« As the second largest fund centre in the world and home to the world’s leading stock exchange for international securities listings, Luxembourg is today a key centre for the development of Islamic finance in Europe » said Tom Theobald, Deputy CEO of Luxembourg for Finance (LFF), during a recent Islamic Finance Workshop organized by LFF in partnership with QInvest, one of the most prominent global islamic financing institutions worldwide. This workshop brought together around 120 local and international investment fund professionals, bankers and law firms.
From Esoteric to Global Assets
The spread of Islamic finance into western markets during the last 30 years demonstrates that it is now being viewed by investors, financial institutions and regulators as a viable alternative to conventional products. Consultancy and accounting firm Ernst & Young estimates that Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% a year to 2018. As a result, Islamic finance is moving from a very esoteric asset class to one that’s more global. The demand created by this rapidly growing pool of Islamic capital has spurred the growth of sharia-compliant products, which take many forms but may not pay or charge interest, nor can they invest in things that Islam forbids (so no alcohol, pork, gambling or pornography). In an Islamic mortgage, instead of lending money to an individual who buys a property, the bank buys the property itself. The customer can then either buy it back from the bank at a higher price paid in installments (murabaha) or make monthly payments to the bank comprising both a repayment of the purchase price and rent until he owns the property outright (ijara). It is a way to share between the bank and the debtor the risk burden of the investment.
Contrary to traditional securities, Sukuk securities are structured to comply by not paying interest. This is done by involving a tangible asset in the investment. For instance, by giving partial ownership of a property built by the investment company to the bond owner who collect the profit as rent, which is allowed under Islamic law. Upon expiration of the Sukuk, the rent payments cease. So, a holder of Sukuk doesn’t technically lend the issuer money; he rather owns a nominal share of whatever the money was spent on and derives income not from interest but either from the profit generated by that asset or from rental payments made by the issuer. The aim of this process is to exclude cumulative interest from any financial gain.
Advantages of Islamic Finance
However, this doesn’t mean that profit creation and growth are not objectives of islamic finance companies. They simply choose to invest in businesses based on their potential for growth and success. That is why each bank in the Islamic banking industry invests in promising business ventures and attempts to out-perform its competitors, in order to attract more funds from its depositors. This will eventually result in a high return on investments both for the bank and the depositors too, while in a conventional bank, depositors redeem returns on their deposits based on a pre-determined interest rate. Moreover, Islamic financing companies approach investment projects slowly and cautiously, performing intensive audits and analyses and keeping away too risky operations. As a result, Islamic finance promotes the reduction of risk and creates the space for a greater investment stability.
Popular and Promising in Luxembourg
This interest for Islamic asset management industry is due to its growth and challenges. As largest domicile for Islamic funds in the eurozone, Luxembourg is a key actor of this industry. The Grand Duchy has a history of innovation in this field since it hosted Europe’s first Islamic financial institution in 1978 and Europe’s Sharia’a-compliant insurance company (Takaful) in 1983. Always at the forefront, Luxembourg’s stock market was the first in Europe to list a Sukuk in 2002, and since that date, the Luxembourg Stock Exchange has listed 16 Sukuk. Therefore, is it obvious that the financial services industry in Luxembourg looks towards Islamic finance as a means to diversify as well as attract capital and products. Its growth potential is high: by 2018 Islamic banking assets could reach about US$3.4 trillion.
For more information on Islamic Finance and our solutions (e.g. Islamic Trusts), please contact Hance Law:
Hance Law Avocats, 3A, Sentier de l’Espérance – L-1474 Luxembourg
www.hance-law.com – Tel: +352 274 404 – [email protected]