Structuring Islamic Microfinance Investments Through Luxembourg

Islamic microfinance, still a nascent industry, has the potential to help alleviate poverty in an ethical way and empower Muslim and non-Muslim micro-entrepreneurs. Said Qaceme looks at how setting up a microfinance investment vehicle may help realise this potential.

Although microfinance is now widely recognised as a powerful tool to alleviate poverty among the working poor, very few microfinance initiatives adhere to Islamic financing principles and many poor people in Muslim countries remain financially excluded. Indeed, it is estimated that only 1.28 million micro-entrepreneurs rely on Shariah compliant microfinance products, mainly in Bangladesh and Indonesia. However, according to the World Bank’s Consultative Group to Assist the Poor (CGAP): “With an estimated 650 million Muslims living on less than US$2 a day, finding sustainable Islamic models could be the key to providing financial access to millions of Muslim poor who strive to avoid financial products that do not comply with Shariah.” While CGAP’s report was written in 2008 and considering the current instability and difficult economic reality in the Arab world, many more Muslimsmay nowadays be in need of financial inclusion.

Various Islamic microfinance initiatives exist and the work of the IDB and other institutions, mainly based on donations, is remarkable. However, an untapped opportunity could be covered by setting-up an investment vehicle only dedicated to the financing of Islamic micro-entrepreneurship in a stable and regulated environment, hence giving confidence to socially responsible investors.

Microfinance and Islamic finance in Luxembourg

The financial regulator and the government strongly support both Islamic and microfinance in order to make Luxembourg an attractive financial centre. Home to numerous Shariah compliant investment vehicles and subject to persistent discussions about the imminent set-up of an Islamic bank on its territory, Luxembourg is one of the leading Islamic finance centres in Europe. At the same time, Luxembourg is the domicile of around 40 microfinance investment vehicles (MIVs) that represent over 50% of the global MIVs’ assets under management amounting to US$7.5 billion end of 2012.

Until recently, Luxembourg may have suffered the competition of other financial centres considered cheaper and less regulated to attract the initiators of alternative investment funds, including MIVs and Islamic funds. However, since the financial crisis and in times of economic instability, it is exactly its recognised supervisory framework, the flexibility of various investment instruments, the EU passport and the cross-border platform it offers that investors and funds promoters look for in order to launch their products in a politically and economically stable environment.

Two months ago, on the 10th of July, the parliament transposed the Alternative Investment Fund Manager Directive (AIFMD) into Luxembourg which will enable alternative fund managers to benefit from a marketing passport. In addition, the law introduced a new Limited Partnership regime which is tax transparent and offers contractual freedom which will be particularly attractive to investors accustomed with the Anglo-Saxon partnership regime.

An Islamic microfinance vehicle in Luxembourg

The principal challenge for the growth of Islamic microfinance is the lack of investment for existing and fledgling Islamic microfinance institutions, which have, as a consequence, remained relatively small. Furthermore, they lack technical expertise and training opportunities remain severely limited. The development of an investment vehicle that can provide both finance and technical expertise is key to enabling Islamic microfinance to develop.

Just like conventional MIVs, an Islamic microfinance investment vehicle (IMIV) would enter into the category of alternative investment vehicles thereby subject to the aforementioned regulations if certain criteria are met. The IMIV would not directly engage with the micro entrepreneurs but rather with the Islamic MFIs which can demonstrate the essential local business and cultural knowledge.
The MIV and all its investments shall be Shariah compliant. It would be designed to promote social development through investment in Islamic MFIs (IMFIs). Various Luxembourg investment vehicles allowing umbrella or compartment structures may be used in order to combine profit-seeking investment policies with purely social and philanthropic investment in order to help the destitute escape poverty or assist setting-up education centres. In this latter case, the eligibility of the channelling of Zakat and Sadaqa for instance through such a structure may have to be discussed with Shariah scholars.


While there is increasing interest in the potential of Islamic microfinance as practitioners, investors and scholars are beginning to highlight and debate the viability of a microfinance system based on Islamic principles, there remain significant challenges to overcome before Islamic microfinance becomes more widespread.

The development of an Islamic MIV that can be structured in a way to provide both finance and technical expertise is extremely important in order for Islamic microfinance to blossom. The regulatory framework, the recognised supervision and relevant expertise of the Luxembourg investment management Industry may help reassure investors of the timely opportunity.



Said Qaceme is a qualified Islamic finance professional who has been attached to several leading professional services firms.

This article first appeared in Islamic Finance News (11 September 2013, Volume 10, Issue 36, Page 25). For more information, please visit