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Goldman’s Sukuk: Is the criticism fair?

Goldman’s Sukuk: Is the criticism fair?

To condemn this Sukuk for the alleged unscrupulous use of Murabaha proceeds is not fair says Asim Khan, managing director at Dar Al Istithmar.

January 2, 2012 3:50 by


It bears repetition that the transaction structure has received approval of leading scholars in the contemporary Islamic finance industry after extensive scrutiny and examination of all aspects of the transaction and a thorough review of the legal documentation involved, as re-confirmed by the following statement recently issued by the Chairman of the Sharia’a Supervisory Board that approved the structure:

“We have reviewed the structure and legal documents of the Goldman Sachs 1 year Sukuk Al Murabaha program, and after carefully reviewing the same found them to be in compliance with the AAOIFI standards and the generally accepted Shari’a guidelines. I welcome well established conventional industry players such as Goldman Sachs in the Islamic finance world evidencing the growth of the Islamic Finance industry and wish them every success with this product and their future Islamic financial initiatives.” — Dr Hussain Hamid Hassan, Chairman, Dar Al Istithmar Shari’a Supervisory Board.


There is a marginal, albeit louder, section of the community that sees commodity murabaha as a “shallow attempt to mimic conventional debt structures” even though deferred-payment commodity murabaha establishes a clean obligation which qualifies for classification anywhere between a zero and 100 percent risk weighting under Basel and IFSB standards (depending on the rating of the counterparty), while most other sharia-compliant contractual instruments such as wakala, mudaraba and musharaka qualify for up to a 400 percent risk weighting. Though this presents a conundrum and disincentive for both Islamic and conventional banks engaging in such types of structures, it also explains why murabaha continues to be the most commonly used instrument across the Middle East and southeast Asia, including Saudi Arabia and Malaysia.

Ironically, the use of real commodity-based murabaha in the Goldman Sachs sukuk is distinct from traditional commodity murabaha activities (sometimes up to 90 percent of the asset book) conducted by Islamic banks to manage their liquidity or provide corporate/trade financing. Most investor-depositors in Islamic banks do not necessarily expect the Islamic banks to risk their deposits in equity-based investments but expect protection of their funds from depletion. Without structural changes to the regulatory framework for Islamic banks and the development of a broader-based institutional investor community, one cannot expect equity-like structures to be as prominent as debt-like structures.

A broader issue that has crept into this discourse is the issuance of a sukuk by a purely conventional bank. The entry of a bulge-bracket investment bank (not a commercial bank) into the Islamic capital markets is a welcome development, if it is based on the generally accepted sharia guidelines developed by the Islamic finance industry. The benefits of a large investment bank’s foray into Islamic banking could be significant. For years, the Islamic finance industry has struggled with a few critical issues that affect the structural sustainability of the industry, including issues such as liquidity management and lack of a critical mass of institutional funds. 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. So far there is no basis to speculate otherwise.

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1 Comment

  1. nizar alshubaily on January 22, 2012 10:50 am

    The problem with this sukuk is that there seems to be some misinformation taking place by claiming that two eminent scholars will be studying it or have in fact looked at it. Both scholars now deny this fact according to Al Arabiya web site, link attached. The issuers and their advisors have some explaining to do.


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