8 January 2014
The Grand Duchy of Luxembourg has entered the race to be Europe's first sovereign to issue Islamic debt instruments. The government presented a draft bill to parliament to pave the way for the deal, just months after British Prime Minister David Cameron signalled the UK's intention to issue a debut £200m sukuk
Luxembourg's intention to raise sukuk financing is a direct challenge to the UK's attempt to be the first. Having a highly rated rival enter the race not only adds impetus to the UK to keep to a tight schedule, but also shows the UK government has made the right decision to push ahead.
Sukuk are the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam
, sukuk securities are structured to comply with the Islamic law and its investment principles, which prohibits the charging, or paying of interest.
Both countries have been considering the issuance of an Islamic bond for years, as their respective stock exchanges battle it out to become the listing venue of choice for sukuk issuers.
Triple-A rated Luxembourg's plans to issue â¬200m worth of notes in euros or dollars invites direct comparison with the UK's (Aa1/AAA/AA+) project to test the market with £200m in the next financial year. The need for Luxembourg's parliament to approve the bill puts it behind the UK, but Luxembourg has already identified underlying assets for its program â something the UK Treasury is still working on.
Therefore, the winner of this race is still uncertain.
"The government has presented a draft bill to parliament. The approval of the bill is indeed part of the preparatory work for the potential issuance of a sovereign sukuk," a Luxembourg ministry of finance spokesperson told Reuters in an email.
The legislative calendar for the bill cannot be confirmed at this stage, she added.
Whichever borrower comes first will doubtless gain kudos for its boldness â the UK itself has said that being the first mover would bolster its credentials as the western world's foremost Islamic finance center. But in that sense the UK has already claimed the prize by announcing its intentions first. Practitioners hailed prime minster David Cameron's unveiling of the plans at the World Islamic Economic Forum in October as a game-changing endorsement and defining moment for the Islamic finance market.
Luxembourg's entrance merely shows that the UK's big splash is already having an impact. The similar size and scope of the programmes means that whatever accolades the second mover gives up would be compensated for by the experience and pricing knowledge gained.
As with the UK, there is much for Luxembourg to gain from a sovereign sukuk regardless of whether proves to be Europe's first or not. The deal will help the principality boost its credentials as a listing jurisdiction for sukuk and as an Islamic finance domicile.
While Luxembourg funding
in euros, should it choose that currency, would do little to help UK Islamic banks, it would help establish a curve for European corporate borrowers who might be looking at the Islamic asset class. It also comes amid plans for the first European Islamic bank, Eurisbank to launch in this year's first quarter. Having sovereign liquidity support from the outset would be a useful boost that UK banking counterparts had to do without when they launched.
But on a wider level, Luxembourg's involvement adds to the mounting evidence that Islamic finance â and in particular sukuk â is gaining mainstream acceptance in Europe. That is good for everyone involved in the market.
"Luxembourg Sukus is Good for UK" Euroweek
January 7, 2013
Abhinav Ramnarayan, "Luxembourg moves closer to debut sukuk" Reuters
January 7, 2013