Luxembourg Sees Islamic Finance a Tonic After LuxLeaks

 Islamic finance offers a path toward greater transparency for Luxembourg after confidence in the country’s tax regime was undermined last year, according to Finance Minister Pierre Gramegna.

The reliance on asset-backed deals in Shariah-compliant finance fits the approach now being considered by the Grand Duchy, he said in an interview in Dubai on Tuesday. As part of this, Luxembourg has vowed to rein in sweetheart tax deals.

“The safety that collateral gives is one way of having a financial system that’s built on confidence and transparency,” Gramegna said. “It really fits that strategy.”

Thousands of leaked documents at the end of last year, the so-called LuxLeaks revelations, showed some international companies effectively lowered their tax burden to less than 1 percent of profit in Luxembourg through so-called tax rulings. The country, one of the smallest economies in the 28-member European Union, also introduced new tax measures this year.

“LuxLeaks has shown that there is a need to adjust tax systems worldwide,” Gramegna said.

Second Sukuk

The country also plans to sell its second sukuk, which adheres to Islam’s ban on interest, in the first half of next year, he said. The nation of about half a million people raised 200 million euros ($223 million) of five-year Islamic bonds in September.

The yield on its debt due 2019 has fallen 17 basis points since it began trading in October to 0.27 percent at 4:13 p.m. in Dubai. That compares with a eight basis point decline in the average yield on global sukuk to 2.87 percent, according to a Deutsche Bank AG index.

Luxembourg’s second Shariah-compliant bond offering will probably be structured through property-related investment vehicles, Gramegna said.

“It’s part of the strategy of our international financial center,” he said. “It’s not only diversifying our way of financing, our budget, but it’s also a way to diversify the products that you offer in the financial center. Obviously I think sukuk has put us on the map.”

Not Immune

Luxembourg is rated AAA at Moody’s Investors Service and Standard & Poor’s, the highest investment-grade ranking. Landlocked between Germany and France, the country has reinvented itself as a business and finance hub, softening the blow as traditional industries, such as steel, decline.

Still, not all Islamic finance products are immune to risks, according to Rizwan Kanji, a Dubai-based partner at law firm King & Spalding LLP, which helps structure Shariah-compliant deals.

“Not every Islamic finance structure has a collateral,” Kanji said by telephone. “Ninety percent of the world’s sukuk issuances are asset-based, and there’s no recourse to the collateral or the underlying asset.”

Asset-backed sukuk typically transfer ownership of underlying assets if the borrower is unable to repay, while holders of asset-based sukuk have no claim to the assets used to structure the debt.

For Gramegna, Islamic finance is part of the approach to strengthen the system and address wider concerns about the risks of conventional finance.

Increasing interest in Islamic finance “comes when the markets are demanding more security,” Gramegna said. “Complicated products proved to be quite dangerous in the past. Islamic products are very much down to earth.”

(Bloomberg Business / 04 March 2015)

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Luxembourg Plans Investor Meetings to Market Debut Sukuk

Luxembourg will start meeting investors in the next two months to drum up support for a debut sale of shariah compliant bonds as sukuk sales surge worldwide.

The country, which has an AAA credit rating at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, is planning to become the second non-Muslim nation to issue a sovereign Islamic bond after the U.K. raised 200 million pounds ($335 million) in June. Ministry of Finance officials will meet investors in Europe, the Middle East, and Asia from the end of September to promote the proposed sale, according to an e-mailed statement Aug. 7.

Borrowers from Hong Kong to South Africa are considering selling sukuk to tap into the Islamic segment, where almost $27 billion of bonds were sold this year compared with about $21 billion for the same period in 2013, according to data compiled by Bloomberg. Investors placed orders for more than 10-times the amount offered by the U.K.

Issuing a sukuk, which pay returns on assets to comply with Islam’s ban on interest, would help Luxembourg diversify its status as a financial center and develop new skills to help it stand out from other European hubs, according to the finance ministry’s website. The ministry is planning to use three government buildings as assets in the deal, it said.

Officials will visit the U.K., Malaysia, Saudi Arabia, the United Arab Emirates and Qatar to market the bond to local institutions, according to the e-mailed statement.

(Bloomberg / 10 August 2014)

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Luxembourg Sukuk Bill Adopted

On 9 July 2014, the Luxembourg Parliament has adopted the bill of law 6631 on the sale and buy back of real estate assets compulsory for the issuance of a sovereign Sukuk in an amount of Euro 200 million.

To this end, a Luxembourg SPV will be created and will be fully owned by the Luxembourg State. Such SPV will purchase three main buildings located in Luxembourg and will benefit from a guarantee from the Luxembourg State.

The SPV will issue Sukuk and lease back to the Luxembourg government the underlying real estate assets for a duration of 5 years corresponding to the duration of the Sukuk. The rental income to be received by the SPV, equivalent to the periodic amount to be paid to the Sukuk holders, will be used for such purpose in compliance with Sharia.

The enactment of such law by the Luxembourg legislator demonstrates a strong and clear political will to diversify and develop alternative markets such as Islamic Finance within the financial services industry in the Grand-Duchy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

(Mondaq / 24 July 2014)

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Luxembourg approves bill paving way for sukuk this year

Luxembourg's parliament passed a bill that will allow the AAA-rated government to issue its first Islamic bond later this year, becoming only the second European sovereign after Britain to tap the market for sukuk.

The bill allows Luxembourg to securitise three government properties to back a sukuk worth 200 million euros ($275 million), designed to boost its Islamic finance credentials to attract more business from cash-rich Gulf countries.

The law was adopted with 55 votes in favour and 5 against, a parliament spokesperson said late on Wednesday.

A revised bill was presented last month which addressed issues such as the economic rationale for using sukuk instead of conventional bonds and clarified its tax treatment, paving the way for the finance ministry to begin work on the transaction.

"The issuance of the sukuk will be done later this year," said Guy Arendt, a member of Luxembourg's legislature, the Chamber of Deputies.

Luxembourg's finance ministry did not respond to Reuters requests for comment on its sukuk plans, but such an issuance would comes on the heels of Britain's own sukuk.

In June, Britain became the first Western country to sell sukuk, raising 200 million pounds from a five-year deal, attracting 2.3 billion pounds in orders.

Unlike Britain, which has six full-fledged Islamic banks, Luxembourg does not have a domestic Islamic banking industry although that could soon change.

A new Islamic bank, named Eurisbank, is in the advanced stages of launching operations in Luxembourg, according to a source familiar with the matter.

"The license process is still in progress, but significant advances have been made and it should be finalised in the next few weeks. Capital is firmed up...first semester next year seems very realistic."

Luxembourg has sought to build a wider role in the industry: it remains a popular domicile for Islamic mutual funds with London-based Arabesque registering its new funds in June.

Luxembourg's central bank also remains the only regulator in Europe that is a member of the Malaysia-based Islamic Financial Services Board, one of the industry's main standard-setting bodies. 

(Reuters / 09 July 2014)

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First Eurozone Islamic Bank Planned For Luxembourg

The Eurozone is to get its first Islamic bank after a consortium of Gulf businessmen and a UAE royal family announced an agreement to set up a new lender headquartered in Luxembourg.

Eurisbank will have a start-up capital of 60 million euros and is set to have branches in Paris, Brussels, The Netherlands and Frankfurt. The bank will offer services in retail, corporate and private banking.

The consortium – which also includes an unnamed bank – plans to launch the new lender in the fourth quarter of 2014.

Deloitte’s feasibility study of the bank demonstrated high return on investment, taking advantage of being the first Islamic lender to be based in the Eurozone.

The investors and Deloitte have concluded a meeting with the CSSF – Luxemburg’s Supervisory Authority – which has welcomed the idea and gave directions to prepare the documents required to obtain a banking license.

“As the worldwide Islamic finance industry moves from niche to critical mass while Europe is becoming an attractive and promising market that is not yet served by Shari’ah-compliant banking services, considerable potential exists for the expansion of Islamic Finance,” said Marco Lichtfous, partner in Deloitte Luxembourg.

“The global market for Islamic financial services is estimated at USD 1.8 trillion, and by opening new markets the numbers are set to grow significantly in the years ahead,” he added.

Deloitte and Excellencia Investment Management have been assigned to conduct all procedures and to finalise the establishment of Eurisbank.

“A large untapped customer base with more than 20 million Muslims in the EU represent a significant market growth potential for Islamic Finance, and with the strong support of the European governments and regulatory authorities of the Islamic Finance Model, the unification of the regulatory framework within the European Union is a significant advantage to serve Muslim and non-Muslim communities across Europe,” said Ammar Dabbour, Managing Partner in Excellencia Investment Management.

“With low penetration rates of Islamic banking products in Europe resulting from a lack of supply and the strong demand from Muslim clients for Shari’ah-compliant services which are not appropriately addressed by current banking offering, Eurisbank is devised to supply a much needed spectrum of services and products unique to their audience.

(Gulf Business / 26 Nov 2013)

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Growing number of Mid East Shariah-compliant funds launch in Luxembourg

Luxembourg ranks fifth worldwide by number of Shariah compliant funds and the number of Middle East-based managers launching investment funds in Luxembourg has increased constantly. There are 41 regulated Shariah compliant investment funds domiciled in Luxembourg and total Assets under Management in Shariah compliant funds are estimated at $5.3bn

As such four Luxembourg-based companies are now joining forces to create a specialised platform that will service Shariah-compliant investment funds. Amanie Advisors, ADEPA Asset Management, Theisen Law, and KBL European Private Bankers have launched a service that will be branded ALIF (Alliance for Luxembourg Islamic Finance), offering fund managers a service to have their custodianship and fund servicing carried out in a Shariah-compliant manner.

Specifically assets will be held in segregated pools and prohibited from being used for short-selling or as security for interest-based lending, two activities prohibited under Islamic law. ALIF aims to compete on price and service in order to take advantage of the growing number of such funds in the market. 

Commenting on the launch, Carlos Alberto Morales, CEO of ADEPA Asset Management, said: "Our clients will be able to take advantage of all the benefits of the Luxembourg fund structures and also have their funds administered locally in a professional and transparent way, and in a way that is in keeping with the religious practice."

The ALIF service will feature legal work covered by Theisen Law, a well-established and leading law firm active in Luxembourg; as well as the Islamic Finance expertise by Amanie Advisors. 

Funds registered by ALIF will be registered under the Luxembourg fund regime and be established to comply with Islamic prohibitions on investing in gambling, interest-based banking, alcohol and pornography-related industries, amongst others. Additionally, the securities will be disallowed as security for lending activities. 

The portfolios and processing of these funds will be periodically reviewed by the Shariah Supervisory Board of Amanie Advisors, which is comprised of Dr. Mohamed Ali Elgari, Dr. Mohd Daud Bakar, Dr. Muhammad Amin Ali Qattan, and Dr. Osama Al Dereai.

Commenting on Amanie Advisor's role in ALIF Dr. Mohd Daud Bakar, Amanie's founder and group chairman commented, "For many years the market for Islamic funds has concentrated on the Shariah-compliant investment of the assets only. Whilst this is important, it is a great development to have one efficient service that assures the compliance of both the investment activities as well as the administration and custody of Islamic funds."

(Ameinfo.Com / 14 Jan 2013)

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