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DIGITAL ECONOMY & TECHNOLOGY

Promoting Financial Inclusion for Female-Managed SMEs Through Blockchain Technology

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By Tuhu Nugraha and Temmy Debora*

In the midst of the rapid digital era, blockchain technology emerges as an innovation with the potential to revolutionize the global financial industry. In Indonesia, SMEs managed by women stand as one of the sectors that can reap significant benefits from this technology. SMEs play a crucial role in the national economy, with over 64.2 million business units contributing 61.9% to the GDP and employing up to 97% of the workforce.

However, many SMEs face challenges, ranging from access to financing to marketing issues and productivity. With the government’s financial inclusion target set at 90% for 2024, the role of SMEs, especially those managed by women (which account for 64.5% of all SMEs), becomes pivotal. Therefore, promoting financial inclusion for female entrepreneurs has a strategic impact in achieving this target.

Here’s how blockchain can be a solution to enhance financial inclusion for female SME entrepreneurs in Indonesia:

Access to Financing

Based on data from the Ministry of Communication and Information, only 20 million out of 64 million SMEs have accessed formal financial institutions. One of the main reasons many SMEs, especially those managed by women, struggle to access formal financial institutions is due to stringent requirements. Many SMEs lack formal documents like audited financial statements, physical collateral, or a good credit history. Moreover, the lengthy and bureaucratic loan application process often becomes a barrier for SMEs to obtain working capital.

Blockchain technology offers a financial inclusion solution for female-managed SMEs in Indonesia, often hindered by strict requirements and lengthy processes in formal financial institutions. With a blockchain-based lending platform, female-managed SMEs can access financing with a simpler, transparent, and efficient process. Direct interaction between lenders and borrowers reduces transaction costs, while blockchain transparency enhances trust. Additionally, an alternative credit assessment model based on SME transaction data allows those without a formal credit history to still obtain financing.

Low Transaction Costs

Transaction costs play a significant role in SME operations. For many SMEs, especially those transacting in small amounts, high transaction costs can significantly erode profit margins. This becomes even more critical for female-managed SMEs who might have limited initial capital and smaller operations compared to other SMEs.

Blockchain technology offers a solution to reduce these transaction costs. With its decentralized nature, blockchain eliminates the need for intermediaries like banks or other financial institutions. This means that fees typically charged by intermediaries – such as administrative fees, transfer fees, or other charges – can be eliminated or drastically reduced.

When compared to the interest rates currently borne by SMEs from loan sharks, the difference becomes stark. Loan sharks typically offer loans with very high-interest rates, sometimes reaching 20% to 40% per month. This is much higher compared to interest rates from formal financial institutions. With blockchain, female-managed SMEs can not only reduce transaction costs but also potentially access financing at lower interest rates through blockchain-based peer-to-peer lending platforms.

Thus, adopting blockchain technology can provide dual benefits for female-managed SMEs: reducing transaction costs and providing access to cheaper financing, thereby enhancing their profit margins and competitiveness in the market.

Global Payments

In the midst of globalization, female-managed SMEs in Indonesia find opportunities to penetrate international markets. However, a disparity is evident: although SME exporters account for 77.28% or about 13,775 exporters, their contribution is only 4.09% or 6.331 million USD of total exports. In contrast, large-scale exporters, which only account for 22.72% or 4,044 exporters, dominate with a contribution of 95.9% or 148.609.7 million USD, as stated by the Director of Export Market Development of the Ministry of Trade in 2023. One of the main challenges faced by female-managed SMEs is cross-border transactions. Many of them find it difficult to access international payment platforms, such as PayPal, due to language barriers and complex administrative requirements. High transaction fees and long settlement times through conventional banks add to their burden. As a solution, blockchain technology and cryptocurrencies emerge, offering simpler transactions, lower fees, and higher security. With an interface that supports the Indonesian language and without the need for a conventional bank account, female-managed SMEs now have a greater opportunity to compete more effectively on the international stage.

Digital Identity

Female-managed SMEs, especially in remote areas, often face challenges in accessing financial services such as loans or insurance. One of their main obstacles is the lack of formal identity documents, such as national ID cards, family cards, or proof of land ownership, typically required by banks or other financial institutions. Without these documents, they are often marginalized from the formal financial system. However, blockchain technology offers an innovative solution to this problem. Imagine blockchain as a secure digital ledger, where every piece of information entered cannot be altered or deleted. With this technology, female-managed SMEs can have a “digital identity” registered on the blockchain. This identity can contain basic information such as name, address, business transaction history, and more. Most importantly, this identity is secure and verified. By having a blockchain-based digital identity, female-managed SMEs in remote areas can demonstrate to financial institutions that they are legitimate and trustworthy business entities. This makes it easier for them to apply for loans, open bank accounts, or access other financial services that were previously hard to reach. In other words, blockchain provides an opportunity for female-managed SMEs to integrate into the formal economy, enhancing their business growth potential.

Blockchain provides innovative solutions for female-managed SMEs in Indonesia, especially in remote areas. There, they often face various challenges, from inadequate education, limited capital, to a lack of supporting infrastructure. But why focus on female-managed SMEs? Because in many cases, these women are the main pillars of the family. They play a crucial role in efforts to break the chain of poverty, hoping to provide better education for future generations. With the help of blockchain technology, financial inclusion can be expanded, social disparities can be reduced, and opportunities for female-managed SMEs to improve their families’ quality of life become even greater.

Tuhu NugrahaTuhu Nugraha is a Digital Business & Metaverse Expert Principal of Indonesia Applied Economy & Regulatory Network (IADERN)

Temmy Debora, is the CEO and Founder Nakama.id, & Web3 Trailblazer Indonesia

Courtesy: Modern Diplomacy


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DIGITAL ECONOMY & TECHNOLOGY

The Digital Currency that could Upend how the Gulf Trades

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By Shruthi Nair

Project mBridge – a China-led central bank digital currency initiative, which the UAE and Saudi Arabia are part of – could have “broad strategic implications” for regional trade, according to market analysts.

A CBDC is a digital form of a country’s fiat currency, which is backed by a government. It eliminates the need for intermediaries like banks, or even other currencies such as the US dollar, to facilitate real-time, peer-to-peer, cross-border payments.

“When we look at international trade, not much has changed over the decades. It is a primitive method in the digital age,” Arun Leslie John, chief market analyst at Century Financial, said.

China’s global digital yuan transactions amounted to 7 trillion yuan ($986 billion) in the first six months of this year. The UAE’s inaugural cross-border payment utilising the digital dirham amounted to AED50 million ($13.6 million).

Considering the UAE and China are major trading partners with the total volume of bilateral trade between the two countries reaching $95 billion last year, project mBridge would significantly reduce and replace the use of dollars in this case.  However, analysts believe that it might be too early to conclude whether CBDCs could result in global de-dollarisation.

“Dollar is the choice of transaction for global trade. The US has the deepest capital, debt and equity market. Many countries around the world would want to diversify away from the dollar but they aren’t able to do so,” John said.

While Europe does not have deep debt markets, the Chinese government has capital controls over the yuan. So the only remaining choice is the dollar.

Countries such as Russia and Iran that are facing sanctions stand to be beneficiaries of CBDCs and initiatives like mBridge too. While the Russian central bank announced plans to launch its CBDC next year, the central bank of Iran said that its digital rial will be used for retail transactions, including purchasing goods and services.

“In the current international payment structure, countries can arbitrarily kick out one country from the system. This reduces strategic autonomy and political power of other countries involved,” John said.

To find out how CBDC’s work and its retail use cases, click to watch the video above


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DIGITAL ECONOMY & TECHNOLOGY

How Blockchain can Enhance Islamic Finance by Overcoming Barriers

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Blockchain technology is making waves in the financial sector with its promise of transparency and immutability. These features align closely with the principles of Shariah law, which governs Islamic finance, creating significant opportunities for blockchain to overcome barriers and unlock growth. The Islamic finance sector is projected to reach approximately $6.7 trillion in assets by 2027, as noted in LSEG’s Islamic Finance Development Report. In this evolving landscape, blockchain technology is emerging as a crucial tool for addressing the unique challenges faced by Islamic finance.

Islamic finance operates under Shariah law, which prohibits practices such as interest (Riba), excessive uncertainty (Gharar), and speculative transactions (Maysir). Blockchain technology’s core attributes—transparency and decentralization—are well-suited to address these constraints. Blockchain can effectively enhance compliance with Shariah principles by providing a tamper-proof ledger and facilitating decentralized transactions. Its ability to create a permanent, verifiable record of transactions aligns well with the Islamic finance requirement for clarity and accountability.

According to Moody’s, innovations like smart contracts are poised to improve Islamic finance transactions significantly. Smart contracts are self-executing contracts with terms written directly into code. They automatically enforce Shariah-compliant rules, reducing human error and enhancing transparency. These advancements support real-time settlements, which align with Islamic finance principles of fairness and clarity. By using blockchain to overcome barriers related to transparency and automation, financial processes can become more efficient and compliant with Shariah.

Enhancing Transparency and Efficiency

One of the most significant ways blockchain can overcome barriers in Islamic finance is through its ability to enhance transparency. The immutable nature of blockchain ensures that every transaction is recorded in a tamper-proof ledger, providing a clear and verifiable record of all financial activities. This transparency is crucial for maintaining compliance with Shariah principles, which demand a high level of clarity and accountability in financial transactions.

Blockchain technology facilitates smart contracts that automate the execution of Shariah-compliant financial agreements. This not only streamlines processes but also reduces the need for intermediaries, lowering transaction costs and increasing the speed and accuracy of financial transactions. By addressing long-standing challenges in Islamic finance, blockchain technology is helping to create a more efficient and reliable financial system.

Modernizing Charitable Giving

Blockchain technology also holds promise for modernizing Zakat, the obligatory charitable giving in Islam. Traditionally, the collection and distribution of Zakat have faced challenges related to efficiency and transparency. Blockchain can address these issues by providing a more transparent and efficient platform for managing charitable contributions.

With blockchain, Zakat collection and distribution can be streamlined, ensuring accurate tracking of funds and effective distribution to eligible recipients. This technology allows donors to see exactly how their contributions are used, enhancing trust and accountability. Additionally, blockchain can facilitate the creation of smart contracts to automate the distribution of Zakat, ensuring compliance with Shariah guidelines and reaching those in need more efficiently.

Addressing Challenges and Compatibility Issues

Despite its potential, the integration of blockchain into Islamic finance comes with its own set of challenges. The compatibility of digital assets, including cryptocurrencies and tokenized assets, with Shariah principles, is a topic of ongoing debate. Concerns about speculation and anonymity associated with these assets pose significant challenges, as they contrast with the Islamic finance emphasis on transparency, accountability, and ethical conduct.

Digital assets, particularly unbacked cryptocurrencies, have sparked discussions about their suitability for Islamic finance. The potential for speculation and the lack of intrinsic value associated with some digital assets diverge from Islamic finance principles that prioritize stability and ethical behavior. As a result, Shariah scholars and financial institutions are actively evaluating the compatibility of these assets with Islamic financial principles.

A promising alternative is Central Bank Digital Currencies (CBDCs), which align with Shariah principles by emphasizing transparency, fairness, and social welfare. CBDCs offer a way to digitize national currencies, providing a more efficient and accessible payment system while maintaining compliance with Islamic financial principles. This approach could address some of the concerns associated with speculative digital assets and provide a stable alternative for Islamic finance.

Islamic Finance Innovation in the UAE

The UAE serves as a notable example of how blockchain can be integrated into Islamic finance effectively. With a well-regulated Islamic finance sector, the UAE is at the forefront of digital assets innovation. The country’s regulatory framework for digital assets is overseen by key federal bodies, including the Securities and Commodities Authority (SCA) and the UAE Central Bank. While the SCA focuses on securities-related matters, the Central Bank regulates digital currencies and stored value.

The UAE also has three additional jurisdictions for digital assets regulation: the Dubai International Financial Center (DIFC), regulated by the Dubai Financial Services Authority (DFSA); the Abu Dhabi Global Market (ADGM), regulated by the Financial Services Regulatory Authority (FSRA); and the Virtual Assets Regulatory Authority (VARA). Each jurisdiction approaches digital assets regulation with a unique focus, contributing to the dynamic regulatory landscape in the UAE.

The UAE’s proactive stance on digital assets regulation and innovation underscores its commitment to leveraging blockchain technology to enhance its Islamic finance sector. The country’s regulatory framework continues to evolve, aligning with international trends and addressing emerging challenges.

Strategic Integration and Collaboration

For Islamic finance institutions to fully capitalize on blockchain technology, comprehensive adoption strategies are essential. These strategies should include technology integration, Shariah compliance, regulatory adherence, risk management, and customer education. Collaboration with Shariah scholars and experts will be vital to ensure that blockchain initiatives and digital asset offerings align with Islamic ethical and legal principles.

Many Islamic banks and financial institutions are exploring blockchain technology to streamline their operations. However, they face challenges related to regulatory compliance and interoperability with existing legacy systems. To overcome these obstacles, institutions are seeking solutions to integrate blockchain effectively while ensuring alignment with regulatory requirements and Shariah principles.

In conclusion, blockchain technology holds significant promise for overcoming barriers and unlocking growth in Islamic finance. By enhancing transparency, efficiency, and compliance with Shariah principles, blockchain can address the unique challenges of Islamic finance. As the technology continues to evolve, its integration into Islamic financial practices will likely become increasingly sophisticated, driving further innovation and growth in the sector. The potential of blockchain to transform Islamic finance underscores the need for ongoing collaboration, research, and strategic planning to fully realize its benefits.


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DIGITAL ECONOMY & TECHNOLOGY

How Blockchain Can Enhance Islamic Finance by Overcoming Barriers

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on

By

Spread the love

Blockchain technology is making waves in the financial sector with its promise of transparency and immutability. These features align closely with the principles of Shariah law, which governs Islamic finance, creating significant opportunities for blockchain to overcome barriers and unlock growth. The Islamic finance sector is projected to reach approximately $6.7 trillion in assets by 2027, as noted in LSEG’s Islamic Finance Development Report. In this evolving landscape, blockchain technology is emerging as a crucial tool for addressing the unique challenges faced by Islamic finance.

Islamic finance operates under Shariah law, which prohibits practices such as interest (Riba), excessive uncertainty (Gharar), and speculative transactions (Maysir). Blockchain technology’s core attributes—transparency and decentralization—are well-suited to address these constraints. Blockchain can effectively enhance compliance with Shariah principles by providing a tamper-proof ledger and facilitating decentralized transactions. Its ability to create a permanent, verifiable record of transactions aligns well with the Islamic finance requirement for clarity and accountability.

According to Moody’s, innovations like smart contracts are poised to improve Islamic finance transactions significantly. Smart contracts are self-executing contracts with terms written directly into code. They automatically enforce Shariah-compliant rules, reducing human error and enhancing transparency. These advancements support real-time settlements, which align with Islamic finance principles of fairness and clarity. By using blockchain to overcome barriers related to transparency and automation, financial processes can become more efficient and compliant with Shariah.

Enhancing Transparency and Efficiency

One of the most significant ways blockchain can overcome barriers in Islamic finance is through its ability to enhance transparency. The immutable nature of blockchain ensures that every transaction is recorded in a tamper-proof ledger, providing a clear and verifiable record of all financial activities. This transparency is crucial for maintaining compliance with Shariah principles, which demand a high level of clarity and accountability in financial transactions.

Blockchain technology facilitates smart contracts that automate the execution of Shariah-compliant financial agreements. This not only streamlines processes but also reduces the need for intermediaries, lowering transaction costs and increasing the speed and accuracy of financial transactions. By addressing long-standing challenges in Islamic finance, blockchain technology is helping to create a more efficient and reliable financial system.

Modernizing Charitable Giving

Blockchain technology also holds promise for modernizing Zakat, the obligatory charitable giving in Islam. Traditionally, the collection and distribution of Zakat have faced challenges related to efficiency and transparency. Blockchain can address these issues by providing a more transparent and efficient platform for managing charitable contributions.

With blockchain, Zakat collection and distribution can be streamlined, ensuring accurate tracking of funds and effective distribution to eligible recipients. This technology allows donors to see exactly how their contributions are used, enhancing trust and accountability. Additionally, blockchain can facilitate the creation of smart contracts to automate the distribution of Zakat, ensuring compliance with Shariah guidelines and reaching those in need more efficiently.

Addressing Challenges and Compatibility Issues

Despite its potential, the integration of blockchain into Islamic finance comes with its own set of challenges. The compatibility of digital assets, including cryptocurrencies and tokenized assets, with Shariah principles, is a topic of ongoing debate. Concerns about speculation and anonymity associated with these assets pose significant challenges, as they contrast with the Islamic finance emphasis on transparency, accountability, and ethical conduct.

Digital assets, particularly unbacked cryptocurrencies, have sparked discussions about their suitability for Islamic finance. The potential for speculation and the lack of intrinsic value associated with some digital assets diverge from Islamic finance principles that prioritize stability and ethical behavior. As a result, Shariah scholars and financial institutions are actively evaluating the compatibility of these assets with Islamic financial principles.

A promising alternative is Central Bank Digital Currencies (CBDCs), which align with Shariah principles by emphasizing transparency, fairness, and social welfare. CBDCs offer a way to digitize national currencies, providing a more efficient and accessible payment system while maintaining compliance with Islamic financial principles. This approach could address some of the concerns associated with speculative digital assets and provide a stable alternative for Islamic finance.

Islamic Finance Innovation in the UAE

The UAE serves as a notable example of how blockchain can be integrated into Islamic finance effectively. With a well-regulated Islamic finance sector, the UAE is at the forefront of digital assets innovation. The country’s regulatory framework for digital assets is overseen by key federal bodies, including the Securities and Commodities Authority (SCA) and the UAE Central Bank. While the SCA focuses on securities-related matters, the Central Bank regulates digital currencies and stored value.

The UAE also has three additional jurisdictions for digital assets regulation: the Dubai International Financial Center (DIFC), regulated by the Dubai Financial Services Authority (DFSA); the Abu Dhabi Global Market (ADGM), regulated by the Financial Services Regulatory Authority (FSRA); and the Virtual Assets Regulatory Authority (VARA). Each jurisdiction approaches digital assets regulation with a unique focus, contributing to the dynamic regulatory landscape in the UAE.

The UAE’s proactive stance on digital assets regulation and innovation underscores its commitment to leveraging blockchain technology to enhance its Islamic finance sector. The country’s regulatory framework continues to evolve, aligning with international trends and addressing emerging challenges.

Strategic Integration and Collaboration

For Islamic finance institutions to fully capitalize on blockchain technology, comprehensive adoption strategies are essential. These strategies should include technology integration, Shariah compliance, regulatory adherence, risk management, and customer education. Collaboration with Shariah scholars and experts will be vital to ensure that blockchain initiatives and digital asset offerings align with Islamic ethical and legal principles.

Many Islamic banks and financial institutions are exploring blockchain technology to streamline their operations. However, they face challenges related to regulatory compliance and interoperability with existing legacy systems. To overcome these obstacles, institutions are seeking solutions to integrate blockchain effectively while ensuring alignment with regulatory requirements and Shariah principles.

In conclusion, blockchain technology holds significant promise for overcoming barriers and unlocking growth in Islamic finance. By enhancing transparency, efficiency, and compliance with Shariah principles, blockchain can address the unique challenges of Islamic finance. As the technology continues to evolve, its integration into Islamic financial practices will likely become increasingly sophisticated, driving further innovation and growth in the sector. The potential of blockchain to transform Islamic finance underscores the need for ongoing collaboration, research, and strategic planning to fully realize its benefits.


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