Eliminating Trust Issues in Islamic Interbank Monetary System by Blockchain Technology

Abstract

In the literature, it is argued that there is an agency or incentive problem in the Mudarabah Interbank Instrument (MII), an instrument where the depositor is the rabbul-mal (capital provider or investor) while the counterparty is the mudarib or entrepreneur. It is to the receiving bank's advantage to ‘declare' a lower profit rate. To solve this problem, the Malaysian Central Bank revised the rules by setting a minimum benchmark rate for the MII. This practice is quite similar to the fixed interest rate in conventional financial system which may trigger several Shariah issues. In this chapter, the authors argue that the blockchain technology is a better way to address the issue and propose and how it overcomes the issue in the Islamic interbank money market. As implication of the study, Islamic banks can start using it as a testing process for the future businesses, and in accordance with the analyzing test results, they can implement the system for every occasion.