Utilizing blockchain technology for post-trade securities settlement : a framework for Islamic capital markets in the GCC region

Financial digital innovations have attracted the attention of millions. Over decades, innovations have contributed significantly to the evolution and development of financial markets changing the ways how financial institutions interact with each other. Currently, market players predict that new technology such as blockchain could change the market and particularly the securities market. This study presents a framework for post-trade securities settlement utilizing blockchain technology for the GCC region with particular reference to the Islamic capital markets. To achieve this goal, the qualitative research design was adopted to specifically examine the challenges in the current post-trade securities settlement in Islamic capital markets with two unique case studies from Saudi Arabia and Bahrain. The study finds that the main issues are limitation in operating hours, the involvement of unintegrated multiple intermediaries, and associated high costs. From the Sharı̄‘ah perspective, the current practice of contra trade is considered unlawful and therefore the profit generated from such activities is not acceptable. Further, the research finds that blockchain based on the distributed ledger technology (DLT) with no centralized authority could enhance the speed of current securities clearing and settlement process by cutting down the number of intermediaries and improving the reconciliation process. Apart from that, blockchain technology will provide a unique database of recorded listed securities and will allow for real-time tracking of the chains of ownership and successive ownerships of listed securities. Additionally, the system enables the immediate, final and simultaneous transfer of funds and securities without limitation in working hours, thus solving the Sharı̄‘ah issue of the current practice of contra trade. From the legal perspective, the research finds that the technology will fit into the current legal structure of the GCC region with little amendments. With the political will on the part of the GCC governments for digitization, particularly the two jurisdictions considered in this study, it is expected that the region would adopt blockchain technology for post-trade securities settlement to enhance market practices.