Since the spring of 2008, the Luxembourg government has been convinced of the development opportunities associated with Islamic finance. Indeed, in April 2008, Budget Minister Luc Frieden met with a taskforce specifically set up and including various stakeholders to discuss the development of Islamic finance in Luxembourg and to ascertain which measures needed to be adopted and introduced to develop Luxembourg as a European Islamic finance center, especially for capital markets and investment funds.
This taskforce included officials from the Ministry of Finance, Luxembourg for Finance, the Association of the Luxembourg Fund Industry (ALFI), the Luxembourg Bankers’ Association (ABBL), the Inland Revenue, the Commission de Surveillance du Secteur Financier (CSSF) and the Luxembourg Stock Exchange.
The mandate of the taskforce is to identify possible obstacles to the development of Islamic finance in Luxembourg and to come up with strategies to develop Islamic finance in Luxembourg.
At the same time, a working group — entitled the Working Group on Islamic Finance — established by Luxembourg for Finance and ALFI, has conducted in-depth analyses of the strengths and weaknesses of the Luxembourg financial market place in the field of Islamic finance to define concrete proposals.
At a conference on Islamic finance that took place in Luxembourg on May 5 and 6 this year, Frieden presented four messages from the government through Fernand Grulms, CEO of Luxembourg for Finance. These may be summarized as follows:
1. The Luxembourg government recognizes the interesting opportunities offered by the development of Islamic finance;
2. The government intends to have the characteristics of Islamic finance transactions examined, and to propose solutions for these transactions to benefit from the same tax treatment equivalent to that applied to traditional banking and financial transactions;
3. The government is also examining the extent to which Islamic finance products such as sukuk could be used to finance certain government or corporate activities;
4. The government supports the application of the Luxembourg National Bank to become an associate member of the Islamic Financial Services Board (ISFB).
In its declaration on July 27, the Luxembourg government stated that it “would follow an active policy for the development of the financial market place as one of the principal pillars of the Luxembourg economy by strengthening the mechanisms necessary for the development ... of Islamic finance ...”
At present, Luxembourg has some 40 registered investment funds that are Shariah compliant. Since August 2009, 16 sukuks are also listed on the Luxembourg Stock Exchange. Over the last few months, several banks have established “Islamic finance” departments.
The conference on Islamic finance held last May, and several seminars and roundtables organized since by one or the other bank or asset management company have been extremely successful. In fact, from the middle of this month, the local Institute of Banking Training is starting to offer training courses on Islamic finance. But despite all these activities it will take some time for any real developments and concerted actions to filter through.
As far as the legislative framework is concerned, initial conclusions show that Luxembourg law is not in principle against Islamic finance and that it is not necessary to create a specific legislative regulatory framework dedicated to Islamic finance.
If current investment fund legislation permits the use of current instruments and the simple offering of the relevant Islamic finance products, the same applies to the listing of sukuk on the Luxembourg Stock Exchange, which has been successfully done moreover within the context of the laws and regulations currently in force.
Still, although there is no legal obstacle to the creation or management of Shariah-compliant investment funds, it would be preferable, however, for the Luxembourg regulator, the CSSF, to stipulate in an addendum that a fund may adopt extra-financial selection criteria and call on the services of a Shariah board provided that it does not breach the framework of the law of 2002. To the extent that the majority of Shariah-compliant financial products provide a double transaction involving a double transfer of ownership for the same transaction, this also involves a double registration duty or even a double payment of VAT, which bankers and lawyers feel should be reviewed.
On the subject of Islamic bonds (sukuk), which remunerate the holder on the basis of profit generated by the underlying asset, it would be necessary to define those proceeds either as a dividend or as interest. What approach should be retained vis-à-vis non-Luxembourg residents holding Sukuk to which the generated profit is paid?
Indeed, it seems that adjustments like those which have been made in England and France are undeniable and in the end rulings can’t be used as a general rule in the long-term especially if the government intends to develop the Luxembourg market within the context of Islamic finance.
Beyond that, and although in the current state of affairs the issue of a sovereign sukuk is hardly conceivable in Luxembourg, it is still a fact that, in view of the position it occupies in international finance and in view of its undeniable advantages, would it not be right to ask if the Luxembourg state should not stand as an example by itself issuing sukuk, which in any event would send a strong signal to investors in the Gulf countries and could make Luxembourg a forerunner in Islamic finance.
By taking account of the opportunities offered by Islamic finance in Luxembourg and to become really involved in Islamic finance, it would be right for the government to establish a genuine action plan evolving around training and education. This could include:
1. Using specialists from outside the Luxembourg financial market place with an in-depth knowledge of Islamic finance. In fact, we are at present insufficiently equipped with human capital when it comes to the Islamic finance industry to be able to develop the actions necessary to benefit the Luxembourg financial market place.
2. Developing training inter alia with the assistance of countries such as Malaysia or the Gulf region to educate and train professionals in particular and for instance in the field of risk management while at the same time organizing seminars and symposiums specific to the activities of Islamic finance.
3. Receiving offers for example from the Securities Commission or Bursa Malaysia (the Malaysian Stock Exchange) for the purposes of collaborating more closely with similar bodies in Luxembourg.
4. Facilitating flows of Islamic listings between both exchanges through promotions and facilitative application regime.
5. To present fund raising opportunities for Luxembourg’s public and corporate spending through Islamic structures for distribution in Europe and Asia.
6. Institutions directly involved in structures or transactions in Islamic finance, such as the CSSF, the Luxembourg Stock Exchange and the Inland Revenue, must define precise rules so that potential clients of that market can have concrete and tangible data.
7. It is necessary to determine by what means it would be correct to proceed with ad hoc legal, regulatory or even fiscal reforms.
8. Luxembourg is favorably placed with its internal structures, as well as historically, to promote such a market through a higher listing on the Stock Exchange or the issuance of Sukuk.
In conclusion, Luxembourg banks have long been experts in conventional finance packages and, by adopting a genuine action plan and subject to the factors dealt with above, Luxembourg could create opportunities by launching Shariah-compliant structured products intended particularly for the Gulf countries, Malaysia or Asia.
The banks have the means, in the medium or long term, to become leaders in Islamic finance within the context of syndicated finance. The recognition of Luxembourg in global financial circles, its undeniable attributes, particularly its fiscal neutrality as a cornerstone, its proximity to a very large Muslim community, excellent access to markets such as Singapore and Hong Kong are all undeniable attributes which should enable Luxembourg to rapidly accelerate the development of a sector with immense potential.
Marc Theisen is a barrister-at-law based in Luxembourg.