Analysts at Standard & Poor’s: the Blockchain is the future of Islamic bonds
A group of experts of the Standard & Poor’s engaged in the research of financial markets and owned by the big three international rating agencies, published an article entitled “the Future of banking: the blockchain as the missing link industry sukuk”. According to experts, the blockchain and smart contracts are able to change this industry for the better.
Sukuk is a financial document that had been circulated in Islamic countries, the Islamic equivalent of bonds. Due to the fact that Sharia law prohibits usury, the traditional bonds with fixed yield in Islam is unacceptable. Sukuk provides non-guaranteed income at the expense of profit funded activities, that is, is the target. The volume of sukuk in the world equal to several tens of billions of dollars.
So how blockchain can improve this industry?
First, according to the authors of the article, the movement of masses of cash within the model of sukuk may become more transparent. Islamic scholars and investors often criticize the opacity of the emission processes and profits, as well as the fact that within the model it is difficult to track underlying assets or the flow of money without disclosing financial information or conducting follow-up audits for compliance with Sharia law. In this aspect come to the aid of the blockchain technology and smart contracts. Thanks to the blockchain, you can consider cash flows in a transparent way, as the dates and sources of payment become available to the public.
As a rule, the complex patterns of sukuk, when it appears some assets, legal documents stipulate the terms and conditions of replacement, but rarely mention the nature of the underlying assets, except to report that they comply with the Sharia. As a result, investors are faced with risks.
Some of the sukuk documents also contain clarifications and changes that would limit investors the opportunity to apply to the court for protection in the event of total loss of assets.
If included in the equation, the blockchain, digital registers allows real-time tracking of underlying assets, including any changes in the form of replacement or deletion of data. The technology also will ensure that the assets will be used exclusively for specific Islamic financial transactions (this is assuming the basics of the sukuk).
In the course of certain transactions, the Issuer or the sponsor must inform the investors about the timing of certain events and to ask for approval or guidance on further action. Using the blockchain and protocols, smart contracts will be available in real time to register the sukuk holders, because each transaction is documented with a new block in the chain.
Along with this technology will allow you to automatically carry out the implementation of the provisions of the sukuk documents in full or partially, for example to start the process of early termination of the transaction, if the consent of a certain percentage of investors.
All this will help to avoid long legal procedures, since the intention of the parties and their understanding of the process will be documented in smart contracts.
Sukuk should be subject to Shariah auditing only if its sponsored institutions, operating in accordance with Shariah. Auditors also verify that the transaction is compliant to Sharia, wanting to make sure that it is consistent with the original fatwa (goal setting). If sukuk is issued by a structure that is not subject to audit, the latter is rarely done. Because of this, there is the risk that sukuk becomes Sharia-compliant in its implementation.
The use of the blockchain will greatly reduce this risk, as data will be easy to compile and make available external Sharia audit. Thus, the tool will become more reliable, and the problem of compliance with the Shariah at the stage after the issue will become less acute.
Blockchain will also ease the coordination of financial flows will allow to establish the presence of problems at an early stage.
As we reported yesterday, an Indonesian company Blossom Finance plans in the coming months to issue sukuk on the blockchain, and funds raised be used to Finance social projects, including waste disposal and construction of hospitals.
According to the materials of Argaam