* Western banks increasingly interested in sukuk
* But controversy could affect their entry into sector
* Advisor mounts detailed defence in Reuters column
* Says funds will not be used for interest-base lending
* Argues Goldman's entry could help solve industry'sproblems
By Andrew Torchia
DUBAI, Jan 2 (Reuters) - An advisor to Goldman Sachs has defended the U.S. bank's $2 billion Islamic bondprogramme against criticism it may contravene religiousprinciples, in a controversy that could affect Western banks'ability to enter the Islamic debt market.
In October, Goldman registered the sukuk programme with theIrish Stock Exchange. It set up a Cayman Islands-registeredspecial purpose vehicle, Global Sukuk Co Ltd, to issue a sukukbased on murabaha, a cost-plus-profit arrangement which complieswith Islamic law.
Some analysts however have suggested Goldman might use theproceeds of the issue to lend money to clients for interest,which would be against Islamic law, and that the issue might nottrade at par value on the Irish exchange, which would alsocontravene sharia law.
Asim Khan, managing director at Islamic finance advisoryfirm Dar Al Istithmar, said such speculation was groundless.
"Bulge-bracket banks such as Goldman Sachs can bring toIslamic finance their sophistication and depth of experience inliquidity management and equity/quasi-equity investment, whichcan take Islamic finance closer to its true ideals, so long asthey adhere to the generally accepted sharia principles," Khansaid.
"So far there is no basis to speculate otherwise," Khan,whose London- and Dubai-based company advised Goldman on thesukuk, wrote in a column contributed to Reuters. (For the fullcolumn, click on ).
As the euro zone debt crisis poisoned conventional debtmarkets last year, several big Western banks considered raisingmoney through Islamic finance, which is based on religiousprinciples and bans the payment of interest and pure monetaryspeculation. The Arab Gulf, home to billions of dollars ofIslamic investment funds, has been relatively untouched by thefinancial crisis.
HSBC's Middle East unit became the first Westernbank to issue a sukuk last May with a $500 million Islamic bondcarrying a maturity of five years. French bank Credit Agricole has said it is considering issuing an Islamic bond orcreating a wider sukuk programme that could lead to severalissues.
Unlike HSBC with its HSBC Amanah brand, however, Goldmandoes not have an established presence in the Islamic bankingsector, and its entry into the market has caused controversy.
Mohammed Khnifer, an Islamic finance analyst in SaudiArabia, wrote that Goldman might use the proceeds of the sukukto fund conventional banking activities. He suggested the sukukmight trade on the Irish exchange at levels other than parvalue, which would be impermissible under sharia law, and thatthe underlying structure of the sukuk might not be murabaha butreverse tawarruq, which has been ruled unacceptable by someIslamic scholars as an effort to hide the use of interest.
In his column, Khan wrote that the prospectus clearly showedthe proceeds of the sukuk would not be used to lend money toGoldman clients for interest.
"Goldman Sachs, as an investment bank and as a proprietarycommodity trader, has invested billions of dollars incommodities and will use the murabaha commodities in itscommodity trading business, which will partly replace theconventional funding with Islamic finance," he wrote.
Khan said the prospectus had informed investors that thesukuk should only be traded at par value, and had warnedinvestors there was not expected to be a secondary market in theinstrument.
He argued that the Goldman deal had a legitimate murabahastructure. "One would have to stretch one's imagination a bittoo far to label such a vanilla murabaha transaction as atawarruq," he wrote.
Khan also suggested Goldman's entry into Islamic financecould help the industry overcome obstacles hindering itsexpansion, including a shortage of tools to help banks managetheir liquidity, and a lack of sufficient involvement byinstitutional funds.
"The benefits of a large investment bank's foray intoIslamic banking could be significant," he wrote.
Controversies over the permissibility of financialinstruments, which can affect investors' willingness to putmoney into them, have characterised Islamic finance since it wasborn in its modern form in the 1970s. A range of scholars andindustry bodies set product standards which are sometimescontradictory and act as guidelines rather than firm,enforceable rules.
Goldman has said its sukuk could be denominated in UnitedArab Emirates dirhams, U.S. dollars, Saudi riyals or Singaporedollars. It has not disclosed a time frame for issuance, but hasinsisted that Islamic scholars have given the programme adequatecertification that it complies with sharia principles.