(MENAFN - Arab News) Perhaps it is not surprising that Luxembourg has put a dampener on any speculation that it may go to the international market to raise funds through a debut Sukuk issuance. Yves Mersch, governor of the Banque Centrale de Luxembourg, speaking to reporters at the 8th Islamic Financial Services Board (IFSB) Summit on May 12-13 which was held in the Duchy and in Europe for the first time and hosted by the central bank, confirmed that the Luxembourg government is in no hurry to issue a sukuk because there are currently no compelling reasons for doing so.
Because the government is not in need of borrowing at the moment, any issuance of a sukuk has been deferred. The good news is that Mersch did not rule out a future sukuk issuance.
The Luxembourg declaration contrasts with that of the UK Treasury which before the onset of the global financial crisis in mid-2008 similarly indicated that the UK is considering whether to raise funds through a sukuk issuance in the wholesale sterling market. That issuance according to London bankers nearly got off the ground only to be scuppered by a combination of fears over whether the uptake would be there for the sukuk, following dissipating demand for two Treasury bonds at the time; the political fallout this side of the last UK general election especially when a few right wing tabloids were referring to the "Islamic extremists at the Treasury"; and of course the "official reason" that a Sukuk issuance would not be "value for money" for the moment.
However, if Mersch had been present at one of the side meetings of the summit on "Islamic Finance in Luxembourg" organized by the local office of Ernst & Young, Theisen Law and Lux Global Trust Services, he would have a got an entirely new and perhaps provocative perspective of why Luxembourg should indeed spearhead the beginnings of a euro-sukuk market.
Official summits can be a stifling experience because top participants always have be on their toes in the fear of not stepping on those of other people, let alone the host's.
But in the nouveau corporate surroundings of Ernst & Young in the leafy suburb of Munsbach, Luxmbourg officials albeit speaking in their private capacities were refreshingly proactive and frank.
Pierre Weimerskirch, partner, Alternative Investment Funds Advisory, Ernst & Young, stressed that Islamic finance can indeed be a sustainable value proposition in a post-crisis Europe, given its strong ethos of linking financing to the real economy and backed by tangible assets. Luxembourg officials indeed see the Duchy as an international financial hub sharing a natural fit with Islamic finance with its ethos of ethical banking based on a viable profitable proposition. In this respect Luxembourg can play an important role as an interface between Islamic finance and global finance.
Both Fernand Grulms, CEO of Luxembourg for Finance, and Jean-Marc Goy, head of the International Department, CSSF (the financial regulator), agreed that the basic policy and commitment on the part of the government to facilitate Islamic finance in and out of Luxembourg is in place. The challenge now is to turn this ambition into concrete action.
One such step in this direction is the publication recently by the Luxembourg tax authorities of guidelines to facilitate securitization through Shariah-compliant vehicles under specific conditions including that there is no active management of the underlying asset. The guidelines are for two categories of sukuk - one treated as guaranteed debt securitization in the case of Sukuk Al-Ijarah, and the other as asset-backed debt securitization.
Prominent Shariah advisory and structuring expert, Daud Bakar, CEO, Amanie Financial Solutions, which has recently opened an office in Luxembourg, welcomed the move and the commitment from various stakeholders in Luxembourg to facilitate and promote the Islamic finance space in the Duchy. He stressed the importance of the Shariah-compliance of the structures.
Non-Muslim and some Muslim regulators see alarm bells when they are confronted with the word "Shariah" even in the financial services context. They misconceived the function of a national Shariah Advisory Board, even at the regulator level, as a certification vehicle endorsing a particular product or structure. "We (the CSSF) are a secular authority and not a religious authority. I do not envisage such a development," explained Jean Marc Goy.
However, Fernand Grulms upped the voltage of the debate when he declared that personally he supports the establishment of a National Shariah Advisory Council at the central bank or financial regulator level which sets the rules of the game for the industry as a whole. Bakar advised that such a Council should be seen as a an advisory one and not as a certification body or product endorser and that if it is established would further enhance the credibility of Luxembourg's Islamic finance proposition. Another suggestion was that the central bank could always appoint an ad hoc Shariah advisory merely to guide its guidelines and circulars through the necessary Shariah compliance. But for both these developments to happen, would require a seismic shift in the mindset of the regulators whether in Luxembourg and in many other countries including Muslim ones.
Another intriguing suggestion from Grulms was that Luxembourg spearhead the development of an European model of Islamic finance to complement the Middle East and Asian Models as espoused by say Bahrain and Malaysia respectively. In Luxembourg like in the other 27 European Union countries, 85 percent of the national rules relating to financial services come from the European Commission in Brussels. In the investment funds space, individual countries can decide on a number of things such as when to implement the UCITS IV for instance, or rules on solvency etc.
Jean Marc Goy reminded delegates that the CSSF now has a dedicated section on Islamic finance on its website which sets out the financial regulator's approach to the industry. This is to enhance transparency of the process. Luxembourg, he added has a fast-track authorization process and a pretty good record in the respect to boot.
One enticing topic was the lack of any signs of a debut sovereign sukuk out of Luxembourg. While Jean Marc Goy reiterated Gov. Mersch's sentiments that a sovereign sukuk issuance from Luxembourg will not be forthcoming in the foreseeable future, Noripah Khamso, CEO, CIMB Principal Islamic Asset Management, Malaysia, whose investors are institutional, including sovereign wealth funds and government agencies, said that the attitude of potential sovereign European originators was baffling especially relating to the appetite for such AAA-rated papers. Her company for one had over 250 million to invest in AAA-rated sukuk especially sovereign issuances, but cannot find enough sukuk to invest in. Similarly, she had to turn down new orders from institutional clients interested in investing in such sukuk, because of the dearth of such offerings in the market, which admittedly only started to recovery in late 2010 in the aftermath of the global financial crisis.
However, the dearth of sukuk originations may suggest continued caution of investors over global market conditions. Sukuk issuances are estimated to top 37 billion at end 2011 but market activity has been sluggish, especially from potential sovereign issuers, despite the hype and rhetoric.
According to Noripah Khamso, "there is one common thing between Luxembourg and Malaysia. Both jurisdictions are so small in the world map that we are forced to think beyond our shores to be relevant and internationally visible." This explains the strong force behind the Malaysian aspiration to be recognized as the global hub/financial centre for global Islamic finance. In the case of Luxembourg, the Duchy is one of the major domiciles for fund and trusts registration; for custodial and administration services; for listings of funds, bonds and sukuk; and as a clearing location for global bond transactions.