Digital Mutual Stimulation Theory for Strengthening Islamic Finance in China

Abstract

Central Bank Digital Currencies (CBDCs) represent a very important innovation in the digital and payment space affecting the participants in the global financial services industry. A CBDC is an innovation and is a digital payment instrument that is denominated in the national unit of the account. Islamic finance has similarly experienced significant growth in the last several decades, but challenges remain in terms of transaction processing speed and cost. Given the significant opportunities of central bank digital currencies in reducing transaction costs, and increasing transaction speed, the interrelationship between the promotion of Islamic finance and CBDCs is of significant interest. The conceptualized theory digital mutual stimulation outlines the growing relationship between the strengthening of Islamic finance and the utilization of the digital yuan. Specifically, the theory provides an outline that the ease in the conduct of transactions, as well as reduction in transaction cost and greater democratization will significantly strengthen the provisioning of Islamic financial products. The article utilizes a grounded theory approach integrating empirical research data from interviews and surveys. The digital nature of the digital yuan acts as a stimulus for smart contract execution and reduces the need for an intermediary as well as increases trusts between the contracting parties. This becomes especially important for international trade and transfers, as well as for asset purchases. Given the connection in Islamic finance between financing and real assets, the digital Yuan can play an important role in strengthening this interconnection and support Islamic finance in China and beyond.