Luxembourg is well recognized as a financial hub with a strong culture of investor safety and a multilingual and multicultural workforce. Luxembourg has a long-standing reputation being one of the major financial centers for the global community, enabling regulations and strong political will, also making a name for itself in the Islamic finance world.
Islamic finance: Land of opportunities in Luxembourg
Islamic finance is one of the quickest-growing areas of the international financial services industry. The spread of Islamic finance into western markets indicates that it is now being regarded by investors, financial institutions, and regulators as a reasonable alternative to traditional products.
The key principles of Islamic finance include the following:
- Risk and profit must be shared equally between parties to a transaction
- Speculation and skepticism in transactions are strictly prohibited
- Making money from money (e.g., interest) is restricted
- Specific activities are prohibited (e.g, gambling)
- Transactions must either be asset-based or asset-backed
Islamic financial products are available to the public and not to Muslims only.
Islamic finance in Luxembourg
Luxembourg is the first European country to be a member of the International Islamic Liquidity Management, and Luxembourg’s Central Bank is the first European central bank to be a member of the Islamic Financial Services Board.
Luxembourg is the dominating non-Muslim domicile for Sharia-compliant investment funds and internationally the third Islamic Fund Center, rated by the number of Islamic funds established in the market.
The primary advantage that Luxembourg has over other jurisdictions is that the government has made continual efforts to facilitate the country as a robust Islamic financial center. This governmental support is enabling different institutions in the private sector to inspect this emergent market, and therefore to adopt new business strategies to improve Shariah-compliant business.
Luxembourg also has a modern legal and regulatory framework that is frequently updated through formal consultation between the government, the legislator, and the private sector. Hence, over the years, special regulatory frameworks have been developed for a wide range of innovative products and services. Islamic finance products and services in Luxembourg enjoy the same level of care and treatment.
Islamic investment funds in Luxembourg
To date, over 40 Islamic investment funds are already created in Luxembourg and the constitution of many other new funds is already planned. This figure places Luxembourg beside Kuwait and behind only Malaysia and Saudi Arabia as the most famous domicile for Shariah-compliant investment funds.
It is not surprising to know that Luxembourg is the dominating non-Muslim country for the domiciliation of Islamic investment funds with its long and well-known history in the investment funds industry and a well-established legal framework that permits it to launch a wide range of products.
Sukuk
Sukuk is the Arabic name for financial certificates, also generally referred to as sharia-compliant bonds. Sukuk are characterized as securities of equal denomination representing individual ownership interests in a portfolio of eligible existing or future assets.
Sukuk was created as an alternative to formal bonds which are not considered acceptable by many Muslims as they pay interest and also may finance businesses involved in activities not allowed under Sharia. Sukuk securities are structured to adjust with Sharia by paying profit, not interest, mainly by involving a tangible asset in the investment.
Different types of Sukuk are based on varied structures of Islamic contracts depending on the project the Sukuk is financing.
Luxembourg was the first European exchange to list a Sukuk in Europe in 2002. And today, 16 Sukuk are listed on the Luxembourg stock exchange while 20 are listed on the London stock exchange.
Sukuk issues and issuers are governed by the same rules as those applicable to non-Islamic debt securities. They are admitted to trading on the Euro MTF (multilateral trading facility) market and could probably be admitted to trading on the regulated market if the issuer desires.
Luxembourg is also the first Eurozone country to issue a sovereign Sukuk.
Luxembourg Shariah-Compliant Investment Funds
As the leading hub for globally distributed investment funds, with several service providers experienced in Islamic finance, Luxembourg is an excellent location for the setup, management, and cross-border distribution of shariah-compliant investment vehicles.
Luxembourg contains a large selection of regulated and unregulated investment vehicles, any of which can be used to create a Shariah-compliant investment fund. Luxembourg is also a primary center for structured finance, highly preferred by High Net Worth Individuals and Sovereign Wealth Funds.
Islamic Finance Ecosystem in Luxembourg
Luxembourg’s expertise in the cross-border distribution of investment products and services is at the disposal of Islamic asset managers.
Recognizing the presence of different interpretations of shariah law, Luxembourg does not have a standing shariah authority. But, the financial center welcomes standardization as a vital driver for the growth of the sector in Europe.
Luxembourg’s toolbox of investment vehicles can be modified without difficulty to Islamic finance standards as the CSSF has experience in authorizing and regulating these structures.
Conclusion
Luxembourg has a history in Islamic finance. It first appeared in Luxembourg in 1978 with the appearance of the first Islamic finance institution to set up in a western country. Years later, the first sharia-compliant insurance company in Europe was founded in Luxembourg and, in 2002, Luxembourg was the first European stock exchange to list a Sukuk.
Luxembourg’s legal strengths and the financial center’s growing expertise in Islamic finance make the country an excellent location for the domiciliation or the management of sharia-compliant investment vehicles.
For detailed information on how to set up your Islamic investment fund in Luxembourg, let’s go ahead together and contact your Damalion expert now.
