Monday, March 19, 2012

Trading murabaha (Arcapita and Goldman Sachs)

There are a lot of areas where criticism has been directed at Goldman Sachs' murabaha sukuk, but one area can probably be dismissed: the listing of the sukuk on the Irish Stock Exchange.  The concern is that the sukuk will be traded at values other than par, which is not allowed in most cases (outside of Malaysia where bay' al-dayn or debt trading is permitted). 

The argument from Goldman Sachs is that the listing on the Irish Stock Exchange is for "tax mechanism purposes", not for trading according to a Shari'ah scholar quoted by EuroWeek.  The prospectus states that the sukuk is not tradable except at par, but this is just a statement from the scholars, not a legally binding part of the prospectus.  A spokesperson for the Irish Stock Exchange has also said it "would not be appropriate for an exchange to determine price in the market" (also from the EuroWeek article). 

This makes sense, and while not desirable from a Shari'ah perspective, will inevitably be a concern whether or not the sukuk is listed.  Arcapita's $1.1 billion murabaha (which the company was not able to roll-over leading the firm to file for Chapter 11 bankruptcy protection) would have contained a similar requirement around trading for Shari'ah-compliant investors, yet it traded a year ago at 76 cents on the dollar and other market data suggests it was trading between 50 and 60 cents a few months ago. 

I am not making an argument on Shari'ah grounds here (I am utterly unqualified to make a judgement on such an issue), but on the mechanics of how Islamic finance interacts with the conventional financial system.  There is no requirement that Islamic debt be subscribed only by Shari'ah-compliant investors, nor would that make sense.  The issuer buys a commodity (or other tangible asset) from the investors at the cost plus a markup and agrees to make deferred payment for the asset.  The Shari'ah board reviews the transaction to ensure it complies fully. 

An Islamic financial institution which subscribes to the murabaha would hold the debt and could--if it chooses--sell it to another institution, but only at par (something its own Shari'ah board would oversee and sign off on).  However, the other investors who are not required to be Shari'ah-compliant are freely able to trade that receivable to other conventional investors at whatever price they decide is fair (if they were to sell to an Islamic financial institution, the buyer's Shari'ah board would likely determine that the purchase must take place at par). 

The murabaha issued to conventional investors is subject only to the law chosen that governs it (e.g. English or New York law is most common) and the post-sale transactions with non-Islamic investors would be governed by whatever securities laws apply to the buyers and sellers.  It would be inappropriate and impossible to have Shari'ah scholars ruling on the transactions between two parties who do not subject themselves to remaining Shari'ah-compliant.  Nor would transactions at prices besides par make the rest of the issued murabaha not Shari'ah-compliant. 

Returning to the Goldman Sachs sukuk, there are other more pressing issues for potential Islamic investors than the tradability of the sukuk.  For example, the use of proceeds and the ability of a non-Shari'ah-compliant institution to fund its non-compliant businesses using Islamic financial products. 

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