Loading...
See More

Goldman adviser defends Islamic bond scheme

Jan 02 2012 14:06 Reuters

Related Articles

Goldman Sachs posts deeper Q3 loss

Goldman slumps as CEO retains lawyer

EU probe targets global banks

Goldman Sachs posts steep profit loss

Investments into Facebook spark probe

Goldman issues R1.25bn SA bond

 
Dubai - An adviser to Goldman Sachs has defended the US bank’s $2bn 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 eurozone 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 $500m 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 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 insisted Islamic scholars have given the programme adequate certification to make it compliant with sharia principles.
NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
1 comment
Add your comment
Comment 0 characters remaining
 

Company Snapshot

We're talking about:

Small Business

Retailers of any shape and size can now unlock the power of mobile transacting.
 

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...
Loading...