Jibrel recently announced a partnership with Abu Dhabi Global Market (ADGM) and Al Hilal Bank to build the next generation of compliant Sukuk bond transactions.
Debt financing forms the pipeline through which liquidity flows into global capital markets. Throughout history, corporations and governments have issued bonds to raise funds for various endeavors, providing volatility averted investors with stable annual coupon yields. Yet until very recently, financial institutions and investors in the Islamic world did not have access to this. With the development of the Sukuk at the end of the 20th century, Islamic investors gained the ability to receive annuities derived from profits generated by an underlying asset. Since its inception in 2001, the demand for Sukuk bonds has risen significantly.
The Ingenuity of a Sukuk Bond
In a traditional Sukuk bond, the issuer raises funds from investors and uses that capital to purchase an underlying asset or invest in a venture. In exchange, investors are provided with fractional ownership and receive periodic payments proportional to the capital they invested. There are three main types of Sukuk:
- Mudharabah: Investors are treated as silent partners that share in profits based on the performance of the underlying venture. With this type of Sukuk, all losses are borne exclusively by the investor.
- Musharakah: In addition to sharing profits, investors are seen as joint partners that participate in business decisions. Also, unlike the Mudharabah, losses are shared by the issuer and investor.
- Murabahah: Investors purchase an underlying asset and lease it back to the Sukuk issuer. At the end of the lease term, Sukuk holders sell the asset back to the issuer at a predetermined price.
While this asset class is treated differently than regular bonds from a compliance perspective, from a technical perspective, it is very much subject to the same inefficiencies as regular bonds. These inefficiencies are what Jibrel’s blockchain aims to solve.
Introducing the Smart Sukuk
Smart Sukuks are able to standardize and automate much of the legal, accounting and payment overhead of conventional Sukuk offerings. By utilizing smart regulation, they enable parties to share a common source of truth. The ownership status of each bond and its underlying asset are automatically updated on a single blockchain, which provides a single view of records enforced through consensus mechanisms.
By streamlining operations in multiparty activities, Jibrel’s blockchain disrupts bond issuance and trading in the following ways:
Clearing & Settlement Efficiencies: Applying blockchain to the clearing and settlement of securities saves institutions millions of dollars in operational and back office costs.
Risk Exposure Reduction: Settlement risk exposure can be reduced by over 99%, dramatically lowering capital costs and systemic risk. In addition, there is no counterparty risk as the settlement happens in real time.
Cost of Issuance Reduction: Cost of issuance is reduced due to removal of third-party intermediaries and the fees associated with them. Furthermore, the administrative burden and operational risks of the current, largely manual and multi-step process are reduced as well.
Transaction Cost Reduction: The lower cost of acquiring and maintaining the new blockchain technology application systems make transactions processes faster and cheaper.
Uptime & Availability: The system is available 24/7 with complete replication across network participants, ensuring there is no single point of failure or any reliance on a single device or infrastructure.
Transparency, Traceability and Auditability: A single view of records allows for a seamless audit process. Regulators can play a secondary spectator role, only intervening as needed.
The Future of the Sukuk
While the Sukuk revolutionized Islamic finance, so far, it has only been available to large institutional investors due to the financial and legal complexity of issuance. Yet in Malaysia, the Securities Commission has recently announced its intent to facilitate greater retail access to the RM 1.3 trillion Malaysian bond and Sukuk market. New frameworks are currently being introduced that combine efficient issuance structures with greater investor protections, such as, prime credit rating requirements on bonds issued. Ultimately, with the future of this asset class looking so bright, we are very excited to be part of this financial asset revolution.
While putting the Sukuk onto the blockchain was a massive success for Jibrel, it is but one step in our vision to put traditional assets on the Ethereum blockchain. To learn more about Jibrel, please visit us at visit us at https://jibrel.network/
