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Digitization has been making inroads into Islamic finance in a push that promises to demystify a complex market. In fact, S&P Global sees sukuk issuances “showing pockets of opportunity,” as they increasingly adopt digital technologies, it said in its latest global sukuk market report. The local market has emerged as somewhat of a hub for shariah-compliant e-finance with the likes of Rakeez Capital, Emkan Alarabiya, Sukuk Capital and Mudaraba Financial, among a flurry of homegrown fintechs, spearheading the digital sukuk movement.
In context: Rakeez Capital launched its first automated sukuk issuance platform in June of last year, which you can access — to invest or raise funds — through the fintech’s webpage, and mobile application (Appstore | Playstore). Emkan Alarabiya followed suit earlier this year with a similar online space that offers accessible shariah-compliant financing options, with a step-by-step guide (Appstore | Playstore). Sukuk Capital is an old hand at digital sukuk sales, the online marketplace offers a wide pool of crowdfunding solutions (Appstore | Playstore). Meanwhile, Mudaraba Financial debuted its sukuk crowdfunding platform back in 2022, to cater to SMEs (Appstore | Playstore).
BACKGROUND- Global sukuk issuances in 2023: A drop in local SAR-denominated sukuk issuances last year, along with the concurrent decline in Indonesia, contributed to the 17% y-o-y in global issuances in 2023. Meanwhile, KSA accounted for nearly a third (28%) of the total USD 823 bn international sukuk outstanding as of 3Q 2023. Malaysia leads the global market with a 40% share, followed by Indonesia (13%), the UAE (6%), and Turkey (3%). Global sukuk issuance is expected to total USD 160 bn to USD 170 bn this year, including foreign currency-denominated issuance of USD 45 bn to USD 50 bn.
Transactions on autopilot: Digital sukuk refers to non-interest bearing shariah-compliant debt instruments that are typically issued and managed using self-executing contracts. Investors interested in buying sukuk would then be able to do so through a digital asset exchange or any platform that supports sukuk trading. Their yields — which are generated by underlying assets as per Shariah law — would then be automatically and accurately disbursed in due time courtesy of the smart contract.
Sukuk crowdfunding: Smart sukuk issuances have unlocked a new stream of financing for local small and medium enterprises, which typically have less access to bank funding by virtue of their financial firepower. For example, Thara, a Riyadh-based startup, has recently unveiled a new sukuk crowdfunding platform — certified by the Shariah Review Bureau (SRB) — which allows SMEs in the real estate sector to raise funds by digitally offering sukuk to retail and institutional investors alike. Using the Murabaha modality, this process democratizes access to shariah-compliant financing for the issuer and shores up investment options for prospective sukuk holders.
There are of course some caveats: The full-blown adoption of smart sukuk faces a set of obstacles including the absence of a legal framework to regulate issuances, some networks’ susceptibility to cyber threats, and difficulties in ensuring compliance with relevant financial laws and regulations, in addition to the overarching issue of shariah interpretation, according to a new study (pdf).
