Avenues for blockchain tech are expanding in the tough shariah-compliant market, as just today a Dubai-based fintech company Wethaq, struck a strategic partnership with R3, in order to engineer a blockchain-powered architecture for Arab financial markets.
R3 is an enterprise blockchain software firm and is quite famous for working with a broad ecosystem of more than 300 members across various industries. Corda, R3’s open-source enterprise blockchain platform, is one of the main attractions of the firm that attracts industries from both, the public and private sector.
According to the press release published earlier today Wehtaq, the Dubai-based “platform-as-a-service” firm is aiming to leverage Corda’s blockchain in order to improve the market structure supporting the issuance and trading of Sukuk securities.
Sukuk can be understood as a type of financial certificate, much like a bond. However Sukuks and traditional bonds aren’t exactly alike, the former complies with the Islamic shariah law, while the latter does not. Moreover Sukuks denote partial ownership in an asset, where as bonds are more of a debt obligation. And since Sukuks basically share the risk that comes with backing an asset, the holder isn’t provided with any sort of guarantee for receiving back their initial investment.
Sukuks are quite popular in the Islamic finance space, so much so that its global market is worth over $120b annually, per the press release. In the market however there is an unmet demand for Sukuk, because they are heavily regulated and consume a considerable amount of time for issuance, under the current non-standardized process. This is where Wehtaq and R3 come in.
Wehtaq’s platform, on Corda is specifically designed to automate and streamline the cumbersome process. It will make sukuk’s more accessible by digitizing the issuance process, which isn’t time efficient nor cost efficient. Solely because the different functions through the lifecycle of the sukuk are performed by a number of parties that include various banks, clearing and trustee entities.
Furthermore, while the Wehtaq platform is shariah compliant, it however does not limit the functionality. It is specifically designed to work in conjunction with the global financial market infrastructure. Which would broaden the horizon of distribution for both investors and users.
R3’s Corda platform is particularly designed for more practical and streamlined business usage with additional security protocols. Thus making it an ideal platform for the heavily regulated and complex sukuk market. David E. Rutter, CEO of R3 also reflected on the matter:
Blockchain is driving an unprecedented period of innovation across capital markets, with more assets moving towards complete digitization. As such, there is no better time to seize the advantages of blockchain to transform global financial systems.
He further added that Saudia Arabia and the wider Middle East region are areas harboring huge potential for Corda because of room for economy’s modernization. R3’s latest partnership with Wethaq is an important step towards tapping into the new market and introducing blockchain technology in its financial ecosystem. As stated by Mohammed Alsehli, CEO at Wethaq:
In building the next generation of financial market infrastructure for Sukuks we have found a valuable and trusted partner in R3 and its Corda Enterprise software
The blockchain and crypto space is wary when it comes to Islamic finance because of the religious restrictions that come with it. For example, under the shariah law charging interest is prohibited, which is why with sukuks, instead of paying interest are sometimes issued at a discount and linked to an asset. So at maturity, there’s a capital gain. It is things like these that are a source of confusion for firms as well as people.
But as companies like R3 join forces with local platforms like Wehtaq to navigate through that confusion, blockchain could very well become an integral part of their financial ecosystem, all the while staying shariah compliant. This partnership if fruitful, will enable issuers, investors, central banks and regulators to seamlessly transact in Islamic capital markets. Sehli concluded:
Our joint focus is on building world-class financial infrastructure in Saudi Arabia, in alignment with the Kingdom’s Vision 2030, and the UAE, pursuant to their ambitious fintech agenda.
While shariah-compliant platforms are a rarity, they aren’t non-existent. In fact in addition to R3, there are other blockchain platforms that are looking to expand their reach to the shariah compliant finance market. Back in June 2018, Ripple-based platform Stellar became the first ever distributed ledger protocol to obtain Sharia compliance certification, for the money transfer and asset tokenization field.