Blockchain Based Smart Sukuk as Shariah Compliant Investment Avenues for Islamic Financial Institutions in Pakistan

Abstract

The biggest challenge for the Islamic banking industry in Pakistan is the scarcity of Shariah-compliant investment instruments and the absence of a lender of last resort (LOLR) facility for Islamic banks. Due to the problem of surplus liquidity, returns for Islamic banks in Pakistan are lower as compared to the conventional counterparts putting them at a competitive disadvantage with respect to their competitor conventional banks. Sukuk issuance is associated with a high cost of issuance and legal complexity, problems that could be solved by the application of blockchain technology. With the advent of cryptocurrency and developments around blockchain, technology experts, industry professionals along with Shariah scholars have been working to introduce FinTech in Shariah-compliant financing products and services. This research applies a qualitative approach. The study relies on primary data from interviews and secondary data from published sources, academic journals, government and private-sector reports, and public domain including newspaper articles, and websites. Interviews are conducted from blockchain technology experts along with banking \& commerce industry professionals. This study highlights financial instability, lack of financial education and absence of political will being the main reasons for low Sukuk issuance in Pakistan. This study proposes a low-cost smart Sukuk structure to address the liquidity problem of the Islamic banking industry in Pakistan. It is found that smart Sukuk issuance and transaction fees are much lower than the current Sukuk issuances and are expected to be more secure and marketable internationally. Blockchain-based smart Sukuk are practicable to solve the problem of standardization and huge issuance and maintenance cost for the Sukuk industry. The proposed structure could be adopted by governments and organizations to issue Sukuk promising transparent, economical, efficient, and reliable business transactions for both parties.