Islamic Finance is A Choice in Europe

Eleanor De Rosmorduc and Jean-Nicholas Durand question why success in the retail market is necessary for Islamic finance to reach a viable scale in Europe.

One of the sensible things that emerged from the recent financial crisis is a more realistic approach to estimating the growth rate of Islamic finance. Indeed, the 2012 Global Islamic Finance Report foregoes the temptation to make any global predictions at all.

Clearly, Islamic finance was not impervious to the financial crisis in Europe, nor is every born Muslim a client for Islamic finance. This is not to say that the industry is destined to fail in Europe: on the contrary. The financial crisis has led people to reassess the role of moral values in finance and this has had a beneficial impact on attitudes towards the Islamic finance sector.

Moreover, Islamic finance experts have themselves contributed to the debate by fearlessly evoking moral values as a touchstone for financial transactions. In this sense, Islamic finance is a mainstream 21st century development, in line with the millennium goals and the sustainability movement: it’s all about aligning our financial decisions with our inner convictions.

However, if Islamic finance is going to retain its current energy level in Europe, if it is going to move beyond being a niche product and become a viable, scalable business, then it cannot live on expectations of population growth. It must succeed in reaching and convincing the existing Muslim population and it has to succeed as an ethical choice (among others) for non-Islamic investors.

The UK market

The UK provides us with a litmus test. The UK was an early adopter and plays a leadership role in the European Islamic finance sector, with five Islamic banks and a number of Islamic finance windows offering innovative home financing plans and savings accounts.

However, two factors have so far prevented the UK from achieving viable scale. The first is relentlessly lukewarm demand from the retail public and the second is a lack of cross-border distribution into continental Europe. There are an estimated 44 million Muslims in the European economic space, which may be considered as a viable target group. However, populations are diff use and for the most part well-integrated. Success will go to the financial center — or centers — that crack the nut of distribution.

Who is in the game?

Outside the UK, the cities that are contending for the title of a European Islamic finance center are more or less limited to Paris, Luxembourg and Dublin. Germany has a large Muslim population but the federal nature of the country acts as a break on the sort of rapid policy-making that we have seen in the cities cited above.

France is the natural home for Islamic finance: an affluent Muslim population combined with very high concentration in the retail banking market should permit economies of scale. However, despite political support as early as 2008 (including a number of tax rulings), the business ran into two barriers: legal opposition centered on the laïcity principle and concern by bank managers – presumably grounded in research – that promoting Shariah compliant products at the point of sale would be a public relations disaster.

It was therefore very encouraging to see the launch of a first Shariah compliant bank account, in June 2011, by the Moroccan-owned Chaabi Bank. This was followed, two months ago, by the launch of an independent unit-linked Takaful life assurance plan designed for third party distribution.

The plan is positioned as an ethical choice, reflecting the strategy of Malaysian companies that successfully sell Takaful savings plans to non-Muslim investors.


Luxembourg arrived at Islamic finance by a different route. As a small, predominantly Catholic country the impetus for developing Shariah compliant products did not arise internally. Islamic finance promoters came to Europe in search of a stable political and economic environment, an appropriate legal framework, an internationally recognized stock exchange and a gateway to the single European market.

These factors brought the first sukuk to Luxembourg in 2002. Within a few years business began to flood in, in the form of sukuk listings and Shariah compliant mutual funds.

The Luxembourg government reacted to this development with characteristic efficiency. Within a couple of years tax circulars had clarified the treatment of various Shariah compliant vehicles, the best practice guidelines had been published by the investment fund industry, the banking institute had launched diploma programs to educate whole teams in Islamic finance and the Central Bank of Luxembourg had become the first EU central bank to be a member of the Islamic Financial Services
Board (IFSB). A string of state visits and financial missions to Asia and the GCC countries can have left nobody in doubt that Luxembourg is open for business.

Dublin, Ireland

Dublin is putting up a spirited challenge to both London and Luxembourg for the domiciliation of Shariah compliant investment funds and the listing of sukuk. This competition is healthy for the industry and will keep costs down. Nevertheless, lacking a significant domestic Muslim population, like that of the UK; or the linguistic skills to challenge Luxembourg on cross-border distribution, Dublin is likely to remain the competitor.


Leadership could also come from Turkey. With one foot in Europe and the other in Asia, there is an opportunity for Turkish institutions to set up business in the European Union and create the sort of economies of scale that most banks could only dream of. However, though Islamic banking — under various names — has existed in Turkey since 1983, it has struggled to achieve market share. As at June 2011, the four ‘participation banks’ had just 6% of the bank branch network and 5% of deposits.

Moreover, since the financial crisis, the growth rate in Shariah compliant credit has slowed in comparison to the growth rate in traditional corporate loans.

On the bright side, the European Investment Bank reports that recovery in the Turkish small and medium-sized enterprises sector is very strong. Such an environment is ideal for the growth of Islamic finance. This will be further assisted if the government goes ahead with plans to reform the taxation of sukuk and launch a sovereign issue.

Supply and demand

Why have governments and companies poured so much energy into a market niche for which demand – in Europe – is so sluggish?

Firstly, no financial center servicing a significant Muslim population, or providing international services to corporate, institutional or high net worth (HNW) clients from Muslim countries, would want to be behind in building capacity to handle such a visible cultural evolution.
Demand at the retail (mass affluent) end of the market may be latent, but anecdotal evidence suggests that it is there. At Luxembourg for Finance we receive a small but regular flow of enquiries for Shariah compliant house financing plans from people living in France, Belgium and Germany. As yet, there is no way of satisfying this demand but if the right products become available, there will be a natural snowball effect. This market is financially savvy: products will need to be priced and packaged in a way that is competitive and compelling, which implies a degree of streamlining in the product development process that is currently out of reach. This is where European skills can help: the single market has trained up a generation with the experience to solve some of these problems.

Clearly, it is inappropriate for a European financial center to position itself as knowing more about Islamic finance than the Islamic markets themselves. A desire – in itself legitimate - to project an image of readiness and competence can thus obscure the real message, which is potentially more valuable to Islamic finance promoters. Cities like London and Luxembourg have decades of experience in particular skills and services that can be useful to promoters from the MENA region.

Luxembourg, for instance, can offer unmatched expertise in cross-border distribution, professional cost-effective outsourcing and highly developed skills in financial engineering.

Financial engineering

The success of Luxembourg in the competitive world of financial engineering has been built on a track record of innovation. With limited domestic demand, financial services professionals directed their efforts into designing structures that were flexible enough to meet the needs of the widest possible range of clients. In this, they were supported by a political establishment that was – and is — motivated by the dual ambition of creating an environment that is business friendly and safe.

The securitisation company and the Specialized Investment Fund (SIF), a regulated, flexible investment vehicle designed for use by qualified investors, are examples of conventional structures that lend themselves perfectly to the needs of Islamic finance.

The Luxembourg securitization law was rapidly identified as a tool that met the need for a Shariah compliant vehicle that could be used both for structured products and for liquidity management.

In recent years, this vehicle has been used to issue a comprehensive range of products linked to various underlying assets. For instance, it can hold a portfolio of white-labeled products for distribution through the EU passporting process. It is also worth noting that recent international initiatives designed to increase the number of short-term sukuk available on the market will also use Luxembourg securitization vehicles.

If the Luxembourg UCITS structure (which benefits from the European passport) is the favourite vehicle of Islamic asset managers looking for international distribution, the SIF is a popular vehicle in family offices because it offers high net worth individuals and ultra high net worth individuals an efficient method for structuring a global estate in a Shariah compliant way.

The investor benefits from a vehicle that enjoys a robust legal and regulatory environment and can be tailored to hold any type of investment from real estate to works of art.


Moving forward, legislation in the pipeline may add two vehicles that are likely to be popular with the Islamic finance community: the Private Foundation and the Luxembourg law Trust.

At the same time, Luxembourg’s expertise in the design and distribution of unit-linked life assurance will sooner or later attract business in the underdeveloped Takaful market. Life assurance is a core holding of millions of European families.

European financial centers are ready for Islamic finance, not least, because they know that Muslim investors have a choice.

Eleanor de Rosmorduc is communication and public relations head at Luxembourg for Finance while Jean-Nicolas Durand is a senior legal advisor at KBL European Private Bankers.

This article first appeared in Islamic Finance News (25 July 2012, Volume 9, Issue 29, Page 23 – 24).  For more information, please visit