Islamic Finance: A Very Relative Success

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

According to data from the agency Fitch Ratings at 3And quarter of 2021, Luxembourg, however, has led the European Islamic funds industry since 2016, with 30 Sharia-compliant funds consisting mainly of mutual funds. Ireland has 16, consisting of both mutual funds and exchange-traded funds (ETFs), and the UK around 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 funds industry has grown 122% over the past six years, with total assets under management of USD 6.7 billion, placing the country in the top five in this segment globally, with Saudi Arabia and Malaysia which remain 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 up to the end of the third quarter of 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 market diversification strategy, it does not serve as the main economic lever. Which is logical since, we repeat, Islamic assets represent just 0.11% of all assets under management in Luxembourg funds.

A regulatory framework that remains attractive

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

At the level of funds, the sector benefited from a tolerance: the Financial Sector Supervisory Commission (CSSF) found that as long as the rules applied to investment funds in general were compatible with those applied to finance under Islamic law, there was no reason to reject Sharia compliant funds. It should be noted that funds of Islamic origin do not respect all the principles of Sharia, depending on the degree of religiosity of the issuer or its region of origin. Indeed, since May 2011, the CSSF has not changed its education report relating to Islamic UCIs, which was quite conciliatory regarding investment products that meet the Sharia criteria. The provisions of the law of 17 December 2010 relating to UCI 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 other types of UCI governed by Luxembourg law. .

Breakdown of existing Islamic activities Source: Financial Development Report 2020

Breakdown of existing Islamic heritage

Source: Financial Development Report 2020

The new Eldorado?

The context for welcoming more Islamic investors to Luxembourg therefore appears favorable. The announced boom in Islamic finance since 2008 was a political will led 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 faces increasing competition from other financial centers such as Ireland or Jersey, in a global context where Islamic finance remains highly regionalized (Muslim countries’ investors mainly target to local hosts) and underdeveloped in the world (less than 1% of global finance).

Furthermore, Islamic finance at the European level is mainly aimed at Muslim investors, who are few in Europe.

Finally, while Luxembourg remains among 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 said. , president of the Islamic Development Bank, had planned in 2019. “However, local banks can act as a repository for Sharia compliant funds,” says Emmanuelle Entringer.

No transmitter in place

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

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