The increasing number of recent sovereign and corporate Sukuk issuances in the Islamic world has not remained unnoticed in Europe. Both the UK and Luxembourg have announced the issuance of sovereign Sukuk in a move to boost their Islamic finance credentials and to welcome further investments from the Islamic world. BISHR SHIBLAQ explores the status of the Luxembourg bid.
In October 2013, addressing the World Islamic Economic Forum (WIEF) meeting in London, the prime minister of the UK, David Cameron, announced the plan to issue a UK sovereign Sukuk with an estimate value of GBP200 million (US$330 million), indicating a 2014-15 time frame for the issuance. It has been rumored for many years that the Luxembourg government could issue sovereign Sukuk and in January this year, the government also presented a bill to parliament to allow the securitization of assets for a proposed Sukuk of EUR200 million (US$275 million).
Luxembourg’s bill on sovereign Sukuk is a challenge to UK’s attempt to be the first European country to issue Islamic debt instrument. While the UK Treasury has not yet identified the underlying assets for its structure issuance, the Luxembourg bill identifies three prime real estate assets to underpin the Islamic bond, including the two towers of the Gate of Europe (Porte de l’Europe) on the Kirchberg Plateau, which is the main financial district and seat of the European Union bodies in Luxembourg.
Recently, the Luxembourg bill was scrutinized by the Council of State (Conseild’Etat), a body which advises the national legislature, the Chamber of Deputies. After expressing its full support to the strategy followed by the Luxembourg government to diversify and reinforce its position as a leading non-Muslim financial center, the Council of State nevertheless raised issues concerning the economic rationale for issuing Sukuk, the need for greater clarity on the tax treatment, and listed several issues not addressed in the bill and relating to the Luxembourg law.
The Council of State requested a “convincing explanation” on why sovereign Sukuk could be considered a more appropriate financing instrument than a conventional bond, referring to the additional costs of establishing a Shariah board to oversee the transaction’s compliance with the Islamic principles. As Luxembourg is an ‘AAA’-rated country with a stable outlook, as recently confirmed by rating agencies, it is able to issue a conventional bond at a significantly lower cost than Sukuk.
Moreover, the Council of State argued that the transfer of assets required to issue a Sukuk will inevitably trigger tax liabilities, which would entail more costs when compared to conventional bonds. However, the Luxembourg tax authorities have already clarified the tax treatment of Islamic finance transactions in circulars dating back to 2010, where Sukuk is analyzed as a debt instrument from a Luxemburg tax perspective, providing hence a similar tax treatment to that of conventional bonds.
On a different note, the Council of State pointed out the need to clarify the purpose of the funds raised by the Sukuk issuance. The link between Sukuk and legislative requirements of public spending is missing according to the Council of State.
Finally, the Council of State raised questions on who will be entitled to buy the Sukuk. Only Muslim investors or institutional investors or also Luxembourg individuals would be allowed to buy? Will there be a banking syndicate in the classical sense or will the mode of marketing be different? What are the ‘coupons’?
According to the Council of State, the answers to these questions do not affect the regularity of the bill from a legislative perspective. Nevertheless, given the innovative character of the proposal, they need to be addressed.
The questions raised by the Luxembourg Council of State underlined both the progress which Islamic finance has accomplished in winning acceptance in European markets, and the challenges which it still faces. The issues that need to be addressed are valid. A Sukuk issuance should not only be a marketing tool, but should make economical sense in Luxembourg, the UK or any other country wishing to issue an Islamic financial debt instrument.
Bishr Shiblaq is the head of Dubai Representative Office for Arendt & Medernach — Avocats. He can be contacted at