Islamic finance

  • 12 Jan 2012 at 6:52 PM


In for a penny, in for a pound on the sacrilege front, so let’s talk metaphysics for a minute. Last night a reader who knows more than us about Islamic finance sent us a thoughtful email about the somewhat broken Goldman Sachs sukuk deal, saying in part:

The Shari’ah scholars listed in the base prospectus were described as “expected” to rule on the Shari’ah-compliance of the sukuk, so GS has an out. However, there is a big caveat here that makes it more problematic than it first appears. In Islamic finance, particularly in sukuk issued by Western financial institutions, the “nameworthiness” of the scholars on the board is viewed as important for selling the sukuk. While there are a few hundred scholars qualified to rule on the Shari’ah-compliance of financial instruments, there are about 10 that are internationally recognized and who are the most high profile. Goldman listed almost all of them …. There are a few exceptions, but when I first read the Prospectus, I thought they had just gone overboard with the number of top-name scholars. …. Goldman was basically name dropping as many top scholars to gain credibility but, they were found out.

Again, oops. And strange and amusing. But it also helped me clarify why I find the whole situation so interesting. That description is, with a few small differences of detail, exactly how you’d go build a financial product that is novel under U.S. tax or securities or whatever law. You’d have some people at a bank cook up a thing, and then you’d go call some lawyers to bless it. The more aggressive and high profile your thing is, the more important it would be to get (1) a whole bunch of (2) very prominent high profile lawyers to sign off on it.

When I worked designing financial products, I knew the informal list of outside lawyers who could sign off on the tax treatment or securities law approach or whatever of a novel structure. These were short lists, and something seriously borderline required multiple signoffs. This wasn’t, like, required by law or anything. I doubt it was even a written internal policy. It was just what everyone expected. There are some differences – there is a written policy, promulgated by an Islamic finance trade group, requiring three certifiable signoffs; and in US products you wouldn’t advertise all the lawyers who gave you informal opinions though you do advertise named advisors and some tax opinions in the prospectus. But basically the practices, of going to a smallish group of widely recognized independent experts and asking them to more or less formally sign off on the permissibility of what you’re up to, are very similar.

But the epistemology behind those practices differs in a maybe interesting way. Read more »

  • 11 Jan 2012 at 6:50 PM

Goldman Sachs Loses Another Demographic

So, yeah, juvenile of me, but it’s just a little hard to keep an entirely straight face about the fact that Goldman Sachs is the first U.S. bank to venture into the world of Islamic finance. And it’s not going so hot:

Goldman Sachs’ controversial $2 billion Islamic bond programme faced a fresh challenge on Wednesday as it emerged that at least two scholars named as potential approvers had not even seen the prospectus.

Asim Khan, an adviser to Goldman on the issue which needs approval from sharia scholars to proceed, confirmed media reports that three of the eight scholars listed as potential approvers had not responded to requests to endorse the issue, but he said their lack of co-operation had no bearing on its sharia credentials.


I went and found the prospectus and it’s fascinating for someone, like me, whose understanding of Islamic finance basically comes from Wikipedia. Now, even I know that the basic idea of a sukuk is to replicate a fixed income, or let’s say not-quite-common-equity-anyway, financial instrument without the use of “interest,” because interest is forbidden under Shari’a law. This, actually, is a topic close to my heart, because it turns out that in regular old American law sometimes “interest” is also forbidden, and by “forbidden” I mean “taxed,” which means that people who do what I used to do have certain incentives to turn things that look like taxable interest into things that look like non-taxable equity returns and vice versa. One thing you learn in that line of work is that it’s in large part the business of defeating substance with form: you pay for the use of money over time, but fall into some category of “paying for money over time” that isn’t what that is normally called, viz. “interest.” There are ways to do that in American tax law (one is called “option premium,” true story), and there are apparently ways to do it under Islamic law (one is called “murabaha,” which is what GS is aiming at here, and it’s basically the equivalent of “getting paid a fee for brokering a commodity transaction with forward settlement”).

It’s unclear if Goldman achieved that here. Read more »