Kuala Lumpur: Islamic bond programmes from a trio of big conventional banks are set to expand the boundaries of Islamic finance, helping open the market to first-time issuers while testing the banks’ ability to win over industry purists.

Since June, France’s Societe Generale, Bank of Tokyo-Mitsubishi UFJ (BTMU) and Goldman Sachs have set up sukuk programmes, aiming to tap the pool of cash-rich Islamic investors.

They are treading a fine line, having to reconcile the fact that their businesses mostly depend on conventional banking practices — interest payments, and to some degree monetary speculation — which Islamic principles forbid.

An abortive plan by Goldman to issue sukuk in 2011 showed the obstacles which conventional banks can face in the market.

Some in the industry accused Goldman of failing to follow Islamic principles, and it never went ahead with that issue.

But if the three banks are successful and become regular sukuk issuers, they could help to widen Islamic finance beyond its core markets in the Middle East and south-east Asia.

Governments in non-Muslim countries are already issuing sukuk; Britain and Hong Kong made debut issues earlier this year, while South Africa and Luxembourg are next in line. The entry of conventional banks into the market may be needed to prompt significant numbers of Western companies to issue.

“It builds credibility in an industry that is attracting many new participants,” said Khalid Howladar, Moody’s Investors Service’s global head of Islamic finance.

“Key financial institutions represent volume issuers in mature markets. They will improve liquidity and encourage more global investor participation.” Year-to-date, sukuk issuance totals $88.9 billion through 475 deals globally, up from $76.4 billion (Dh280.6 billion) through 574 deals a year earlier, according to Zawya, a Thomson Reuters company.

But the market remains stubbornly reliant on sovereign and quasi-sovereign issuers, who represent a combined 77 per cent of the total; most corporate sukuk come from Malaysia.

Only a few companies from non-Muslim countries have so far issued sukuk, including GE Capital, which in 2009 raised $500 million through five-year Islamic bonds backed by interests in a portfolio of aircraft, and Japanese brokerage Nomura Holdings, which in 2010 issued $100 million of two-year sukuk in Malaysia.


HSBC is the only non-Islamic bank to have issued sukuk, through a $500 million deal in 2011. Market acceptance of that deal was ensured in part by the fact that HSBC operates a major Islamic retail brand, HSBC Amanah.

SocGen and BTMU, Japan’s largest lender, do not have Islamic retail banking brands. So they have been building their Islamic credentials by establishing strategic relationships with heavyweight Islamic financial institutions.

BTMU, which set up its $500 million multi-currency sukuk programme in Malaysia in June, signed in April a cooperation agreement with the Jeddah-based Islamic Corporation for the Development of the Private Sector (ICD), the private sector arm of the Islamic Development Bank.

Last week, BTMU extended $100 million in murabaha financing to the ICD, marking the first time that the ICD had raised cash from a non-Islamic financial institution. Murabaha is a common cost-plus sale arrangement in Islamic finance.

The participation of conventional banks in Islamic finance is positive as long as they ensure adherence to sharia principles in a way that is acceptable to the market, the ICD said in a statement to Reuters.

“The recent murabaha agreement marks the first step along this path and we fully expect the relationship to grow, develop and strengthen over the coming years.” SocGen, which also set up a sukuk programme in Malaysia in June, offers Sharia-compliant commodity hedging tools to corporate clients. Last year, it helped Dubai-based cable manufacturer Ducab migrate most of its commodity hedging needs into Islamic equivalents.

“We know there are many similar companies to Ducab within the region and we do hope they will gradually move into sharia-compliant programmes,” said Dubai-based Mohamed Virani, SocGen’s head of Islamic products.

“It’s a natural progress in the evolution of the Islamic finance market as it develops and matures.”

Different tack

The biggest leap could be for Goldman, which is viewed by some in Islamic finance as a symbol of Western financial engineering. Though it insisted that its 2011 sukuk plan obeyed sharia principles and had enough certification from Islamic scholars, it is taking a different tack with this year’s plan.

While the 2011 plan was a $2 billion programme of one-year sukuk, the current plan appears smaller; lead managers said the issue would be benchmark-sized, meaning at least $500 million, and the tenor would be longer, at five years.

Goldman sought advice for its latest plan from two of the same scholars whom it cited for its 2011 scheme, Abdul Sattar Abu Ghuddah and Mohammad Al Gari, a source familiar with the plan said. This time, however, Goldman has also revealed the banks arranging the issue: Abu Dhabi Islamic Bank (ADIB), Emirates NBD, National Bank of Abu Dhabi and Saudi Arabia’s National Commercial Bank.

The involvement of four top Gulf banks, including ADIB which has a Sharia board led by the prominent scholar Taqi Usmani, may go a long way towards removing the misgivings which dogged Goldman’s 2011 plan.

Goldman has also changed the structure of its sukuk plan.

While its 2011 scheme was based on murabaha, its current plan has a hybrid structure and envisages operating only 49 per cent though murabaha and 51 per cent through a structure called wakala.

Under wakala, certificates are issued by an originator to buy assets which are given to an agent, who charges a fee for managing the assets, Some scholars favour wakala over murabaha because of its clearer link to the assets backing the sukuk; the HSBC issue in 2011 was wakala, as are the issuance plans of SocGen and BTMU.

The fact that the Goldman sukuk is predominantly wakala may remove one objection to its 2011 plan: that the sukuk might be traded at prices other than par value. Trading wakala structures is relatively uncontroversial, according to scholars.

Hybrid formats have been used in the past by the likes of the Islamic Development Bank, Abu Dhabi Commercial Bank and Qatar International Islamic Bank, combining different Islamic structures among which at least one is tradable to ensure the sukuk can be bought and sold in the secondary market.

Another objection to Goldman’s 2011 sukuk, which the US bank said was unfounded, was that the proceeds might be used in interest-bearing finance. Documentation for the current sukuk plan, seen by Reuters, does not appear to address that issue directly, though it says proceeds would be used in the commodities business of J. Aron & Co, a Goldman unit.

“The thing they have to be most careful with is the use of the proceeds. They are a conventional bank, so they need to show that the proceeds are going to Sharia-compliant purposes,” said Shamsiah Mohammad, senior researcher at the Malaysia-based International Sharia Research Academy.