JEDDAH — Blockchain can reduce costs and increase speeds by streamlining processes and eliminating redundancies for the financial services industry, Moody’s Investors Service said on Monday. These benefits stem from the significant

improvements blockchain has brought about in respect of 1) operational efficiency (participants verify and validate trade data); 2) transparency (transactions on a blockchain are visible to all members of the blockchain and provide near real-time accounting); and 3) regulatory oversight and reporting (regulators could be provided with access to the blockchain).

These features could have significant benefits for the sukuk industry. While the market for sukuk continues to grow steadily – we expect total sukuk issuance is expected to be around $130 billion in 2019, up 6% from 2018 – it remains concentrated in the core Islamic finance markets of the Gulf Cooperation Council (GCC), Malaysia, Indonesia and Turkey.

Blockchain will help reduce the costs and time involved in issuing a sukuk, which is currently greater than for a conventional bond.

Issuing a sukuk generally includes complex legal documentation, unlike a conventional bond

issuance, and this – in addition to the relative complexity of the instruments' structures –

may be inhibiting new actors from issuing sukuk. Issuance activity is primarily conducted by sovereigns and government-related entities, and volumes are mostly determined by issuances by key GCC and Southeast Asian states.

On 28 August, R3 LLC, a leading blockchain software company, announced that it had signed a strategic partnership with Dubai-based fintech startup Wethaq to build the next generation of financial market infrastructure for Islamic capital markets.

Wethaq’s platform is built on Corda, an open-source blockchain platform, and aims to improve the market infrastructure supporting sukuk issuance and trading, making sukuk more easily accessible and manageable, a credit positive.

The platform will be designed to work with the infrastructure of global financial markets to facilitate the wider distribution of sukuk. — SG