Sukuk, often referred to as Islamic bonds, allow Muslims from around the world to invest in a Shariah-compliant way. In recent years, this investment instrument has facilitated significant economic development projects – and today, it opens even wider avenues as it is brought on-chain.
Tokenization opens sukuk to a broad range of retail investors as it allows for fractional ownership of Islamic bonds and their instant exchange on the blockchain. With increased accessibility and liquidity, tokenized sukuk mark a new chapter in the history of Islamic finance.
Understanding Sukuk
Today, Islamic finance is an industry with a market capitalization of around $3 trillion. This financial system operates in accordance with Islamic law (Shariah) – it prohibits certain activities such as interest, speculation, and investment in businesses that involve practices considered unethical in Islam.
Sukuk, or Islamic bonds, are a crucial segment of this economy. This financial tool represents fractional ownership in an asset – and offers investors a share in the profits generated by this asset. The latter can include real estate, infrastructure projects, or commodities; there are also government and corporate sukuk. Compared to conventional bonds, sukuk prohibit interest as it adheres strictly to Islamic laws.
The Sukuk market size in the UAE alone is roughly $80bn. The global sukuk volume has surged in the past years – and it is projected to grow from $904.5bn in 2023 to $1084.8bn in 2024. This increase can be attributed to overall Islamic finance growth, diversification of funding sources, infrastructure development, and positive government initiatives.
Sukuk have gained popularity in Islamic finance as an alternative to conventional bonds: they offer opportunities to invest consistently with Shariah principles.
From Traditional to Digital Sukuk
Sukuk are an excellent investment tool experiencing growing demand, but certain factors limit their usability.
- High entry level. The starting price for most types of Sukuk ranges from several hundred to several thousand dollars. This cuts off the opportunity to invest in sukuk for the majority of users. Additionally, the requirement to have a verified account on licensed platforms complicates access to Sukuk.
- Limited liquidity. Due to the relatively high entry-level, sukuk lack liquidity: the speed and ease of their trading are restricted.
- Predominantly regional market. According to research, Sukuk are mostly issued in a few Muslim states, which hampers their global adoption rate.
This is where blockchain technology comes into play – all three limitations can be addressed by issuing sukuk as digital tokens.
Tokenization: This Decade’s Trend
Tokenization is a process of transforming assets from the real world into tokens on the blockchain. Most often, tokenization is applied to real estate, commodities, bonds, and equities. Once these assets (usually referred to as real-world assets or RWAs) are tokenized, they get all the properties inherent to crypto tokens:
- Increased liquidity. Tokenized assets are easy to trade, buy, and sell. All you need to purchase an RWA is a Web3 wallet.
- Transparency and security. As with all on-chain assets, RWA transactions are publicly visible and secured by the blockchain.
- Fractional ownership and improved accessibility. Tokenization makes it possible to own only a share of the asset – there’s no need to buy one entirely. This lowers the entry barrier for all RWAs.
In 2023, there was a surge of US Treasuries tokenization: the market cap of tokenized treasuries skyrocketed from $105m in January to $740m in December. On a global level, it is projected that up to 10% of the world’s GDP may be tokenized by 2030. Market data suggests that the same can be expected for Sukuk in the coming years.
Tokenized Sukuk: Islamic Bonds Made Accessible
On-chain sukuk could be the tool to take Islamic finance to a new level. It will provide Muslims from around the world with the opportunity to invest in accessible Islamic bonds in a Shariah-compliant way. Tokenized sukuk can be tightly integrated with DeFi, opening up new prospects for capital efficiency.
Moreover, tokenizing sukuk could enhance the overall credibility of cryptocurrency in the Islamic world. Muslim scholars often deem cryptocurrency as non-halal because it lacks backing from tangible assets in the real world. Using RWAs such as Sukuk could make cryptocurrency more Shariah-compliant in the eyes of Muslim authorities and mass audiences.
Holistic Approach to Digital Sukuk: A Shariah-Compliant Blockchain Environment
Issuing on-chain sukuk entails certain difficulties. It is necessary to build dedicated oracles to ensure that the price of tokenized assets is accurate and updated properly. Also, traditional businesses will need to collaborate with cryptocurrency companies to guarantee the legality of on-chain Sukuk, which may be challenging.
A favourable blockchain environment could address the obstacles in sukuk tokenization. Such an environment could be HAQQ – a community-run, ethics-first financial ecosystem that operates in full compliance with Shariah. In 2022, the world’s leading Muslim authorities issued a Fatwa, recognizing its alignment with Islamic principles.
Haqq is an efficient EVM-compatible blockchain with Shariah Oracles – on-chain registries of Halal Certificates. The platform allows developers to build all necessary infrastructure for tokenized sukuk, including DEX and other tools.
Democratizing Investment Opportunities in the Muslim World
The advent of tokenized sukuk is a step forward in Islamic finance that offers broader accessibility and increased liquidity for Muslim investors from across the world. Embracing blockchain technology through platforms like Islamic Coin and Haqq could pave the way for a more inclusive and Shariah-compliant financial ecosystem, ushering in a new era of prosperity and opportunity.
Mohammed AlKaff AlHashmi is the co-founder of the Sharia-compliant blockchain ecosystem HAQQ
