With over 2.6 trillion euros of assets under management this January, Luxembourg is the largest regulated funds domicile in Europe and the world’s cross-border distribution hub for investment funds with a market share of 75%.
But what about Islamic Finance? Is Luxembourg an emerging country in this field?
Geographically speaking, the market for sharia-compliant funds is concentrated within three main markets: Saudi Arabia, Malaysia and Luxembourg. According to Thomson Reuters’ Global Islamic Asset Management Report 2014, 2013 saw the highest number of funds launched and lowest number of closures. As a result, the number of mutual funds has doubled since 2007.
What makes Luxembourg so attractive?
Luxembourg’s well-known financial sector and its strength in conventional finance was a natural incentive for Islamic Finance to choose Luxembourg back in 1978. Unlike London, which is primarily known for its Islamic banks, Luxembourg does not focus on one single area but rather embraces all aspects of Islamic Finance: Banking, Asset Management as well as Insurance (Takaful). What’s more, Luxembourg has not chosen to limit itself by applying only one set of Sharia rules. Instead, it welcomes all of them, each with their own specificities.
As it stands today, Islamic finance is still a niche activity in Luxembourg. However, key figures in both the public and private sector see Sharia-compliant funds as a promising opportunity for growth: the infrastructure is in place and many new projects are in the pipeline. With its openness to innovation, the country has demonstrated an ever growing interest in Islamic Finance. Not only has a favourable environment been set up, but the government has also led by example in its initiative to issue a Sukuk. 
From niche to mainstream: how to reach the critical mass?
What are the key challenges?
There are a number of barriers to the growth of Islamic Finance in the EU:
The way forward
The Luxembourg State experienced some difficulties in launching Luxembourg’s first Sukuk. This makes for a good case study, highlighting a number of areas where further clarification will be required if EU countries are to boost the use or issue of Islamic finance products.
Once these aspects are clarified, large conventional players may be encouraged to offer Sharia compliant versions of their current products, as they have the credibility and confidence to give the get-up-and-go as well as the client base. Positioning Islamic funds as socially responsible or ethical investments could be a key strategy for fund managers. SRI is a fast-growing subsector of the conventional funds industry, naturally aligned with Islamic funds.
 The sovereign sukuk to be issued by Luxembourg will involve the sale and leaseback of assets (sukuk-al-ijara). Three buildings including the two towers situated at the Place de l’Europe in Kirchberg and the Gutenberg building in Strassen will be transferred to an SPV (a Luxembourg S.A. owned by the state of Luxembourg) that will issue EUR 200m of sukuk (corresponding to the value of the three properties).
 The tax treatment of Sukuk issued by a Luxembourg company has been clarified in a tax circular released on 12 January 2010 (Circular L.G.-A No. 55 of 12 January 2010). The circular confirms the classification of Sukuk as debt for Luxembourg tax purposes