Fitch Ratings-Dubai: : Fitch Ratings expects the Luxembourg Islamic Mutual Funds Industry’s (MFI) strong growth momentum will continue in the short to medium term, supported by the government’s continuous promotion of Luxembourg as a Western hub for Islamic finance and as an international financial centre in general. The country’s favourable regulatory, legal and tax framework supports the set-up, administration and cross-border distribution of Islamic funds and augments its growth.
Luxembourg is leading the European Islamic fund industry, with 30 sharia-compliant funds by end-3Q21, composed of mainly mutual funds. In contrast, Ireland has 16 Islamic funds, consisting of both mutual funds and Exchange Traded Funds (ETF), and the UK has about five funds, mainly pension funds. At end-3Q21, Luxembourg was also ahead of Jersey (13 active Islamic funds, mostly ETF instruments) and the Cayman Islands (10 mutual funds). The Islamic MFI in Luxembourg has grown by 122% over the past six years, with total assets under management (AUM) of USD6.7 billion by end-3Q21, making Luxembourg among the top-five countries in this segment globally.
In addition to Luxembourg Islamic MFI, tax and cost efficiencies are also anchored by the country’s position being amongst the largest fund centres globally, and its human capital that is skilled in catering to the Islamic MFI.
Luxembourg is facing increasing competition as Western hubs from other financial centres, such as the UK, Ireland, Jersey and the Cayman Islands, begin to capture the global Islamic mutual fund market share. Luxembourg’s potential is also capped by the relatively small size of the global Islamic fund market, with total AUM reaching USD123.4 billion in 3Q21. The Islamic fund industry is also comparatively underdeveloped more concentrated compared with the conventional fund market globally.
Islamic finance has been a key focus sector for the Luxembourg government for more than a decade, as part of its financial centre diversification strategy. The Luxembourg Stock Exchange (LuxSE) is a global sukuk listing venue, with 21 sukuk listings, amounting to around USD9 billion. The country issued its sovereign sukuk in 2014 to promote the country’s position in the Islamic finance industry, raising EUR200 million. Luxembourg’s central bank was also the first in the eurozone to join the Islamic Financial Services Board, and the only founding European member country of the International Islamic Liquidity Management.
Luxembourg is also aiming to become a sustainable finance hub, with more than 20% of the world’s ‘green’ bonds listed on LuxSE as of end-3Q21. A number of green and sustainable sukuk could be listed on LuxSE in the medium term. Total green and sustainable sukuk volumes reached USD19.2 billion by end-3Q21, representing 53.5% growth year-to-date.
The domestic Islamic finance system in Luxembourg, however, remains underdeveloped compared with the UK for example. There are no Islamic banks or outstanding sukuk by Luxembourg-based issuer or takaful companies, and the country does not have a national sharia governance framework. This is due primarily to the lack of bottom-up public demand for Islamic products, as less than 3% of Luxembourg’s population is Muslim.
The key differences between Islamic funds and conventional funds stems from the need to ensure sharia-compliance of the underlying portfolio, contractual relationships, obligations, and fee structures, among others. An additional layer of cost is present due to sharia governance mechanisms, including a sharia board, audit and reporting.
We expect Luxembourg to be able to maintain the status for the Islamic funds management over the next few years. However, it would be challenging for Luxembourg to become a leader in other sectors, such as the sukuk and Islamic banks markets, any time soon.
© Press Release 2021
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