When news of Goldman Sachs’ US$2 billion Sukuk first emerged, the market was almost euphoric in its reaction. Finally, the deal seemed to say, an American banking giant has recognized the merits of raising money Islamicly. It was hoped the deal would help to showcase the Islamic finance industry, which despite having topped US$1 trillion in value remains dwarfed by its conventional counterpart, especially in western markets.
However, the deal was quickly thrown into controversy, as Islamic Finance news was first to report, following questions raised over the Shariah compliance of the transaction.
The market has subsequently learned that some of the Shariah scholars identified by Goldman Sachs in its Sukuk prospectus as expected to sign off on the deal’s compliance are not necessarily interested in being involved with the transaction.
Although both Goldman Sachs and Dar Al Istithmar (DI), the Shariah advisor for the deal, have reiterated their confidence in the Shariah compliance of the transaction, it seems their actions, or the lack of, could speak louder than their words. Following the announcement of the Sukuk in October last year the market has seen little progress, apart from the registration of the base prospectus with the Irish Stock Exchange (ISE).
With the Islamic bond market currently experiencing a bull run – including the issuance of the world’s largest ever Sukuk and Saudi Arabia’s first sovereign Sukuk in the second week of January – this could be the perfect opportunity for Goldman Sachs to put its money where its mouth is.
But whatever happens with the deal, rumblings of discontent among the Shariah compliant financial community have already been reported, with rumored concerns that the transaction has put Islamic finance in a bad light.
Delayed reaction
To recap: Mohammed Khnifer, an expert in Islamic finance and Sukuk structuring, raised concerns in November 2011 that the Sukuk was structured as a reverse Tawarruq, which is ruled impermissible by the International Council of Fiqh Academy. The report also questioned the use of the Sukuk’s proceeds and its trading (see IFN Vol. 8, Issue 47).
The bank’s initial reaction was apparently to lay low. Unlike most organizations placed under the media spotlight (think UBS’ quick response to its US$2.3 billion rogue trading scandal) Goldman Sachs remained tight-lipped on the matter of its Shariah compliance, before commenting to Islamic Finance news in the middle of December last year that it was “entirely confident” in its program’s compliance to Shariah law.
By remaining silent, however, the bank allowed room for further criticism of its plans. Harris Irfan, the managing partner of Cordoba Capital, was in December reported as saying that: “The commodity Murabahah structure is already under fire from much of the Islamic community, who consider it a shallow attempt to mimic conventional debt structures, and using such proceeds to fund conventional banking activities is ludicrous.”
Yet through it all, Goldman Sachs’ and Dar Al Istithmar’s stance has remained firm, with both parties standing by their confidence in the program’s compliance. The question is, therefore: why the delay in response, given the tumult in the Islamic finance community over the deal?
Now, already faced with industry uproar and accusations of giving Islamic finance a bad name, Goldman Sachs is taking further flak on the back of new reports alleging that three Shariah scholars, named in its prospectus as expected to endorse its Sukuk, have not in fact responded to its request. The scholars include Dr Daud Bakar, the president and CEO of Amanie Business Solutions; Sheikh Abdulla Sulaiman Al Manea, the deputy chairman of the Shariah board at AAOIFI; and Dr Mohamed Ali Elgari, a professor of Islamic economics; as well as two unidentified scholars who have reportedly expressed shock and concern over the listing of their names in the prospectus.
Time for damage control?
Three prominent individuals in connection to the Goldman Sachs deal – namely Geert Bossuyt, the CEO of Dar Al Istithmar; Asim Khan, its managing director and head of structuring; and Ali Abbas Zaidi, the vice president and executive director of fixed income, currency and commodities at Goldman Sachs in Dubai – are old hands and colleagues, having all previously worked together in the Islamic finance department at Deutsche Bank.
Boosuyt was the global head of Deutsche’s Islamic business until 2009, based in Dubai; while Asim was a vice president at Deutsche Bank in London until 2008; and Ali was the global head of Islamic sales at the bank, also up to 2009, also in Dubai. Could these three, having already worked together on key industry transactions at Deutsche, put their heads together to solve Goldman Sachs’ current conundrum? Perhaps this is similar to structures used when together at Deutsche?
Whatever the process may be, the time has come for Goldman Sachs to make some crucial decisions.
The blame game
So who is to blame for this debacle? Goldman Sachs or Dar Al Istithmar may not bear individual responsibility, but collectively there are issues that certainly could (and should) have been recognized in advance. As a Shariah advisor, DI should have known better – the ruling on Tawarruq has been common knowledge since 2009. Meanwhile Goldman Sachs, surely familiar with the sub-prime crisis fiasco which so seriously impacted western markets, should perhaps have approached with greater sensitivity a Shariah compliant industry already wary of its conventional counterpart.
As Mohammed Khnifer has put it: “Goldman Sachs could have easily come up with a pure form of a Sukuk structure, instead of risking it by gambling their reputation.”
What the bank may not yet have realized, is that it has also jeopardized the reputation of Islamic finance. — EB