Green Financing : Sukuk going Green

The issuance of world’s first Green SRI sukuk by Malaysia not only serves as a testament for its leadership in sukuk market but also exemplifies the country’s commitment towards green and sustainable responsible investments. Malaysia’s experience in facilitating the green sukuk issuance by developing the necessary framework and infrastructure for a conducive market of green sukuk is set to become a model in bridging Islamic finance and SRI industry. more

Goldman Sachs First & Second Sukuk Issues

Done by: RAZAN ALTWAIRQI, Zainab Bin Mafouz, and Noha Dhaba’an

Goldman Sachs The firm

Goldman Sachs is an American multinational firm founded in 1869 in New York, while Saudi Arabia Goldman Sachs were authorized in January 2009. The firm offers a wide range of financial services primarily in investment banking services, lending, securities, financial management and financial engineering. It deals basically with institutional clients beside the high-net worth individuals, and provides a variety of financial specialized services that can be classified into four major categories:

 1- Investment banking as strategic advising, risk management, IPOs and underwriting for other securities.

 2- Institutional client services as facilitating the client’s transactions and making markets in financial and commodity products.

3- Investing and lending services as originating loans to finance the clients and investing through financial assets and real estate entities.

4- Investment management services as financial counselling, portfolio management, wealth advisory and transaction services.

The first Sukuk issue:

In 2011 Goldman Sachs intended to inter the Islamic capital market by issuing a 2 billion U.S.D worth sharia compliant Sukuk. This issue has caused a large debate in the Islamic region due to many reasons. Firstly, the Islamic community had a great doubt in the intention and the goals behind this issuance. As per the idea that says, Muslims are willing to accept lower returns on their investments in comparison to their conventional counter party just for the sake of a sharia compliant product that they understand its cost and liabilities.

 In addition, they are willing to share risk with the issuer of the Sukuk as part of the main profit loss sharing Islamic principle. The second reason the Islamic society was hesitant about this issuance is the accusations to the western financial sector of causing the financial crisis by applying the easy money product that contradicts the Islamic principles, so what do they have to offer to the Islamic conservative capital market. The third and most important reason is that the society was skeptical on what sharia knowledge does Goldman Sachs has to create an Islamic compliant product. (Global Islamic Finance Report “GIFR”2012).

On the other hand, voices in the Islamic capital market supported this issuance as they expected it to boost the market and enhance the current creditability of the market. Moreover, it will open new financing channels by the cooperation between the advanced western capital market and the Islamic markets.

In spite of these two contradicting opinions of the Goldman Sachs issue, the logic would be to inspect the compliant of the Sukuk structure offered. As per the rulings of Islam, everything is permissible unless it violates a sharia rule. Western companies are offering many different products to the Islamic world, and Muslims have been trading with non-Muslim countries for ages. Then the core of this issue is to investigate the compliance of the Sukuk despite its source and take a decision that considers the best interest of the society.

The first Sukuk structure:   

Goldman Sachs announced that it was going to the market to rise financing totaling $2 billion through a Murabaha agreement; they set up a special purpose vehicle (SPV) called “Global Sukuk Company Limited” as a trustee. The Trustee was incorporated under the laws of the Cayman Islands on 6 September 2011 as an exempted company with limited liability. The Trustee is a newly formed entity and has no operating history, there only asset will be the Trust Assets held for credit holders (from Goldman Sachs’ base prospectus). The base prospectus submitted to various stock exchanges including the London Stock Exchange and the Irish Stock Exchange. The SPV 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 (MUSHTAK, 2012).

Below are the terms and conditions of Trust Certificate Issuance Program taken from GLOBAL SUKUK COMPANY LIMITED’s base prospectus.

Trustee: Global Sukuk Company Limited, as trustee for and on behalf of the Certificate-holders and, in such capacity, as issuer of the Certificates.

Ownership of the Trustee: The authorized share capital of the Trustee is U.S.$50,000 consisting of 50,000 ordinary shares of U.S.$1.00 each, of which 250 have been fully paid up and issued.

Arranger: Goldman Sachs International

Guarantor: The Goldman Sachs Group, Inc.

Guarantee: GSG (as the Guarantor) will agree to unconditionally and irrevocably guarantee to the Trustee the prompt and complete payment when and to the extent due, whether by acceleration or otherwise, of all payment obligations, of GSI arising out of or under the Master Murabaha Agreement.

Initial Program Amount: Up to U.S. $2,000,000,000 (or its equivalent in other currencies) aggregate face amount of Certificates outstanding at any one time.

Issuance in Series: The Certificates will be issued in series .The specific terms of each Series will be completed in the applicable Final Terms. Certificates may be distributed by way of private or public placement and in each case on a syndicated or non-syndicated basis.

Currencies: Certificates may be denominated in Dirhams, U.S. Dollars, Saudi Riyals and Singapore Dollars or any other currency or currencies, subject to compliance with all applicable legal and/or regulatory and/or central bank requirements.

Maturities: The Certificates will have such maturities as may be agreed between the Trustee and the relevant Dealer.

Issue Price: Certificates may be issued at any price on a fully paid basis.

Status of the Certificates: Each Certificate will represent an undivided ownership interest in the Trust Assets of the relevant Series.

Dissolution Amount: In relation to a particular Series, the sum of (i) the aggregate face amount of the Certificates of the Series and (ii) the profit amount due on the maturity of such Series, which shall in aggregate, be equal to the Deferred Payment Price in respect of the Murabaha Contract for such Series.

According to Wouters (2011) he indicated that the above chart represents Murabaha Arrangements used by Goldman Sachs in their first Sukuk issuance:

1. The Trustee (as the Seller) will, at the request of the Purchaser, enter into a Murabaha Contract with the Purchaser whereby the Seller will use the proceeds from the issuance of the Series to purchase certain commodities from a third party supplier on immediate delivery and immediate payment terms.

2. The client (GSI) will act as the buying agent of the trustee in this acquisition transaction from the supplier.

3. Then the trustee will sell the commodities to the GSI (as a purchaser) on immediate delivery but with deferred payment basis (cost + the markup).

The certificate holder will receive their periodic distribution amount as it comes due.

Sharia Issues:

In 2011, GSI declaration of $2 billion Sukuk issuance was marred with controversy, and consequently, was faced by a storm of disapproval to the extent that is was never issued. Before going through the main issues in GSI first proposed Sukuk issue, it is worth noting that the idea of a conventional bank issuing Islamic bonds is by itself widely controversial. According to (CHAPTER 10: Goldman Sachs Milestone Global Sukuk, 2012); while some Muslim investors are willing to sacrifice high return for being in compliance with Sharia principles, and consequently, will refrain from investing in any financial products issued by conventional financial institutions, others deem the participation of conventional banks in Sukuk issuance as a step that might contribute to the development of Islamic markets. In general, scholars and Islamic finance practitioners had specified three main problems in GSI 2011 Sukuk issue related to its structure, listing on an exchange, and the use of its proceeds.

The Structure

Regarding the issue of GSI’s 2011 Sukuk structure, it was stated in the prospectus that it was Murabaha based Sukuk as the contract between the SPV (Global Sukuk Company as a trustee and seller) and GSI was Murabaha. However, Mohammed Khnifer, a renowned Islamic banking practitioner, Sukuk structurer, and strategist, argued that GSI’s 2011 Sukuk issue structure can possibly be deemed as reverse Tawarruq as the Sukuk proceeds’ cycle was not entirely revealed prospectus (2011). Accordingly, a verification of such a claim is essential.

Murabaha Sukuk, as defined by AAOIFI, are certificates of equal value issued to provide financing for the acquisition of goods through a Murabaha-based sale contract where the certificate-holders are the owners of the commodity. Figure (2) illustrates the structure of Plain Vanilla Murabaha Facility as proposed by GSI Sukuk base prospectus in which the following statement was repeatedly stipulated

“…whereby the Trustee will, at the request of GSI, use the proceeds of the issuance of the Series to purchase certain commodities from a third party Seller on immediate delivery and immediate payment terms and will immediately sell such commodities to the GSI on immediate delivery terms but with payment on a deferred basis.” (Global Sukuk Company Limited, 2011, p. i)

Moreover, Mr. Asim Khan, MD and head of structuring for Dar Al Istithmar (the Sharia advisor for Global Sukuk issue), stated that the documents “clearly shows that Trustee, as seller, sells the commodity to GSI, as purchaser. That’s it…” (Khan, 2011)

However, despite the apparent conformity to Sharia, the structure requires a second leg to attain cash flows to make Sukuk of value, a thing that originated the debate regarding the existence of Tawarruq transaction. Apparently, a simple review of the legal documentation is insufficient to provide a clear evidence regarding the implicit existence of reverse Tawarruq. Therefore, looking at the intentions of the parties involved might provide an insight on this issue. In essence, GSI is likely to sell the commodities immediately in order to get cash. This constitutes a situation of gaining money against deferred payments with a markup. Thus, for sure there will be a pre-intended second leg associated with the proposed Murabaha facility as it was stated in the base prospectus

Upon completion of the sale of the Commodities by the Trustee (in its capacity as Seller) to the GSI, the latter may hold the Commodities as inventory or elect to sell the Commodities in the open market provided that where GSI elects to sell the Commodities, it shall sell the Commodities to a third party buyer that is not the initial Seller.” (Global Sukuk Company Limited, 2011, p. 16)

Additionally, and to ensure the full compliance with Sharia, Dar Al Istithmar declared in the base prospectus that once the commodities are sold to GSI, it will have full discretion regarding the utilization of commodities (Khan, 2011). This seems like a confirmation that the structure of GSI 2011 Sukuk is far from being tainted with the non-complaint features of Organized Tawarruq.

Tawarruq, in its essence, is generally deemed acceptable from a Sharia point of view as it is considered a cash generating facility as funds will be firstly converted to commodities with deferred payment, and then back to cash. Yet, the organized version of Tawarruq, where the Islamic financial institution (IFI) will organize the process by acting as an agent that will sell the commodity on behalf of the client, had been categorized as unlawful by the Organization of Islamic Countries (OIC) Fiqh Academy (2009). Traditionally, the IFI used to provide assistance to the client by offering to organize the Tawarruq process, as the client usually has no expertise in regards to the sale of the commodities. This is a situation in which the client only has to sign some papers in order to end up with cash at the cost of deferred payments. Accordingly, one can conclude that since the Trustee (SPV/IFI) is not playing the role of an agent of GSI (in its client capacity), this will render the structure far from being classified as Organized Tawarruq. Yet, further scrutiny in regards to GSI Sukuk structure will reveal the true classification of this Sukuk structure.

In (Khnifer, 2011), the author argued that the structure of GSI 2011 Sukuk, illustrated in Figure (4), suggested that except for the legal issues (signing of papers and transfer of legal title), the Trustee (SPV) has no role in the first purchase transaction. Instead, GSI acted as an agent for the Trustee in this transaction, thus, was actually organizing the two legged structure by itself with full control over the process and the behavior of the Trustee. It is true that GSI, with its well situated global presence, is utterly capable to solely run the two legs of the structure, yet, this situation is deemed in clear contradiction to Sharia principles. This is because the purpose for which the SPV presence was required (to protect the rights and to work for the interest of the certificates-holders) was not fulfilled. The fact that the role of the Trustee in GSI Sukuk structure was clearly marginalized has rendered the structure not in full compliance with Sharia. This explains why most of the Islamic scholars, especially those who were mentioned in the base prospectus as members of the Advisory board of Dar Al Istithmar, refrained from approving this Sukuk issue (Davies, 2012).

Listing on the Irish Stock Exchange

Mr. Mohammed Khnifer and other Islamic financial practitioners had further concerns regarding GSI 2011 Sukuk listing on the Irish Stock Exchange (ISE). It was clearly stated in (Khan, 2011) that

…the offering circular clearly states in several places that the certificates can only be traded on a spot basis and at par value if they are to be Sharia compliant … hence the listing can, practically speaking, only have a taxation and regulatory benefit without impinging on Sharia principle in any manner.

Although this statement might seemingly provide reassurance regarding the Sukuk trading on ISE, neither it nor the base prospectus provided a clarification regarding the procedures by which the implied non-tradability feature of Murabaha Sukuk can be ensured. Khnifer (2011) asserted that the ability of ISE to ensure that GSI Sukuk will be traded at par is questionable. More importantly, he stated that, practically, listed securities are intended to be traded and this is always associated with fluctuations in the yield. Thus, a situation of debt trading will be created, a thing that will render the process of Sukuk issuance impermissible due to the prohibition of debt sale under Sharia.

In fact, any leniency in regards to such a case might open the door for possible disguised interest bearing transaction to be dominant, a thing that will surely compromised the credibility of Islamic finance as a whole. This is because as time passes, and with enough clemency, modifications to what are supposedly non-tradable Sukuk would be applied just to create more demand by attracting more investors regardless of their sentiments. In other words, the mere intention to promote Murabaha Sukuk, by listing them on a stock exchange for instance, just to make them more appealing to non-compliant investors is hazardous as it jeopardizes the authenticity of this type of Islamic investments as it cannot be distinguished from conventional bonds any more. Ideally, non-compliant investors must accept the principles of Islamic finance if they want to invest their wealth using any facilities categorized under this concept. Hence, issuers as well as investors involved in Islamic oriented investments must abide by the rules and principles of Islamic finance while the “vice versa” situation cannot be applied.

 The use of the Sukuk Proceeds

According to Khnifer (2011), there are strong indications that GSI will eventually use the proceeds of the Sukuk to fund its conventional activities, a thing that was clearly classified as impermissible by AAOIFI. Referring to Khan (2011), who was quoted previously in this paper, he asserted that proceeds would be only used for GSI “general corporate purposes and to meet its financing needs.” Assuming that GSI will do this with good faith, still, the alternatives available for this conventional, creative financial engineering practitioner to use funds in Sharia compliant investments are outnumbered by the proliferated non-Islamic investment activities. The fact that GSI lack an Islamic window/unit raises more concerns regarding the true availability of Sharia compliant ventures in which Sukuk proceeds can be utilized. Furthermore, according to Wouters (2012), none of the following was found in the base prospectus:

1)    A written commitment from GSI to utilized the proceeds in full compliance to Sharia principles;

2)    A guarantee by GSI in regards to provide full isolation to the proceeds from the institution’s interest-contaminated funds;

3)    An assurance by the Sharia Board regarding the existence of continuous monitoring, reporting, isolating, and cleansing of the funds.

In general, people with conservative perspectives oppose the participation of conventional banks in Sukuk issuance due to the possibility of the use of the proceeds in financing non-Sharia compliant activities. According to (Davies, 2012), Badlisyah Abdul Ghani, the chief executive of the Islamic unit of CIMB group in Malaysia, stated that except for development banks, conventional banks should be banned from issuing Sukuk. This is because Islamic finance, in essence, involves providing funds for Sharia-compliant activities, a thing that is not applicable to the interest-based nature of the conventional banks activities.

As we have seen the Goldman Sachs has offered a controversial structure in its Sukuk, this Sukuk remained as a plan and was not issued in real. However, Goldman Sachs has planned a second Sukuk issuance in 2014.

The second Sukuk issuance:

In 2014 Goldman Sachs issued their five-year second Sukuk of 500 million U.S.D. In this Sukuk issuance results turned around after the first issue failure, after the roadshows in Qatar and UAE the majority of the Sukuk were bought by Middle Eastern banks as the represented 87% of the investors while European investors represented 11% and Asian investors by 2% according to Gulf Business. These were significant results as the second issue of a conventional bank in a Muslim country especially after the controversial first Sukuk were Goldman Sachs has to cancel the issuance due to sharia incompliance.

 

 

The information about this issuance as per the base Goldman Sachs prospectus:

Face amount: 500,000,000 U.S.D

Issue price: 100%

Profit rate: 2.844%

Maturity date: 23 September 2019

Expected rating (S&P/Fitch): A- / A

Lead Manager(s): Goldman Sachs International, Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, NCB Capital & QInvest.

Trustee: JANY Sukuk Company limited

Arranger: Goldman Sachs

Guarantor: The Goldman Sachs Group, Inc.

The primer asset: crude oil assets via Wakalah agreement invested in a portfolio as follows:

51% sharia compliant commodities.

49% deferred payment Murabaha.

Dissolution Amount: As per the event of dissolution, the company is obligated to find a third party purchaser to purchase for a price equal to the then market value of the commodities.

By this Sukuk Goldman Sachs managed to inter the Islamic capital market after three years of its first attempt. Muslim investors represented mainly by Islamic financial institutions as banks bought the Sukuk Al-Wakala and were the majority of investors who invested in this Sukuk.  Goldman Sachs could inter the Islamic capital market this time by changing the structure of its Sukuk and due to changes in circumstances in the Middle East.

 The second Sukuk structure:

This is Goldman’s second attempt to issue Sukuk, after a $2 billion plan to issue a one-year Sukuk in 2011 was withdrawn amid charges that it failed to uphold Sariah principles. Goldman plans to use a new hybrid structure and has named four prominent Arab Gulf banks to manage the proposed $500 million, five-year issue: Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, and Saudi Arabia’s NCB Capital. The Sukuk will be listed on the Luxembourg Stock Exchange (Gordon, 2014).

Gordon stated in Global Finance magazine in October 2014 that Goldman investment vehicle JANY Sukuk will act as the Trustee and enter into a Murabaha (cost-plus sale agreement) for 49% of the issue and into a Wakala agreement for 51% with Goldman subsidiary J. Aron. Under a Wakala, where one party manages assets on behalf of another.

Figure 5 GSI Second Sukuk Issue Structure

Fitch Ratings, which said it expected to issue an A rating to the Sukuk program, noted that Goldman will unconditionally and irrevocably guarantee the payments of J. Aron under the Murabaha contract. The underlying assets are linked to commodities and crude oil (Bernardo, 2014).

Below are further details of the Sukuk terms and conditions taken from the Goldman Sachs’ Base prospectus. However, the structure diagram was taken from the general hybrid Wakala-Murabaha structure concept.

1, 2.The Goldman investment vehicle JANY Sukuk (SPV) will receive the proceeds from certificate issuance.

3. Then SPV will enter a 49% of Murabaha cost plus in Sharia commodities and 51% Wakala agreement with J. Aron (Wakeel).

4, 5. The Wakeel will purchase the assets from a third party (seller) and invest in the Wakala assets profile.

6, 7. The return on investment will be transferred to the SPV by the wakeel in order to be distributed to the investors.

8. Investors will receive the periodic amount distribution as well as the dissolution amount at maturity.

9. At the maturity the GSI will buy the assets as the purchaser and pay the exercise price.

Resolving the Previous Sharia Issues:

Apparently, GSI had learned the lesson and was able to resolve most of the Sharia issues related to the first Sukuk issue. Firstly, GSI opted to issue the second Sukuk using Wakala facility, in which one party manages assets on behalf of another, which became the preferred structure for Sukuk by multinational banks such as Societe Generale, HSBC, and Bank of Tokyo-Mitsubishi UFJ (Narayanan & Hamzah, 2014). Wakala is a basic structure and less complicated than other structures opted for in similar deals such as Murabaha; thus posing fewer challenges as to its conformity and compliance with Islamic Sharia principles, especially when it is structured and promoted by a conventional bank.

Moreover, it was clearly specified that the proceeds of the Sukuk would be used to fund the commodities business of J. Aron & Co. (Goldman Unit). This is deemed as an assurance by GSI that the Sukuk proceeds will be used to finance Sharia complaint activities (Narayanan & Hamzah, 2014).

More importantly, this time around GSI made sure it had on board key players in the GCC, including Abu Dhabi Islamic Bank (ADIB), Emirates NBD, National Bank of Abu Dhabi, QInvest and NCB Capital as arrangers, as well as itself (Narayanan & Hamzah, 2014). This has been done to engage institutions with more expertise in Sukuk issuance field to provide simultaneous facilitation and guidance regarding the requirements of Sharia compliant investors, especially those high net worth ones in GCC region.

Furthermore, the issue had been listed on the Luxembourg Stock Exchange as the trading of Wakala Sukuk is less controversial than trading Murabaha-based Sukuk (Kerr & Braithwaite, 2014). This is due to the absence of the indebtedness in the former type of Sukuk which rendered the trading of latter type impermissible. Yet, Mr. Mohammed Khnifer still emphasized on GSI expected efforts regarding ensuring the isolation of the Sukuk proceeds from financing its conventional activities (Kerr & Braithwaite, 2014).

Additionally, the involvement of multinational financial institutions with their profound financial expertise and investor base would, in a way or another, positively contribute to development of Islamic finance. However, this is contingent to these financial wholesalers level of disclosure regarding the characteristics of the underlying assets/projects and to the extent to which they abide by Sharia principles.

References:

(2009). OIC Fiqh Academy Ruled Organised Tawarruq Impermissible. Organization of Islamic Contries.

CHAPTER 10: Goldman Sachs Milestone Global Sukuk. (2012). EDBIZ-NASDAQ OMX Sharia Indexes. NASDAQ OMX. (pp. 99-104).

Davies, A. (2012, April 24). Islamic Finance: Islamic Sukuk By Goldman Sachs Causes Debate. Retrieved from Huff Post Religion: http://www.huffingtonpost.com/2012/02/23/refile-debate-rages-over-_n_1296351.html

Goldman Sachs. (2015). Retrieved November 23, 2015, from http://www.goldmansachs.com/index.html.

Kerr. S. & Braithwaite. T. (September 4, 2014). Goldman Sachs to issue its first Islamic bond. Financial Times, Retrieved from http://www.ft.com/cms/s/0/1af110fe-3448-11e4-b81c-00144feabdc0.html#axzz3tdGmoB30

Khan, A. (2011, December 8). Controversy dogs GS Sukuk. (T. I. Globe, Interviewer)

Khnifer. M. (2012). Disclosure of 3 Flaws in Goldman Sachs’ $2 Billion Islamic Bonds. Retrieved from http:// reading.academia.edu/MohammedKhnifer/Papers/1209426/ Disclosure_of_3_Flaws_ in_Goldman_Sachs_2_Billion_Islamic_Bonds.

Khnifer, M. (2011). Goldman Sachs Claims that its $2 billion Sukuk Program Follows a Murabaha Structure, Mohammed Khnifer Claims Otherwise–That it’s Nothing More than A reverse Tawarruq. (December 6, 2011).

Limited, G. S. (2011, October). Trust Certificate Issuance Programme. Goldman Sachs Base prospectus. Goldman Sachs.

Narayanan. A. (Sep 16, 2014). UPDATE 1-Goldman Sachs gets strong demand for landmark Sukuk issue. Thomson Reuters. Retrieved from http://www.reuters.com/article/2014/09/16/goldman-sukuk-launch-idUSL6N0RH2RH20140916#HskwtfmI67Go4TQ4.99

Narayanan, A., & Hamzah, A.-Z. A. (2014). UPDATE 3-Goldman Sachs plans debut sukuk issue as Islamic finance goes mainstream. Dubai/Kuala Lumpur: Reuters. Retrieved from http://www.reuters.com/article/2014/09/04/goldman-sukuk idUSL5N0R513N20140904#KKQbbYXyHazVtqpi.99

Parker. M. (2012). The lessons from the Goldman Sachs proposed $2bn Sukuk saga.  ARAB NEWS, Retrieved from http://www.arabnews.com/node/405183

Platt. G. (October 09, 2014). GOLDMAN SACHS TO TAP GROWING ISLAMIC MARKET. Global Finance Magazine, Retrieved from https://www.gfmag.com/magazine/october-2014/goldman-sachs-tap-growing-islamic-market.99

Reuters. (2014, September 18). Middle East Banks Buy Vast Majority of Landmark Goldman Sachs Sukuk. Gulf Business. Retrieved November 15, 2015, from http://www.gulfbusiness.com/articles/industry/middle-east-banks-buy-vast-majority-of-landmark-goldman-sachs-sukuk/#.VBqtBxarFFM

The base prospectus of Goldman Sachs Global Sukuk. Retrieved from http://uaelaws.files.wordpress.com/2012/01/47882- base20prospectus.pdf

Vizcaino. B. (Sep 14, 2014). MIDEAST DEBT-Conventional banks’ Sukuk to push limits of Islamic finance. Reuters Report, Retrieved from http://www.reuters.com/article/2014/09/14/sukuk-banks-west-idUSL5N0RC05F20140914#hGk8si5uAodrtPlE

Vizcaino. B. (Sep 4, 2014). UPDATE 3-Goldman Sachs plans debut Sukuk issue as Islamic finance goes mainstream. Thomson Reuters. Retrieved from http://www.reuters.com/article/2014/09/04/goldman-sukuk-idUSL5N0R513N20140904#d1rqpl27LR417LFq.97

Wouters, P. (2012, January-February). Goldman Sachs : Genuine or Ribawi Sukuk in the Making? Business Islamica Magazine, pp. 34-37.

 

 

Fitch rates Turkey’s USD Sukuk ‘BBB-‘

Fitch Ratings has assigned Hazine Mustesarligi Varlik Kiralama Anonim Sirketi’s (Hazine) USD1.5bn of global certificates (Sukuk), due 26 March 2018, a ‘BBB-‘ rating. The certificates have a profit rate of 2.803%.
Hazine, an asset leasing company incorporated solely for the purpose of participating in this transaction, is wholly owned by the Republic of Turkey, acting through the Undersecretariat of the Treasury.
The rating reflects Fitch’s judgement that the Sukuk can be considered an unconditional, unsubordinated and general obligation of the Republic of Turkey, ranking equally with Turkey’s other senior unsecured obligations. The rating is therefore in line with Turkey’s Long-term foreign currency Issuer Default Rating (IDR) of ‘BBB-‘ on which the Outlook is Stable.
The Sukuk follows an ijara’ (leasing) structure. The issuer has purchased publicly-owned real estate from the Republic of Turkey using the proceeds from the Sukuk. These assets have been leased back to the Republic for a period equal to the tenor of the Sukuk; in return the Republic makes semi-annual rental payments to the issuer at least equal to periodic distribution amounts made by the issuer to the Sukuk investors.
The transaction documents incorporate a purchase undertaking requiring the Republic to repurchase the assets on maturity (or earlier, in the event of dissolution/default), together with any outstanding distribution. Certificates are unsecured and certificate holders have no direct recourse to the lease assets.
While certain transaction documents relating to this issue, being governed by English law, may not be enforceable under applicable law, including Turkish law, Fitch’s rating for the certificates reflects the agency’s belief that the Republic of Turkey would stand behind its obligations under the transaction documents.
By assigning a rating to the certificates, Fitch does not express an opinion on the Sukuk structure’s compliance with Sharia principles.
Source: bne

Demand for Local Sukuk ‘Excessive’ With More Likely Ahead, Official Says

The government has issued Rp 120 trillion ($12.8 billion) in Islamic bonds during the past four years, which the Finance Ministry attributes to an “excessive” demand for them among Muslim investors.

The ministry’s director for Shariah financing, Dahlan Siamat, said the government issued its first Islamic bond, known as sukuk, in 2008, and as of Thursday it had issued a total of Rp 120 trillion.

“The achievement has been supported by excessive demand for sukuk in the domestic market,” Dahlan said in Surabaya on Thursday.

“The potential for state sukuk in the country is developing rapidly, given that 80 percent of Indonesians are Muslims and there remains large potential for them to become investors.”

Indonesia has been selling conventional and Islamic bonds during the past year to help plug its growing budget deficit. The country’s budget shortfall is forecast to reach 2.23 percent of the gross domestic product this year, according to a revised 2012 state budget.

Read more at

http://www.thejakartaglobe.com/business/demand-for-local-sukuk-excessive-with-more-likely-ahead-official-says/522996

Ireland may be first EU state to sell Islamic bond

By Elffie Chew

IRELAND plans to become the first European nation to sell sovereign sukuk — Islam-approved financial certificates — as its equal tax treatment for Islamic-finance products attracts investors.

The Government has agreements with more than 60 countries to avoid double taxation on Islamic transactions, Micheál Smith, the south-east Asia director of IDA Ireland, said.

Islamic finance assets around the world may rise about 16% to €1,240 billion this year, Raj Mohamad, managing director at Five Pillars, a consulting firm based in Singapore, told Bloomberg Television yesterday.

While plans to sell sukuk by Britain, France and Luxembourg have stalled, Mr Smith said Ireland will push ahead with a sale.

“Ireland will be going back to the bond market and a sukuk is an option when conditions are right. We also hope to form more working groups with Muslim countries such as Malaysia to build up a critical mass of expertise as the objective is for Dublin to become a centre of excellence for Islamic finance.”

Ireland introduced tax legislation for products that comply with Islam’s ban on interest in 2010, Mr Smith, who is based in Singapore, said.

The Central Bank has a Shariah team overseeing its Islamic funds, which total about €390m under management.

The Irish Stock Exchange listed its first sukuk in 2005 and Ireland is a popular choice for sales because the nation offers a “relatively inexpensive” and timely listing process, he said.

The Government last sold bonds in September 2010, the year it had a deficit that was the highest as a percentage of gross domestic product in the developed world. The Department of Finance estimates the ratio dropped to 10.1% of GDP in 2011 from 31% the previous year.

CIMB Group Holdings, the world’s biggest sukuk arranger, said this week that it got approval to set up the first Shariah-compliant equity funds from Malaysia in Ireland.

Ireland’s bid to become an Islamic finance hub received a boost in October when Goldman Sachs Group got approval from the nation’s central bank to list its $2bn (€1.55bn) sukuk programme. The planned sale has attracted criticism among Islamic scholars, with some saying the proceeds may not be used according to Shariah law.

CIMB-Principal Islamic Asset Management, based in Kuala Lumpur, chose Ireland for its Islamic equity funds because there’s no double taxation and no withholding tax on interest payments, Jim McCaughan, chief executive of US-based venture partner Principal Global Investors, said on Monday.

An initial investment of $20m (€15.5m) will be put into three funds that will open for subscription next month, he said.

“We expect interest from Europe, Malaysia and more importantly the Persian Gulf and other Muslim countries,” Mr McCaughan said. “People are getting wealthier and want to diversify their funds.”

Global sales of sukuk, which pay asset returns instead of interest, total €4.7bn this year, compared with €500m in the same period in 2011, according to data compiled by Bloomberg. Offerings reached a record $36.3bn last year, surpassing the $31bn raised in 2007.

The difference between the average yield for sukuk and the London interbank offered rate, or Libor, narrowed two basis points to 299 basis points yesterday, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index.

The average yield has climbed nine basis points, or 0.09% point, this year to 4.08%.

Shariah-compliant bonds have dropped 0.1% in 2012, according to the HSBC/Nasdaq index, while debt in developing markets declined 0.2%, JPMorgan Chase & Co’s EMBI Global Composite Index shows.

The Bloomberg Malaysian Sukuk Ex-MYR Index of foreign currency Islamic debt sold by companies in Malaysia rose 0.5% this year to 104.919 yesterday. The gauge increased 5.9% in 2011.

Britain cancelled what would have been the first sukuk sale by a Western government last February, saying the debt didn’t offer value for money. Luxembourg ruled out a plan to sell Islamic bonds in 2011 because the government saw no need to raise additional funding. France has legislation in place to facilitate a sale and has yet to proceed with an issue.

Ireland has a Muslim population of 30,000, according to a Department of Finance document covering the nation’s Islamic industry issued in March 2010. Roman Catholics make up 87% of Ireland’s population.

The Islamic Cultural Centre for Ireland and the Immigrant Council of Ireland have all called for more Shariah-compliant initiatives, the report said.

“There’s been no objection to Islamic products being sold in Ireland,” said Mr Smith, who is also a director in charge of the 10-member Association of Southeast Asian Nations at the IDA.

The European debt crisis provides an opportunity for Islamic finance to grow given it is rooted in ethics and religion, according to Nik Norzrul Thani, the chairman of Malaysian law firm Zaid Ibrahim & Co.

“What Ireland is doing is a step in the right direction,” Nik Norzrul said in an interview in Kuala Lumpur.

“Ireland’s ambition to be a Shariah-compliant hub is a recognition that Islamic finance isn’t only for Muslims.”

Read more: http://www.irishexaminer.com/business/ireland-may-be-first-eu-state-to-sell-islamic-bond-180837.html#ixzz1k8GcROxQ

source : Irish Examinar

Indonesian government to offer retail sukuk bonds next March

JAKARTA: The Indonesian government will begin offering retail Islamic debt papers (sukuk) to individual investors in March, after previous issuances drew strong interest, despite the shaky global financial market.
The Finance Ministry’s Debt Management Office (DMO) began accepting applications from banks and brokerages to be sales agents for the government’s fourth issue of syariah-compliant bonds, English daily The Jakarta Post quoted DMO chief Rahmat Waluyanto as saying.
Sales agents would be appointed on January 4 and the offering would be in March. Government debt papers were attractive to individual investors because the return rates were higher than bank deposits. It was also viewed as safe because of government guarantees.
In its last retail sukuk issuance in February, the Indonesian government raised 7.34 trillion rupiahs (US$800.06 million) with an annual coupon rate of 8.15 per cent to be paid monthly, compared with a 6.75 per cent bank deposit rate guaranteed by the Indonesia Deposit Insurance Corporation (LPS).
The government’s retail bond offerings had received strong demand from individual domestic investors, with the last sukuk issuance, exceeding its six trillion rupiah target.
Meanwhile the latest regular retail bond offering saw 20.35 trillion rupiah in bids, although the government ended up selling 11 trillion rupiah in debt papers.
The issuance of government debt papers, in the form of regular and sukuk institutional and retail bonds in rupiah and US dollar dominations, was a move to finance development projects and plug an estimated state budget deficit equal to 1.5 per cent of the country’s gross domestic product (GDP).
The global financial market had been hit by high-level volatility in the stocks, bonds and currency markets on international fund sell-offs over fears of a global economic slowdown on the eurozone debt crisis and the stalling US economic recovery.
Rahmat had dismissed concerns on the retail sukuk issuance due to the shaky markets, saying that the retail market was relatively resilient to crisis, as the investors were individuals. — Bernama

Read more: http://www.theborneopost.com/2011/12/01/indonesian-government-to-offer-retail-sukuk-bonds-next-march/#ixzz1fIJ5nrOk

Sri Lanka, Malaysia partners to promote Islamic banking and bonds

Sri Lanka’s Wealth Lanka Management (Pvt) Ltd, an investment house, and Al Tayseer Advisory Services Sdn. Bhd a Malaysia based consultancy has linked up to provide Islamic banking and bond market instruments, officials said

The firm advices on Islamic banking and corporate finance and advisory services for specialist industries like steel, cement and cotton.
“We find Sri Lanka as an emerging market for Islamic finance with immense future growth potential,” Al Tayseer Advisors Services, chief executive and partner Fahd Hashim, told reporters in Colombo.

“Sri Lanka is the second fastest growing economy in Asia right now and growth is linked to public sector investment with imports of cement steel.”

Al Tayseer can help with setting up plants or acquiring them to supply commodities to Sri Lanka, Hashim said.

The firm was also working in Pakistan. Hashim said it was already advising a Pakistan based cement maker that is exporting to Sri Lanka. In addition to corporate finance the consultancy also advised in materials and energy efficiency and use of carbon credits.

Mangala Boyagoda, head of Wealth Lanka Management, a senior fixed income specialist in Sri Lanka said the new partnership could provide Shariah based bond market products to help create an interbank market in Islamic finance.

“You cannot develop Shariah banking without an interbank market,” Boyagoda said. “We are looking at the possibility of raising a Shariah government bond.”

Though several banks have Islamic finance units in the country, they have constraints in Treasury management due to lack of compliant products.

The partnership will also advice on setting up Islamic banking units or outsource such units for banks, finance companies and leasing firms, Hashim said.

source : lbo – Sri lanka

Sharia debt funds post biggest gains

Karachi: Pakistan’s biggest Sharia- compliant debt funds are posting the best returns for sukuk investors this quarter as an export revival boosts bonds sold by the government and agricultural companies.

The JS Islamic Pension Savings Fund-Debt, owned by JS Investments, and the NAFA Islamic Aggressive Income Fund, managed by NBP Fullerton Asset Management, recorded gains of 3.9 per cent and 3.2 per cent, data compiled by Bloomberg show. The Meezan Capital Protected Fund-I run by Kuwait’s Noor Financial Investment returned 3 per cent, ranked third among 76 such vehicles tracked by Bloomberg. The three Karachi-based funds oversee 57 billion rupees (Dh2.4 billion) of assets. Pakistan’s government forecasts economic growth will more than double to 2.5 per cent in the 12 months ending June 30.

source : gulf news

Sukuk bill may be revived despite pastors’ opposition

Korean lawmakers may revive legislation scuttled earlier this year amid opposition from church leaders that would pave the way for the first Islamic bond sales in the country.

A group of legislators will review the proposal as early as November regulating taxes on sukuk, or bonds that comply with Shariah law, said Choi Sung Soo, assistant director of the office of the committee’s Chairman Kang Ghil Boo. Lee Man Sub, head pastor at the Korean Association of Church Communication, was among Christian leaders seeking to stop the plan on concern Islamic charities would funnel contributions to terrorist activities from zakat, a tax paid by Muslims with wealth to be distributed to the poor and needy.

Sukuk sales in the nation could reach $1 billion a year as companies including GS Engineering & Construction Corp. try to raise financing that complies with Islam’s ban on interest to build power plants and skyscrapers in the Middle East, according to Korea Investment & Securities Co. The United Nations has a list of hundreds of organizations and individuals it suspects of supporting terrorism in a bid to control funding.

“Several church pastors have approached me, worried that Korean money would go to terrorists,” Yoo Il Ho, a committee member who belongs to the governing Grand National Party, said in an interview in Seoul. “But I told them that these bonds have nothing to do with that.”

There are about 35,000 Muslim residents in Korea and more than 100,000 Muslim foreign workers, said Cho Min-Haeng, director of administration at the Korean Muslim Federation in Seoul. The country has a population of about 49 million.

Protestants and Roman Catholics together make up the largest religious group in Korea, comprising 18.3 percent and 10.9 percent, respectively, according to a 2005 population census from the statistics office. About 23 percent are Buddhist and the rest are mostly non-religious, the census said.

Approving the tax “will be like pouring gasoline over a burning fire,” said Lee, whose organization represents the nation’s Christian groups in the media in Seoul. “That money can be used for terrorism, or money-laundering in our banks. It’s unfair to give them a tax advantage and with all that money pouring in, they could take control over our economy.”

He also cited concern proceeds would fund Islamic schools and infrastructure at home, which will mean “more Koreans may become Muslim.”

Korea Investment, a Seoul-based brokerage that said in February it hired Shariah scholar Mohammed Daud Bakar to help structure Islamic financial products, has put plans on hold because the legislation has yet to be approved. Mohammed Daud declined to comment in an e-mailed response to questions.

Concern that sukuk will fund terrorist activities is a “certain kind of phobia” and is difficult to substantiate, said Lee Yul Hee, head of the Islamic finance team at Korea Investment in Seoul.

Closer ties with the Middle East would help narrow Korea’s only regional trade deficit, he said. The Gulf Cooperation Council states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates pumped 68 percent of Korea’s oil and 53 percent of its natural gas last year, causing a $38 billion deficit, according to the Korea International Trade Association.

Korea Electric Power Corp., the nation’s biggest supplier, won a $20 billion contract to build nuclear power plants in the U.A.E. in December. Samsung Engineering Co., its biggest engineering company, won a $1.5 billion contract in April to build utility and offsite facilities for a gas project in Abu Dhabi. Samsung C&T Corp., the second-biggest contractor, built the world’s largest tower in Dubai. All the companies are based in Seoul.

Woori Investment & Securities Co., a unit of Korea’s third-largest financial company, signed an agreement in March with Qatar Islamic Bank SAQ, the Gulf state’s biggest Shariah- compliant lender, to cooperate in investment banking services, the Asian company said in an e-mail on March 10.

Mohamed Azahari Kamil, head of Asian Finance Bank Bhd., the Malaysian unit of Qatar Islamic, said the issue of terrorism was never discussed.

“There’s not enough evidence to prove that” charities are being used to fund terrorism, Mohamed Azahari said in an interview from Kuala Lumpur. “The accusation is baseless.”

Islamic bonds, which are based on the exchange of asset flows rather than interest, returned 3.7 percent this quarter, beating a 0.8 percent gain in the three months ended June 30, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in developing markets gained 7 percent this quarter, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The spread between the average yield for sukuk and the London interbank offered rate narrowed eight basis points, or 0.8 percentage point, so far in August to 393, according to the HSBC/NASDAQ index.

Global sales of sukuk fell 14 percent to $10 billion so far this year, according to data compiled by Bloomberg. Issuance totaled $20.2 billion last year, up 43 percent from 2008. Debt offerings will increase in the second half, led by first-time issuers, because of improved international market conditions, Standard & Poor’s said in a statement on July 28.

The yield on Malaysia’s 3.928 percent dollar-denominated Islamic note due June 2015 fell 25 basis points this month to 2.67 percent, according to prices from the Royal Bank of Scotland Group Plc.

Korea’s Ministry of Strategy and Finance is pushing ahead with plans to sell Islamic bonds to diversify financing, said Sohn Byung Doo, director at the international financial policy division in Seoul. The global credit crisis in 2008 caused international funds to leave the country, he said.

“Sukuk will allow Korea to diversify funding sources, especially since capital flight during a crisis may dry up money pools,” he said. 

source : korea herald

Saudi Sukuk Double on Spending as New Islamic Issues Drop: Islamic Finance

By Haris Anwar

Saudi Arabian real estate and energy companies are leading Islamic bond sales from the Persian Gulf as the kingdom’s $400 billion stimulus plan, the biggest among the Group of 20 nations, boosts spending.

Sukuk from borrowers in the largest Arab economy may more than double to $4.5 billion this year from $2.1 billion in 2009, as a “scarcity” of local notes that comply with the religion’s ban on interest bolsters demand from local banks, according to Riyadh-based HSBC Saudi Arabia Ltd.

Saudi Arabia, the world’s largest oil supplier, announced the five-year plan in 2008 to spur economic growth and finance construction projects. Saudi Finance Minister Ibrahim al-Assaf said on Feb. 11 that gross domestic product may increase more than 4 percent in 2010, compared with 0.6 percent last year.

“There’s going to be a reasonable amount of sukuk supply this year,” Rajiv Shukla, managing director and head of global capital finance at HSBC Saudi Arabia in Riyadh, a unit of HSBC Holdings Plc, said in an interview yesterday. “Saudi Arabia has been a steady supplier.”

Saudi Electricity Co., the Arab world’s largest utility, and Dar Al Arkan Real Estate Development Co., the biggest Saudi developer by market value, led sales of the bonds so far in 2010, according to data compiled by Bloomberg. Saudi Arabia is rated Aa3 by Moody’s Investors Service and AA- by Standard & Poor’s, the fourth-highest rankings.

The average yield on sukuk sold by Gulf Cooperation Council issuers fell 17 basis points to 6.77 percent on July 30, according to the HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index. It’s still up from the year’s low of 6.6 percent on April 15.

New Issues

State-controlled Saudi Electricity sold 7 billion riyals ($1.9 billion) of 20-year Islamic bonds in May at 95 basis points more than the three-month Saudi riyal interbank offered rate. That compares with a spread of 160 basis points on 7 billion riyals of similar-maturity debt in June 2009. The company may issue sukuk overseas in 2011, Executive Director of Treasury Fahad Alsudairy said on May 18.

“The new sales will entirely or almost entirely be riyal- denominated,” said Shukla at the unit of Europe’s largest lender. “Local Saudi banks are very flush with riyals and there has been scarcity of riyal-denominated paper.”

Banks tightened rules for lending after Saad Group, the business owned by Saudi billionaire Maan al-Sanea, and Ahmad Hamad Al-Gosaibi & Brothers Co. defaulted on loans last year after borrowing at least $15.7 billion from about 80 banks. Dubai World said in November it was seeking to renegotiate liabilities.

U.A.E. Lags

Sales of Islamic notes from companies in the Gulf have dropped 24 percent to $2.5 billion so far in 2010, the lowest level since 2005, data compiled by Bloomberg show. Twenty-six companies from Malaysia raised 9.6 billion ringgit ($3 billion) from sukuk sales in the period, according to the data. Islamic debt is typically backed by assets or cash flows because of Shariah law’s ban on interest.

National Bank of Abu Dhabi PJSC, the United Arab Emirates’ second-largest lender by assets, sold 500 million ringgit in the only Islamic debt offering from the emirate this year.

“It may not be easy for Gulf countries to lead sukuk issuance because real estate, the most trusted underlying asset for sukuk, is in crisis in the region,” Pervez Said, chief executive officer of Dawood Islamic Bank Ltd., said in an interview in Karachi on July 30. “The underlying asset for a sukuk must have credibility and when the real estate has lost its value, investors will be reluctant to buy the bond.”

Debt Negotiations

Dubai World, which is renegotiating terms on $23.5 billion of liabilities, said on July 22 it expects to complete the agreement in “coming months.” Property unit Nakheel PJSC, which held a separate meeting with its lenders July 14, said a group of creditors representing banks “unanimously supported” a proposal on terms of $10.5 billion of loans and unpaid bills.

The yield on the Dubai Department of Finance’s 6.396 percent sukuk due in November 2014 rose two basis points to 7.12 percent today, according to data compiled by Bloomberg. The difference over similar-maturity U.S. Treasuries has widened to 582 basis points from 406 when the debt was sold in October.

The difference in yield between the Dubai bonds and the Malaysian government’s 3.928 percent Islamic note due June 2015 has widened 42 basis points since June 2 to 417 basis points, according to data compiled by Bloomberg.

Place Cash

Saudi Binladin Group issued a 700 million riyal sukuk last month through a private placement to Saudi investors as the Jeddah-based company expands, lead manager HSBC Saudi Arabia said on July 17.

“There is liquidity in the system both from the institutional side to large companies that want to place their cash in Islamic paper,” John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, said yesterday. “The supply is coming from capital investments the kingdom is undertaking.”

source : bloomberg