Obviously, the industry relies on scholars' reputation to market the product. Goldman Sachs registered a program to issue sukuk based on murabaha (a cost-plus-profit arrangement which is in line with Islamic law).

Goldman Sachs' $2 billion Islamic bond program has become under scrutiny as some scholars -- who were named as potential approvers -- had not even seen the prospectus.

Indeed, one of Goldman's advisers, Asim Khan, admitted that three of the eight scholars listed as approvers had not replied to demands to endorse the issue. Yet, Asim Khan argued that their lack of cooperation had no impact on the sukuk Shariah credentials.

"Given that the issuance was not to take place at that stage and this was only a preliminary prospectus, it was appropriate not to pre-judge the eventual outcome or speculate which Shariah scholars would eventually be available to consider, evaluate and sign off on the Sharia compliance of this complex transaction," said Khan, who is managing director at Islamic finance adviser Dar Al-Istithmar.

While Goldman's advisers are trying to play down the issue, some scholars are both surprised and concerned to see their names appearing on the prospectus. According to Reuters, two scholars said that they had not even seen any documentation.

Compliance of sukuk structure with religious principles is a prerequisite for the approval of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which stipulates to have at lease three Sharia scholars advice.

The controversy over Goldman's sukuk issue is an ongoing issue.

His adviser Khan said: "It is ironic that Goldman Sachs' extra endeavors in seeking guidance from a very broad spectrum of Shariah scholars is sought to perpetuate misgivings about Shariah compliance of its product."

Murat Unal, CEO of Funds@Work, an investment consultant with considerable experience on this issue, told Reuters that the reputation and name of a Shariah scholar is usually employed as influence in selling product.

Unal said that "The worst thing is that they have no idea the company is mentioning their name in the market."

Based on that, it can be stated that Goldman's first Islamic bond issuance has faced troubles.

While the Wall Street bank has already secured the approval of top scholars for its maiden $2 billion bond, Goldman has opted for a controversial structure thus inviting the wrath regarding its Islamic finance credentials. Islamic law is obvious. It bans interest payments and instead stipulates that any financial transaction should be based on a structure of profit-sharing agreements.

To understand the Islamic law's position with regard to Islamic bonds, we have to appreciate the philosophy behind the idea.

First, bonds should be based on a structure called ijara.

This arrangement is similar to a leasing accord.

A buyer for instance can rent a building and the rent can fluctuate thus impacting on the value of ijara.

Based on this logic, ijara bonds should be freely traded. Here where it is different from Goldman's bond where he seeks to employ a different Islamic structure called murabaha.

To experts, this is exactly where the asset is sold to customers in exchange fore deferred payment.

It follows that its value cannot change bringing the whole idea closer to the concept of interest that is banned in Islam.

While bonds are supposed to be tradable, some Islamic scholars who approved the Goldman case have said that the structure must trade at par. Here the decision of Goldman to list bond on the Irish Stock Exchange underlines the incongruity.

Advisers working for Dar Al-Istithmar are of the opinion that Goldman is not in the business of making a secondary market.

On the contrary, the stock market listing can make the bond more tax efficient for the bank.

Yet, there is no way that Goldman can secure that the sukuk will not trade.

These kinds of criticism can stick and if they do then buyers may either shun Goldman's offering or alternatively ask for a bigger return to make up for the fact that they can not trade bonds. This in turn makes the offer less attractive.

A Saudi Arabia-based Islamic finance expert wrote in the Financial Times on Dec. 15 that Goldman structure suffers from a serious flaw.

According to the finance expert, the structure breaches Islamic finance requirements.

According to Goldman's structure, sukuk's assets can be easily sold to a third party and in this way Goldman's can use the funds raised to earn interests. In this case, finance expert argues that listing the securities created a risk that they might not trade at par.

That said, Goldman is not without ammunitions.

Asim Khan, who is the managing director at Dar Al-Istithmar, Britain-based Islamic finance entity, stressed the bonds' compliance with Shariah.

To him, Goldman is not a conventional bank and therefore it would not be lending out the proceeds of the bond to gain interest.

Judging from what is written in the media specially the American ones on this issue, it seems that Goldman is losing ground.

Some readers cast doubt on Goldman because of this issue in particular.

It is worth quoting a comment made by a reader at length: "I went and found the prospectus and it's fascinating for someone, like me, whose understanding of Islamic finance basically comes from Wikipedia. Now, even I know that the basic idea of a sukuk is to replicate a fixed income, or let's say not-quite-common-equity-anyway, financial instrument without the use of "interest," because interest is forbidden under Shariah law. This, actually, is a topic close to my heart, because it turns out that in regular old American law sometimes "interest" is also forbidden, and by "forbidden" I mean "taxed," which means that people who do what I used to do have certain incentives to turn things that look like taxable interest into things that look like non-taxable equity returns and vice versa. One thing you learn in that line of work is that it's in large part the business of defeating substance with form: You pay for the use of money over time, but fall into some category of "paying for money over time" that isn't what that is normally called, viz. "interest." There are ways to do that in American tax law (one is called "option premium," true story), and there are apparently ways to do it under Islamic law (one is called "murabaha," which is what GS is aiming at here, and it's basically the equivalent of "getting paid a fee for brokering a commodity transaction with forward settlement")."

A report in the Business Insider magazine published on Jan. 12 explains how Goldman screwed up it Islamic bond issuance.

The report is about a story the Business Insider had ran before and then the finance expert makes a clear case that Goldman's structure is not in line with even murabaha. finance expert identified three basis issues. Goldman's transaction is nothing but a reverse Tawarruq -- a structure of a deception that tries to disguise interest income (usury) as permissible income.

In Tawarruq, a transaction is made where one buy an asset from a customer and then sells it to a third party. 

Second, Goldman's bonds will be listed on the Irish Stock Exchange and therefore any trading that does not take place at par is a breach to Shariah. Finally, Goldman will have the possibility to use the proceeds of the transaction for loan activities.

Banks that issue sukuk can use the liquidity generated by the sukuk for interest-based activities.

© Arab News 2012