SocGen Avoiding Goldman Missteps With $300m Sukuk Plan

With its plan to issue up to 1 billion Malaysian ringgit ($305 million) of Islamic bonds, Societe Generale appears to be avoiding missteps made by Goldman Sachs in an ill-fated attempt to sell sukuk two years ago – a positive sign for Western banks’ efforts to move into Islamic finance.

SocGen aims to issue the first tranche of its sukuk programme by the end of this year in Malaysia, sources familiar with the matter told Reuters.

It would be only the second big European bank to issue sukuk, and the first to do so in Asia; the Middle East unit of HSBC tapped the market in 2011 with a $500 million issue.

Goldman Sachs tried to follow HSBC in late 2011 with a $2 billion sukuk programme, but its plan ran into controversy among Islamic scholars and analysts, who questioned whether the U.S. investment bank was obeying religious principles.

The debacle threatened to hurt Islamic markets’ acceptance of Western banks in general. SocGen’s less controversial plan may now ease that worry, however.

Because it plans to issue in Malaysia’s centralised regulatory environment, the French bank has a clear set of rules to follow which may help it to avoid the issues faced by Goldman, said Aznan Hasan, an Islamic scholar who worked on preparing the Goldman sukuk plan in 2011 and serves on both of Malaysia’s central sharia boards which supervise the industry.

“There were two issues with Goldman Sachs – the first was the use of the proceeds and the second was tradability. If Goldman had managed to follow the instructions by the sharia scholars, there would have been no issue at all,” he told Reuters.

CONTROVERSY

Goldman registered its sukuk programme with the Irish Stock Exchange in October 2011, setting up a special-purpose vehicle in the Cayman Islands to issue a sukuk based on murabaha, a common cost-plus-profit arrangement in Islamic finance.

The plan ran into criticism from some Islamic scholars and analysts who suggested Goldman might use the proceeds of the issue to conduct conventional banking, violating Islam’s ban on interest payments.

There was also concern that the issue might not trade at par value on the Irish exchange, which would contravene sharia law’s prohibition on monetary speculation, and debate over whether the underlying structure of the sukuk was murabaha or reverse tawarruq, which has been ruled unacceptable by some Islamic scholars as an effort to hide the use of interest.

Complicating the situation was the way in which Goldman arranged for sharia scholars to vet the issue. The prospectus said eight scholars were “expected” to approve it, before all of them had actually signed off on the plan.

Goldman insisted its planned sukuk complied with all Islamic principles, and the instrument was eventually endorsed by 10 eminent scholars, according to the U.S. bank’s sharia advisory firm. According to regulatory filings, Goldman still maintains its Cayman Islands vehicle.

But a public issue of sukuk never went ahead and the prospectus on the Irish exchange is now well past its 12-month validity period – making Goldman’s plan a public relations headache for the U.S. firm, and a missed opportunity for the Islamic finance industry to increase its credibility by engaging with a top global institution.

CENTRALISED

SocGen has declined to comment on its own plan, but initial signs are that it will manage to avoid many or all of the pitfalls which tripped up Goldman. So far, news of SocGen’s issue has not prompted nearly as much debate in the industry.

Malaysia has developed a centralised approach to Islamic finance, with issuers required to obtain the approval of a sharia board at the central bank and products needing to be vetted by a sharia board at the securities commission.

After the approval of those two boards is granted, other scholars will find it hard to challenge the SocGen sukuk – and even if objections are raised in the Gulf, a large pool of southeast Asian investors, comfortable with Malaysia’s regulatory approach, are likely to buy the issue.

“With the proposed SocGen sukuk…in our regulatory framework, it mentions clearly that any issuance of sukuk shall be used for sharia-compliant purposes. This is built into our regulation, so the issue would not arise at all,” Hasan said.

A source familiar with the matter said SocGen had obtained a green light from the Malaysian central bank for the issue and was now seeking approval from the securities commission.

“The structure is still being worked on as SocGen is after the highest possible rating for better pricing,” he said.

One of the structures being considered by SocGen is wakala, an arrangement in which one party acts as agent for another, the source said. In a wakala sukuk, certificates are issued by an originator to buy specific assets which are given to the agent, who charges a fee for his services. The originator undertakes to buy the assets on maturity at an agreed price.

The HSBC sukuk of 2011 used the wakala structure, which has been favoured by many scholars over murabaha because of its clearer link to the assets backing the structure. It is also tradable, making it popular for interbank transactions.

“HSBC issued sukuk before and they used this to grow their own sharia-compliant businesses. If SocGen wants to issue a sukuk in Malaysia, they have to comply with that ruling as well,” said Hasan.

“If they use a structure that is tradable in nature, for example a sukuk ijara, wakala or musharaka, there shall be no issue with tradability.”

Proceeds from SocGen’s sukuk would be used to buy sharia-compliant assets in Dubai, where the bank’s private banking operations for the Middle East are based, said the source. Sukuk issued under the programme could carry tenors ranging from five to ten years, said a second source with knowledge of the matter.