Goldman Sachs's first foray into the Islamic bond market looks too clever by half. The Wall Street bank has secured approval from top sharia scholars for its maiden $2-billion (U.S.) bond. But by opting for an innovative and controversial structure, Goldman has invited criticism of its Islamic finance credentials.
Sharia rules prohibit interest payments, requiring financial transactions to be structured as profit-sharing agreements. Most Islamic bonds are based on a structure called ijara. This is comparable to a conventional leasing agreement, where the buyer rents an asset like buildings or machinery. Because rent can go up or down, the value of an ijara can change. As a result, ijara bonds are allowed to be freely traded.
But Goldman's bond, which will be backed by commodities, uses another Islamic structure called a murabaha. This is where the underlying asset is sold to the customer in return for deferred payment. As a debt is now owed, its value cannot change, as this would constitute interest in the eyes of scholars in the Middle East where Goldman is targeting its issue.
For many potential buyers, that makes Goldman's bond a contradiction in terms. Though bonds are assumed to be tradable, the Islamic scholars that approved the Goldman issue have expressly said the structure should only trade at par. Goldman's decision to seek a listing for its bond on the Irish Stock Exchange reinforces the contradiction.
According to its advisers, Dar Al Istithmar, Goldman isn't trying to create a secondary market. The stock market listing simply makes the bond issue more tax efficient for the bank. But Goldman cannot guarantee that the sukuk will not trade.
If these criticisms stick, the risk is that buyers will shun Goldman's offering or demand a bigger return to compensate for the fact that they can't trade the bonds. That would undermine one of the main attractions of the offering: Access to cheaper capital. And even if Goldman gets the bonds away, the controversy could make it harder for the bank to arrange Islamic bonds on behalf of its clients in future. Given the inevitable scrutiny Goldman was bound to face when dipping its toe into this market, it should have been less ambitious.