The Luxembourg Ministry of Finance sent a strong message of support for the Islamic finance sector in a recently held two day conference in Luxembourg.
The conference, attended by Islamic scholars and experts from Europe, the Middle East and Asia, was jointly organised by local industry bodies including IFBL (the Luxembourg Institute for Training in Banking), ALFI (Association of the Luxembourg Fund Industry) and LFF (Luxembourg for Finance). As a provider of custody and administration to Islamic investment funds and structures, HSBC Securities Services showed its commitment to the industry by acting as the only non-industry body participating in the conference, and being a sponsor.
Many panels during the conference referred to the findings of the ALFI Committee on Islamic Investment Funds, initiated in April 2008 and chaired by Germain Birgen, Managing Director of HSBC Securities Services in Luxembourg. The Committee analysed four areas – eligible assets (primarily for UCITS), operational challenges, tax concerns and an analysis of Luxembourg as an Islamic finance centre and submitted a set of recommendations to the Ministry of Finance. Going forward, the Committee will set and maintain best practice standards in the industry.
In his opening remarks Fernand Grulms, CEO of Luxembourg for Finance, passed on four messages from the Minister of the Treasury and Budget, Luc Frieden.
-The Luxembourg Government believes in the opportunity presented by Islamic finance. For this reason, in April 2008, Minister Frieden set up a working group to identify potential obstacles to the development of Islamic finance in Luxembourg and ways that it can be further developed.
-The Government has asked the tax authorities to look into the characteristics of Islamic finance deals and come up with proposals to ensure tax neutrality of these transactions compared to traditional banking and financial transactions.
-The Government is examining to what extent Islamic financial products, such as sukuk, could be used for funding purposes of the Government or entities belonging to the Government.
– The Government supports the application by the Luxembourg Central Bank to become the first non regional associate member of the Islamic Financial Services Board, the international regulator of Islamic financial markets.
ADVICE FOR MANAGERS LAUNCHING AN ISLAMIC FUND
Clear messages emerged for aspiring Islamic fund managers:
-understand your material;
-choose the jurisdiction as for a conventional fund;
-be aware that the regulatory process will be the same, with additional questions asked on individual instruments, such as sukuk;
-recognise that the fund must be subject first to the law of the land and then also to Islamic principles;
-provide full disclosure in the prospectus of all shariah related processes and potential outcomes (e.g. purification);
-manage risk as for a normal fund, but be aware of additional shariah compliance risks, increased liquidity risk (borrowing restrictions, illiquid investments) and potential FX risk (no hedging).
LUXEMBOURG FOR ISLAMIC FINANCE AND FUNDS
International Fund managers represented on the various panels included Bank of London and the Middle East, BMB Islamic, Blackrock, NCB Capital and Nomura Asset Management. All believe that UCITS can provide Islamic funds with international recognition and distribution. They praised the ease with which an Islamic fund can be set-up and distributed internationally from Luxembourg. Advantages cited include the flexible legal and regulatory framework, experienced export-oriented workforce and the network of tax treaties factors that have earned Luxembourg pre-eminence in the cross-border distribution of traditional funds.
The CSSF clarified its views regarding questions such as the shariah board and shariah compliance: both are the responsibility of the board of directors and not subject to regulatory approval, except where a shariah board member is also a regular board member, or where shariah rules touch UCITS regulations. The board of directors is responsible for all investment decisions.
CONCLUSION
“The surprising success of this conference confirms the increasing interest in the sector, even outside the Muslim world. Within HSBC, through our Amanah and Securities Services divisions, we are committed to support this development in Luxembourg as well as in all major centres for Islamic finance,” says Germain Birgen of HSBC Securities Services.
L.D.