London - A controversial plan by Goldman Sachs to issue an
Islamic bond has ignited a wider debate on whether conventional banks in the
West should be allowed to engage in Islamic finance.
At a major conference of Islamic scholars and bankers in
London this week, much of the public and private discussion was devoted to
whether growing Western interest in Islamic finance could damage the industry
by compromising its religious principles.
Some participants argued investment banks such as Goldman
should be banned from issuing Islamic bonds, or sukuk, because the funds they
raised could help to finance other parts of their business that did not comply
with sharia or Islamic law.
"A conventional bank, with the exception of
multilateral development banks like the World Bank and the Asian Development
Bank, should not be allowed to issue sukuk," said Badlisyah Abdul Ghani,
chief executive of CIMB Islamic, the Islamic unit of Malaysia's second-biggest
bank CIMB Group.
"The basic principle of Islamic finance is that you
should only finance activities that are consistent with sharia, and
conventional rib (interest) is not," he told Reuters on the sidelines of
the Euromoney Islamic Finance Summit.
Other participants said the industry could not bar
conventional banks and should focus instead on ensuring that each of their
Islamic transactions complied with sharia law.
"The fact that these sukuk are issued by Goldman Sachs
or by another Western bank really makes no difference whatsoever as far as
judgement of sharia is concerned," Mohamed Elgari, a prominent Islamic
scholar, said during a panel discussion.
"An institution has no religion and therefore cannot be
judged on religious grounds. Our judgement is always on the structure of the
transaction, and whether it is permissible or not and had the necessary sharia
Financial crisis fallout
The debate could affect Western access to a fast-growing
area of the financial world. Estimated at over $100bn, global sukuk issuance is
still dwarfed by trillions of dollars worth of conventional bonds. But Western
banks are becoming more involved in Islamic finance as its pool of wealthy,
conservative investors from the Gulf and southeast Asia makes it a stable
source of funds during the global financial crisis.
HSBC's Middle East unit became the first Western bank to
issue a sukuk last May with a $500m, five-year Islamic bond. France's Credit
Agricole said last October it was considering whether to issue a sukuk.
Goldman's sukuk became controversial partly because for many
investors, the US investment bank embodies aggressive, sophisticated Western
It announced in October that it planned to issue a sukuk
worth as much as $2bn based on murabaha, a structure that instead of interest -
banned by Islamic principles - uses a cost-plus-profit arrangement to pay
Some Islamic finance analysts questioned whether the
underlying structure of the sukuk was really murabaha, and suggested Goldman
might use the proceeds of its sukuk to fund interest-based banking activities.
They also said the sukuk might violate a ban against pure
monetary speculation if it traded between investors on the Irish Stock
Exchange, where it would be registered, at levels other than par value.
The controversy has put the top authorities of Islamic
finance in a difficult position. Big Western banks such as Goldman could help
the industry grow by providing trading liquidity, trained personnel and access
to Western investors. But the credibility of the industry could suffer if it is
perceived to be manipulated by Western institutions.
Asked about the participation of Western banks, a top
official of one of the international bodies which sets standards for the
industry replied: "That's a tough question - there is a sharia-compliant
"It requires a seriousness of purpose and respect of
Islamic finance, and if those two are not there, I am not sure how they would
participate," said the official, declining to be named because of the
sensitivity of the issue.
He noted that Malaysia's central bank, for example,
stipulated Islamic banking activities could only be transacted by a licensed
Islamic bank. But he added that this should not exclude Western banks from all
involvement in the industry.
"Western banks can certainly participate in terms of
underwriting and helping in structuring the products."
Most participants at the conference said there was unlikely
to be any sustained, concerted push within the industry to exclude conventional
or Western banks from areas of Islamic finance. Some big Western banks, such as
HSBC, already operate well-established Islamic arms offering a range of
Any attempt to exclude conventional banks could also be
thwarted by the industry's decentralised structure.
Bodies such as the Malaysia-based Islamic Financial Services
Board and the Bahrain-based Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI) set standards which they hope banks will follow,
but they cannot impose rules; that is up to national regulators in each
Ultimately, therefore, the success of Islamic financial
products offered by Western banks is likely to come down to whether investors
choose to buy them. The Goldman case suggests they will.
Banking sources in the Gulf told Reuters this week that
Goldman, which insists its planned sukuk obeys Islamic principles and will not
be used to raise money for interest-based activities, was talking to potential
Saudi Arabian buyers and was likely to have no problem in attracting enough
A copy of the fatwa or Islamic ruling behind the Goldman
sukuk, which was seen by Reuters, showed five sharia scholars had signed it.
The AAOIFI's guidelines stipulate that at least three scholars advising on a
bond programme should approve it in writing before issuance.
However, the Goldman controversy could cause conventional
banks to take more steps in future to allay potential concerns over whether
they are following Islamic principles.
Aznan Has, one of the scholars who signed the Goldman fatwa,
said there were no sharia-related problems with the sukuk. The intention to
list on the Irish exchange is purely for tax purposes, he said. But he added
that Goldman should consider more measures to address doubts.
"I personally think the issue now is what is the
mechanism to ensure that it is not traded, and even if it is traded, that it's
traded at par, and they have to come up to us with a mechanism for that,"
he told Reuters.
He said Goldman might issue an additional or complementary
prospectus to address this aspect and describe how it would ensure proceeds of
the sukuk were only used for sharia-compliant purposes. Goldman might also
agree to issue a letter to its board of sharia scholars whenever it used the
proceeds, or agree to quarterly audits, he added.
"If they can put all the mechanisms in there, then
there shouldn't be any problem," said Has. "The murabaha is not a new
one - there is nothing new in the structure."
Another scholar, Sheikh Edam M Ishaq, said the Goldman case
might lead to institutional reforms in the industry and closer scrutiny of
sukuk issues in general.
"There must be some regulatory body to monitor and
ensure the compliance of these issues, otherwise sooner rather than later the
attraction of sukuk as Islamic liquidity management instruments will lose a
lot," he said.