Luxembourg's intention to raise sukuk financing is a challenge to the UK's attempt to be the first European sovereign to print Islamic debt. Having a highly rated rival enter the race not only adds impetus to the UK to keep to a tight schedule, but also shows the UK government has made the right decision to push ahead.
Triple-A rated Luxembourg’s plans to issue €200m worth of notes in euros or dollars invites direct comparison with the UK’s (Aa1/AAA/AA+) project to test the market with £200m in the next financial year. The need for Luxembourg’s parliament to approve the bill puts it behind the UK, but the principality has already identified underlying assets for its programme — something the UK Treasury is still working on.
Whichever borrower comes first will doubtless gain kudos for its boldness — the UK itself has said that being the first mover would bolster its credentials as the western world's foremost Islamic finance centre. But in that sense the UK has already claimed the prize by announcing its intentions first. Practitioners hailed prime minster David Cameron’s unveiling of the plans at the World Islamic Economic Forum in October as a game-changing endorsement and defining moment for the Islamic finance market.
Luxembourg’s entrance merely shows that the UK’s big splash is already having an impact. The similar size and scope of the programmes means that whatever accolades the second mover gives up would be compensated for by the experience and pricing knowledge gained.
As with the UK, there is much for Luxembourg to gain from a sovereign sukuk regardless of whether proves to be Europe’s first or not. The deal will help the principality boost its credentials as a listing jurisdiction for sukuk and as an Islamic finance domicile.
While Luxembourg funding in euros, should it choose that currency, would do little to help UK Islamic banks, it would help establish a curve for European corporate borrowers who might be looking at the Islamic asset class. It also comes amid plans for the first European Islamic bank, Eurisbank to launch in this year’s first quarter. Having sovereign liquidity support from the outset would be a useful boost that UK banking counterparts had to do without when they launched.
But on a wider level, Luxembourg’s involvement adds to the mounting evidence that Islamic finance — and in particular sukuk — is gaining mainstream acceptance in Europe. That is good for everyone involved in the market.