An advisor to Goldman Sachs has defended the US bank's $2 billion Islamic bond programme against criticism it may contravene religious principles, in a controversy that could affect Western banks' ability to enter the Islamic debt market.
In October, Goldman registered the sukuk programme with the Irish Stock Exchange. It set up a Cayman Islands-registered special purpose vehicle, Global Sukuk Co Ltd, to issue a sukuk based on murabaha, a cost-plus-profit arrangement which complies with Islamic law.
Some analysts however have suggested Goldman might use the proceeds of the issue to lend money to clients for interest, which would be against Islamic law, and that the issue might not trade at par value on the Irish exchange, which would also contravene sharia law.
Asim Khan, managing director at Islamic finance advisory firm Dar Al Istithmar, said such speculation was groundless. "Bulge-bracket banks such as Goldman Sachs can bring to Islamic finance their sophistication and depth of experience in liquidity management and equity/quasi-equity investment, which can take Islamic finance closer to its true ideals, so long as they adhere to the generally accepted sharia principles," Khan said.
"So far there is no basis to speculate otherwise," Khan, whose London- and Dubai-based company advised Goldman on the sukuk, wrote in a column contributed to Reuters.
As the euro zone debt crisis poisoned conventional debt markets last year, several big Western banks considered raising money through Islamic finance, which is based on religious principles and bans the payment of interest and pure monetary speculation. The Arab Gulf, home to billions of dollars of Islamic investment funds, has been relatively untouched by the financial crisis.
HSBC's Middle East unit became the first Western bank to issue a sukuk last May with a $500 million Islamic bond carrying a maturity of five years. French bank Credit Agricole has said it is considering issuing an Islamic bond or creating a wider sukuk programme that could lead to several issues.
Unlike HSBC with its HSBC Amanah brand, however, Goldman does not have an established presence in the Islamic banking sector, and its entry into the market has caused controversy.
Mohammed Khnifer, an Islamic finance analyst in Saudi Arabia, wrote that Goldman might use the proceeds of the sukuk to fund conventional banking activities. He suggested the sukuk might trade on the Irish exchange at levels other than par value, which would be impermissible under sharia law, and that the underlying structure of the sukuk might not be murabaha but reverse tawarruq, which has been ruled unacceptable by some Islamic scholars as an effort to hide the use of interest.
In his column, Khan wrote that the prospectus clearly showed the proceeds of the sukuk would not be used to lend money to Goldman clients for interest.
"Goldman Sachs, as an investment bank and as a proprietary commodity trader, has invested billions of dollars in commodities and will use the murabaha commodities in its commodity trading business, which will partly replace the conventional funding with Islamic finance," he wrote.
Khan said the prospectus had informed investors that the sukuk should only be traded at par value, and had warned investors there was not expected to be a secondary market in the instrument.
He argued that the Goldman deal had a legitimate murabaha structure. "One would have to stretch one's imagination a bit too far to label such a vanilla murabaha transaction as a tawarruq," he wrote.
Khan also suggested Goldman's entry into Islamic finance could help the industry overcome obstacles hindering its expansion, including a shortage of tools to help banks manage their liquidity, and a lack of sufficient involvement by institutional funds.
"The benefits of a large investment bank's foray into Islamic banking could be significant," he wrote. Controversies over the permissibility of financial instruments, which can affect investors' willingness to put money into them, have characterised Islamic finance since it was born in its modern form in the 1970s. A range of scholars and industry bodies set product standards which are sometimes contradictory and act as guidelines rather than firm, enforceable rules.
Goldman has said its sukuk could be denominated in United Arab Emirates dirhams, US dollars, Saudi riyals or Singapore dollars. It has not disclosed a time frame for issuance, but has insisted that Islamic scholars have given the programme adequate certification that it complies with sharia principles.
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