Sukuk is now maturing and there is increasing momentum in the wake of interest from issuers and investors. Sukuk have confirmed their viability as an alternative means to mobilize medium- to long-term savings and investments from a huge investor base. Investors are able to focus on the underlying asset and viability of a project and not just on the credit of the issuer. Different Sukuk structures have been emerging over the years but most of the Sukuk issuances to date have been Sukuk al-Ijarah. Since they are based on the undivided pro-rata ownership of the underlying leased asset, it is freely tradable at par, premium or discount. Tradability of the Sukuk in the secondary market makes them more attractive.
Although less common than Sukuk al-Ijarah, other types of Sukuk are also playing significant roles in emerging markets to help issuers and investors alike to participate in major projects, including airports, bridges, power plants etc. The sovereign Sukuk issues, following Malaysia's lead, are enjoying widespread and positive acclaim among Islamic investors and global institutional investors alike. In general, corporate Sukuk tend to have lower credit rating than sovereign Sukuk and are also smaller in size. As investors become more diverse, so too will their appetites, and this will lead to issuances beyond the currently prevalent Ijarah and Salam contracts into more profit-and-loss sharing contracts such as Murabah Sukuk.
Goldman Sachs $2 billion Sukuk
Goldman Sachs intended to issue a $2 billion Sukuk as a Murabah structure Sukuk. Since the announcement of the issuance, controversy surrounded the issue of the Sukuk, mostly claiming that it was a Reverse Tawarruq Sukuk, which are not permissible under Shari'ah.
What is Reverse Tawarruq?
Reverse Tawarruq is when the beneficiary, in this case (Goldman Sacks), purchases the commodity from the customer (Sukuk certificate holders) and sells it to a third party to obtain liquidity. What are the legal phrases that prove Goldman Sachs will sell the commodities to obtain liquidity?
The following excerpt was taking from the GS offering circular:
"The Master Murabah Agreement states that the proceeds from the issuance of Certificates will be directly invested in Commodities which will in turn be sold back to Goldman Sacks in its capacity as Purchaser under a Murabah 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 in the open market provided that the Purchaser elects to sell the Commodities, it shall sell the Commodities to a third party, buyer that is not the initial Supplier."
The issue of "...elect to sell the Commodities.." signals a reverse Tawarruq.
What is a Murabah Sukuk?
Sukuk Al Murabah as defined by AAOIFI are certificates of equal value issued for the purpose of financing the purchase of goods through Murabah so that the certificate-holders become the owners of the Murabah commodity.
The evidence supporting the claimant
The legal documents were written in a smart way to camouflage the issue:
" The net proceeds of each Series issued under the Program will be supplied by the trustee and Goldman Sachs in the manner described in the structure overview-Murabah arrangements and in respect of Goldman Sachs are only for its general corporate purpose and to meet its financial needs"
The claimant say that the lawyers and the Islamic investment bank have mislead the certificate holders by not holding on those commodities during the tenure of the issuance which will put the Sukuk certificate holders in great risk (that defies the purpose of the Sukuk as there is not real underlying asset). Also the Sukuk proceeds will be channeled through a long cycle and Goldman Sachs can utilize the proceeds for its corporate business to finance other needs, creating a great risk in default at maturity. We have seen big banks such as Lehman Brothers going bankrupt, therefore Goldman Sachs is not immune.
According to the Accounting and Auditing Organization for Islamic Financials 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 Shari'ah- compliant operations"
The Murabah Sukuk is listed on the Irish Stock Exchange (ISE), and there are doubts as to how the ISE will make sure that the securities will be traded at par value. Usually with trading, the yield will rise or fall, and if and when that happens it means that the Sukuk are traded as debts, which is prohibited under Shari'ah. The entire structure indicates the possible existence of a Reverse Tawarruq.
Goldman Sachs in defense
Goldman Sachs may argue that the contract between the certificate holders i.e. the Global Sukuk Company as trustee and seller and the New York based bank Goldman Sachs International (GSI) is a Murabah is correct. But there is no indication of the existence of the commodities that are the base for the underlying asset to make the Sukuk Shari'ah compliant.
The debate continue
About Author
Dr Aly Khorshid is an Islamic Finance Scholar & Shari'ah Consultant with over twenty years' experience in the Islamic sector, particularly private banking and wealth management. He is a member of several boards including Excellencia Securities S.A, Luxemburg. He holds a PhD on Islamic studies/economics from the University of Leeds (UK), and studied Fiqh and Shari'ah at Al-Azhar University (Egypt). He presents TV programs, is an author and editor on Islamic finance, and is a regular attendee and speaker at Islamic finance conferences. He is a monthly columnist for Business Islamica.
© Business Islamica 2012
