I was asked by prospective investors to provide independent financial advice over the planned milestone USD 2 billion sukuk issuance by Goldman Sachs. In this column, we will reveal, after examining the offer circular thoroughly, three possible flaws in the overall structure. In addition to that, we will try to suggest briefly alternative possible sukuk structures for Goldman.
1- Strong indication from the proposed structure and the prospectus as well that the sukuk is not, as they claim, Murabaha, but a Reverse Tawarruq. In 2009, the International Council of Fiqh Academy, a leading industry body driven by the Organization of Islamic Conference, had ruled organized and reverse Tawarruq to be "a deception" that seeks to disguise the use of usury. Thus, it is impermissible.
2- Strong indication that Goldman will be using, eventually, the proceeds to fund its conventional activities. According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), "Monetization should not be performed for the benefit of conventional banks when it is discovered that such banks are going to use liquidity for interest-based lending instead of Shariah-compliant operations." Thus, it is impermissible.
3- The so called Murabaha sukuk is listed on the Irish Stock Exchange (ISE). There are some doubts on how the ISE will make sure that the securities will be traded at par value. Usually with trading, the yield will rise or fall. When and if that happens, that means we are trading debt. That is prohibited under Shariah.
Tawarruq Sukuk
The following analysis is based on publically available information such as the approved initial prospectus by the Central Bank of Ireland, which was published in October on the Dublin-based central bank's website.
To start off, Goldman may argue that the contract between the certificate holders (Global Sukuk Company Limited as trustee and seller) and the New York-based bank's Goldman Sachs International (GSI) is Murabaha. That is correct. But they are not revealing the "overall" structure of the entire proceeds cycle. The entire structure indicates the possible existence of reverse Tawarruq.
Let's go back and define Murabaha. AAOIFI defines Murabaha sukuk as certificates of equal value issued for the purpose of financing the purchase of goods through Murabaha so that the certificate-holders become the owners of the Murabaha commodity.
Now let's compare that definition with what the Goldman sukuk prospectus stipulates. If we go along with their claim, then they should have labeled the products reverse Murabaha because the final ownership is in GSI's hands.
"Pursuant to the terms of a master Murabaha agreement dated the Closing Date (the "Master Murabaha Agreement") and entered into between Global Sukuk Company Limited as Trustee and seller (in such capacity, the "Seller") and Goldman Sachs International ("GSI") as purchaser (in such capacity, the "Purchaser") and in connection with each Series, the Purchaser will enter into a Murabaha contract (on the terms and subject to the conditions set out in the Master Murabaha Agreement) whereby the Seller will, at the request of the Purchaser, use the proceeds of the issuance of the Series to purchase certain commodities from a third party supplier on immediate delivery and immediate payment terms and will immediately sell such commodities to the Purchaser on immediate delivery terms but with payment on a deferred basis."
The above excerpt from the offering circular proves that they got it wrong, intentionally or unintentionally.
Now what is the definition of reverse Tawarruq? This is when the beneficiary in our case (GSI) purchases the commodity from the customer (sukukholder) and sells it to a third party to obtain liquidity.
Given the above, how can we extract the exact legal phrases that prove GSI will sell the commodities to obtain liquidity? The following excerpt was taking from Goldman's offering circular:
"Pursuant to the Master Murabaha Agreement, the proceeds from the issuance of each Series of Certificates will be directly invested in Commodities (as defined in the Conditions) which will in turn be on-sold to GSI (in its capacity as Purchaser) under a Murabaha transaction. Upon completion of the sale of the Commodities by the Trustee (in its capacity as Seller) to the Purchaser, the Purchaser may hold the Commodities as inventory or elect to sell the Commodities in the open market provided that where the Purchaser elects to sell the Commodities, it shall sell the Commodities to a third party buyer that is not the initial Supplier."
"...elect to sell the Commodities..." is our first signal for the existence of reverse Tawarruq.
Hard Evidence
Our second clue in this well-written legal document is what follows:
"The net proceeds of each Series issued under the Programme will be applied by the Trustee and GSI in the manner described in "Structure Overview - Murabaha Arrangements" and, in respect of GSI only, for its general corporate purposes and to meet its financing needs."
What these clever lawyers and "Islamic" investment bankers are saying is that Goldman is not going to hold on to these commodities during the tenure of the issuance (which could be five or 10 years). In other words, the sukuk proceeds will be channeled through a long cycle, so Goldman can utilize them for its "general corporate purposes and to meet its financing needs."
Proposed Structures
I am reluctant to reveal to the public the detailed proposed and alternative sukuk structures Goldman can use if it is really keen to tap the Islamic finance industry with a pure structure. What I can say in general is these financially engineered structures rely heavily on the Mudaraba and Wakala contracts. Clustered sukuk is not ruled out as well. Exotic forms for Tier II capital can be structured too.
Goldman could have easily come up with the purest form of sukuk structure, instead of risking it by gambling with their reputation.
Mohammed Khnifer is regarded as part of a second generation of Islamic banking practitioners, who come with a solid academic background in Islamic finance. He is a Sukuk Structurer and Strategist as well as an External Islamic Finance Expert at the New York-based Edcomm Group Banker's Academy. He is in the process of being certified as a Shariah Advisor and Auditor by AAOIFI. He is a holder of an MSc in Investment Banking & Islamic Finance from Reading University and is a Chartered Islamic Finance Professional (CIFP) from INCEIF. Khnifer is also an MBA specialising in Islamic Banking & Finance (Bangor University).He can be contacted at mkhnifer1@ gmail.com.
© Zawya 2011
