During the last decade, cross-border financing was an inevitable path with outgrowing globalization of financial businesses around the world. Through this shift in global dynamics, some financial centers emerged to become the hub and the reference for fundraising. In fact, Luxembourg in particular is considered the largest domicile for Islamic funds in Europe, and the third-largest domicile worldwide after Malaysia and Saudi Arabia. It currently hosts 44 domiciled funds that are labelled as Islamic theme/strategy funds with total assets under management of US$2.27 billion.
Being rated as an ‘AAA’ economy in the last decade, Luxembourg’s economic, political and social stability attracted countless new businesses, investment funds and major banking and insurance companies. Furthermore, Luxembourg’s regulatory environment permits the establishment of diversified investment vehicles that are suitable to investors from different countries with different investment strategies. For example, with regards to tax regulations, Luxembourg has signed over 75 treaties with other countries including many Islamic finance markets to avoid double taxation on cross-border business.
As mentioned by CEO of PwC, John Parkhouse, in PwC’s 2016 annual review: “The market in Luxembourg is export-focused. Pretty much everything we do is designed to go across the border. That fixes our mindset and makes sure that we look at things globally.”
Review of 2016
On one hand, the year 2016 has been marked by decreased oil prices coupled by an unstable social and political environment in MENA countries and shriveled government spending in the Middle East. These factors have played a major role in dwindling the appetite of investors and in the compressed growth of Islamic finance products in the world as a whole and Luxembourg in particular. However, these slowing economic factors have not limited the recent extended support provided by the Luxembourg government to promote a network of cooperative Islamic finance relationships. In fact, an MoU was signed on the 10th March 2016 between the Abu Dhabi Global Market and Luxembourg for Finance on bilateral cooperation. One of the main objectives of such a memorandum is to facilitate any cross-border Islamic finance initiatives between the two countries.
On the other hand, given the events that Europe has gone through recently, a lesser investment appetite is being shown for Islamic finance products in general which can be related to the ideology of the name itself. In this case, one factor that might encourage the promotion of Islamic finance products globally and particularly in Luxembourg is to align and associate them to socially responsible investments (SRIs). SRIs are exponentially growing globally and they are naturally aligned with Islamic finance objectives and pillars.
Preview of 2017
As Luxembourg’s regulatory and investment vehicle framework is already flexible to house Shariah compliant structures, Luxembourg has a great potential to be a strategic place to develop these products in the future given the stable economic growth it has witnessed in the last few decades. In addition, the UK’s exit from the EU through the June 2016 Brexit vote will open the doors for many non-EU companies based in the the UK to move to Luxembourg as it is a strong cross-border financing hub. In fact, as mentioned recently in a BBC radio interview by Nicolas Mackel, CEO of Luxembourg for Finance, Luxembourg has already received calls from a few large investment institutions serving the European market and domiciled in the UK that they are already looking at Luxembourg to host their operations.
In fact, Mackel gave the example of AMG, a leading global asset manager with approximately US$700 billion in assets, which has chosen Luxembourg to set up its post-Brexit operations in the next year or so. Furthermore, 2017 can be a crucial year for the fund industry in Luxembourg in general and cross-border Islamic finance specifically.
With continued political, economic and investment enthusiasm, Luxembourg is expected to witness a growth in its fund investment and banking industry. If Islamic finance promoters find a way to market Shariah compliant products as SRIs, the industry can grow drastically. SRIs are well perceived in Luxembourg and are experiencing fast growth as a subsector of conventional banking. So if a marketing emphasis of Islamic finance products can be drawn as a division of SRIs, a big market win will be waiting for the Islamic finance cross-border industry.
Ashraf Ammar is the director of financial services consulting and Mouna Siala is the senior advisor in Financial Services Consulting at PwC Luxembourg. They can be contacted at [email protected] and [email protected], respectively.