The use of blockchain for the issuance of sukuk bonds

Sukuk is an Islamic financial certificate, which is the equivalent of a bond used in traditional financial systems. This type of financial documents based on the rules of Islamic finance was first issued in the 90s in Malaysia. The peculiarity of sukuk certificates is in accordance with Islamic religious law (Shariah), where the loan of money at interest, as well as financial speculation is prohibited. Transactions under Shariah law are based on the principle of profit and risk sharing. The sukuk principle is the right of the bondholder to share its profits or losses with the issuer.

In 2021, the total volume of outstanding sukuk bonds was about 66% of deposits of Islamic banks. And this is the main problem faced by the Islamic banking industry, in which there is a problem of excessive liquidity against the background of a growing deposit base. Nevertheless, sukuk has a huge potential for financing various sectors of the economy of Islamic countries and ensuring their sustainable growth. In this article, we will consider the possibility of issuing sukuk bonds using blockchain technologies.

Digitalization, financial technologies and innovations are transforming the Islamic financial system. Countries such as Malaysia, Bahrain and the UAE, which have the largest distribution of Islamic financial institutions, are actively experimenting with fintech. Shariah scholars and researchers evaluate cryptocurrencies and digital innovations in financial products for compliance with Shariah. It is expected that blockchain and fintech projects in the Islamic finance industry will soon surpass traditional financial systems in terms of transaction volume. With the wider spread of cryptocurrencies and smart contracts, sukuk bonds will be able to completely replace conventional credit bonds and become a popular financial instrument of the Islamic world.

Sukuk is an economic and equal joint venture between the issuer and investors. Assets acquired as a result of the issue of sukuk are jointly owned and managed for profit. Holders of sukuk bonds do not receive interest on the debt, but receive partial ownership and receive income as the asset makes a profit. Sukuk links the profitability and cash flows of debt financing to a specific asset acquired, allowing investors to receive the benefits of debt financing, but only for financing that is attracted for identifiable assets.

On the other hand, bonds are investment securities in which investors lend money to a company or government for a certain period in exchange for regular interest payments. After the maturity date, the bond issuer returns the investor's capital, and the profit is generated by fixed payments that the investor receives during the entire term of the bond.

Sukuk based on blockchain smart contracts can significantly increase the transparency of transactions, reduce costs and eliminate intermediaries. Sukuk is beneficial to government organizations, agencies, and large companies in order to remain competitive and adapt to the changing needs of customers.

The cost of issuing sukuk bonds is significantly higher than the cost of issuing ordinary bonds due to lower liquidity, which leads to investors expecting compensation with higher yields. Standardization of sukuk in terms of documentation and interpretation of Shariah rules can help reduce transaction costs and the cost of issuing bonds, stimulate and automate accounting, legal procedures and general expenses of issuers.

The blockchain-based transactional structure of the smart sukuk allows investors to fulfill obligations using programmed data and parameters that are automatically executed when the terms of the contract are fulfilled. The main transaction is carried out using a blockchain-based smart contract, which transfers ownership of the asset directly to investors. It collects signatures from investors and makes a payment to the issuer in real time. The mechanics of a smart contract are shown in the figure below. All important individual contract documents can be programmed in the form of smart contracts with a timestamp and electronic signatures of participants.

The introduction of blockchain into the sukuk work structure is less costly compared to traditional methods. Thanks to the proposed automated smart contract, sukuk can be issued without much cost and effort, thereby supporting the economy and the Islamic banking industry. The compliance of the blockchain and the cryptocurrencies (digital means of payment) used in it with Shariah makes it possible to form an accessible pool of customer funds to obtain competitive profits compared to traditional analogues. The main goal of blockchain technology is to reduce the number of intermediaries and the total cost of the transaction without compromising the credibility of the structures from the point of view of Shariah.

HAQQ blockchain can be used in the implementation of fintech projects based on the principles of Islamic finance. This blockchain network fully complies with the rules of Shariah, has its own digital currency and a Fatwa issued by well-known Shariah scholars. The Evergreen DAO Fund, funded by the issue of Haqq base tokens and managed by network participants, is designed to support innovative projects for the international Muslim community. High bandwidth makes Haqq an ideal tool for implementing digital campaigns.

IslamicCoin is a digital currency conforming to the norms of Islam and Shariah, functioning in its own blockchain Haqq, which means "Truth". Already at the stage of closed sales, IslamicCoin aroused huge investor interest and was able to raise more than $ 200 million in just a few weeks. Unlike technically outdated Bitcoin and Ethereum, which have a lot of problems, IslamicCoin uses the full power of the most progressive blockchain technologies and is based on the most fair and reliable ideology and rules of conduct.

Successful investors choose ideology, technology and prospects based on something more than minor fluctuations in price charts. For almost 20 years of the existence of a new type of digital money, cryptocurrencies have not brought a drop of real value into this world, have not made people free, independent and happy.

And this means that it's time for a new type of finance based on responsible choices and new values!