Luxembourg joins the IFSB Summit in Bahrain
For the first time Luxembourg has taken part in the annual IFSB summit as a member and sponsor of the event. The programme for members included a Public Hearing of the IFSB Exposure Draft on setting a standard on solvency requirements for takaful (Islamic insurance) undertakings. Luxembourg also conducted a Country Showcase, providing fellow members and other guests with the opportunity to ask questions relating to the Grand Duchy, which resulted in a lively and extended Q&A session.
The Islamic Financial Services Board (IFSB)
The IFSB was set up in 2002 to serve as an international standard setting body for regulatory and supervisory agencies that have a vested interest in ensuring the soundness and stability of the Islamic financial services industry. It develops best practice standards, conducts research and coordinates initiatives. Members include the IMF, the World Bank, the Bank for International Settlements, the Islamic Development Bank and the Asian Development Bank.
The Central Bank of Luxembourg (BCL) is the first central bank of a European country to be an Associate Member of the IFSB.
2010 IFSB Summit in Bahrain
Yves Mersch, Governor of the Central Bank, took part in the recent annual IFSB Summit in Bahrain, where the programme included a panel discussion by the IFSB Working Group on Liquidity Management, of which the Governor is a member.
The Luxembourg Country Showcase was attended by some 50 central bankers, Islamic finance scholars and senior bankers from the Islamic finance world. Chaired by Mushtak Parker of MP Associates and Islamic Banker magazine, this workshop provided attendees with an opportunity to direct questions at representatives of the Central Bank, the investment fund association, Luxembourg for Finance and Theisen Associates, representing the Luxembourg legal community.
Opening the Showcase, Mushtak Parker informed delegates that Luxembourg had been a pioneer in the European Islamic finance sector and that the European market was opening up: both France and Germany had recently authorised an Islamic banking institution.
A lively debate
Introductory statements by the four Luxembourg panelists were followed by a lively debate that lasted two hours in total.
Delegates asked a number of questions concerning the legal infrastructure for Islamic finance in Luxembourg and the political will to adopt any necessary changes. They were informed that where individual products were concerned the legal structure was fully adapted to Islamic finance structures. Nevertheless, looking ahead at future requirements, the financial centre is well placed politically: the Minister of Finance himself chairs a Committee to drive forward the agenda for developing the financial centre.
There was discussion concerning the legal treatment of conflicts under the Luxembourg civil code system, as opposed to the common law system familiar to countries that have had former links to the United Kingdom. The delegation underlined that Luxembourg law must be respected, first and foremost; however, they added that the examples quoted were really matters of shariah risk management. This could be dealt with through private international law and arbitration.
Delegates stressed that Luxembourg is not really comparable to France although they share a civil code legal system. France is predominantly a domestic market whereas Luxembourg has an international, cross-border business model.
There was considerable interest in whether Luxembourg would be making a sukuk issue in the near future, a discussion that was picked up by Reuters and the international press. The delegation reported that Luxembourg is examining the possibility but has no immediate plans to make such an issue. A key question is which assets to use to back the sukuk. When asked why so many sukuk issues were already listed on the Luxembourg stock exchange, the delegation responded that such a listing met a common liquidity requirement for institutional investors, while the exchange was also favoured for its speed, reasonable costs and efficiency.
On being asked what value the European Union could add to Islamic finance, the delegation responded that if there were to be an EU initiative this would be on the regulatory side. An EU passport in the area of Islamic finance would be welcomed by Luxembourg. However, the level of awareness of this sector within the EU is not yet high enough to anticipate action in the foreseeable future.
On the subject of takaful, and whether Luxembourg had anything to offer in this area, the delegation informed attendees about the Luxembourg insolvency privilege (known as the “super privilege”), which gives life assurance contract holders a primary claim on assets. This is considered to be among the most protective regimes in Europe for the client.