Shariah Decryption of Real, Financial and Digital Assets

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With the advancement in technology and finance over the centuries, the world has seen the growth of different forms of assets. Real assets were something the world was very much accustomed to and dealing with daily. The financialisation of the economy introduced financial assets. Assets were further divided into tangible and intangible assets. Digital and technological advancements introduced a new breed of assets, digital assets. How does Shariah consider these different types of assets? What makes an asset, an asset in Shariah? This article considers the different types of assets and attempts to address what the Shariah seeks when it comes to assets.

Real assets and the real economy

Real assets are units within the real economy. A real asset has a tangible form, and its value derives from its physical qualities. It can be a natural substance, like gold or oil, or a man-made one, like machinery or buildings. A real asset is a tangible asset you can touch—like a bridge, or a building, or a bar of gold.

Real assets are visible in the real economy, which concerns the production, purchase and flow of goods and services (like oil, bread and labour) within an economy. In this way, the real economy is focused on the activities that allow human beings to directly satisfy their needs and desires, apart from any speculative considerations. Thus, real assets typically directly satisfy the needs of humans and give various utilities, not just financial or speculative gains. Hence, the real economy relates to economic activities that generate goods and services as opposed to a financial economy that is concerned exclusively with activities in the financial markets.

The question of real vs unreal is something we should also take note of. Maybe the use of real assets is no longer the best term to describe the physical and tangible assets we have in the world. Using ‘real’ can create a false dichotomy in our minds to suggest that everything else is unreal, which is clearly not the case.  Real should be understood relatively, that these assets have multiple intrinsic utilities that people benefit from, and that are then exchanged for other goods and services, and in that sense are more “real” than traditional financial investments like equities or bonds.

Financial assets and Financial Economy

Financial assets are any asset that derive value from a contract or other claim. More specifically, according to the International Financial Reporting Standards (IFRS), a financial asset is any asset that is:

  • Cash
  • An equity instrument of an entity
  • A contractual right to receive cash or assets—known as accounts receivable—or exchange financial assets or liabilities with another entity
  • A contract that can be settled in the entity’s own equity instruments

The utilities of financial assets can be summed up in being stores of value, provision of liquidity and savings, and income. The utilities are all financial in nature, hence they are financial assets. The major feature of financial assets is that it has some economic value that is easily realised. The immediate and direct utility of a financial asset is liquidity and access to cash. Financial assets have a connection with real assets, although they do not give the identical utility as that of real assets. Dividends earned through owning shares of a company are profits of that company, and a company is a formation of real assets, factors of production and financial assets coming together to generate revenue.

Financial assets are a breed of the financial economy, which is the result of the financialisation of the economy. There is a lot of debate and concerns with the financialisation of the economy. Financialisation has been described from various angles, one such explanation is that financialisation is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialisation transforms the functioning of economic systems at both the macro and micro levels. It is argued that its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialisation may put the economy at risk of debt deflation and prolonged recession[1]. The world has witnessed the bridging divide between the financial economy and real economy in the last decade, where financial assets have proven not to correlate with what is happening in the real economy in terms of equality, profits, growth and employment.

Digital assets and the digital economy

Digital assets are digital representations of values. A digital asset is content that’s stored digitally. That could mean images, photos, videos, files containing text, spreadsheets, or slide decks. Digital assets are electronic files of data that can be owned and transferred by individuals, and used as a medium of exchange to make transactions, or as a way of storing intangible content, such as computerised artworks, video or contract documents. Examples of digital assets include crypto-assets, such as bitcoin, so-called asset-backed stablecoins, such as tether, and non-fungible tokens (NFTs) — certificates of ownership of original digital media. Records of ownership of digital assets are held securely on a type of decentralised database, or electronic ledger, called a blockchain, which is distributed among its users[2].

The digital economy involves the production, distribution and usage of digital assets, with the typical utility of digital assets being digital in form and gained in a digital infrastructure.

Shariah perspectives on assets

The form of an asset is irrelevant in Shariah. The Fuqahā’ state that a grain of wheat will not be property (Mal) without the Tamawwul (usage) of people. This shows that although a grain of wheat is existing, it is tangible, visible and storable, the jurists negated it from being Mal unless people find this usable and beneficial. People should have some form of inclination, utility, use case and benefit for it to be deemed a valid asset in Shariah[3]. On the other hand, Manfa’ah (services) has been recognised as an asset and property according to the Maliki, Shafi’i and Hanbali scholars, despite it having no form and no visible existence. A person only consumes and benefits from the service without ever holding it.

Although some Hanafi jurists have stated that Mal must be a physical entity, Mufti Taqi Uthmani dispels this argument and states that the Qur’an and Sunnah have not explicitly defined Mal, rather the Shariah has left its identification to the people. This is completely logical and makes perfect sense since the idea of what an asset is has only evolved over time and space. This is from among the many miracles of the Shariah that it is universal and accommodating where needed.

Furthermore, Mufti Taqi Uthmani argues that some Furu’ (substantive laws) in the Hanafi school discuss intangibles as Mal. He thereafter quotes the edicts of late Hanafi jurists which consider electricity and gas as Mal despite being intangibles[4]. Thus, intangibles can also be Mal on condition they are desirable and retrievable. It is not necessary for intangible Mal to remain after using, it may be an intangible which is consumed and depleted upon usage. The condition of perpetuity is not required in physical Mal either, hence food is Mal despite being used by consumption.

The Shafi’i jurist Imam al-Zarkashi states that Mal is what gives benefit, and he continues to say that Mal can be material objects or usufructs. Imam al-Khiraqi states that Mal is something in which there exists a lawful benefit.

Summarising the above, it is clear that the Islamic jurists were more concerned with the use case and utility an item rather than its form. For something to be deemed as an asset and property in Shariah, it must have a genuine use case and utility. That is the key determinant for anything to be an asset. Thereafter, the use case must be Halal and lawful for it to have Taqawwum (economic value) in the lens of Shariah. If an asset has a use case and utility, but the asset is unlawful, then it cannot be sold or bought, as it has no economic value in Shariah. Hence, alcohol, despite being recognised as an asset in Shariah, it does not have Taqawwum, and therefore cannot be traded. Any gains from such sales are impure and unlawful. Taqawwum is derived from having a beneficial and lawful use case, as all the rulings of Shariah are ultimately to benefit. Ibn Taymiyyah states that “Shariah was revealed to establish and perfect that which is beneficial, and was revealed to prevent and eliminate that which is harmful.” [Fatawa ibn Taymiyyah]

Therefore, the key in any asset is not the form, but the utility of that asset. Anything which provides benefit has the potential to be deemed a valid asset in the eyes of the Shariah. There are many types of real assets such as gold, buildings, computers, land, machinery etc. Each real asset provides different use cases and utilities to other real assets. Gold can be used as medium of exchange, medals, as jewellery and adornment, as a store of value among other things. Buildings provide storage, housing, shelter, and space. Hence, from a Shariah perspective, most real assets generally have use cases and utility. Most have some form of benefit. That would be sufficient to deem them as valid assets in Shariah. Of course, if an asset has no genuine use case or utility, then despite being real, it will not be an asset. The real asset should also be Halal and lawful for it to be tradable in Shariah.

Shariah perspective of financial assets

If the financial economy was embedded more with the principles of Shariah, whereby Riba, debt trading, leveraging, shorting, gambling, hoarding, monopolising and other such prohibitions were banned, we may have a more stable financial economy, which could potentially correlate more with the real economy and support the real economy. Overlooking the way financialisation is being done by some market participants as that is another discussion, financial assets – in and of themselves – also hold utility and valid use cases. Financial assets exist within the realm of financial markets, which are a marketplace where the creation and the trading of financial assets take place. Financial markets provide finance for companies so they can hire, invest and grow. They provide money for the government to help it pay for new roads, schools and hospitals. They act as an intermediary between savers and the investors by mobilising the funds between them. So, financial market gives buyers and sellers a platform to trade in the assets at the price.

Financial assets can provide liquidity, savings, store of value, diversification, investment opportunities and access to finance. From a Shariah perspective, all such use cases and utilities are genuine and beneficial in managing wealth and one’s finances. Although the utility and benefits of financial assets are financial in nature, they are still valid use cases and sought after by people. As such, financial assets can also be deemed as valid and recognised assets in Shariah. However, not every financial asset is Mal from a Shariah perspective. Some are merely commitments and obligations, without any independent entity being invested into. Further, the validity of financial assets will depend on whether they have Taqawwum or not. A financial asset which is not Halal will not be permissible to trade, even if it has utility or a use case.

Shariah perspective of digital assets

Being digital does not disregard an asset from being a valid and recognised asset in Shariah, as the driving factor in being a valid asset is the ability to benefit from the asset in a reasonable manner. Remember, that the jurists defined Mal as:

Mal is that which is normally sought and can be stored to use when needed.” [Majallat al-Ahkam]

Digital assets did not exist in earlier times. In earlier times, it was inconceivable to have incorporeal assets and intangibles as stored assets. There was no infrastructure to store, retrieve and use such intangibles. With the advancements in the technology, an entire digital world exists now. We store data, send data and use data in this world. We are constantly engaging with this world, which is stored on data servers all across the world.

Further, the utility of digital assets cannot be measured in the same way as real assets. This is also true for financial assets. The metrics and notions used to quantify and qualify real assets do not hold true for financial assets and digital assets. Each type of asset has to be understood in their realm of existence and domain. Each type of asset serves a purpose and provides utility in their world. Real assets serve several physical benefits in the ‘real’ world. Financial assets provide various utilities and benefits in the financial world. Digital assets provide utility and benefits in the digital world. Therefore, when measuring if something is a recognisable and valid asset in Shariah, we need to understand the purpose, benefits and utilities of the world within which the asset exists, operates, functions and moves. Otherwise, we will fall prey to comparing apples and oranges.

Many digital assets serve functions and purpose in digital infrastructure. Digital infrastructure is the core and backbone of the digital economy. Digital assets provide access, storage, facilitate trade, services, records, content and more. Of course, some digital assets may not serve a Shariah compliant purpose or may not serve a genuine use case. This is why a Shariah review of such assets is vital.

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[1] Palley, T. (2007). Financialisation: What is it and Why it Matters. Washington DC: The Levy Economics Institute

[2] Vencent, M. (2021). What are digital assets and how does blockchain work? Financial Times

[3] فما يكون مباح الانتفاع بدون تمول الناس لا يكون مالا كحبة حنطة (عمدة الرعاية ج 5 ص 8 ط دار الكتب)

[4] Mufti Taqi Uthmani (2015). Fiqh al-Buyu’. Karachi: Maktabah Ma’ariful Qur’an