant.

In terms of direct laws and regulations on crypto finance, Sharia prohibits all interest-based lending activities. For this reason, Muslims must not engage in lending activities where borrowers pay interest. This principle applies to both fiat currency, crypto loans, and mortgages. We will discuss this further in this article.

Additionally, this principle applies to financial tools designed to accumulate interest and deliver returns to investors. Based on this assessment, investment in traditional banks or insurance firms may be considered haram.

Sharia laws also prohibit all forms of gambling activities. Based on these laws, Muslims must not invest in any form of gambling venture. This Islamic law also prohibits financial investments into brands that produce alcohol, pork, pornography, and tobacco, to name a few. All of these are considered haram.

It is imperative to note that there are no clear instructions on whether Muslims should invest in the crypto markets. Despite this fact, considering some of the principles stated in this section can help us determine aspects of the crypto space that are permissible under Islamic laws.

Are Crypto-Assets Halal?

Many Muslims have asked questions regarding cryptocurrencies, such as "Is Bitcoin Halal?" The short answer is yes. Cryptocurrencies like Bitcoin, Ether, and DOGE are not necessarily haram. However, for these digital assets to be accepted, their use must comply with the tenets of Islam.

Any transaction involving fiat money or digital assets needs to be ethical if it is to be accepted in Islam. Moreover, such transactions cannot be exploitative. With that in mind, transactions using crypto-assets can only be halal when they are not used for extortion, bribery, and profiteering purposes.

Cryptocurrencies conform with this tenet when they are used as a standard of payment or as a means for making low-cost transactions. Many scholars also support the use of cryptocurrencies for this and many other purposes.

In a 2017 report released by Mufti Muhammad Abu-Bakar, former Shariah advisor to Blossom Finance stated his belief that Bitcoin and many other cryptocurrencies are halal. Abu-Bakar states that all currencies can be classified to a reasonable degree as speculative assets since the laws of demand and supply control them.

In his opinion, if speculative assets like gold, the US dollar, and many other fiat currencies and financial tools are accepted under Sharia law, digital assets can also be permitted.

Responding to arguments citing the use of Bitcoin for illegal activities, Mufti Abu-bakar noted that this does not make Bitcoin an illegal asset. He notes that it is still not unlawful to use a legal product for an illegal purpose. He then cites the sale of grapes to wine merchants as an example of his argument.

Opinions Expressed By Other Islamic Scholars

Different scholars have expressed numerous opinions regarding the Islamic laws that apply to the crypto industry. For example, UK-based Islamic finance and fintech consultant Mufti Faraz Adam believes that Bitcoin and many other cryptocurrencies should be considered assets since they have value.

Using Shariah terms, Mufti Faraz states that Bitcoin has "Maal" and "Taqawwum". Both terms indicate that Bitcoin can be stored and has legal value. From this assessment, he concludes that Bitcoin and many other digital assets are lawful.

According to Mufti Muhammad Abu Bakar, a Shariah scholar and mufti at SilkBank Limited, any currency endorsed by a government becomes legal tender in that region. He argues further that Muslims can trade, buy, and sell cryptocurrencies in countries that accept them as an official payment method.

Can DeFi be considered halal?

Decentralized finance protocols eliminate the need for a central authority and use smart contracts to run its operations. The DeFi space has also experienced enormous growth over the past few years. Scholars have been drawn to the growth of this sector, raising questions such as "Is DeFi Halal?"

A major part of investment vehicles in the DeFi space currently offer interest as a reward for investors for their crypto staking activities. Based on the principles of Sharia, such protocols cannot be considered halal.

There are, however, many other DeFi platforms that offer Sharia-compliant services. DeFi protocols built on Islamic finance laws can help drive further growth in this sector. The growth of the market will inevitably lead to the creation of halal DeFi apps.

Applying Islamic Finance Laws to Crypto Lending

As we have stated previously, Sharia prohibits all interest-based lending activities. For this reason, Muslims must not engage in lending activities where borrowers pay interest. This principle applies to fiat currency and crypto loans requiring borrowers to pay back interest for their loans. At best, it is worth asking your local religious leader before engaging in it.

The law against interest-based lending is designed to protect borrowers from exploitative financial practices. Several Islamic financial institutions offer interest-free crypto loans to borrowers as an alternative. However, at the time of writing this article, no crypto lending platform offers interest-free loans to its users.

Apart from offering its lending services, many crypto sites also provide an opportunity for investors on their platform to open a savings account and earn interest on their deposits. Similar to interest-based lending, this practice can not be considered lawful based on Islamic laws.

Conclusion

The cryptocurrency market has grown in leaps and bounds over the past few years. However, there is room for more growth. One way to ensure increased growth for this industry is by creating financial services that are sharia compliant.

Although some aspects of crypto can be considered lawful based on Islamic laws, there are many others that are unlawful. These include crypto staking, gambling, and crypto lending activities. With increased innovation in this sector, we expect to see blockchain-based products built according to Sharia laws.