* Programme approved by 10 scholars
* Advisor says no need for further debate
* Industry unlikely to switch from murabaha
* Secondary market trading risk not new
* Still unclear when Goldman may issue sukuk
By Bernardo Vizcaino
DUBAI, March 29 (Reuters) - Dar Al Istithmar, the advisor to Goldman Sachs' planned $2 billion sukuk programme, said it had finished obtaining the approval of Islamic scholars for the issue and that the next move was up to Goldman.
"The ball is in their court," Geert Bossuyt, chief executive of Dar, told Reuters on Wednesday, adding that the programme had been approved by 10 scholars, which was more than enough, and that the structure of the sukuk had been debated sufficiently.
Goldman's plan to become one of the first top Western banks to raise money through Islamic bonds, announced last October, has attracted controversy in the industry, and the bank has not so far proceeded with the plan.
Some analysts have suggested Goldman might use the proceeds of the sukuk 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.
Bossuyt said, however, that the approval of 10 scholars - the normal practice for Islamic financial instruments is to obtain the endorsement of three to five scholars - meant there was no need for further debate on the issue.
Scholars endorsing the Goldman sukuk include Dubai-based Sheikh Hussein Hamed Hassan and Malaysia-based Aznan Hasan, two of the industry's most experienced and respected figures. Both belong to Dar's five-member sharia board, which Sheikh Hussein chairs.
Goldman has also been criticised for naming in its prospectus at least three Islamic scholars as potential advisors on the sukuk even though they had not responded to it. One of them, Malaysia-based Daud Bakar, told Reuters this was "unprecedented, unprofessional and unethical".
Goldman, which has insisted its sukuk meets all necessary criteria and that it has acted properly, has not said when it may issue the debt. Gulf banking sources told Reuters last month that Goldman was in talks with potential Saudi investors about the sukuk and was likely to have no major difficulty in selling it. A Goldman spokesman declined to comment on Thursday.
The proposed sukuk is based on a murabaha structure; investors' money is used to buy commodities that are then sold by a special-purpose vehicle to the issuer of the sukuk at cost plus an agreed mark-up.
Bossuyt said the scholars had established that the Goldman programme was a valid example of the murabaha structure, similar to transactions done in the past by other issuers in places such as Saudi Arabia. Some supporters of Goldman believe it is being targeted by critics simply because it is such a prominent U.S. investment bank, and that accusations against it could also have been levelled against past deals which did not spark controversy.
Murabaha has been criticised by some scholars for mirroring conventional finance too closely; the mark-up resembles interest and in some cases is even based on a conventional interest rate.
Islamic banks rely heavily on murabaha, however; their balance sheets are often comprised 30 to 50 percent of murabaha-related transactions, according to data from the Islamic Banks & Financial Institutions Information System. So banks have little incentive to switch to another structure.
"Murabaha is the most difficult product to begin with. A true Islamic solution would call for a total overhaul of the economic model, and that is in no way happening in the short- (and probably) medium term," said a senior Islamic banker in London.
The risk of murabaha sukuk trading at levels other than par is also not confined to the Goldman sukuk.
This month's filing for U.S. bankruptcy protection by Bahrain investment house Arcapita, ahead of the maturity of a $1.1 billion syndicated murabaha facility, highlighted the risk. A group of distressed-debt hedge funds are listed as creditors even though they were not present during the 2007 placement.
It is unclear whether they entered the facility through an over-the-counter transaction or a sharia-approved mechanism. The current murabaha was partly used to refinance a pre-existing, $210 million murabaha sukuk issued in 2005; that deal incorporated a sharia-approved trading mechanism, but public documentation does not show whether that mechanism was incorporated into the 2007 refinancing as well.
Arcapita said at the time that the financing would be used for "general corporate purposes" - language identical to Goldman's prospectus, which gave the same explanation for its sukuk.