KUALA LUMPUR, Malaysia. May 7, 2018 – The darling of Islamic finance - sukuk - has thus far been limited to governments and large institutions due to the high issuing costs and complexity. But a new approach announced today by Blossom Finance aims to change that - using the blockchain. Blossom Finance’s “Smart Sukuk” platform leverages Ethereum blockchain smart contracts to increase the efficiency and reach of sukuk issuance globally. Smart Sukuk standardizes and automates much of the legal, accounting, and payment overhead of conventional sukuk offerings - all backed by fully licensed legal entities in the issuing jurisdiction.

Sukuk: Islamic Finance Securities

Unlike conventional bonds - which are based debt with an interest payment - a sukuk is a shariah compliant financing structure typically based on a profit sharing  payment or ownership of an asset. Sukuk is securitized, meaning it is tradable on secondary markets much like a stock can be traded on a stock exchange. Islamic finance prohibits  interest payments on loans and the sale of debt; sukuk markets evolved as a way to securitize Islamic modes of financing such as profit sharing.

Sukuk has been a popular approach for governments seeking to finance infrastructure projects, but the legal complexity and overall cost to issue sukuk has kept it out of reach for the bulk of institutional clients.

Sukuk Structures

Depending on the particular needs of an institution, there are a variety of sukuk structures based on various Shariah-compliant contracts: profit sharing (sukuk al-mudaraba), deferred-delivery purchase (sukuk al-salam), lease of an asset (sukuk al-ijara), joint venture (sukuk al-musharaka), sukuk al-istisnah (project based), and cost-plus asset purchase (sukuk al-murabaha). A notable difference between bonds and sukuk can be seen in the case of default: bond holders are left with a bad debt, but sukuk holders are left with a valuable asset.

matthew at pesantrenHi-res image available hereBlossom CEO Matthew J. Martin visits a pesantren (private boarding school) in Sukoredjo, Central Java Province, Indonesia. Many community-led religious organizations fund the creation of private schools to improve access to high quality education in their community.

Cost Structure Aligns Incentives

Blossom's microfinance Smart Sukuk product will not charge any up-front fees or costs to the institutions or investors. Rather, Blossom will take a 20% share of the investor's profits - called a carried capital interest. This means that Blossom only makes money if investors make money.

Regarding the pricing model, CEO Martin noted: “I'm a big believer in practicing what you preach. I can't think of a better way to align our incentives with the investors' incentives than for us to take a pure profit-sharing based commission structure. We'll stand behind each and every Smart Sukuk we issue and I feel this type of incentive model shows that's the case."

"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 agains 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.

Blossom has not yet announced a pricing model for the construction project Smart Sukuk model because, according to Martin, the specifics of each construction project will require a more case-by-case assessment.

Sukuk: Not Just for Giants Anymore

“The sukuk markets are the darling of Islamic finance, but really they’ve only been available to governments and very large institutions due to the complexity and cost of issuance,” explained Matthew J. Martin, CEO of Blossom Finance. “Smart Sukuk takes the sukuk structure and adds standardization, efficiency, and transparency using the blockchain.”

Currently, many institutions seeking to raise funds in a Shariah-compliant manner find a lack of options and these institutions find the only financing available is a conventional loan from a commercial bank. Loans with interest are prohibited in Shariah and therefore prohibited in Islamic finance. Sukuk emerged as a Shariah-compliant method for institutions to raise funds, but often has much greater legal and operational complexity than a conventional loan.

rs pku muhammadiya wonosoboHi-res image available hereBlossom CEO Matthew J. Martin and PBMT General Manager Jamil Abbas meet with Muhammadiya Wonosobo Hospital’s Vice Director and Treasurer, Mr. Abud Ba’asir. Institutions like Muhammadiya champion numerous construction projects - such as waqaf (permanent charity) hospitals like this one - but often face a lack of Shariah compliant financing options.

“We’ve selected two specific structures for the initial issuances: sukuk al-mudaraba which is a profit sharing sukuk and also sukuk al-istisna for construction projects” explained Mr. Martin. “We’ll be using the profit sharing Smart Sukuk for all our microfinance funds, and we’re in early talks with several institutions in Indonesia who are interested in financing construction projects using the al-istisna structure.”

Blockchain Makes Sukuk Smarter

Investors in a sukuk are issued a share of ownership, which represents their fractional ownership in the underlying asset or structure with the terms of the sukuk ownership. Holders of sukuk receive periodic payments from the fund-raising institution. Investors can hold a sukuk until maturity, or they can sell their ownership in the sukuk to a third party. This subsequent sale to a third party is known as “secondary trading” and is what distinguishes a sukuk as a “securitized” asset.

Blossom’s Smart Sukuk runs on the Ethereum blockchain, which supports “smart contracts”. A smart contract encodes business rules directly into the underlying payment currency itself – the blockchain itself enforces the contract rules regarding payments and transfer of ownership.

sukuk al istisna al ijarahHi-res image available hereDiagram illustrating the maturity phase of Blossom’s Smart Sukuk for construction projects.

An institution looking to raise funds can issue Blossom’s Smart Sukuk, which collects funds from investors in exchange for Smart Sukuk Tokens representing an ownership portion of the sukuk. When the institution makes payments, the funds are automatically distributed back to the Smart Sukuk Token holders via the blockchain according to the rules of the smart contract - without the need of conventional banks or intermediaries.

Smart Sukuk Tokens support an industry standard protocol, called ERC20. The standard allows tokens to be traded globally on a variety of public cryptocurrency exchanges.

Legal Status is a Must for Smart Sukuk

Islamic finance is bound by local rules and regulations. A recent working paper written by Mufti Muhammad Abu Bakar and published by Blossom Finance notes that cryptocurrency like Bitcoin and Ethereum is halal based on its attributes but is not permissible for use by Muslims if it’s banned by local government.

“Let me be clear – we will only offer the Smart Sukuk in jurisdictions with clear and viable legal frameworks to support it,” clarifies Martin. “Take sukuk al-ijarah (lease based) as an example – an ijarah sukuk is only halal (permissible) if the true ownership of the underlying asset is legally transferred to the sukuk holders. And for a Smart Sukuk, it’s only halal if the government permits trading in cryptocurrency.”

Blossom’s Smart Sukuk supports issuance of the sukuk in local currency and eliminates the need for institutions to add cryptocurrency to their balance sheet.

man unloads fish from boatHi-res photo hereA worker unloads fishing transport boat. Indonesia is home to many large scale commercial fisheries that regularly seek financing to fund the purchase of boats and for repairs.

Not an ICO

Martin clarified that Blossom’s Smart Sukuk platform is neither an ICO nor will it allow ICO style fundraising. Sukuk financing generally represents fixed-length time bound investments that have a clear exit date, known as maturity. Over the term of the investment, investors receive payments based on the terms of the Sukuk, and at maturity, investors receive their principle back.

“It’s so completely and totally the opposite of most ICOs and even most plain equity funding rounds - in many of those cases, investors have little to no foresight into how they’ll ever get any money back, if ever. That’s fine if you’re a savvy venture capitalist or angel investor - but for the retail investor doing one or two deals it’s a horrible idea and quite literally a way to put proverbial your eggs in one very fragile basket.  There’s average, hard working folks pouring money into some “ICOs” that are literally just an idea, a wordpress website, and a PDF - and some of these are being marketed directly to the Muslim community. ”

A Sukuk by definition must have a clear profit generating activity, a clear exit point, and a reasonable expectation of a commercial return to the investors.

Smart Sukuk Denominated in Local Currency

“We’re using Ethereum as a way to collect and send international payments, as a ledger system to maintain the record of ownership, and as a technology for trading on global exchanges. We’re not issuing any sukuk denominated in cryptocurrency.” added Martin.  “Cryptocurrency is volatile and we discourage Muslims from making purely speculative investments. All Smart Sukuk will be based on real projects tied to productive economic activity.”

About Blossom Finance

Blossom Finance was founded in 2014 to increase the availability of halal financial products using technology. Since 2015, Blossom has been helping microfinance institutions in Indonesia raise funds from international investors to fund micro-businesses aimed at reducing regional poverty. Blossom’s Smart Sukuk helps institutions to raise cost-effective, Shariah-compliant financing from global investors using blockchain technology. Blossom Labs, Inc. is a US Delaware corporation.

Legal Disclaimer

Blossom Investments are not guaranteed or insured, and investors may lose some or all of the principal invested. Blossom is not a financial advisor and statements appearing on Blossom's website and communications from Blossom do not constitute financial advice. Historical Returns are not intended as a promise of future results. Investments may have negative returns. Individual portfolio results may be impacted by, among other things, the size and diversity of the portfolio, the exposure to any single Note, Beneficiary or group of Notes or Beneficiaries, as well as macroeconomic conditions. US Residents must qualify as accredited investor under Regulation D of the Securities Act of 1933.

For information about Blossom’s Smart Sukuk, visit: https://bossomfinance.com/sukuk

For more information about Blossom, visit: blossomfinance.com

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