Goldman Sachs to launch an Islamic Compliant Bond?

When Goldman Sachs Group Inc (NYSE:GS) starts reviving its plans to launch Islamic Bonds worth $500 Million you know that Islamic Finance has hit mainstream bigtime! It’s now time for big banks to tap into the Middle Eastern oil money.

Meetings have already started with investors from Qatar and UAE to discuss the issuance of the sukuk. Goldman Sachs Group Inc (NYSE:GS) representatives did not comment on these developments. In 2011 Goldman Sachs Group Inc (NYSE:GS) was accused of not following Islamic principles such as monetary speculation and no interest.

After HSBC’s (HSBA.L) $500 Million issue in 2011, Goldman Sachs (GS.N) will be the second non-Islamic bank selling sukuk. Even Societe Generale (SOGN.PA) in France and Japan’s Bank of Tokyo-Mitsubishi UFJ (8306.T) are preparing for their sukuk issues in Malaysia.

Zawya the company owned by Thomson Reuters reported this year’s total sukuk issues to be $85.9 Billion with 456 global deals, which is up from last year’s total of $74.9 Billion and only 558 deals. This might seem like insignificant numbers; however they are substantial enough for borrowers in the west to join in.

Even non-Muslim governments have started issuing sukuk and the UK started this trend in June with Hong Kong, South Africa and Lexembourg all set to follow suit.

What the real controversy is…

Goldman (GS.N) tried Suksuk sales back in 2011 as well; however since it was a symbol representing all that is western, it was considered a bank that possibly would not follow Islamic principles. The most popular suspicion was dealing with money with interest and the issue of not trading at par which defies Islamic Sharia. Even with Goldman (GS.N) insisting that Islamic scholars gave the 2011 plan certification and the speculations were baseless the sukuk issue never materialized.

This time round Goldman (GS.N) isn’t taking any chances and has based its sukuk structure on a wakala instead of a murabaha. Murabaha being a cost plus selling technique is criticized for resembling financial reengineering too much. As opposed to wakala which is a technique for one party’s assets being managed by another party.

Point to note here is that HSBCs’ (HSBA.L) 2011 issue was a wakala, and along with Goldman (GS.N), Societe Generale (SOGN.PA) and Band of Tokyo-Mitsubishi UFJ (8306.T) all have chosen wakala for their issues. Reflecting this choice by Goldman (GS.N), the market indications point towards a more favourable response.

Islamic Finance will greatly benefit by the involvement of these big western institutions by giving them an immediate access to an immensely large investor base and innumerable experts involved in developing these Islamic instruments.

The Shariah advisorys’ chairman Daud Bakar under the Malaysia Central Bank advises Goldman (GS.N) towards full disclosure on the underlying project.

Investor meetings included Goldman Sachs (GS.N), the Abu Dhabi Islamic Bank (ADIB.AD), the National bank of Abu Dhabi (NBAD.AD), Emirates NBD (ENBD.DU) and Saudia Arabias’ National Commercial Bank’s (IPO-NACO.SE) investment banking division. The vehicle which shall be used for the issue is JANY Sukuk Co with Goldman Sachs (GS.N) guaranteeing it. The issue will have the same ratings as the investment bank, an A- by S&P and an A by Fitch.