DeFi, Islamic Finance, and Crypto Culture in the UAE

5 mins
28 February 2021, 14:11 GMT+0000
Updated by James Hydzik
28 February 2021, 16:07 GMT+0000
In Brief
  • BIC explores how DeFi projects rising in the Islamic world are impacted by Islamic finance.
  • BIC interviewed Saeed Al Darmaki of Alphabit Digital Currency Fund.
  • BIC spoke to Rim El Aridi, the co-founder and managing director of Agora Group.
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The cryptocurrency and DLT space are growing in the Islamic world. BeInCrypto explores the relationship between Islamic finance, DeFi, and how local culture in the UAE is impacted.

Decentralized Finance (DeFi) has the cryptocurrency world experiencing a new buzz. Enthusiasts in wealthy countries such as the United Arab Emirates (UAE) are making the most of the space.

At the same time, a set of cultural norms permeate society in these mostly Muslim countries. These would not accept some of the current ideas in DeFi. Particularly, Islam has a list of rules called Sharia Law. These govern various areas of finance, namely interest and how money can be used.

These rules give rise to Islamic finance. This is an area of finance that assures the financial systems in the Islamic world comply with Sharia Law.

In this article, BeInCrypto explores how DeFi projects rising in the Islamic world are impacted by Islamic finance. BeInCrypto also looks at how compliance may change the nature of DeFi projects in the space.

BeInCrypto also explores the wider cultural environment in the middle-east. It examines culture’s impact on cryptocurrency adoption in the UAE, and how current initiatives overcome cultural barriers.

But first, let’s take a closer look at the basics of Islamic finance.

Sharia compliance

Islamic finance espouses two basic principles:

  1. You can’t charge interest.
  2. You can’t finance or invest in anything that causes others harm, or is explicitly prohibited by the Qur’an. These include things such as gambling, alcohol, and tobacco.

Not spending on prohibited items is fairly clear. However, not charging interest might cause some confusion.

Lending, borrowing, and mortgages

Indeed, how do individuals obtain mortgages in the Islamic world? Or how do governments established under Sharia Law borrow for public spending?

In fact, the Islamic world includes a particularly intelligent and potentially less risky alternative. It manages without the loan and interest-based system in the rest of the world just fine.

For example, an individual wants to purchase a home using finance. The bank will purchase the home itself.

The bank then rents the home to the individual for a pre-set term. This sets a level of rent with a profit over the entire length of that term.

In the end, the the bank gives the title to the home to the individual. The bank retains the profits or shares them with stakeholders. Stakeholders in a bank’s case can include be its customers who offered their deposits .

Crucially, the deposits are used to make investments for profit such as in the above or in public infrastructure spending, which is then shared with depositors.

Sharia-compliant DeFi

Accordingly, the prohibition of interest has implications for DeFi. Anyone in the DeFi space is well aware of the prevalence of lending products.

DeFi runs the gamut from collateralized and uncollateralized loans, to the jazzier, newer flash equivalents. Making money in DeFi quite often relies on lending and borrowing.

Moreover, providing liquidity for things such as swaps or insurance won’t work. The interest you receive in the form of Annual Percentage Yield (APY) is prohibited in Islamic Finance.

Legacy coins in, AAVE out

Indeed, this pretty much excludes most DeFi projects on DeFi Pulse, according to Islamic finance site Islamic Finance Guru (IFG). Aave (AAVE), the second-largest project according to Total Value Locked (TVL), is out of the question due to its lending offering.

Decentralized exchanges (DEXs) potentially fall foul too — think SushiSwap, PancakeSwap, Serum — due to the fact they package rewards for liquidity providing as interest.

Although, on this point, it is worth noting that the DEXs and associated tokens themselves aren’t technically Sharia non-compliant. If one was to use a DEX or exchange SUSHI, as no interest is involved in that action, there are no prohibitions in Islamic finance.

IFG points this out in its approval (with the words “just about” in bold) of UNI, the native token of DEX Uniswap. They go on to argue that weight must be given to the primary attention of the project/token, saying:

“The question is whether UNI itself is inextricably structured to be used in a way that ends up being sharia-non-compliant”

Interestingly, this leaves a lot of legacy projects such as Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC) gaining approval from IFG.

And following on from the above, even the addition of staking to ETH or the fact that it is the base of many DeFi projects, may not prohibit its use given its principal purpose isn’t Sharia non-compliant.

Gambling, volatility, and derivatives trading

Nevertheless, legacy tokens/projects could fail in other areas. Many use BTC for example as a way to grow capital. However, given the volatility of the entire cryptocurrency market, investing in even these crypto-assets could be considered gambling.

And clearly, this doesn’t bode well for the newly developing areas of crypto-derivatives trading or synthetic derivative platforms. This holds true especially for the DeFi-based ones.

Innovation innovates

Naturally, Islamic scholars debate on this topic. While they debate, Islamic countries are in fact becoming hubs for the cryptocurrency and DLT space.

BeInCrypto interviewed Alphabit Digital Currency Fund (ADCF), a UAE-based investment fund actively supporting and promoting DeFi projects in the region.

According to Saeed Al Darmaki, a co-founder and managing director at ADCF, innovation in the UAE crypto space extends beyond just technology.

Projects wanting to ensure Sharia-compliance, particularly in DeFi, have options. They can repackage staking into rent payments like the mortgage example above, he argued.

He suggested that a critical part of Islamic finance is simply to make sure projects go through a rigorous vetting process. Projects need to involve several scholars. This could avoid potential arguments regarding compliance in the future.

Few such projects exist in the region at the moment. However, the pace of development and investment in the DeFi and wider DLT space will likely trigger more innovation.

The Middle-Eastern blockchain hub

To the original point, the region is a growing hub for the industry. It impacts on all areas of society. This includes the legal, economic, business, and cultural environments.

Al Darmaki made interesting points regarding the openness of the UAE government to create the best blockchain and DeFi environment.

From his point of view, the legal approach to crypto is progressive and open-minded. There are also fewer decision-makers that hold things up in a long-drawn-out bureaucratic process. Combined, this creates the perfect laboratory for experimentation and application.

Indeed, the UAE government recently launched Emirates Blockchain Strategy 2021. This strategy aims to capitalize on innovation in the space to improve public services.

The government now uses a custom-built blockchain to conduct government transactions.

Cultural shift and the future

All of this is leading to a cultural change in the region. A notable area is the growing inclusion of women in the cryptocurrency and DLT space.

Rim El Aridi, the co-founder and managing director of Agora Group, helps lead this change. BeInCrypto asked about her experience as a woman in blockchain in the UAE.

While she explained the challenges of being a woman in the DeFi space in the region, she also noted that the growth of the investment ecosystem could encourage more female participation.

In an open letter to the space in the Arab world, El Aridi welcomes the growing debate on the inclusion of women. She highlighted the progress seen at the government level following the appointment of women to key roles.

In fact, Agora Group recently hosted the Global DeFi Congress in the UAE in one such effort to grow that ecosystem.

Investment being the key to both the further development of the space in the UAE, and the encouragement of women to enter the space, Sharia-compliant projects might, in fact, be of aid.


BeInCrypto strives to provide accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. You comply and understand that you should use any of this information at your own risk. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.