Indonesia Embraces Blockchain-based Islamic Bonds

Tuesday, 30 April 2019, 08:56 Last update: about 6 years ago

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Blossom Finance, an Indonesian firm has just announced its intentions to launch a blockchain-based sukuk (Islamic Bond) to aid in microfinancing projects in this Muslim country.

A sukuk is an Islamic financial certificate that is similar to a Western bond, but that complies with Islamic law. The issuer of a sukuk sells a certificate to a group of investors and then purchases an asset of which the group of investors has partial ownership of. The issuer must also issue a contract stating that they will buy the bond back at the same value at a later date.

This project in Indonesia will roll out over the coming months and will involve DLT to keep the cost of issuance low, whilst encouraging a large pool of retail investors. Khalid Howladar, the CSO of Blossom Finance stated "technology allows you to onboard customers in a far cheaper way than you could ever do before".

He also added that whilst the deal would be of a smaller size that most other sukuk, the asset would benefit from a profit-sharing structure with a profit rate of around 10%. Interestingly, this is not the only blockchain-bases sukuk planned in the near future, with environmental waste disposal and a hospital expansion all planned using the same method.

The Smart Sukuk

The so-called "Smart Sukuk" platform will utilise the Ethereum blockchain as well as smart contracts to increase the efficiency and the reach of the sukuk. By standardising and automating a lot of the legal, payment, and financial overheads, it becomes more efficient and cost effective than managing a conventional sukuk.

Smart Sukuks do not charge upfront fees to institutions or investors, instead Blossom takes 20% of the profits, otherwise known as a 'carried capital interest'. Chief Executive Matthew J. Martin explained further in a statement:

"It's all about having skin in the game. The world is full of quick money bankers that simply want to transfer the risk away - and that is completely against the spirit of Islamic finance. The excessive risk transferred garbage assets that bankers love led to the 2008 worldwide financial implosion. Sukuk is the polar opposite: it's based on assets, not debt; it involves risk participation, not risk transfer."

A securitised asset

What makes a sukuk a securitised asset is the fact that after share of ownership has been issued, investors are able to hold the sukuk until it matures, and then receive their payment from the fund-raising institution. Alternatively, they can choose to sell it to a third party on the secondary market. All payments are automatically distributed to those holding a Smart Sukuk token, with each one representing a slice of ownership.

By using the blockchain, institutions do not have to add cryptocurrency to their balance sheet as the Smart Sukuk supports the creation and issuance of Sharia- compliant bonds in the local, Indonesian currency.

The Maltese government has recently announced as a part of the Malta Budget 2019 that it intends to develop additional Islamic Finance options on the island. With a strong blockchain sector that is set to continue growing, it may not be long before Malta sees similar solutions being adopted.