Islamic finance is a relatively young but fast developing area of finance. Although the concept behind it is as old as the religion itself, the modern Shari’a banking and investment industry really took off in the 1960s with the launch of the Social Bank in Egypt.
It took approximately forty years for Islamic Finance to reach the $ 1 trillion threshold of assets under management. However, many experts predict that the $ 2 trillion figure will be reached in less than five years and it has even been estimated that the market could potentially be worth at least $ 5 trillion as the industry continues to expand globally.
Among those $ 1 trillion worth of assets, it is important to keep in mind that only 25% is invested. Indeed, $ 750 billion is totally liquid and ready to be invested, giving rise to a lot of opportunities for innovations such as Islamic investment funds.
Another factor that works in Islamic finance’s favour is the percentage of Muslims within the world population and the fact that their wealth is steadily growing in markets such as Malaysia and India.
Essentially, Islamic finance is a financial system subject to Shari’a principles. In practice, it means that every aspect of Islamic finance shall be undertaken in such a way to allow wealth and prosperity to be shared within the community through morally acceptable business activities and investments (i.e. a concept somewhat similar to the Socially Responsible Investments).
As profits have to be shared, it is logical that losses and risks should be shared as well. To that extent, any type of growth or increase that is not driven by effort or risk sharing such as interest income is forbidden. Investments in non-ethical or haram business activities such as the alcohol, tobacco, pornography, gambling and weapons industries are also forbidden.
Of all places, Luxembourg has been evolving as a global hub for Islamic Finance, where the government has been instrumental in putting the measures and means in place to allow the development of the practice. It has been the first European stock market to launch and list sukuk, has been the first European Member State to be admitted to the Council of the Islamic Financial Services Board, and has organised frequent government sponsored missions to GCC countries.
In addition, Luxembourg is very well positioned to attract Islamic finance projects thanks to its highly qualified multicultural professionals, its favorable and flexible legal and regulatory environment (investment vehicles compatible with Islamic finance, securitisation law) and its state of the art investment fund industry (Luxembourg is the second fund domicile globally after the US).
And if Islamic finance continues to grow at the rate that it has been, perhaps more countries will follow Luxembourg’s lead.
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