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.