Islamic Products & Services
Luxembourg is the leading European domicile for Islamic investment funds and fifth most popular in the world. The principal reasons for this are:
- a wide range of investment vehicles, any of which can be used to create an Islamic investment fund;
- the fact that Luxembourg EU coordinated retail funds are recognised for distribution in some 50 markets worldwide, and
- the Luxembourg service providers’ unequalled experience in cross-border distribution of financial products.
The choice of vehicle will largely depend on the target assets and the distribution policy. This is summarised in the table comparing Luxembourg Islamic investment vehicles.
UCITS ("Part 1" Funds)
The Undertaking for Collective Investment in Transferable Securities (UCITS) complies with EU legislation on investment funds and is eligible for the EU “passport”, which permits cross-border distribution within the European Union. Luxembourg UCITS are also widely recognised by regulatory authorities outside Europe. This product is ideal for a multi-market distribution strategy and is popular with Islamic promoters.
UCI "Part 2" Funds
A fund that does not comply with UCITS criteria can be set up under "part 2" of the relevant law. The "part 2" regime can be used for alternative investment strategies such as real estate investment. These funds are not eligible for the EU passport and cross-border distribution requires authorisation on a market by market bases.
Specialised Investment Fund (SIF)
This is a multi-purpose vehicle designed for well-informed investors. There are no investment restrictions except for the principle of asset diversification. The SIF can be used to invest in anything from real estate to fine art and is a popular choice for professional Islamic investors.
SICAR
The investment company in risk capital (société d’investissement en capital à risque - SICAR) is designed for private equity and venture capital. Reserved for well-informed investors, it has no investment restrictions except that the target investment(s) must be in risk capital.
Flexibility
The vehicles listed above benefit from a wide range of structural options. For instance, promoters may choose between incorporated or non-incorporated, open ended or closed ended, with a single portfolio or an umbrella structure with underlying sub-funds and share classes. This flexibility gives fund promoters almost unlimited scope to tailor products for specific markets and client groups.
Takaful
Gambling is not permitted under Islamic law. Takaful has therefore evolved to meet the need for a Islamic insurance contract. It can be broadly compared to cooperative insurance schemes in traditional finance.
At present no takaful is sold in Luxembourg. However, around 100 insurance companies are established in Luxembourg, most of which specialise in cross-border distribution (some 95% of premiums are sold in other EU Member States). Many of these companies offer takaful in Malaysia or the Gulf Cooperation Council (GCC) countries. It is probably only a matter of time before we see takaful products in Luxembourg.
Islamic Retail Banking
While existing banking law permits the creation of an Islamic bank or the opening of an Islamic finance window, as at today no Islamic banking products, such as deposit accounts or home financing plans, are offered to retail customers in or from Luxembourg.
Islamic Wealth Management and Structured Finance
Luxembourg has a long tradition of private banking and is the leading wealth management centre in the Eurozone.
Local private banks and family offices specialise in handling international clients, who often have complex business and family profiles stretching across several countries or continents.
A number of these firms have a dedicated Islamic Finance desk that is able to offer Islamic products and services. In addition to the investment structures listed above, the following two holding structures can be used to control a portfolio of Islamic investments:
- SOPARFI (société de participations financières) is designed to optimise the management of a group of companies and can take advantage of Luxembourg’s double taxation treaties.
- The SPF (société de gestion de patrimoine familial) is an investment company that facilitates the administration and management of wealth on behalf of individuals (who do not need to be related to each other).
Securitisation
Luxembourg’s flexible and tax efficient regime for securitisation vehicles has earned it recognition as an international structured finance hub.
A wide range of eligible assets can be securitised and Luxembourg securitisation vehicles have been used in several murabahah and ijarah structures.