Luxembourg is marching ahead

Author: 
MUSHTAK PARKER
Publication Date: 
Mon, 2010-05-17 02:18

This was confirmed by both senior IFSB and Banque Centrale du Luxembourg (the central bank) sources in Bahrain and will be the first time that the summit will be hosted by a European Union (EU) member country. Luxembourg last November became the first and remains the first EU member country to become a member of the IFSB, the prudential and supervisory standard setting body for global Islamic finance.
The move comes at a time when Luxembourg has been proactively promoting the Duchy as another EU hub for Islamic finance. Luxembourg is already a major domicile for sukuk listing and the registration of Islamic funds. Currently, there are some 16 sukuk listed on the Luxembourg Stock Exchange with a combined value of 5.5 billion euros; and over 45 Islamic investment funds, largely equity funds domiciled in Luxembourg.
The showcase was addressed by Claude Zimmer, a member of the council at Banque Central du Luxembourg; Fernand Grulms, chief executive officer of Luxembourg for Finance (LFF), the promotion arm of the Luxembourg financial services industry, whose chairman is Yves Mersch, governor of the central bank; Camille Thommes, director general of the association of the Luxembourg Fund Industry (ALFI); and Marc Theisen, senior partner at Theisen Law.
The general consensus was that there is significant potential for Islamic finance out of Luxembourg and for the Duchy to become a major Islamic finance hub, especially for cross-border transactions, including in Europe using the EU passport, because this initiative has strong political support especially from Luxembourg's Minister of Finance Luc Frieden and Gov. Yves Mersch.
Zimmer stressed that the Luxembourg delegation was in Bahrain to inform delegates about the latest developments regarding Islamic finance in the Duchy and to learn from others' experiences.
He said that there should be no regulatory or legal impediments for an Islamic bank to be authorized in Luxembourg as long as it meets the provisions of banking law. Because the Duchy has a mere population of half a million, it would not make sense for a commercial bank to be established. However, an Islamic investment bank could be feasible.
Zimmer, however, agreed that the main challenge for the Islamic finance sector in many jurisdictions is liquidity management, because there are no Shariah-compliant government treasury instruments in which Islamic banks can park their reserves requirements and short-term liquidity requirements.
As such, he supports the call for Luxembourg to issue its debut sovereign sukuk, even if primarily for benchmark purposes. However, depending on the structure of the sukuk, the biggest challenge, according to Zimmer, is identifying a quality asset pool for securitization which would be acceptable to both the politicians and investors. The Duchy being limited by size may not have as wide a choice of acceptable assets to issue a sukuk. However, market players stress that this problem may be exaggerated because of the unfamiliarity of some Luxembourg officials about the structures and dynamics of the sukuk and its issuance.
Zimmer also stressed that it would be possible for Luxembourg to issue a sovereign sukuk, subject to finding the right assets. Such an issuance would reinforce the Duchy's Islamic finance initiative and message and could also be beneficial to the Luxembourg economy and government borrowing requirements. However, he could not confirm whether such a sukuk issuance would be possible in 2010 or early 2011.
Gov. Mersch is very positive about Islamic finance and the potential role it can play toward contributing to global financial stability and to financial inclusion in the EU. The Luxembourg tax authority in January 2010 introduced measures facilitating sukuk and Islamic finance products in the country. Guy Heintz, director of Contributions (tax administration) of Luxembourg, stressed that neutrality and equality is the basis for all financial products including Shariah-compliant ones. He confirmed that "Shariah-compliant products such as Murabaha and Sukuk are no longer considered to be at a disadvantage when compared with conventional banking products and systems found in Luxembourg."
Fernand Grulms outlined the importance of the financial services industry to Luxembourg which employs 78,000 people. Luxembourg, he added, is a world leader in wealth management, asset management, corporate finance and fund management. It is also a major center for cross-border offerings. Islamic finance, he added, is a natural extension of the product and services offerings in Luxembourg given its rapid global growth in the last few years. It also completes and complements product offerings in the financial services industry in Luxembourg.
Camille Thommes and Marc Theisen stressed the country's huge contribution to fund management using various investment vehicles. Luxembourg is the pioneer of the UCITS (Undertakings for Collective Investment Trusts) fund structure of which UCITS IV was recently approved.
Luxembourg is also involved with the IFSB and the Islamic Development Bank taskforce on developing a liquidity management scheme for global Islamic finance. Elie Flatter of the Prudential Supervision of Liquidity Risk Department at Banque Centrale du Luxembourg recently revealed that the central bank is keen to develop a Shariah-compliant money market in the Duchy.
"We are a member of the IFSB Working Group entrusted with the task of preparing the guiding principles on liquidity risk management. We are in the process of identifying instruments, practices and solutions for managing liquidity in a Shariah-compliant manner," she explained.

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