Watch: Islamic finance principles could have prevented the crypto collapse in 2022′ | The Crypto Mile
Gold-backed debit cards and wealth management offer a form of banking that is free from interest, speculation and inflationary currencies. Yahoo Finance speaks to the founder of investment platform Wahed about a centuries-old system that seems at odds with the ups and downs of global finance.
Since the global financial crisis of 2008, blame has been placed on the destabilising effects of leveraged trading, speculation and investments in complex derivatives and synthetic assets.
The collapse of Lehman Brothers in September 2008 was reflected over a decade later in November 2022 in the collapse of the cryptocurrency exchange FTX.
Proponents of Islamic finance argue that there is a common denominator in each of these financial disasters, one that creates patterns of booms and busts in which rapid growth is followed by sudden collapse.
Junaid Wahedna, CEO of investment platform Wahed, told The Crypto Mile that the principles of Islamic finance could be an antidote to the rollercoaster ride of boom and bust capitalism.
Read more: FTX bankruptcy causes 80,000 British crypto investors to lose money
Referring to recent crypto crashes, such as the collapse of Terra UST, the bankruptcy of hedge fund Three Arrows Capital and the fall of FTX, Wahedna said a Shariah-compliant system could have prevented the crash: “It would have ensured a strict checklist; no leverage, which is a big part of the cause of these crashes, and no speculation, no derivatives or synthetic assets and instruments,” he said.
The Bahamas-based FTX exchange was a hub of high-leverage derivatives trading. Three Arrows Capital was known for its high-leverage long bets that the crypto bull run would continue. But this high-risk, high-reward activity from the crypto sector was only a small part of what was happening daily in global institutional finance.
Read more: The worst crypto scams and “cover-ups” of 2022
Many Muslims find it difficult to invest in accordance with their faith because they must avoid companies that make their profits from interest. “Today’s financial ecosystem revolves around interest, even in our everyday lives, in the bank accounts we use. So if you keep your money in a checking account or a savings account, it is exposed to interest,” Wahedna said.
He said his company offers an alternative way to store and invest wealth. Wahed’s gold-backed bank accounts are promoted as an alternative to storing wealth in inflationary currencies and interest-bearing financial instruments.
Wahed’s debit card with gold reserve
The New York-based Islamic fintech company, backed by Saudi oil giant Aramco (2222.SR), recently launched a gold-backed debit card that complies with Sharia regulations and prevents customer funds from remaining in the traditional banking system where they would be exposed to interest.
“Our mission is to find a real alternative for people with the same values and ethics. So our solution is to keep your wealth in real assets, but make it liquid enough to be able to make transactions.
“We chose physical gold as our primary investment to secure our client accounts for a very specific reason: our market surveys and all of our research have shown that people are very comfortable with gold.
“Historically, it has been God’s currency and many of our churches are very comfortable with it. That’s why we chose gold as the backing for this main account.”
Read more: Why UK banks are blocking transfers to and from crypto exchanges | The Crypto Mile
He added that client accounts could be backed by other real assets that were consistent with Islamic values and ethical principles. He said his investment platform carefully screens the securities clients want to invest in, excluding those that have links to tobacco, alcohol, gambling and pornography.
“Other assets that are OK are real estate, reclaimed commodities and audited stocks.”
Read more: Islamic finance relies on fintech with gold-backed debit card
Buying a house without a mortgage
Wahedna pointed out that the real estate market is built on a mountain of debt. He said: “Most of the debt today is mortgage debt. The accumulation of debt in the real estate crisis is getting worse, so we need to find a solution to it and we have theoretical hypotheses on how we will do that.”
He described a concept of shared ownership, where the buyer of the property does not get a loan, but instead invests as much as they can in the home they want to buy, and a financial institution buys the rest. The buyer can then purchase the entire home over time at market rates.
He added: “It’s actually possible today because there are already companies in America that do it. Even in the UK there are relatively large institutions that offer shared ownership, it’s just that many people don’t know about it.”
“Let’s say you want to buy a house and you have put down 20%. Then a company comes along and buys the remaining 80% of your house.
“So if the price of your home goes down, you also bear the loss, unlike with a mortgage.
“Because with a mortgage, you definitely have to pay the bank back the capital. You can then buy the whole house over time and it depends on the structure of the company you use, but you should be able to buy the price of the house back at market price, so if the house price goes down, you can get it cheaper.”
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