NFT Marketplace by IBF Net Certified as Shariah Compliant
Affluence, the platform for the creation and exchange of non-fungible tokens (NFTs) launched by IBF Net last month has been certified as fully Shariah compliant by Amanah Advisors, the well-known UK-based Shariah Advisory firm. The certificate issued by Amanah asserts, its “structure and the documentation conform with the principles of Shariah and is Shariah compliant in our opinion.”
Mufti Faraz Adam, CEO of Amanah Advisors in some of his recent writings and presentations has dealt with, in great detail, the relevant Shariah issues with NFTs in general. He mentions a few principles that should be considered while reviewing NFTs. For example, the creation of an NFT as a digital asset should be lawful, if it has a lawful “utility” or benefit. Further, the “utility” must be such that it is sensibly and commonly sought after by people. It should not be something that the Shariah objects to or reasonable people would not seek such utility. Additional considerations include the possibility of extravagance and wastefulness or any potential wider Shariah infringements. Scholars should also consider the impact of investing in such assets and how it impacts the remaining wealth of a person to fulfil their Islamic duties and obligations. Further, since the most well-known and common NFTs have been produced in the following industries — art, collectibles, in-game items, data and licensing, media and ticketing — he elaborates on the specific issues relevant to such NFTs. These form the “hard criteria” and basis for creation and exchange of NFTs in general at Affluence, according to Mohammed Alim, CEO of IBF Net Group.
Are there additional Shariah considerations involved in the review of the Affluence platform that essentially enables the users to do the following?
- One may convert his/her physical assets into digital ones (NFTs); individually or collectively (as a member of a group or community); hold a digital high-value asset;
- One may create and sell his/her NFTs in single or multiple copies;
- One may sell his/her NFTs at a fixed price; or carry out an auction of his/her NFTs for correct price discovery;
- One may buy NFTs on cash or credit at no additional financial cost;
- One may borrow from another willing lender any amount with or without collateral; and
- One may unlock the value in his/her existing NFTs by offering them as collateral.
Affluence being a market place is bound by all the Shariah rules of sale/ exchange and norms of good market conduct. The possibility of correct price discovery through auction has a direct reference in hadith sources (1). None of the parties to contracting on Affluence would have any informational and hence, price advantage over others.
No to Riba and Suspicions of Riba
The feature of collateral-backed loan on Affluence is a novel one and requires serious investigation into the possible presence of riba, and especially, of riba through the back-door.
- On Affluence, there are no hidden fees in the form of deductions upfront or at settlement from the loan related cash flows. There are no deductions by the platform to cover “actual cost” which is often used as an excuse to profit from the process. The lender and borrower independently execute the loans.
- The possibility of riba also arises in the context of settlement of a collateral-backed loan. Often, in case of default by a borrower, the seller claims absolute freedom to dispose of the collateral in any manner he/she likes and own the full realized price. However, this violates the norms of the Shariah-nominate mechanism of Rahn and opens the door for riba-based exploitation. In Rahn, should the borrower default, the lender has the right to sell the collateral and realize the best price. However, if the realized price is higher than the outstanding loan amount, the excess amount must be returned to the borrower. The structure of Affluence platform fully takes care of this Shariah concern.
- The Shariah review process also considered another scenario: what happens to the defaulting borrower, should the lender suffer a loss on the loan (that is even after selling the collateral) or where it is a case of multiple defaults. Affluence does not impose any financial penalty on the defaulter (unlike many Islamic banks do). The defaulting actor is red-flagged and placed on a list that is visible to all members of the network followed by an investigation into whether it was a case of wilful or genuine default. The outcome of the investigation is made available to all members to guide their future lending activity.
While the ways to avoid riba and gharar in trade and in loans have been extensively researched and discussed among Islamic economists and practicing Islamic bankers, not all are comfortable with many of the solutions. IBF Net, through Affluence, has chosen to go for the classical solutions that are free from any controversies, hoping that DeFi and P2P finance offer an unprecedented opportunity to practice such “pure” forms of Islamic finance. In this endeavour, it has the full support of Amanah Advisors “that will continue to provide governance, audit, and advisory support to IBF Net as the Shariah Board,” says Mufti Faraz Adam.
(1) See page 29 for discussion of relevant hadith appearing in Sunan Abu Dawood, Kitab al-Zakah, Book 9, Number 1637
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