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Before I begin, let me clarify one thing. I’m not here to promote shitcoins.

For a lack of a better word, shitcoin is the technical term for cryptocurrencies other than Bitcoin. I’m pretty sure a Bitcoin maximalist came up with the term. It’s quite fitting. Even those who trade shitcoins refer to them as shitcoins.

This essay is about the technology that allows for digital and fractional ownership of real assets. Assets like real estate or commodities like copper, oil, gold. But we can also tokenize funds, businesses and investment products.

Tokenization isn’t new.

If you work in finance, you would’ve heard about it. A few big firms are taking the leap.

And so should players in Islamic finance.

But I’ve seen little talk about how tokenization can benefit Islamic finance. Real Islamic finance.

There are tons of Muslim-owned businesses that need alternative funding. They don’t want to touch interest-bearing debt. They don’t want to dilute their ownership in the business either by issuing equity.

So there’s an opportunity here.

Thanks to technology, raising capital will be easier. Investors will have access to more opportunities. Investment opportunities that are in line with the spirit of Islamic principles.

But before I talk about the benefits, let me explain tokenization.

What Is Tokenization

Tokenization is converting rights to an asset into a digital token on a blockchain network.

The process involves representing real assets like properties, gold, art etc. on a blockchain network. 

You can also tokenize intangible assets like copyrights, trademarks and patents.

A blockchain network is like a database. Just more secure. It should be tamper-proof. I say ‘should’ because it depends on the characteristics of the blockchain.

Bitcoin is a good example of a fully secure public blockchain. 

No particular person or group has control over the blockchain network (i.e. the database). Everyone in the network can add new data if everyone agrees. That means they’re in consensus.

You can also have a private blockchain. A company can have its own blockchain network to store its information. But everyone using that database is trusting the company.

So tokenization is taking something real (like a house) and giving it a digital identity on a secure database.

You’re probably wondering, what’s the point?

Let’s go through some key features of tokenization.

Fractional Ownership

Tokenization allows for fractional ownership of real assets. You can own a portion of it.

Take the example of a $1 million house. The owner of the house can issue 10,000 tokens worth $100 each. He can then sell a portion of these tokens. The buyers of these tokens would own a percentage of that house. 

Clearly, this is not workable in the real world. But with tokenization, you can divide real assets into smaller pieces.

Improved Liquidity

Liquidity is the ability to convert an asset into cash. How quickly can you sell something?

Stocks are very liquid. Houses, not so much. It usually takes a few months minimum to sell a house once you’ve decided to sell it.

If I wanted to sell my Apple stocks, I could sell those instantly (within business hours, of course).

Liquidity plays a big role in deciding what to invest in.

You often hear the term “liquidity premium” in finance. This is just another way of saying that the investor will receive a higher return on an investment that isn’t liquid.

Therefore, a private company will typically have a lower valuation than a public company if they are similar in every other way. 

Investors will ask for a discount given the private company doesn’t have liquid shares. That discount is the liquidity premium offered by the company selling its shares.

Tokenization can help solve this.

By tokenizing private companies, you can sell the tokens on an exchange. The tokens will be liquid.

They may not be as liquid as shares. Liquidity depends on the amount of buyers and sellers available in the market. But some liquidity is better than none. As more players join and trade the token, the more the liquidity will improve.

This goes beyond private companies. Imagine trading in highly illiquid assets like art, vintage cars, commercial real estate, etc. There are many possibilities.

Tokenizing these assets makes buying and selling them a lot easier. And that brings more liquidity. 

Reduced Transaction Costs

Tokenization will help standardise processes that are complex and time-consuming. When there are less middlemen involved and the manual processes are automated, costs go down. 

There will always be an element of regulatory oversight needed. You’ll still need lawyers and underwriters. But as the technology improves, the process is standardised, which should bring costs down.

Think also about selling the tokens. If you’re an investor in a private company and you want to sell your shares, you’ll have to employ brokers to find you a buyer. They’ll take a cut. You might then need lawyers to draft contracts to transfer ownership.

With tokenization, this will be a lot easier. Tokens are bought and sold on an exchange and that transaction proves the change in ownership.


You can program tokens with certain conditions. Whether that’s paying dividends (i.e. for a private company) or deciding where the tokens can be sold and to whom. All of this can be done with smart contracts.

Smart contracts are predefined actions, using algorithms that are executed when certain conditions are met.

A private company may have issued tokens and they link those tokens to the treasury wallet of the company. When the company earns a certain amount of profit, token holders receive a portion of it as dividends. That can be programmed using a smart contract.

Tokenization employs blockchain technology to increase the liquidity, compliance, and accessibility of real-world assets.

It unlocks more investable assets. That’s great for those looking to raise capital and those that want to invest capital.

The central idea behind tokenization is breaking something down into small, discrete units.

The investment bank, Citi, published a paper in March 2023 on this topic. It estimated that tokenization would be a $5 trillion market by 2030.

The private equity giant KKR, which manages around $500 billion, tokenized one of its private equity funds.

Private equity funds of this size deal with very large institutional investors. Think of pension funds, insurance funds, endowments, etc.

By tokenizing a fund, it becomes easier to reach smaller investors. These investors can exit their investment by liquidating their tokens in the secondary market. Without having to wait for the fund to exit its positions and return the funds to its investors.

So how can tokenization benefit Islamic finance?

Tokenization and Islamic Finance

If you’re Muslim, your investment world is restricted.

You can’t invest in certain sectors and you can’t invest in a sizable portion of the financial market: fixed income. These are interest-bearing investments. 

So you can invest in public markets by focusing on halal stocks and halal ETFs. You’ve also got crowdfunding platforms to invest in early stage start-ups on platforms like Cur8, WahedX as well as CrowdCube, Seedrs, and others.

It’s great to have the option to invest in start-ups, but you won’t invest most of your savings there.

What about the boring businesses with predictable cash flows? Pharmacies, dental clinics, restaurants, or other service-based businesses?

The most common investment amongst Muslims is real estate. It’s simple, it’s predictable. And over the long-term, it works. 

But there are many businesses out there doing well that are suitable to risk-averse investors.

These same businesses want to grow. They need capital other than traditional debt.

This is where tokenization can help.

Imagine you’re the owner of a private business. You own a chain of restaurants all over the UK. Your specialty is South Asian and Mediterranean fusion. It’s new. And it’s become popular. Customers can’t get enough and now everyone is referring to you as the better Dishoom.

You’re doing well. The food is good. The margins are good.

You notice another chain of restaurants that is growing well. Slightly different cuisine. But you realise they’re not optimised the same way you are. You have an edge as you own parts of the supply chain which lower your costs.

You take a closer look and run some calculations. The opportunity is obvious.

You know that by taking over their chain, the synergies will help unlock extra margins. It’s a straightforward decision.

You decide to acquire them.

You approach the owner to make an offer. You structure a deal where they can benefit from the upside you’re looking to add on. The owner’s impressed. They know they won’t be able to achieve similar results without you. So you both agree.

On one condition. That you buy 50% of the restaurant chain upfront. In cash.

That’s a hefty amount. You could use a chunk of your cash, but you were already thinking about covering other expenditures. New locations. Refurbishments. 

It’s not ideal.

What are your options to raise funding?

You could go to a bank. They’d be happy to finance such a transaction. But only with an interest-bearing debt.

No way.

How about raising equity in the business? Selling shares of your company?

That would work.

But how easy is it to get investors in a private restaurant business knowing that this company may never go public? What’s the exit strategy? How could they sell their shares?

You could always buy their shares. But it’s only an option. What if you never do?

This is where tokenization simplifies everything.

You can issue fractional ownership tokens for either the holding company or particular restaurants.

This is like giving shares in the holding or subsidiary company which owns a specific restaurant.

The process of tokenizing assets can be a lot easier. You standardise the onboarding process.

Making your assets accessible through tokenization makes it easier to raise financing. 

The investors will be happier knowing that they can sell their investment on an exchange. There’s no guarantee here. Liquidity will depend on the performance of the asset and interest in the business.

But here you are trading in an equity-like product.

This is one example. But it shows you how tokenization opens up investment opportunities for private companies. No matter the size.

Not only do Muslim investors gain access to more investment opportunities, but business owners have more funding options.

Tokenizing Shariah-Compliant Products

I also see an opportunity to make investment products more liquid and easier to access.

Private debt is an enormous market. It’s a $1.5 trillion market.

Private debt, or private credit, is any lending by institutions or investors directly to companies. Think of it as any non-bank loans.

Both small and large companies can access private debt. 

The public debt market is the corporate bond market. This is a whole other game and you typically need a bank to underwrite the investment.

But I want to focus on private debt.

There are a few companies out there who are tokenizing private debt issuance. You can automate investment processes to save time on compliance and subscriptions. You can reduce transaction fees, access a wider investor base and enable liquidity.

Private debt is not a liquid asset. Investors typically hold on to the debt until maturity.

By tokenizing it, you enable the investor to exit their investment by selling the token which represents an ownership stake in the private debt.

Of course, none of this is halal given we’re talking about private debt.

But it’s worth looking at seeing how we can apply this to innovative Islamic finance products.

Take, for example, a Musharakah. An investment partnership where partners share the profit and losses in a business venture. 

A good example is a profit participation note. I wrote about it here if you want a more detailed understanding. It’s an investment where the operator uses the funds to purchase raw goods and sells the finished product. The business operator and the business share the profits of this transaction.

Fairly simple.

The issue is that the onboarding process for such a PPN can be cumbersome. Especially if you’re looking to market this to multiple investors.

What if someone could standardise this?

Not only would this make the onboarding process easier. But having a secondary market in which investors could sell their stake in the PPN to other investors would make the investment more attractive.

You’re often taught that the most important element in investing is credit or default risk. What’s the likelihood that the company I invest in goes bankrupt?

That’s clearly a tremendous risk to consider.

But what’s nearly as important is liquidity risk. You only realise this once you take part in the market.

Many investors won’t invest in specific sectors or asset classes just because of liquidity. Even if the returns are attractive. Even if the risk of default is low.

There’s nothing quite like the safety of knowing that you can cash-out on your investment instantly. As you do with publicly listed shares.

So offering this on investments that aren’t liquid will only attract more investors.

Now tokenization doesn’t mean that these private assets will be as liquid as stocks. That’ll take time as interest grows, and the sector matures.

But some liquidity is better than none.

The company avoids interest-bearing debt and share dilution by opting for PPN financing.

They employ an investment boutique to structure the investment. They’ll assess the company’s financials. Put the contracts in place. Once the structure’s ready, they’ll market it to their investors.

Each PPN will be different. You can standardise them. But each note will be slightly different based on the business nature of the company issuing the PPN.

But once the investor buys the PPN, what can they do it with? It won’t be easy to sell this asset to another investor if they want to cash-out earlier. They could go back to the investment boutique and see if another investor is interested.

That’s a long process.

Instead, you tokenize the PPN and you have a digital record of the product. You can trade this token on a secondary market. The token holder will receive the profits shared with the company directly.

The company can pay out profits in Bitcoin or some other form of USD stablecoin as issued by Tether or Circle.

But tokenization doesn’t solve everything.

A human element is essential. You’re dealing with real physical goods. Proper audits and measures are necessary for the company to verify its profit and loss and give investors their fair share.

Tokenization won’t replace this. It just makes the process easier. It makes the investments more accessible.

Tokenizing a security like a PPN is one thing. But you can also tokenize private businesses as I’ve described above with the restaurant chain. 

As a small business that’s looking for funding, you might use crowdfunding platforms. But again, the shares bought aren’t liquid. They might restrict you from selling your shares outside their platform. 

By tokenizing them, you are standardising these shares. As an investor, you could sell your tokens (i.e. share ownership) on a regulated exchange. 

This is what it’s all about. This is what Islamic finance is all about.

It’s about making the real economy more accessible. 

The problem with our current financial system is over-financialisation. The world is trading securities that are so far removed from the real economy. 

The essence of Islamic finance is to finance real business trade. To finance the real economy.

Who powers the real economy? It’s the small and medium-sized businesses we see around us.

It’s about time we think of solutions to help these businesses grow.

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About Me

I manage a $100m private investment fund and I explore Islamic finance and economics through a personal lens. I help simplify financial markets from a Muslim perspective.

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