While Anglo-Saxon countries such as the UK, Canada and the US are dithering about strategies for promoting Islamic finance in their markets, probably distracted by political scandals, policies or the fallout of the global financial crisis, it seems that the francophone countries are grabbing the main chance for promoting opportunities for Islamic finance and investment.
Following in the footsteps of neighboring France which recently introduced tax neutrality laws for Murabaha and Sukuk, Luxembourg is now promoting itself as a domicile of choice for Islamic funds registration and Sukuk listings and other such services. In fact, the government of the duchy has recently established a task force to study how tax neutrality can be introduced where applicable to facilitate Islamic financial products such as Sukuk and Murabaha. The task force is also looking at issues in avoiding double taxation when structuring Islamic transactions in Luxembourg. However, Luxembourg-domiciled investment funds are already tax neutral.
The Luxembourg road show comes to the Saudi Arabian capital today when the "Investment and Banking Opportunities in Luxembourg" conference convenes in Riyadh. It is hosted by Michel Lastschenko, Belgium's ambassador to the Kingdom, who also represents Luxembourg.
According to Marc Theisen, a partner of the Luxembourg law firm, Theisen Schiltz Barbian, the main objective of the Luxembourg initiative is to inform GCC (Gulf Cooperation Council) investors and bankers of the opportunities Luxemburg offers in Shariah-compliant financing and investment. Luxembourg is the second largest investment fund center in the world after the United States and is the premier captive reinsurance market in the EU and the premier private banking center in the euro zone.
Today, thanks to the spectacular growth of Islamic finance over the last few years, Islamic finance is the flavor of the month and is also increasingly part of the social inclusion policies of several EU governments. Theisen stresses that the Luxembourg government, the central bank, the Bankers Association, and organizations such as ALFI and Luxemburg for Finance, all strongly support initiatives to promote Islamic finance in the country. "The interest of banks in Luxemburg in Islamic finance is high. In most of the larger banks, there are today Islamic finance departments. However, we also need the assistance of qualified experts from the Middle East and South East Asian countries such as Malaysia. Luxembourg is very keen on promoting the issuance of Sukuk from its jurisdiction," explained Theisen.
Luxembourg was in fact the laboratory of Islamic finance in Europe, long before the UK. In the late seventies, Luxembourg licensed the first Islamic financial institution in Europe, the Islamic Banking System Holdings Limited Luxembourg SA (IBS). This institution involved some of the pioneers of contemporary Islamic finance including managing director Gamal Attiya; board members such as Abdul Rahman Al-Ateeqi, the former finance minister of Kuwait and then also a shareholder of Investcorp; and Shariah advisers such as the late Zaki Badawi and Mohammed Abu Saud.
IBS executives including Attiya and the late Badawi initiated discussions with the Bank of England which paved the way for a license to set up an Islamic finance company in London, the Islamic Finance House in the early 1980s. They also acquired a license from the Central Bank of Denmark which authorized the International Islamic Bank of Denmark, the first Islamic bank established in Europe.
This paved the way for other Islamic financial institutions such as Takafol SA, an Islamic insurance subsidiary of the Geneva-based Dar Al-Maal Al-Islami (DMI) Group headed by Prince Muhammed Al-Faisal.
Today, stresses Theisen, there are 14 Sukuk with a combined value of $5.5 billion and 42 Shariah-compliant funds (out of a total 560 funds) listed on the Luxemburg Stock Exchange. In the first quarter of 2009 alone, six new Islamic funds were listed on the exchange, which was also the first in Europe to list a Sukuk in 2002.
Despite the fact there is no specific enabling legislation or amendment pertaining to Islamic or alternative financing and investment, Marc Theisen believes that specific laws for Islamic finance may not necessarily be required. "As far as Shariah-compliant funds comply with the basic principles of the Investment Funds Law of 2002 and the CSSF regulations, they will get the necessary authorizations to launch the funds," he explains. However, tax neutrality regulations for capital markets products such as Sukuk origination may be required.
Being a major international investment fund registration and cross-border distribution center, Theisen adds that it is only normal for Luxembourg to diversify its range of activities to include Islamic fund registration and management; and other Islamic finance activities including Sukuk origination and listing. As many Islamic fund structurers and managers would attest, Luxemburg does have a good reputation as a funds domicile with its UCITS fund structure now a world-renowned brand. However, if it wants to compete with London, the Channel Islands and Dublin, as it says it wants to, then, according to some Islamic bankers, it will have to rein in costs, especially establishment, registration and legal costs which can be prohibitive.
Above all, Theisen believes that the Luxembourg authorities need to invest serious resources in demystifying and educating the market about, and promoting, Islamic finance.
By Mushtak Parker
© Arab News 2009
