The bank last September announced that it was going to the market to raise financing totaling $2 billion through a Murabaha sukuk issuance. The base prospectus submitted to various stock exchanges including the London Stock Exchange and the Irish Stock Exchange confirmed that "Global Sukuk Company Limited (a Cayman Islands registered special purpose vehicle set up by Goldman Sachs International), in its capacity as issuer and trustee, has established a program for the issuance of Murabaha trust certificates in a maximum aggregate face amount of $2,000,000,000 as may be increased in accordance with the terms of the Master Declaration of Trust."

The issuance to be arranged by Goldman Sachs International is based on a structure approved by Dar Al-Istithmar Limited, the Shariah adviser to the issuer, Global Sukuk Company Limited, whose Shariah Supervisory Board is chaired by Hussain Hamed Hassan and comprises Ali Al-Qaradaghi, Abdul Sattar Abu Ghuddah, Abdulaziz Fawzan Saleh Al-Fawzan and Aznan Hasan.

The issuance would have passed as a routine Murabaha sukuk save that the issuer was doing it on behalf of arguably the most high profile investment bank in the world, Goldman Sachs. After all, several banks including Arcapita Bank, Saudi Hollandi Bank and a spate of others in Malaysia and elsewhere have issued Murabaha sukuk in the past, without much ado. In Malaysia, such sukuk are even traded regularly on the Bursa Malaysia, which is a contentious issue in the Gulf Cooperation Council (GCC) and a few other countries such as Pakistan, where debt backed sukuk cannot be traded unless at par.

Somehow Goldman Sachs International allowed itself to be sleepwalked into an unnecessary and preventable controversy which to be fair to the investment bank was not of its own making, but that of its Shariah governance process, which is outsourced to Dar Al-Istithmar Limited.

A self-styled "expert" in Islamic finance who also claims that he "is in the process of being certified as a Shariah adviser and auditor by AAOIFI (the Auditing and accounting Organization for Islamic financial Institutions)", albeit that he has no Shariah nor any auditing qualifications, in a spate of articles online cast doubt over the Shariah compliance of the proposed $2 billion Trust Certificate Issuance Program to be issued by Global Sukuk Company Limited.

His main contention is that the structure is not a Murabaha but a reverse Tawarruq; that Goldman Sachs will use the proceeds from the sukuk to "eventually" fund its conventional activities; and he has doubts that the sukuk will be traded at par on the Irish Stock Exchange (ISE), where it is listed.

Leaving the Shariah compliance issue aside, which is for the five Shariah scholars who approved the structure to defend, the episode perhaps unwittingly raises an important issue, the nature of the Shariah compliance approval process in Islamic finance. This also goes hand-in-hand with the regulation and registration of this process.

In Malaysia uniquely, this process is professional, transparent and more importantly governed by Malaysian law. The registration of Shariah Advisers Guidelines is issued by the Securities Commission Malaysia (SC) under section 377 of the Capital Markets and Services Act 2007 and requires "any person seeking to advise on the issuance of Shariah-based products or services (in the Islamic capital markets in this instance) be a registered as a Shariah adviser" by the Securities Commission Malaysia (SC), the securities regulator.

This does not mean that there are no disputes about Shariah issues including compliance ones in the Malaysian Islamic finance industry. In fact, there are a fair number of such disputes, but the most important difference is that all stakeholders - whether financial institutions, shareholders, customers, investors etc, have recourse to law, and the rules of the game as per Shariah compliance are set by the Shariah Authority of Last Resort (the Apex Shariah Authority), which is the Shariah Advisory Council of the SC for capital markets and that of Bank Negara Malaysia, the central bank, for retail and corporate banking, and Takaful (insurance). This process and institutional arrangement is governed by both the Central Bank Act of 2010 and the Capital Markets and Services Act 2011.

Needless to say, no other jurisdiction in which Islamic banking is practiced requires Shariah advisories to be registered and regulated, under a number of provisions such as having the requisite Shariah education from a recognized (by the SC) institution of learning; and having the requisite skills set (read professionalism) in imparting Shariah advisory to the Islamic financial industry.

An inexplicable anomaly however is implicit in the Base Prospectus of the proposed sukuk issuance program, under the heading "Shariah Compliance and Guidance". According to the Base Prospectus, "a group of Shariah scholars (the advising scholars) composed of, among others, members of the Shariah Supervisory Board of the Shariah adviser may, at the request of the Shariah adviser, issue a fatwa as to their view on the Shariah compliance of the program on or about the closing date. The advising scholars are expected to be Hussain Hamed Hassan; Ali Al-Qaradaghi; Abdul Sattar Abu Ghuddah; Abdulaziz Fawzan Saleh Al-Fawzan; Daud Bakar; Aznan Hasan; Abdullah Bin Sulaiman Al-Manea and Mohamed Ali Elgari".

Why on earth did Dar Al-Istithmar Limited have to consider the opinion of Shariah scholars other than those on its own Shariah Supervisory Board? After all some of them are very experienced and sit on the Boards of several Islamic financial institutions. It gives the impression, rightly or wrongly, that the Dar Al-Istithmar Shariah Supervisory Board is neither confident nor sure of its own legal opinion on the very Murabaha sukuk structure. This is not a ground-breaking sukuk structure. On the contrary it is a straight forward structure and perhaps the proposed trading on the Irish Stock Exchange at par is more of a contentious issue than the structure itself.

Perhaps more seriously, there have been suggestions that those scholars who are not members of the Shariah Supervisory Board of Dar Al-Istithmar Limited and who surprisingly were named in the Base Prospectus, albeit not confirmed, had no idea that there names were in the Prospectus and had not approved the structure of the proposed Murabaha sukuk.

Hussain Hamed Hassan explained that "all of the scholars listed in the base prospectus filed with the Irish Stock Exchange on Oct. 18, 2011 were provided with all the relevant information about the Goldman Sachs 1 year sukuk structure and requested to consider, evaluate and pronounce on its Shariah compliance. Additionally, given the importance of this transaction, Dar Al-Istithmar also consulted and received guidance from a much wider group of industry-leading Shariah scholars not listed in the prospectus and so far more than 10 prominent Shariah scholars, including members of Dar Al Istithmar Shariah Board, have in fact given their written approval to this transaction."

A small number of scholars on the above list have expressed their surprise claiming that they have no involvement with the Goldman Sachs sukuk, and had no part in the approval process or signing off of any documentation of the proposed sukuk.

One way to pre-empt this sort mix-up in the future is to introduce "order" in the process of Shariah approval process. As a first step, it may be prudent to establish a "Fatwa depository" institution in a suitable location. Whenever a Fatwa (legal opinion) is issued by a Shariah Supervisory Board or an individual Shariah scholar or advisory, an original copy of the Fatwa would be required to be deposited there. Anyone who wishes to verify the authenticity of the Fatwa may refer to that depository institution, which can also then serve as a database for all the Fatwas issued in the Islamic finance industry henceforth and perhaps even retrospectively.

This institution and process can add value not only to the Shariah compliance governance functions in Islamic finance, but would also enhance the credibility of the functions and further promote convergence in Shariah issues especially between regions such as the GCC and Malaysia. Such a set-up would not cost much nor should any Shariah advisory worth his or her salt feel threatened by its establishment. Perhaps an institution such as the International Shariah Research Academy for Islamic Finance (ISRA), the Shariah in Islamic Finance Research entity of Bank Negara Malaysia, could consider doing a study in the feasibility of establishing such a Fatwa depository, which can only work if its is adequately resources, transparent and professionally run.

On the issue of listing and trading, according to the base prospectus, "application has been made to the Irish Stock Exchange for the certificates to be admitted to listing on the official list and admitted to trading on the regulated market. The Shariah scholars advising on this base prospectus are of the view that the Certificates can only be traded in the secondary market at par value (that is, in relation to Certificates of a particular Series, the amount of the pro rata deferred payment price relating to such certificates) and on a spot basis in order to comply with Shariah principles. Certificates may be listed or admitted to trading, as the case may be, on other or further stock exchanges or markets agreed between the trustee and the relevant Dealer(s) in relation to the Series. Certificates which are neither listed nor admitted to trading on any market may also be issued."

In general and not necessarily referring to the Goldman Sachs Murabaha sukuk structure and listing and trading regime, while it is permissible to sell monetary debt for cash at par, some Shariah advisories advise caution. Bankers, they stress, understand par in the context of Murabaha as principal (that is sale price minus profit). This, they stress, is not "par" from a Shariah point of view. It is principal plus profit. There are those who stress that no-one in their right mind would purchase a debt due in 2015 and pay the full amount today.

One Shariah expert further clarified the issue of listing and trading. "When I am told: "We will only sell at par", I know they didn't mean the Shariah meaning of par. They mean discounting receivables which is not permissible. As for the tradability, they say sukuk will be listed but not traded. They apparently mean exchange trading. But we all know that sukuk are traded OTC (over the counter). So to say no trading is almost meaningless, if OTC sales are already in vogue," the Shariah advisory explained.

On the actual Murabaha arrangement, according to the Base Prospectus, "pursuant to a Master Murabaha Agreement, in connection with each series, the Trustee (as the seller) will, at the request of Goldman Sachs International (the "purchaser" or "GSI"), use the proceeds from the issuance of the series to (whether directly or through a buying agent) purchase certain commodities from a third party supplier on immediate delivery and immediate payment terms and after gaining title to an possession of the same (whether directly or through the buying agent) the Seller will immediately sell such commodities to the purchaser on immediate delivery terms but with payment on a deferred payment basis by entering into a Murabaha contract (on terms and subject to the conditions set out in the Master Murabaha Agreement) with the purchaser. The commodities should be Shariah-compliant and not to include gold, silver or currencies."

The irony of this Goldman Sachs Murabaha sukuk saga, is that one its earlier subsidiaries, J. Aron, was one of the pioneers of Commodity Murabaha in the London market in the 1980s and 1990s.

© Arab News 2012

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