Security tokens
There is a popular adage commonly used by all and purportedly said by Heraclitus, a pre-Socratic era Greek philosopher. It is “The only constant in life is change”. Are you ready if I prove it wrong?
There is one constant in this world which has not changed, and it is not the ‘change’. The constant that I would like to draw your attention to, and which has not changed a bit in the last 14 centuries, is the set of Islamic financing principles. The phenomenon of Shariah principles being ‘cast in stone’, having remained constant in the fast-changing world, is a reality the world is now coming to notice and admire.
But why should this be a good thing that the Shariah principles on handling money and finance have not changed with time? Does it mean Islamic finance is primitive and does not fit in the modern day and age when the banks and financial institutions are churning out modern products and services for the customers?
To the contrary, the Islamic financing and investment principles are everlasting and always ahead of time. At the same time, they are flexible to be applied for developing any contemporary product without conceding any of its principles. The proof of the pudding is in the successful run of the Islamic banks and financial institutions which have started to give conventional banks a run for their money.
In fact, contrary to the conventional financial institutions which only care about increasing the shareholders’ value, by virtue of the Shariah supervisory board which applies the centuries-old values, the Islamic banks are required to care for all parties viz. the shareholders as well as the depositors and the customers who are in need of funds.
As I had earlier quipped, whereas in conventional financial institutions the odds are always heavily staked against the borrower, in Islamic financial institutions, these are evenly distributed among the shareholders and customers.
Why have I laid down the above prelude? Well, so that I can describe to you another fascinating example of Islamic financing principles being constant and at the same time flexible to the changing world while bearing the substance to remain relevant and effective for all ages — until doomsday.
In the last few articles, I have written about the not-so-old conventional innovation in the shape of REITs and how successfully the concept of sharing property ownership has been embraced by the Islamic finance industry to the utmost delight of the Islamic investors who can now invest in Islamic REITs.
In the same way, today I will explain to you another conventional innovation which is slowly but surely gaining ground and has all the ingredients to perfectly gel very well with the Islamic finance infrastructure. It is the security token or non-fungible token or simply NFT.
I have discussed that real estate investment has traditionally been hardcore and illiquid and not the retail investors’ domain since it requires big-ticket investment and a long holding period.
Also, as mentioned by me earlier, traditionally the real estate and stock markets have been at odds for decades. One market’s gain is the other’s loss. However, REIT funds bridged this gap to some extent since they invest in properties and is also listed and traded on the bourses.
Hence, to some extent, REITs were able to come to the rescue of retail or household investors desiring to seek stable real estate returns. Nevertheless, the investors had to become the REIT entity’s shareholders to be able to benefit, but the shares are not always available at the desired price. Also, the REIT entity is not authorized by the regulatory authorities to keep increasing the share capital frequently.
There is another way to benefit from REITs without being a shareholder. It is by investing in the bonds or Sukuk issued by the REIT entity. Nevertheless, this is the area for institutional investors and pension funds, etc, since the REIT operators would not want to deal with a huge number of investors. They have the option to put a minimum investment which they always use. Also, there are considerable costs involved in dealing with retail-sized investments.
This limitation is needed to be addressed through the technologically disruptive approach so as to bring in a massive number of retail investors to enjoy the secure real estate returns, away from the wild swinging cryptos.
The new disruptive approach is the fractionalization of the ownership of a pool of assets through the use of modern financial technology or fintech. But how? Come back next week to know the answer.
The purpose of this educative series and the article is not to hurt any religious or commercial sentiments either consciously or even unwittingly.
Sohail Zubairi is an Islamic finance specialist and AAOIFI-certified Shariah advisor and auditor. He can be contacted at sazubairi1979@gmail.com.
Next Week: Discussion on the other aspects of Islamic asset management.
