Islamic finance: A great opportunity for Luxembourg

On September 21, 2009, PwC Luxembourg conducted the first in an expected series of forums on Islamic Finance.  Its objective was to gather industry executives and provide an environment for open discussion on a variety of topics affecting the sector, including opportunities for financial institutions interested in Islamic finance, as well as discussions on risk management, servicing gaps and the very popular topic of sukuk.

The Forum attended by about fifty invitees, which began with an introduction from Wim Piot, partner and Middle East and Islamic Finance Leader at PwC Luxembourg, was followed by a presentation given by Mr. Mohammed Amin, member of the PwC Global Islamic Finance Leadership Team, partner and Islamic Finance Leader for PwC UK, who described recent developments and changes in the industry.

“Despite the recent turbulent market conditions, there continues to be tremendous growth and opportunity within the Middle East; both for conventional funds and Islamic funds.  What started off as an industry boom resulting from record high oil prices and an excess of liquidity, has expanded because of benefits associated with the restrictions of Islamic Finance, which have limited the exposure of such funds to the fixed income market that was so highly impacted by the credit crunch,” Wim Piot began.

“The result of both of these factors has been an exponential growth in the Islamic assets and a remarkable worldwide interest in this industry and region.  In the past 5 years, Shariah mutual fund assets have more than doubled according to a report released by Ceruli.^[1], a growth rate that can not be ignored,” added Mohammed Amin, “ Indeed assets under management in Islamic Funds are currently estimated to be between USD 50 to USD 80 billion.”

Even in 2008, a year when the majority of the asset management industry saw net asset declines, the growth in Islamic fund assets was estimated to be close to 8%.  The total size of Islamic Banking Industry is estimated to be USD 800 billion to USD 1 trillion with an average growth rate of 15% - 20% per annum.

Recognising this growing attention, the Islamic Finance market has reacted by expanding its traditional product range to meet the demands of interested investors, including ETF structures, hedge funds, money market options and, of increasing interest recently, Sukuk

“Sukuk are certificates that function in a similar way to traditional bonds, the main differences being that, unlike conventional bond holders, Sukuk holders own, and have rights to, the underlying securitised assets.  This, of course, also means that they also bear the risks associated with the project”, said Wim Piot.

Sukuk have become an attractive method of project financing for companies and an alternative form of investment to clients for several reasons:

• Muslims across the globe are eager to enter the fixed income market and Sukuk provide a Shariah compliant entry,
• Islamic finance in general has become increasingly popular (recent figures state that there are now more than 300 Islamic financial institutions over 75 countries),
• Massive infrastructure plans in GCC countries, requiring significant financing, are likely to look to Sukuk as a source,
• The increased openness of governments and regulators around the world has widened the demand for Sukuk and its issuers.

Wim Piot concluded that, “Despite the difficult year last year, financiers remain very positive for sukuk and this represents a great opportunity for Luxembourg, in terms of securitisation and growth opportunities for funds.   Not only that, but, thanks to efficiency and cost effectiveness, the Luxembourg stock exchange has become a leading centre for listing international securities, and this fact is also attracting Sukuk.  The Luxembourg stock exchange has 16 Sukuk listings to date and the only other financial centre to match this is London.”

Notes to editors

PricewaterhouseCoopers Luxembourg (www.pwc.com/lu) has more than 1900 professionals from 53 different countries. PricewaterhouseCoopers (www.pwc.com) provides industry-focused audit, tax and consulting services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop innovative perspectives and practical advice.

“PricewaterhouseCoopers” refers to the group of independent firms that are members of PricewaterhouseCoopers International network, each of which is a separate and independent legal entity.