Disclosure of 3 Flaws in Goldman Sachs' $2 Billion Islamic Bonds more

SUKUK Goldman sucks? Goldman Sachs claims that its $2 billion Sukuk programme follows a Murabaha structure, Mohammed Khnifer claims otherwise – that it is nothing more than a reverse Tawarruq I was asked by prospective investors to provide independent financial advice over the planned milestone Sukuk issuance by Goldman Sachs (GS). In this article, we will reveal, after examining the offer circular thoroughly, three possible flows in the overall structure. In addition to that, we will try to suggest briefly an alternative possible Sukuk structure for Goldman Sachs. Strong indications from the proposed structure and the prospectus indicate that the Sukuk is not, as they claim, Murabaha – rather a reverse Tawarruq (in 2009, the International Council of Fiqh Academy had ruled that organised and reverse Tawarruq were “a deception” that seeks to disguise the use of usury. Thus, it is impermissible). There are also strong indications that GS will be using, eventually, the REVERSE PYSCHOLOGY proceeds to fund its conventional activities. According to Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), “Monetisation 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.” Thus, it is impermissible. The so-called Murabaha Sukuk is listed on the Irish Stock Exchange (ISE). There are some 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 down, if and when that happens it means that we are trading debt. That is prohibited under the Shari’ah. 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 Dublinbased Central Bank’s website. To begin with, GS 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’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. A CLEVER DECEPTION? 28 Islamic Business & Finance | ISSUE 69 www.cpifinancial.net SUKUK AAOIFI defies 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 GS Sukuk prospectus stipulates. You will notice that if we go along with their claim, then they should have labeled the Sukuk as a reverse Murabaha because the final ownership is at the hand of GSI. “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 excerpt from the offering circular proves that they got it wrong, intentionally or unintentionally, even if we go along with their argument. Now what is the definition of reverse Tawarruq? This is when the beneficiary in our case (i.e. GSI) purchases the commodity from the customer (i.e. Sukuk holders) 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 the GS 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. DEFINING TAWARRUQ Our second clue is in this well-written legal document as 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 GS is not going to hold on to these commodities during the tenure of the issuance (which could be 5 or 10 years). In other words, the Sukuk proceeds with be channeled through a long cycle, so GS can utilise them for its “general corporate purposes and to meet its financing needs.” THE EVIDENCE I am reluctant to reveal to the public a detailed alternative for the structure of Goldman Sachs’ Sukuk, which it could use if it wanted to tap the Islamic finance industry using a pure structure. What I can say in general is these financially-engineered structures rely heavily on the Mudaraba and Wakala contracts. Clustered Sukuk are not ruled out as well. Exotic forms for Tier II capital can be financially structured too. GS could have easily come up with the purest form of Sukuk structure, instead of risking it by gambling with their reputation. PROPOSED STRUCTURES 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 Shari’ah 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. During the past seven years, he became one of the most prolific and well-known researchers & media figures, specialising in Islamic finance today. To compliment his technical knowledge, Khnifer is also an MBA holder specialising in Islamic Banking & Finance (Bangor University). He can be contacted at mkhnifer1@ gmail.com. www.cpifinancial.net ISSUE 69 | Islamic Business & Finance 29