World's first digital sukuk targets Bitcoin generation

BARCELONA: Later this year, what purports to the world’s first digital sukuk will launch, bringing Sharia-compliant social impact investing to the masses.

Blossom Finance — an Indonesia-based, US-owned and regulated company that’s guided by one of the Gulf’s most renowned experts in Islamic finance — hopes its pioneering products can enable retail investors to benefit from the kinds of gains usually only enjoyed by institutions and the ultra-wealthy.

Digital sukuk can also help steer Islamic finance back toward a higher purpose of supporting the communities in which it operates.

“Islamic finance has yet to realize its true value proposition. Most of it is built on replicating conventional finance, which may be a necessary step but isn’t particularly benefitting society,” said Khalid Howladar, chief strategy and risk officer at Blossom Finance.

“Maybe one person can’t change the world, but I saw within Blossom the scope to help take Islamic Finance to the next level and to support a more investment-based — versus debt-based — economy.

“The core premise of Blossom is to be an active social impact investing platform that will use digital sukuk to raise funds from platform members worldwide.”

So, how will the company’s digital sukuk work?

There is no paper. Everything is online and digital at blossomfinance.com. After creating their user account, members will be able to view various projects (new and old) on the Blossom portal that are funded by digital sukuks. They can invest in any of these sukuk and trade them online.

Blossom’s debut digital sukuk will launch before year-end and aims to return around 8-10 percent over its one-year duration. However, unlike the bulk of the global sukuk market, this will be a genuine profit-sharing instrument with variable — not fixed — returns.

With potential investors from Chile to New Zealand registering their interest in the sukuk, Blossom hopes to raise around $500,000 to $1 million. The proceeds will be passed to an Indonesian microfinance institution, which will then use it to finance budding micro-entrepreneurs.

“We would rather the sukuk be relatively short in order to reduce the risk, at least at the outset,” said Howladar, who is also managing director and founder of Dubai’s Acreditus, a boutique risk, ratings, regulatory and Islamic finance advisory practice.

“It will also help instil good practices in the microfinance institution as — for the first sukuk — they need the money back after the year. The microfinance institution can then finance the entrepreneurs again providing all requirements are met.”

A second sukuk, which will be written on an Ethereum blockchain and is slated to launch in the first half of 2019, will also be focused on Indonesia’s microfinance industry. Blossom may then issue a digital sukuk to fund a recycling firm that’s found an innovative way to safely dispose of plastic and medical waste, with plastic residue used to lay roads. A fourth potential project is for an asset-backed sukuk that would fund a hospital expansion.

Previously, the administrative requirements — such as taking customer details, allocating unique and unforgeable reference numbers and distributing profits – would have required an expensive corporate and technology infrastructure to support the sukuk.

“As a result, your investment sizes would have to be tens if not hundreds of thousands of dollars per person, because you needed scale to make it work,” said Howladar, who was formerly Moody’s Global Head of Islamic Finance and GCC Banks.

As profit-sharing instruments, the sukuk do not provide guaranteed returns of profit or capital, but that added risk is reflected in the higher potential profits to be made from investing. The minimum investment size will vary according to the sukuk and will start from around $100 for blockchain-based sukuk, while for the first digital sukuk it will likely be about $5,000 reflecting the current real-world onboarding costs.

“Only when we are fully operational can we use tech to bring the subscription threshold down,” said Howladar.

“Hopefully Blossom’s platform can help democratize the investment process so that you don’t need to have a brokerage account or access to a ‘Swiss’ private bank to invest your money in markets that over the long term generate returns that are typically more than bank deposits.”

The sukuk will have an Indonesian counterparty bank that can receive investors’ funds.