Key highlights
- Islamic asset management grew 128% in just over three years.
- Luxembourg does not have strict Shariah regulations, but its regulatory platform continues to attract fund managers from the MENA region.
- IFN Investor Funds Database reports a total of 54 Islamic funds with assets under management (AuM) of US$6.82 billion domiciled in Luxembourg.
Overview
Luxembourg is the second-largest investment fund center globally, just behind the US, and currently managing over EUR4.5 trillion (US$4.84 trillion). On a global level, considering both conventional and Shariah Islamic fund offerings, 65% of all cross-border funds are domiciled in Luxembourg.
Luxembourg was also the first European country to authorize an Islamic insurance company in 1983, the first European market to list a Sukuk facility in 2002, the first European central bank to join the IFSB in 2010 and the first to issue euro-denominated Sukuk in 2014.
In the year 2020, Luxembourg hosted US$3 billion-worth of AuM in Islamic funds; the total grew to US$6.83 billion in Q1 2024 according the IFN Investor Funds Database — a staggering 128% growth in 39 months, or close to a 40% growth year-over-year.
Luxembourg has built its position to be among the most popular domiciles for undertakings for collective investment in transferable securities (UCITS) offerings, a retail investment product widely sold to public and institutional investors that invests in liquid asset and tradeable security classes. Investment not categorized as UCITS are called alternative investment funds (AIF).
Regulatory framework
The Commission de Surveillance du Secteur Financier (CSSF) represents Luxembourg in supervising and ensuring the soundness of the financial sector. The CSSF also oversees entities to make certain these service providers are playing by the regulations being applied to them, as well as the prevention of those with ill intention of abusing the financial market for money laundering/terrorism financing purposes.
It is notable how an increasing number of fund managers from the MENA region have continuously established and marketed their Shariah compliant private equities and real estate funds in the Grand Duchy, being lured by the robust platform and flexible regulatory regimes alongside efficient tax treatment.
In the EU investment framework, there exists a mechanism which the CSSF calls a European passport. This mechanism essentially allows the funds authorized in one member state to be marketed and sold in another member state, given the condition that the UCITS and AIF managers (AIFM) must undertake ongoing filing and reporting obligations to maintain the passport, especially attractive to Shariah fund managers from the MENA region.
Investment fund managers, investment funds and vehicles are regulated and supervised by the CSSF too. There are two regulatory regimes to protect investors, the UCITS Directive and AIFM Directive.
To invest in UCITS and AIF, the CSSF recognizes the following as an investment vehicle: UCITS; undertakings for collective investment (UCI); specialized investment funds; investment companies in risk capital; securitization undertakings; pension funds; and specific authorizations.
Luxembourg does not have a standing central Shariah authority. That said, some banks and legal and audit firms and other service providers do have active and well-trained Islamic finance teams. The financial sector welcomes this aspect and sees it as an important driver for growth.
In 2013, the Association of the Luxembourg Fund Industry published guidelines for Islamic investment funds, and this has since become an international standard.
Shariah compliant investment funds can be set up under the current ongoing framework applicable to investment funds, as there is no specific element or distinguishing feature to classify as to whether an investment fund is Shariah or otherwise, since it would be bound by the same law and investment policy.
Though supervised by the CSSF and the insurance regulatory body, Commissariat aux Assurances, there are no implied conditions regarding compatibility of assets with Shariah. As far as the supervisory bodies are concerned, the compliance with legal requirements is their priority.
Investment market
The Luxembourg Stock Exchange (LuxSE) has made a significant contribution in promoting Islamic finance alongside its collaboration with international investors. Combined with the expertise of the country’s financial regulators in Islamic finance principles, this has played a crucial role in presenting the investment prospect to the Middle East.
As the foremost global platform for listing debt securities and sustainable debt securities, LuxSE plays a vital role in elevating the visibility of Shariah compliant products and continues to facilitate the convergence of Islamic and sustainable finance initiatives.
With its well-established and internationally recognized financial sector, including its capital markets, which are open to both domestic and foreign investors and issuers, Luxembourg’s financial regulatory framework provides a conducive environment for foreign investment, and the country’s capital markets attract a diverse range of participants from around the world. LuxSE provides a variety of Shariah compliant investment options for investors, readily accessible for public trading. These include Sukuk, Islamic funds, Shariah compliant equities, exchange-traded funds, Islamic finance indices and certificates tailored to Islamic finance principles.
In 2023, amid historically high interest rates and escalating geopolitical tensions, LuxSE saw the addition of 13,900 new securities — marking a 13% rise in listings compared with the prior year. Moreover, bond trading activity surged by over 130% compared with 2022.
The Luxembourg UCITS is the leading globally distributed investment fund product with over 9,700 UCITS and these are traditional investment funds such as equity, bond, money market and mixed funds. More than 72% of the global UCITS funds distributed internationally are based in Luxembourg.
Chart 1: Islamic asset class breakdown by AuM in Luxembourg
Asset management
Luxembourg has emerged as a center for Islamic finance, benefiting from its stable regulations and low interest rates. With over 3,900 funds from 70 countries listed on LuxSE, totaling US$4.29 trillion, it stands as the largest domicile for Islamic investment funds outside Muslim-majority countries, managing assets amounting to roughly US$6.82 billion. Currently, there are 54 Shariah compliant funds domiciled in Luxembourg, including 31 equities and 13 Sukuk funds, alongside others covering diverse asset classes like real estate, fixed income and mixed assets.
According to the IFN Investor Fund Database, Islamic funds domiciled in Luxembourg have total AuM of US$6.82 billion. The largest fund in Luxembourg is the HSBC Islamic Global Equity Index Fund, managed by HSBC Global Asset Management, with AuM totaling US$1.43 billion. SEDCO Capital, HSBC Global Asset Management and Franklin Templeton rank as the top three companies by AuM, collectively offering 33 different Islamic funds.
In 2023, three funds were launched with combined AuM of US$168.14 million: SC Global Real Estate Equities Passive Fund (US$140.57 million), SC Global Small Cap Equities Fund (US$15.97 million) and Franklin Shariah Global Multi-Asset Income Fund (US$11.6 million).
Table 1: Luxembourg’s top performing Islamic funds in Q1 2024
| Fund | Fund manager | Three-month returns (%) |
| Franklin Shariah Technology Fund | Franklin Templeton | 18.6 |
| HSBC Islamic Global Equity Index Fund | HSBC Global Asset Management | 16.53 |
| SC Global Real Estate Equities Fund | SEDCO Capital | 15.88 |
Outlook
Over the years, Luxembourg has emerged as a compelling financial hub for Islamic finance transactions, bolstered by robust government support and an innovative legal framework. While Luxembourg has not established specific Shariah compliant entities or legal structures, its diverse range of fund entities offers ample flexibility for crafting Islamic investment structures. As the industry progresses and responds to evolving market dynamics, Luxembourg is primed to uphold its status as a premier destination for Islamic finance, nurturing sustainable growth and enhancing financial inclusivity both regionally and globally.
This report was produced by Aravinth Rajendran and Elliot Yip, financial data analysts at IFN Investor.
