London and Luxembourg are engaged in a friendly “battle of the listings domicile” especially for sukuk and Islamic investment funds, and its seems that the London Stock Exchange (LSE) currently has the upper hand on its counterpart in the Duchy, Luxembourg Stock Exchange.
In a short and simple announcement on June 1, the London Stock Exchange welcomed "the listing of another two sukuk bringing the total number of sukuk which have listed on the exchange to 33 and the total money raised to $19.4 billion." The two latest listings coup include the IDB Trust Services Ltd.’s $750 million Trust Certificates, and the SIB Sukuk Company II Ltd.'s $400 million Trust Certificates which are due on May 25, 2016. (source - arabnews)
However, behind the scenes there was a right royal battle especially on the part of the Luxembourg Stock Exchange to get the listings mandate for the $750 million sukuk from the Islamic Development Bank (IDB), at least. It now transpires that Luxembourg Stock Exchange officials had three meetings with the IDB prior to the launch of the latest sukuk, which closed on May 25 after a road show program which took in eleven cities including for the first time Frankfurt and Paris. At least one of these meetings took place at the IDB headquarters in Jeddah.
It is no secret that the IDB did have negotiations with the Luxembourg Stock Exchange about four to five years ago with the view to list one of its earlier sukuk offerings on the exchange. However, the listing negotiations broke down due to some legal complexities and anomalies. One Luxembourg source stressed that this was more to do with the inexperience and lack of understanding of sukuk structures and Islamic capital market by the Luxembourg officials at the time, rather than any major legal or documentary requirements that could not be met.
That particular development led to an effective institutional alienation between the IDB and the Luxembourg Stock Exchange, from which the latter is only now starting to emerge to coincide with the Luxembourg government's new policy of engaging with the Islamic finance industry and to make the Duchy a major international hub for Islamic finance especially capital markets including sukuk and investment fund listings, registration and clearance and payment settlement.
With more global sukuk now listing on the Luxembourg Stock Exchange including the $1.5 billion sukuk issued by Petronas Global Sukuk Ltd. in 2009, and the perceived indifference of the new Conservative/Liberal Democrat Coalition government in the UK over its Islamic finance policy going forward, financial organizations in the Duchy seem to have acquired a second wind as far as Islamic finance is concerned. Luxembourg is already a sizeable domicile for sukuk listing and the registration of Islamic funds. Currently, there are some 16 sukuk listed on the Luxembourg Stock Exchange with a combined value of 5.5 billion euros; and over 45 Islamic investment funds, largely equity funds domiciled in Luxembourg.
However, first mover advantage and reputational consistency counts for a lot even these days. Although the $3.5 billion IDB Islamic Trust Certificates Program did start with the first tranche issuance of $500 million listed on the Luxembourg Stock Exchange in 2005, the subsequent problems over future listings that emerged between the IDB and the CSSF, the Luxembourg financial regulator, effectively scuppered any continuation of listings of future issuances under the Program by the IDB Trust Services Limited.
"It was felt that the London Stock Exchange offered a good service and track record in facilitating the listings of the last few IDB sukuk issuances. In addition, the $3.5 billion Trust Certificates Program is also nearing completion. In fact, the latest $750 million issuance is the penultimate issuance under the program. It was felt that there was no need to change the listing domicile so near to the completion of the program. There was no problem or issue of the security of the documentation and all the permissions for listings were already in place. Similarly, the time factor was against changing to a new listings domicile," explained a source.
However, the IDB has not ruled out looking at the Luxembourg Stock Exchange for future listings. "We know Luxembourg is very welcoming. At the last meeting they offered all the support including fast-track registration of the listing requirements. We certainly will consider Luxembourg as a future listing domicile for IDB sukuk offerings," suggested the source.
Both London and Luxembourg however should realize that attracting Islamic finance business is not merely a question of supplying narrow services. It is also about wider policy regarding Islamic finance no matter how tenuous. So when the UK Treasury and more recently the Banque centrale de Luxembourg ruled out the issuance of sovereign sukuk in the wholesale sterling and euro markets respectively, albeit for totally different reasons, it undermined the policy perception and confidence in the Islamic finance propositions of both countries. Islamic financial institutions and investors are reluctant to enter markets which may offer opportunities but where the policy makers and regulators are ambivalent or indifferent to the industry.
The irony is that both Luxembourg and London have a history of engagement with contemporary Islamic finance going back to the late 1970s and early 1980s. And yet more than three decades later, both centers, according to market players, have failed to leverage the full potential of the industry.
Yes, Luxembourg is the only EU country which is a member of the Islamic Financial Services Board (IFSB), the prudential and supervisory standards setting body for the global Islamic finance industry. Yes, the Banque centrale de Luxembourg is a founder member of the newly-established International Islamic Liquidity Management Corporation (IILM), once again being the only EU member country to do so. But for how long can Luxembourg leverage this psychological advantage over London?
The UK will eventually be dragged into joining the IFSB or the IILM if London is really serious about being the major centre for Islamic investment, trade and finance, as successive governments, including the current coalition one, aspires to.
Perhaps the recent re-formation of Islamic finance in the UK over the last two years has seen the sector emerging with a stronger combined "balance sheet," clearer business strategy and purpose, and new relationships with overseas centers and its own Government. The 5 UK Islamic banks — Islamic Bank of Britain, European Islamic Investment Bank, Bank of London & Middle East, QIB UK, and Gatehouse Bank — according to local Islamic bankers, are emerging from the credit crisis as much stronger individual organizations financially, with distinct business plans that complement rather than crowd the market.
Another recent boost has seen the integration of the UK Islamic Finance Secretariat (UKIFS) into TheCityUK, the independent body promoting UK-wide financial and related professional services. UKIFS, which was established in March 2010, is the leading cross-sectoral body assisting with the promotion and development of Islamic Finance, both domestically and to represent the UK industry internationally.
"Luxembourg's commitment through its membership of the IFSB and the International Islamic Liquidity Management Corporation (IILM) - the only European Union country to accede to these organizations - and the fact that they have seized this opportunity is an object lesson to other western regulators including the UK," warns Richard Thomas, CEO of Gatehouse Bank and chairman of the Islamic Finance Committee at TheCityUK.
The fact that UKIFS in its new domain, can exist with viable working groups contributing to banking and Takaful, legal, accounting, and ETQ work streams headed by the some of the strongest names on the international stage, shows that the UK has a viable cluster that underpins its claim and ambition to be a complete centre for Islamic financial services.
This market development, according to TheCityUK, comes at a time of strong growth in Islamic finance across the spectrum of financial and related professional services. There are currently 22 banks in the UK, of which 5 are stand alone Shariah-compliant banks, offering Islamic finance products, exceeding that of any other Western country. There were 5 sukuk listings at the London Stock Exchange in 2010 and one in early 2011, bringing the aggregate total at the LSE to 31 listings worth $18 billion. Islamic funds managed in the UK have combined assets of $300 million. The global Islamic finance market grew by 10 percent in 2009 to $1,041 billion and TheCityUK estimates that the global market for Islamic finance grew at a similar rate in 2010.
Source : http://arabnews.com/economy/islamicfinance/article448955.ece - June 6, 2011
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