Finance

Islamic finance: a very relative success

Always discreet and relatively marginal, Islamic finance has long been heralded as “promising” in Luxembourg. Certainly, its growth continues. But it still only constitutes 0.11% of assets under management within the funds of the Place. Success is therefore very relative.

According to figures from the Fitch Ratings agency as of 3and quarter of 2021, Luxembourg has, however, led the European Islamic fund industry since 2016, with 30 Sharia-compliant funds consisting mainly of mutual funds. Ireland has 16, made up of both mutual funds and exchange-traded funds (ETFs), and the UK about five, mostly pension funds. At the end of the 3and quarter of 2021, Luxembourg was also ahead of Jersey (13 active Islamic funds, mainly ETF instruments) and the Cayman Islands (10 mutual funds).

Luxembourg’s Islamic fund industry has grown by 122% over the past six years, with total assets under management of USD 6.7 billion, placing the country among the top five in this segment globally , with Saudi Arabia and Malaysia remaining the two main domiciles of Islamic funds in the world. In a report on the expansion of Islamic funds, Fitch Ratings estimates that the growth rate of Islamic funds worldwide (84% in nominal terms and 13% in annualized terms) has exceeded that of the global mutual fund industry by placement (68% in nominal terms and 11% in annualized terms), based on the latest comparable data for the five years to the end of Q3 2021, according to data from Lipper and ICI Global.

Global Islamic finance is therefore doing well. But while it remains a key sector for the Luxembourg government as part of its financial center diversification strategy, it does not act as a leading economic lever. Which is logical since, we repeat, Islamic assets represent barely 0.11% of all assets under management in Luxembourg funds.

A regulatory framework that remains attractive

Emmanuelle Entringer is a consultant in the management of Islamic investments (funds) at Arendt, from Dubai where the Luxembourg firm has maintained a presence, but no official office. It advises Muslim fund managers wishing to establish themselves in Luxembourg and informs them of the regulations in force. She goes back to the enthusiasm aroused by the Place among investors from 2008: “Historically, there has always been recognition of investment products and Islamic finance in Luxembourg.

At fund level, the sector benefited from a tolerance: the Financial Sector Supervisory Commission (CSSF) considered that as long as the rules that applied to investment funds in general were compatible with those applied to finance under Islamic law, there was no reason to refuse Sharia-compliant funds. It should be noted that funds of Islamic origin do not all comply with the principles of Sharia, depending on the degree of religiosity of the issuer or his region of origin. The CSSF has in fact not modified its instruction report relating to Islamic UCIs since May 2011, which was rather conciliatory with regard to investment products which meet the Sharia criteria. The provisions of the laws of 17 December 2010 relating to UCIs or the law of 13 February 2007 relating to specialized investment funds therefore apply to the authorization and supervision of “Sharia UCIs” in the same way as for other types UCI under Luxembourg law.


Breakdown of outstanding Islamic assets

Source: Financial Development Report 2020

The new Eldorado?

The context for welcoming more Islamic investors in Luxembourg therefore appears favorable. The announced boom in Islamic finance since 2008 was a political will that was driven by former finance minister Luc Frieden (CSV), and continued by Pierre G ramegna (DP). However, it didn’t really happen. This is partly explained by the fact that Luxembourg is facing growing competition from other financial hubs such as Ireland or Jersey, in a global context where Islamic finance remains highly regionalized (investors from Muslim countries mainly turn to local hosts) and underdeveloped in the world (less than 1% of global finance).

In addition, Islamic finance at the European level primarily appeals to Muslim investors, who are few in Europe.

Finally, if Luxembourg remains in the top 5 attractive countries for Sharia-compliant investments, no Islamic governance bank has yet been legally established there, which could have given the branch a boost, and this , despite what Bandar Hajjar, president of the Islamic Development Bank, had planned in 2019. “However, local banks can serve as a deposit for Sharia-compliant funds,” says Emmanuelle Entringer.

No transmitter on the Place

The Fitch Ratings report also estimates that if Luxembourg can remain the leader in the management of Islamic funds, the future of the sukuk and Islamic banking markets seems to be compromised in the near future, due to a lack of issuers based there. The report states that “the national system of Islamic finance in Luxembourg, however, remains underdeveloped compared to the United Kingdom, for example. There are no Islamic banks or sukuk in circulation issued by issuing companies or takaful (sharia-compatible insurance securities, editor’s note) based in Luxembourg, and the country does not have a national framework for governance of the sharia. This situation is mainly due to the absence of upward public demand for Islamic products, since less than 3% of the population of Luxembourg is Muslim.

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