In 2015, Islamic finance made slower progress than expected in Luxembourg. Indeed, although the industry continued to benefit from strong government support through the Luxembourg for Finance (LFF) and the Association of the Luxembourg Fund Industry (ALFI), the high expectations raised by some local private promoters in 2014 were not met. Nevertheless, it is encouraging to note the growing interest by prominent Middle-Eastern Shariah compliant financial institutions in developing Islamic banking in Europe through a Luxembourg subsidiary. Various local conventional banks and service providers have recently set up a presence in the UAE to be closer to a promising market. Based on this trend, we believe 2015 has been a year of transition in Luxembourg.
Review of 2015
The IFN Europe conference was held in Luxembourg for the second year, underlining Luxembourg’s role as a European Islamic financial center, especially in the Sukuk (commonly referred to as Shariah compliant bonds) and investment funds sectors.
Luxembourg’s prime minister, Xavier Bettel gave a keynote speech at the October 2014 World Islamic Economic Forum in Dubai. In March 2015, Luxembourg’s hereditary Grand Duke Guillaume and his wife Grand Duchess Stephanie, along with a delegation of local businesses led by the minister of finance participated in seminars in Dubai and Doha covering topics such as private banking, investment funds and Islamic finance. This demonstrates Luxembourg’s strong willingness to be recognized as an Islamic financial center in Europe.
According to the LFF, factors encouraging the growing Luxembourg Sukuk market include its fast securities listing procedures (a maximum of two days in 99% of the cases). Luxembourg is also able to offer full service processes including listing, trading and reporting. Sukuk listed on the Luxembourg Stock Exchange (LuxSE) are attractive to European and international investors.
The strategic progress in this market allied with recognition in capital markets took Luxembourg to important landmarks such as being the first European country to list a Sukuk in 2002. It was also recently the domicile of the first sovereign Sukuk denominated in the euro.
Twenty Sukuk have been listed on the LuxSE, with 11 ongoing or yet to reach maturity. Issuers include the IDB, South Africa, Pakistan, PETRONAS, Merrill Lynch, Goldman Sachs and Emirates Airlines. The most recent issuers were Goldman Sachs and South Africa with total amounts of US$500 million each.
The year 2015 confirms the position of Luxembourg as an ideal location for the domiciliation and administration of Shariah compliant investment vehicles. The country is the third-largest domicile for Islamic investment funds and it should be noted that various initiatives in the fields of product innovation and client protection are helping to strengthen the market.
For instance, over the past year, two local Shariah compliant fund management companies have embraced the notion of compliance with a wider set of environmental, social and governance (ESG) targets. Encouraging compliance with international ESG norms helps to promote cross-sector sales.
According to the ALFI, the year 2015 has been mainly characterized by the creation of new conventional funds from Middle East promoters. Currently, the ALFI is completing the update to their publication aggregating the best practices for setting-up and servicing Shariah compliant funds in Luxembourg.
Finally, Luxembourg is playing an active role in the field of ‘responsible investing’ with a market share of more than 50% of global assets under management in microfinance investment vehicles, representing 30% of all European funds with a ‘responsible’ investment strategy (with 35% of assets under management).
The local Islamic banking industry is making slower progress than expected in Luxembourg. This may be partly explained by Islamic finance not being a current priority among the local conventional banks due to their focus on anticipating and adapting to new European regulatory requirements and on consolidating their client base in Europe. Another issue may be that the focus of Middle Eastern banks has so far been on Muslim-majority markets such as Asia rather than Europe. However, through various interviews with UAE financial firms, we understand some may now be ready to target the EU market via a subsidiary in Luxembourg.
Meanwhile, various local financial groups such as SGG and Banque Internationale à Luxembourg (BIL) opened branches in Dubai. Moreover, the LFF confirmed that other projects existed and might come to fruition during 2016.
Finally, in the Takaful area, FWU, Swiss Life, Chaabi and Vitis Life are all selling Takaful products on a cross-border basis out of Luxembourg.
Preview of 2016
The outlook for 2016 is promising, with strong foundations developed in 2015. We may see the issuance of another local or foreign sovereign Sukuk, following the successful South African sovereign Sukuk listing.
Corporate Sukuk may be suggested in both the Gulf and the EU as a form of reaching new customers and broadening the investor’s base as indicated by the demand for the first Goldman Sachs Sukuk listing in Luxembourg.
Other Shariah compliant products are also expected to expand such as Takaful. Recent performance and cross-border sales show an increasing interest for these wealth management solutions.
Finally, on the 5th October 2015, the Qatari and local regulatory authorities (QFMA and the CSSF), signed an MoU on mutual assistance and the exchange of information relating to the supervision of securities markets. The aim of this memorandum is to promote the exchange of regulatory and technical information, as well as cooperation as regards supervision and inquiries. This agreement between both authorities foresees the further expansion of the Islamic finance industry in Luxembourg.
Conclusion
Over recent years, Luxembourg has demonstrated its strong commitment to be recognized as an Islamic financial center in Europe. Despite the fact that 2015 did not meet the expected growth for the Islamic finance industry, Luxembourg consolidated the foundations for a stronger performance in 2016 with many positive announcements from the local government and its agencies. We believe that innovation in the field will be developed by foreign Shariah compliant players from the UAE or Asia rather than by local promoters.
Said Qaceme is a director in strategy and regulatory affairs at Deloitte Luxembourg. He can be contacted at [email protected].