Goldman Sachs is facing obstacles to the launch of its first Islamic bond, with some experts warning its structure might breach sharia law.
The bank announced in October that it would offer a $2bn sukuk, securities designed to comply with Islamic law forbidding usury, via a Cayman Islands-registered vehicle listed on the Irish Stock Exchange.
The exotic offering would be the first foray into the market for Goldman, which enlisted Dar Al Istithmar Limited, a UK-based Islamic finance consultancy, to advise it on the structure of the sukuk and check its compliance.
But other experts say the offering may flout the rules. Mohammed Khnifer, a Saudi Arabia-based sharia adviser, said there were at least three “flaws” in the structure that he believed would disqualify the offering from sharia compliance.
First, the prospectus suggested that underlying assets used in the sukuk could be sold to a third party; second that the funds raised could be directed to Goldman itself; and third that there was no guarantee the securities would trade at par. Any of those might breach the complex rules required to be compliant.
Lawyers who structure products to comply with Islamic law warn that, whatever the merits to the scholarly debate, investors may be deterred by the doubts. “Goldman can list this programme on the Irish Stock Exchange, but that does not mean they will get the buyers,” said one lawyer who specialises in the field. “They may well find there is not much demand because of the widespread doubts over the issue in the market.”
Goldman said: “We are entirely confident in the certification we received that our programme is in compliance with sharia law.”
Instead of a conventional bond offering, Goldman set up a vehicle in the Cayman Islands that will sell certificates to investors and use the funds to buy commodities. According to the prospectus, Goldman will buy the commodities from the Cayman vehicle with deferred payments. These then flow back to the original certificate holders, aping a bond yield without being pure interest.
Asim Khan, managing director at Dar Al Istithmar, hit back against the doubters, saying: “This particular transaction has been vetted and approved by various scholars [who are] very well known, very well reputed.” He said potential investors were also comfortable with the deal and said the negative commentary was ill-informed.
He said each of the concerns put forward by Mr Khnifer misconstrued the transaction. For example, Goldman’s other investment activities were irrelevant. “I can go to a bar and have an orange juice knowing that the bar is a totally non-sharia compliant entity but the transaction between me and the bar is totally sharia compliant,” said Mr Khan. “I got orange juice and I paid for orange juice.”
He added that Goldman would make use of the commodities and was not just flipping them to the original seller to create the illusion of a sale. And he said that the listing on the Irish Stock Exchange was for regulatory and tax purposes – scholars and potential investors did not anticipate a secondary market.
In its prospectus, Goldman advises that “as with any sharia views, differences in opinion are possible”. It says that its advisers say the certificates can only be traded in the secondary market at par value but investors should “make their own determination as to the future tradeability of the certificates on any secondary market”.
There has been $22.7bn of sukuk debt issued globally so far this year, the most since before the financial crisis, according to Dealogic. Issuance peaked in 2007 when $27.2bn was issued.