Goldman Sachs Group Inc., the fifth biggest U.S. bank by assets, has become entangled in a debate about how Shariah compliant its $2 billion Islamic bond program is, which may diminish the allure of Islamic debt.
Goldman Sachs' sukuk program, blessed by eight of the world's top scholars, is criticized by some Islamic advisers for not ensuring the debt will be traded at par value as mandated by Islamic law. Advisers including Riyadh-based Mohammed Khnifer of Edcomm Group Banker's Academy in New York and Dubai-based Harris Irfan at Cordoba Capital have also said it's unclear on how Goldman will use the funds it raises.
The debate highlights the struggle of Islamic finance's standard-setting bodies to formulate rules that apply globally. Companies and governments aren't bound by the regulations set by organizations including Manama-based Accounting & Auditing Organization for Islamic Financial Institutions and Kuala Lumpur-based Islamic Financial Services Board.
“The industry needs to welcome key global financial institutions if it wants to strengthen and further entrench Islamic finance globally in order for it to become a viable and competitive alternative,” Rizwan Kanji, a Dubai-based debt capital markets partner at King & Spalding LLP said in a telephone interview Dec. 15. “That said, new entities looking to Islamic finance as a source of financing should work hard to answer queries by the Islamic finance community.”
Islamic Bond Demand
Islamic bond sales, which jumped 68 percent to $26 billion in 2011, are still below 2007's record $31 billion and are dwarfed by the $764 billion in bonds sold globally this year. Shariah restricts investors to transactions based on the exchange of assets rather than money alone because interest payments are banned.
Goldman Sachs set up a sukuk program based on a so-called commodity murabaha structure, or a cost plus mark-up transaction, that was approved for listing on the Irish Stock Exchange by the Central Bank of Ireland in October. Murabaha certificates can only be bought and sold at par value because they represent a future claim on the underlying assets.
“The commodity murabaha structure is already under fire from much of the Islamic community who consider it a shallow attempt to mimic conventional debt structures, and using such proceeds to fund conventional banking activities is ludicrous,” Irfan, managing partner of Cordoba Capital, an Islamic finance advisory company, said in an e-mailed response to questions Dec. 7.
Edcomm's Khnifer, a sukuk structurer and strategist, drew parallels between Goldman Sachs' Islamic bond structure and the reverse Tawarruq contract, which was banned in 2009 by the Jeddah-based unit of the 57-member Organization of Islamic Cooperation. International Islamic Fiqh Academic hasn't deterred issuers in Malaysia from using Tawarruq.
He also says Goldman's program doesn't ensure the commodity murabaha certificates are only traded at par, as per shariah law, especially since the program is listed on the Irish bourse.
Goldman Sachs says it has done its due diligence. The bank is “entirely confident” in the certification of its program as Shariah compliant, New York-based spokesman Michael DuVally said in an e-mail Dec. 7.
The bank, which hired Dubai-based Islamic finance advisory Dar Al Istithmar Ltd. to help set up the program, said it plans to use the funds it raises ”for its general corporate purposes and to meet its financing needs,” according to details offered in the program. It didn't specify whether the money would be used in compliance with Shariah law, which would prevent it from paying interest and investing in businesses associated with gambling or alcohol.
Scholars involved in overseeing the sukuk program deemed it to comply with Shariah guidelines, Chairman of Dar Al Istithmar's Shariah board, Hussain Hamed Hassan, said in a Dec. 19 e-mailed statement. Hassan sits on more than 15 boards, including Dubai Islamic Bank PJSC. Additional scholars mentioned in Goldman Sachs' program include Mohammed Elgari and Sheikh Abdullah Bin Sulaiman Al Manea.
The sukuk structure is “a Murabaha, pure and simple,” Asim Khan, London-based managing director and head of structuring at Dar Al Istithmar, said in an e-mailed response to questions. A listing on the Irish Stock exchange would offer tax benefits, added Khan, whose said his comments reflect his own views rather than those of his company.
With Islamic bond sales increasing globally, investors may yet overlook the controversy and buy the bonds. South Africa invited banks Dec. 6 to submit proposals for the sale of its first Islamic bond, and Senegal plans to start investor meetings before year-end for the possible sale of sukuk.
Appetite for Goldman
“There will be an appetite from the market as Goldman Sachs is still one of the largest financial institutions in the world,” said Hakim Azaiez, head of capital markets in the Middle East and North Africa at London-based Dinosaur Securities. Still, “if its main aim is to achieve lower funding costs through this deal, then this won't offer much value for investors as there will be comparison with its conventional bonds,” he said in an e-mailed response Dec. 19.
The yield on Goldman Sachs' 5.375 percent dollar bonds maturing March 2020 jumped 88 basis points in 2011 to 5.79 percent today, according to Bloomberg prices. The average yield on Islamic bonds in emerging markets has fallen 65 basis points so far this year to 4.09 percent yesterday on the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The debt returned 6.7 percent in 2011, compared with a loss of 0.1 on Goldman Sachs' debt.
The yield on Dubai government's unrated 6.396 percent sukuk maturing November 2014 dropped 59 basis points so far this year to 5.98 percent today, lowering the extra yield investors demand to hold Dubai's sukuk over Malaysia's 3.928 percent debt maturing in June 2015 26 basis points in the period to 312, according to data compiled by Bloomberg.
“We got ourselves into this fine mess, and have no one else to blame,” Safdar Alam, chief executive officer of Manchester, U.K.-based Solum Asset Management, said in an e- mailed response to questions Dec. 15.
On the one hand the Islamic finance industry encourages issuers to use structures as debt instruments “in clear contradiction of one of the most prominent facets of our industry -- the prohibition of Riba” or interest, he said in an e-mailed response to questions Dec. 15. “Then on the other hand we disagree with how some entities use this product, because it is not ‘right' or ‘good', according to a definition of those words I am not familiar with.”