Can Tokenisation Make Islamic Finance More Transparent, Efficient and Shariah Compliant?

October 2, 2026 | | Finance, Shariah

  1. Introduction

Tokenisation has moved from discussion to practice. On 28 April 2026, Khazanah Nasional Berhad and the Securities Commission Malaysia (SC) priced Malaysia’s first tokenised sukuk. The issue was RM100 million with a one year tenor, under the Sukuk Danum programme, and was based on wakalah bi al istithmar (investment agency). A month earlier, the SC launched FIKRALab, an Islamic capital market innovation lab. Bank Negara Malaysia has also published a discussion paper on asset tokenisation in the Malaysian financial sector. In Dubai, the Land Department has linked property tokens to registered title deeds.

The industry now asks a fair question: does tokenisation make Islamic finance more transparent, more efficient and more Shariah compliant? This report answers each part clearly and states what Shariah boards and issuers should do.

  1. The Issue and the Key Question

A token is a digital record kept on a shared ledger. It stands for a right in an asset. The asset itself, such as a building, an aircraft or a receivable, stays in the real world. Its legal title is still governed by the land registry or by the law of the country where it sits.
The real problem in the sukuk market is older than the technology. Many sukuk today are asset based rather than asset backed (ISRA and SC, 2017). Investors depend mainly on the issuer’s promise to pay. The asset plays only a paper role, and legal title often does not move.

So the key Shariah question is simple: does putting an ownership right on a ledger change the Shariah position, or does it only improve the proof?

  1. Shariah Assessment

3.1 Using a ledger is allowed

The general rule in commercial dealings is permissibility unless something forbidden is involved. Keeping written records is encouraged in Shariah (Al Baqarah 2:282), not restricted. The International Islamic Fiqh Academy has also accepted that contracts may be concluded through modern means of communication (Resolution No. 52 (3/6)). A shared ledger is only a way of keeping records, so the technology itself raises no objection. Therefore, tokenisation is permissible as a recording tool. It is not a Shariah problem by itself.


3.2 A token is evidence of a right

In fiqh, a token is best treated as a certificate that evidences a financial right. It is closer to a certificate than to the property itself. Ownership arises through the relevant Shariah recognised transaction, while legal title and enforceability may depend on the applicable law and registration requirements.. Creating a token does not create ownership. It records it.
The right that the token evidences is a financial right. AAOIFI Shariah Standard No. 42 deals with financial rights and how they are exercised and transferred. AAOIFI groups financial rights into three types: personal rights, property rights and intellectual rights. Where the right is a liability owed by another person, it is a personal right. Where it is attached to a specific property, it is a property right. Where it relates to an intangible asset, it is an intellectual right. The holder owns the right, and the token is the evidence of it. The Shariah ruling on a token therefore follows the ruling on the right behind it.

The Shariah Advisory Council of the SC resolved in 2020 that digital tokens may be treated as property within the category of urud, and allowed their trading on registered digital asset exchanges under its conditions. That resolution addressed digital tokens in general. For an asset linked token, its value and its Shariah character come from the underlying right. It should therefore still be treated as evidence of that right, not as a separate asset standing on its own.


3.3 Better proof of ownership and possession

This is where tokenisation genuinely helps. Fiqh already accepts constructive possession, where possession is completed by enabling the right to the new owner rather than by only physical handling. This is set out in AAOIFI Shariah Standard No. 18 on Possession, and in Resolution No. 53 (4/6) of the International Islamic Fiqh Academy. A register that updates at the moment of transfer is stronger proof than a register that is reconciled from time to time.
Two conditions apply. First, the record only helps where the law recognises it, which is why models linked to an official registry are stronger. Second, better proof of ownership is not the same as ownership. If the transfer is not real, an accurate ledger only records that fact more clearly.

3.4 Real ownership and no guaranteed capital

The relevant Shariah requirements for sukuk are already addressed in established standards. Tokenisation does not change any part of this test. It can, however, make compliance faster to evidence and easier to verify.
AAOIFI Shariah Standard No. 17 defines sukuk as certificates of equal value representing undivided shares in the ownership of assets, usufructs or services. It does not allow debts owed as a liability to be securitised for trading. The AAOIFI Statement on Sukuk adds that, for sukuk to be tradable, holders must own the assets with all the rights and obligations of ownership. The manager must record the transfer of ownership in the sukuk books and must not keep the assets as his own. The same Statement does not allow a mudarib, partner or investment agent to undertake to buy back the assets at nominal value. The purchase may be at net asset value, market value, fair value, or a price agreed at the time of purchase. This is consistent with AAOIFI Shariah Standards No. 12 on Sharikah and No. 13 on Mudarabah, under which the partner or mudarib does not guarantee capital.

Resolution No. 178 (4/19) of the International Islamic Fiqh Academy states the same position. Sukuk holders bear the investment risk and the burdens of ownership. The manager is a trustee and does not guarantee value except in cases of transgression, negligence or breach of the agreed terms. Sukuk should not be redeemed at nominal value. AAOIFI Shariah Standard No. 5 on Guarantees adds that capital may not be guaranteed in trust based contracts, and that combining agency with a guarantee turns the arrangement into an interest bearing loan. Standard No. 46 treats the investment agent as a trustee on the same basis.


3.5 Trading tokens: the debt problem

If the pool behind the token is mostly debt, then selling the token means selling debt. The classical majority position is that debt may not be sold to anyone other than the debtor, because the seller cannot deliver it and the sale carries uncertainty (ISRA, 2016).
The finalised standards take a similar approach, although their thresholds differ. AAOIFI Shariah Standard No. 59 restricts trading in securities based on securitised monetary debts. Standard No. 21 governs mixed portfolios and generally allows trading where tangible assets and usufructs make up at least 30 per cent of the portfolio. Fiqh Academy Resolution No. 178 (4/19), applying the criteria of Resolution No. 30 (4/5), sets a stricter test:
  1. If the assets are still money, the currency exchange rules apply.
  2. If they have become debts, the debt rules apply and transfer is only by hawalah.
  3. If the pool is mixed, trading at an agreed price is allowed only where the greater part is assets and usufructs.
Issuers and Shariah boards should therefore state clearly which threshold they apply. The same resolution warns that permission to trade sukuk must not be used as a way to trade debts. Malaysia’s Shariah Advisory Council permits bay al dayn in the domestic market under conditions, which is a genuine difference of qualified opinion.

Tokens can move instantly across borders. This can carry an instrument out of the market whose ruling permits it and into one where it is not permitted. This risk is created by tokenisation itself. Transfer limits should therefore be built into the token itself, not monitored after the event.


3.6 Automation, correction and trust

A smart contract is a technological mechanism that executes predefined contractual instructions automatically when the specified conditions or triggers are met. The International Islamic Fiqh Academy has considered smart contracts, including how they are activated and terminated, in Resolution No. 230 (1/24). The Shariah status of a smart contract depends on the validity of the underlying contract, rights, assets and instructions encoded in it. Where these are Shariah compliant, the use of smart contract technology does not create a Shariah issue in itself.

However, the underlying asset or right must be validly owned and legally attributable to the token issuer or holder. The tokenised asset should also be subject to appropriate legal and regulatory verification, to prevent the tokenisation of another person’s property or of an invalid right. The structure should also allow correction where an underlying contractual error or Shariah issue is identified.


3.7 Efficiency

Tokenisation mainly improves efficiency after issuance:
  1. Transfers can settle almost immediately instead of over several days.
  2. Profit distribution to each holder can be automated.
  3. The register updates itself, which reduces reconciliation work between custodians, registrars and paying agents.
  4. Smaller denominations may widen investor access, subject to regulation.
Structuring costs change little. The issuer still needs the same contracts, legal opinions, valuation and Shariah pronouncement. Some costs may rise, because the Shariah board and auditors must now also review the code, and legal work is needed to connect the token to the official registry.

Efficiency is a commercial benefit, not a Shariah ruling. Faster settlement must not replace genuine transfer of ownership and possession, which remain the conditions set out in Sections 3.3 and 3.4.


  1. Conclusion and Recommendations

Tokenisation improves the record. It does not improve the ruling. A weak structure that settles in seconds is still a weak structure.

Summary of decisions

Question
Decision
Is using a distributed ledger allowed?
Yes. It is a recording tool and raises no Shariah objection in itself.
Does a token create ownership?
No. It is evidence of a right. Ownership comes from the contract and from the law.
Does it improve transparency?
Yes. Continuous ownership records give stronger proof of possession, where the law recognises the record.
Does it improve efficiency?
Yes, but mainly after issuance, through faster settlement, automated distribution and less reconciliation. Structuring costs change little, and code review may add cost.
Does it make a product more Shariah compliant?
No. Compliance depends on the contracts and the structure, not on the token. Tokenisation only makes compliance, or non compliance, easier to see.
What is the main Shariah risk?
Free secondary trading of pools that are debt only or mostly debt, which raises bay al dayn concerns across jurisdictions.

 

Recommendations

Rule on the structure, not the token. The pronouncement should cover the contracts, the transfer of ownership and any undertakings.
Make the documents authoritative. State clearly that the Shariah and legal documents prevail where the code and the contract differ.
Check the undertakings against the finalised standards. No repurchase at nominal value by a mudarib, partner or investment agent. Use net asset value, market value, fair value, or a price agreed at the time of purchase.
Build transfer limits into the token. This is essential where the pool is debt only or mostly debt. The offering documents should state which trading threshold is applied (AAOIFI or IIFA) and the applicable position on bay al dayn.
Keep pause, unwind and correction powers. These powers should be exercised by the issuer or trustee on the decision of the Shariah board, in line with the governance roles in the Bank Negara Malaysia Shariah Governance Policy Document (2019). Make them auditable and record them in the documents.
Review by the Shariah board. The Shariah board must review all contracts and oversee implementation at every stage. For a tokenised product, this means checking that the deployed code matches the approved ruling.
Link the token to a legal registry where possible. Where this cannot be done, disclose plainly that the ownership claim rests on contract alone.
Engage the regulator early. Malaysia offers FIKRALab and Bank Negara Malaysia’s Digital Asset Innovation Hub.
The governing principle is well known: in contracts, regard is given to intent and substance, not to words and forms. Tokenisation changes the form of the record. Whether it changes the substance is a decision the industry makes, not one the technology makes for it.
 

  1. References

Accounting and Auditing Organization for Islamic Financial Institutions. (2008). Shariah Board statement on sukuk. AAOIFI.
Accounting and Auditing Organization for Islamic Financial Institutions. (2015). Shariah standards. AAOIFI. (Standards No. 5 Guarantees; No. 12 Sharikah; No. 13 Mudarabah; No. 17 Investment Sukuk; No. 18 Possession (Qabd); No. 21 Financial Paper; No. 42 Financial Rights and How They Are Exercised and Transferred; No. 46 Al Wakalah bi al Istithmar)
Accounting and Auditing Organization for Islamic Financial Institutions. (n.d.). Shariah Standard No. 59: Sale of debt. AAOIFI.
Bank Negara Malaysia. (2019). Shariah governance [Policy document]. Bank Negara Malaysia.
Bank Negara Malaysia. (2025). Discussion paper on asset tokenisation in the Malaysian financial sector. Bank Negara Malaysia.
Dubai Land Department. (2025). DLD launches MENA’s first tokenised real estate project through the Prypco Mint platform. https://dubailand.gov.ae/en/news-media/dld-launches-the-mena-s-first-tokenized-real-estate-project-through-the-prypco-mint-platform
International Islamic Fiqh Academy. (1988). Resolution No. 30 (4/5): Muqaradah bonds and investment certificates. IIFA.
International Islamic Fiqh Academy. (1990). Resolution No. 52 (3/6): Conclusion of contracts by modern means of communication. https://iifa-aifi.org/en/32402.html
International Islamic Fiqh Academy. (1990). Resolution No. 53 (4/6): Qabd (taking possession): Forms and their rulings. IIFA.
International Islamic Fiqh Academy. (2009). Resolution No. 178 (4/19): Islamic sukuk (tawriq): Contemporary applications and trading. https://iifa-aifi.org/en/32984.html
International Islamic Fiqh Academy. (2019). Resolution No. 230 (1/24): Smart contracts: Activation and termination modi operandi. https://iifa-aifi.org/en/5964.html
International Shariah Research Academy for Islamic Finance. (2016). Islamic financial system: Principles and operations (2nd ed.). ISRA.
International Shariah Research Academy for Islamic Finance and Securities Commission Malaysia. (2017). Sukuk: Principles and practices. ISRA.
Khazanah Nasional Berhad. (2026, April 28). Khazanah leads Malaysia’s first tokenised sukuk pilot in collaboration with the SC. https://www.khazanah.com.my/newsroom/press-releases/khazanah-leads-malaysias-first-tokenised-sukuk-pilot-in-collaboration-with-the-sc/
Securities Commission Malaysia. (2020). Resolutions of the Shariah Advisory Council of the SC. https://www.sc.com.my/development/icm/shariah/resolutions-of-the-shariah-advisory-council-of-the-sc
Securities Commission Malaysia. (2026, March 26). SC launches ICM Innovation Lab to advance Maqasid al Shariah driven Islamic capital market innovation. https://www.sc.com.my/resources/media/media-release/sc-launches-icm-innovation-lab-to-advance-maqasid-al-shariah-driven-islamic-capital-market-innovation