* Western banks increasingly interested in sukuk
* But controversy could affect their entry into sector
* Advisor mounts detailed defence in Reuters column
* Says funds will not be used for interest-base lending
* Argues Goldman's entry could help solve industry's
By Andrew Torchia
DUBAI, Jan 2 An advisor to Goldman Sachs
has defended the U.S. 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
"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. (For the full
column, click on ).
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
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
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
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
"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,
Goldman has said its sukuk could be denominated in United
Arab Emirates dirhams, U.S. 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.