Matthew J. Martin is the founder of the startup Blossom Finance that uses Bitcoin to help Muslims with Islamic financial law. Blossom Finance, is a microfinance firm based in Indonesia. The company collects capital from investors all around the world and forwards the funds to microfinance institutions for investments. After an annual cycle the company distributes profits back to investors.
With Bitcoin, Martin says “transaction fees are considerably lower” and also offers greater transparency due to its public ledger. By using micro-financiers, Blossom does not break its customers’ religious law of collecting interest.
“Islam prohibits loans with interest. This means financing from conventional banks is a no-no for Muslim businesses.”
— Matthew J. Martin
Matthew J. Martin: Blossom uses bitcoin to move money cheaply across borders and to maintain a publicly verifiable ledger of those movements. We also use bitcoin multi-sig wallets for escrow purposes. Unlike existing crowd-sourced microfinance platforms which are essentially a "black box," bitcoin offers verifiable proof of movement of funds.
Regarding sharia, it's important to understand the five key principles of Islamic finance which include:
- No interest (usury)
- No excessive uncertainty ("gharar")
- No harm to society (alcohol, gambling, pornography, etc...)
- Ownership of underlying assets (no margin trading / no fractional reserve banking)
- Profit and loss sharing
Our model is quite simple in terms of sharia compliance. We use a structure called Mudaraba, which is universally accepted amongst scholars as the ideal mode of sharia financing. The Mudaraba structure does not carry interest, but rather shares profits and the risk of losses between the investor and the entrepreneur.
“One nice aspect of bitcoin is that it ensures ownership of underlying assets with 100% mathematical certainty.”
A Mudaraba is a profit-sharing structure where an investor provides capital to an entrepreneur for a project in exchange for a percentage of any profits generated. This structure was used by Prophet Mohamed as an entrepreneur with an investor named Khadija (who later became his wife) to embark on a caravan trading journey and sell the wares in exchange for sharing the profits with Khadija. He later narrated this as an example to his close companions.
Blossom only invests in sharia compliant businesses, which are not engaged in prohibited activities. Our microfinance partners in Indonesia conduct due diligence on each applicant to verify their business activities.
One nice aspect of bitcoin is that it ensures ownership of underlying assets with 100% mathematical certainty. Our microfinance partners and beneficiary businesses have the guarantee that the money invested into them is not done on margin or with fractional reserve practice, but rather its existence as a real asset is publicly verifiable using the blockchain.
MM: Blossom crowd-sources capital and invests it into profitable microfinance in Indonesia using a sharia model. Capital providers are accredited individuals and institutions - we pool their investments into a "fund" and invest the fund via our microfinance partners to help finance small businesses in Indonesia.
Our microfinance partners in Indonesia act as micro-banks (similar to credit unions in the USA); they manage the retail relationship on the ground and take care of individual underwriting and servicing of the investments. Unlike a P2P model, Blossom's fund model means investors aren't exposed to individual risks; even if one ore more businesses operate at a loss, it doesn't impact the overall profitability of the fund.
“[The Bitcoin model] ensures more money goes directly towards helping build and grow small businesses rather than service fees just to move money around.”
Rates of return average between 7%-12% in 12 months. Investors receive monthly payments of profit as soon as 30 days after investing, and their principal investment is returned after 12 months, which allows it to be re-deployed to finance multiple businesses during its lifetime.
Blossom uses bitcoin to manage the flow of funds including remittance, escrow services, and foreign exchange. Bitcoin helps us reduce the cost of investing capital overseas and returning it profitable. This ensures more money goes directly towards helping build and grow small businesses rather than service fees just to move money around.
“[R]etail and crowd-sourced sharia finance has the ability to completely leapfrog conventional financial technology.”
CT: How did you get converted into Islam and Bitcoin Tech roughly around the same time?
MM: This was purely a coincidence. I became Muslim maybe half a year or so before hearing about Bitcoin. I was working at Boku, which is a mobile payments company - so financial technology news was something on our radar. I got excited about Bitcoin right from the start, but my initial excitement was more driven by the prospects of bitcoin as a technology.
It was only later on after learning more about sharia finance that I realized bitcoin is very interesting from the perspective of several of the key principles in Islamic finance including reducing excessive uncertainty and ownership of underlying assets.
As a whole, retail sharia banking is underdeveloped - and I believe it has the potential to completely leapfrog the conventional banking route and jump straight to digital currency. Much in the same way mobile phones leapfrogged landlines and mobile money leapfrogged conventional banking in Africa, retail and crowd-sourced sharia finance has the ability to completely leapfrog conventional financial technology.
“[I]n some Muslim majority countries there are virtually no sharia financial products.”
CT: Can you explain in a short summary how the Islamic laws affect a Muslims business and regarding interest?
MM: Islam prohibits loans with interest. This means financing from conventional banks is a no-no for Muslim businesses. Islam advocates investment structures, because they encourage viability of the underlying project and risk-sharing.
Unfortunately sharia finance is not always as available as conventional banking products. For example, in Indonesia (which is 90% Muslim) less than 10% of financial products are sharia. This means there is a lack of access for business owners who want to comply with the sharia. In the US there is almost zero availability of sharia financial products. Even in the Middle East, there are many conventional loan-based products that are mislabeled as sharia and in some Muslim majority countries there are virtually no sharia financial products. I've written a comparison of "equity financing" versus "debt financing" on my blog.
“I highly recommend more entrepreneurs consider relocating to Indonesia to extend their runway by 3 or 4 times what they'd manage in San Francisco.”
CT: You are now based in Indonesia can you tell us a little about this move?
MM: Indonesia is the world's most populous Muslim country, with over 220 Million muslims. Only 80% of Indonesians have a bank account. There's a huge demand for microfinance, but a lack of deployable capital. We're helping meet that demand head on by crowdsourcing international capital and investing it into Indonesian small businesses using a sharia model. This means Muslims can get financing for their business in a way compatible with their religion.
We started in the USA, but the market opportunity in the USA for sharia financial products is quite limited. Financial services are heavily regulated and expensive to launch, so it only makes sense to invest in developing financial services products in markets with mass appeal.
On a side note, Indonesia is a great place to build a startup. The cost of living is low, and the food is fantastic. I highly recommend more entrepreneurs consider relocating to Indonesia to extend their runway by 3 or 4 times what they'd manage in San Francisco.
CT: What's the long term goal of Blossom?
MM: Blossom's goal is to help people prosper financially using ethically sound principles. We believe the sharia financial model is a better model overall - especially for microfinance - and we aim to make it more accessible and available globally
“Joining an incubator early on was a huge help and I highly recommend it, especially for first time entrepreneurs.”
CT: How has the start of this business experience been so far?
MJM: Financial services is a heavily regulated space, and it's hard to tell people "Sorry, you can't use it just yet!" The reality is we need to ensure we're fully compliant in every market where we operate. It's encouraging to have strong demand for the service, but discouraging to turn people away. In a way it's a great problem to have.
There are certainly days when I envy consumer apps that can just crank out a prototype and launch it publicly with no lawyers involved. But I remind myself of the great impact we're having in the lives of entrepreneurs to help start and grow their businesses. Joining an incubator early on was a huge help and I highly recommend it, especially for first time entrepreneurs. If you're doing something Bitcoin related, I highly recommend applying to Boost.
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