Conference internationale sur la finance islamique Casablanca 29 Novembre 2012

1. Conference internationalesur la finance islamiqueCasablanca29 Novembre 2012 Rachid Ouaich, Ethiquity Partners Islamic Finance Professionals Association

2. Content • Global View of the Islamic Finance Industry • Islamic Finance in Europe • Introduction to Luxembourg • Luxembourg – hub for Islamic Finance • Conclusion

3. Global View of the Islamic Finance Industry

4. Global View of the Islamic Finance Industry

5. Global View of the Islamic Finance Industry

6. Global View of the Islamic Finance Industry

7. Global View of the Islamic Finance Industry

8. Global View of the Islamic Finance Industry

9. Global View of the Islamic Finance Industry

10. Global View of the Islamic Finance Industry

11. Global View of the Islamic Finance Industry

12. Global View of the Islamic Finance Industry

13. Global View of the Islamic Finance Industry

14. Status of Islamic Finance in some European countries

15. United Kingdom • 5 fully shariah compliant banks and many other islamic windows • 42 sukuk listed on the LSE valued at USD 23.75 billion • 7 sharia compliant ETFs amounting USD 49.8 million as at end-June 2010 • April 2007 : Treasury established an IF Expert Group representing members of the Industry, the City, FSA, Muslim Organizations and other bodies. • FSA encouraged the growth of IF by providing an open and flexible regulatory regime which accomodates both islamic and conventionnal institutions • The Financial Services and Markets Act 2000 order 2010 was introduced by Treasury to support Islamic Finance and the issuance of corporate sukuk within the UK => regulatory treatment, legal costs reduction and obstacles removal. • Issuance of country’s first sovereign sukuk delayed

16. France • July 2007 : AMF circularauthorizingIslamicFunds to applyspecific sharia-compliant management criteria • July 2008 : French Ministry of Economy, Industry and Employment and AMF announcesignificanttax and regulatory changes to boostIslamic Finance => listing of sukuk, in France, taxtreatment of Islamic Finance transactions and reforms on the Fiducie (French trust) • August 2010 : Tax administration guidelines on Murabaha, Ijara, Istisna and Sukukpublished • June2011 : Country’s first sharia compliant saving products offered by a subsidiary of a Moroccan bank (Chaabi Bank).

17. Germany • Issuance by the Saxony-Anhalt regionof a Sukuk in 2004. • Sukukwasfullysubscribedwith 60% of the issue went to investors in Bahraïn and UAE and the remaining 40% sold to investors in Europe • In 2007, Germanbanksstarted to offerislamicbankingproducts to institutionalinvestors (Deutsche Bank, Allianz Global Investors, Meridio). • In 2009, the Federal Financial SupervisoryAuthority (Bafin) accepted a request by the Turkish-Kuwait IslamicLender, KuveitTurk to conductbankingoperations in Germany that are in accordance withIslamicrules.

18. Ireland • •2008: The Irish Financial Regulator established a team specialising in Shari’a compliant funds in order to expedite the approval process. • •2009: Irish Revenue issue a tax briefing confirming that Shari’a compliant funds, Ijarah transactions and Takaful arrangements were to be taxed ion the same basis as that applicable to comparable conventional financial products. • •2010: Irish tax legislation is amended in the Finance Act to tax Islamic banking products and sukuk issuances on the same basis as their conventional equivalents. This includes Murabaha, Diminishing Musharkah and Wakala arrangements. • •2011: Islamic Finance is highlighted as one of the areas of focus in the Government’s ‘Strategy for the International Financial Services Industry in Ireland 2011- 2016’ launched in July 2011

19. Turkey • 1985 : Al Baraka Turkish Finance House established as Turkey’s first interest-free bank • 1999 : Participation and conventional banks began to be governed unde rturkey’s Banking Law No 4389 • 2005 : Approval of Partnership Banks Law No. 5411 • 2009 : Neova Insurance received a license for takaful operations • 2010 : Issuance of Turkey’s first sukuk from Kuveyt Turk and listing of first Shariah-compliant gold ETF on Istanbul stock exchange • 2011 : Change of tax laws making the same tax rate applicable to sukuk as those to conventional bonds and second sukuk issued by Kuveyt Turk • Today : 4 islamic banks (Assets of 61 billion TLR / 5 % of the banking sector) and first government sukuk issued in september 2012 (USD 1.5 billion)

20. Introduction to Luxembourg

21. The attractiveness of Europe The European market and Luxembourg is in the heart of it • Strategic market • 500 million plus consumers • 27 member states composing a vast single market • 17 member states using the euro as currency • Goods free circulation within the European Market [Source: CIA estimates, Science and Engineering Indicators 2011]

22. The outlook on European asset management • The regulatory tsunami: impact of regulations on the cost of compliance (and doing business) ..... UCITS IV, V, AIFMD, Dodd-Frank and FATCA; • Fund rationalisation: UCITS funds are on average 5 times smaller than US funds, and twice as expensive to manage – there is a need to improve the efficiency *; • Explosion of NewCITS: fact or fiction? • New game in town: The rise of the passive, multi-boutique and specialist managers; • Product innovation and new markets: Private equity, microfinance, Latin America and Asia. (Source: State Street “Changing the shape or European IM, Oct 2010)

23. Evolution of the Luxembourg fund market Evolution of AuM in Luxembourg by legal status (EUR bn) Evolution of number of funds in Luxembourg by legal status Source: CSSF statistics June 2012 Growth of the SIFs has been a significant contributor to the industry,

24. Asset growth / decrease Luxembourg net assets represent 27% of European market as of June 2012 Net sales, UCITS and non-UCITS AuM, UCITS and non-UCITS [Source: CSSF, EFAMA] [Source: CSSF, EFAMA]

25. SIF development Net assets of SIF in EUR bn. Number of SIF Source: CSSF statistics June 2012 Figures published on a monthly basis

26. Key highlights This placeholder text (20pt Georgia regular) is intended to show the correct position and size of the real text used in this location. To ensure that you have the correct size, colour and location of the text, it is recommended that you select. Overtype this placeholder text. Number of funds Number of units (traditional funds + sub-funds) 13,434 3,866 [Source: CSSF, September 2012]

27. Promoters by country of origin - AUM in EUR million

28. Luxembourg Fund Distribution

29. The European market – a single market for investment funds • Characteristics: Highly developed, sophisticated and competitive, but also fragmented market in local markets • Regulatory framework: Most European jurisdictions have robust, mature and sophisticated investment fund regulatory frameworks • Pockets of opportunity: Some jurisdictions still have relatively small, immature and/or underdeveloped investment fund markets, especially in Eastern Europe • Sheer size: More than 35 766 UCITS funds with average AuM of approx. EUR 166 mio. and approx. 18 411 non-UCITS schemes with average AuM of EUR 135 mio (as of June 30 2012)

30. Number of funds & net assets of the European fund industry [Source: EFAMA, as of Q2 2012]

31. Luxembourg – Europe’s N° 1 fund domicile • 1st country to implement the UCITS Directive in 1988 and has since then turned into a pan-European and international distribution hub (80% of cross-border funds are domiciled in Luxembourg) • Luxembourg UCITS dominate both European and global x-border fund distribution in terms of number of funds and assets gathered and extent of distribution • 43 of the top 50 investment management groups operating on a x-border basis use Luxembourg fund structures • Luxembourg UCITS funds are distributed to more than 58 countries – worldwide recognition of UCITS brand « Made in Luxembourg » • Sophisticated but pragmatic legal and regulatory framework and accessible and flexible financial regulator (CSSF)

32. Evolution of cross-border distribution

33. Luxembourg – hub for Islamic Finance • Luxembourg: A history of innovation in the European Islamic Finance market • Luxembourg: Leading European center for Islamic finance • Broad choice of investment vehicles in Luxembourg • Sharia Compliant Fund Structuring in Luxembourg • Islamic Products in Luxembourg • Taxation of Islamic Finance Products • SukukOpportunities in Luxembourg • Initiatives (IFSB, IILM,…)

34. Luxembourg: A history of innovation in the European Islamic Finance market • 1978 : First Islamic finance institution established in a western country (Islamic Banking System) • 1982 : First life insurance company (Takafol SA) • 1983 : First Sharia compliant insurance company in Europe • (Bahraini Solidarity Group) • 2002 : First European stock exchange to enter Sukuk market • (Malaysia Global Sukuk) • 2009 : Deutsche Bank domiciles the Platform “Al Mi’yar” (Sharia compliant securitization vehicle) • 2009 : Luxembourg Central Bank became member of IFSB • 2010 : Luxembourg Central Bank became member of IILM

35. Luxembourg: Leading European centre for Islamic finance • 40 Sharia compliant Funds and Sub-Funds • Total assets under management in Sharia compliant investment vehicles is getting to USD 4 billion (unregulated vehicles included) • 16 Sukuk with a combined value of USD 7.3 billion listed at the Luxembourg Stock Exchange (Bourse de Luxembourg) • 5th domicile for Sharia compliant funds in the world with 7% of them, following Saudi Arabia, Malaysia, Cayman Islands and Bahrain.

36. Luxembourg: Leading European centre for Islamic finance • N°1 fund international servicing centre in Europe and the 2nd worldwide - 147 Banks (n°1 location in EU for private banking • High quality regulated framework for UCITS and non UCITS funds • Worldwide leadership in cross border distribution of financial products / World leadership in cross border distribution with 75% on the market / 700 Luxembourg domiciled funds are registered in Bahrain. • Flexible and tax efficient structures (SIF, SICAR, SOPARFI) • Committed to develop Sharia compliant solutions. Stable and predictable environment • Compatible with Sharia Law, Tax Circulars, Large Double Tax Treaties • Large Double Tax Treaty Network : 64 DTT’s in force; 21 DTT’s pending (eg UAE, Bahrain, Qatar, Malaysia, Kuwait, Morocco, Lebanon, Turkey, Kazakhstan, Saudi Arabia, Oman, Tunisia, Indonesia)

37. Broad choice of investment vehicles in Luxembourg

38. Sharia Compliant Fund Structuring in Luxembourg • Luxembourg investment requirements must prevail as imposed by the December 10th 2010 Law or SIF Law 13th February 2007 • Compliant with written guidelines relating to the Sharia investments principles • The fund will be run within the Sharia principles interpreted and laid down by the Sharia Board under the responsibility of the Board of Directors or the Management Company. • Role and functioning of Sharia Board to be described in the Prospectus. In case the Sharia scholars have an executive power equivalent to those of the Board of Directors, this has to be pre-approved by the CSSF.

39. Islamic Products in Luxembourg Islamic products that can be set up within the existing legal and tax framework of Luxembourg – the full range including: • Murabaha Deposits • Islamic Funds (Equity, Real Estate, Private Equity, etc,...) • Sukuk

40. Taxation of Islamic Finance Products • Liberal approach to Islamic transactions • Pragmatic and open minded position • Confirmation of compatibility of the Luxembourg Tax framework with Islamic Finance requirements. • Tax Circular 12th January 2010 in relation to direct taxes applicable to Murabaha agreements and Sukuk transactions • Tax Circular 17th June 2010 issued by the Luxemburg indirect Tax authorities providing guidance regarding registration duties (real estate transfer taxes) and certain VAT aspects applicable to Murabaha and Ijara transaction in relation to Luxemburg real estate

41. Tax Circular 12th January 2010 in relation to direct taxes applicable to Murabaha agreements and Sukuk transactions SUKUK • Yield on sukuk treated as interest payments on conventional debt instruments. • Applies even though the yield on the instrument is directly contingent on the income earned on the underlying asset. • Yield will be tax deductible at the level of the sukuk issuer in the same way as interest on a conventional debt obligation. • No withholding tax applies on such a yield under Luxembourg domestic law (implications of EU savings directive should be fairly limited given the nature of the instruments and the residency of the investors).

42. Tax Circular 12th January 2010 in relation to direct taxes applicable to Murabaha agreements and Sukuk transactions (cont’d) MURABAHA (‘substance-over form’ approach ) • taxation of the income can be deferred over the term of the transaction. Treatment granted if the following conditions are satisfied: Conditions: • finance provider acquires the goods with the aim of reselling them (maximum period of six months following the initial acquisition) • Predetermined mark-up as remuneration for the services provided, known and accepted by both parties • The remuneration must be deferred for accounting and tax purposes in the finance provider’s books (based on a straight-line method)

43. Tax Circular 17th June 2010 issued by the Luxemburg indirect Tax authorities - registration duties and certain VAT aspects applicable to Murabaha and Ijara • Registration duties (transfer tax): Specific regime when a property is acquired in order to be resold. Increase in the tax rate from 6% to 7.2%, or 9% to 10.8%, • with a refund of 5% or 7,5% if the resale takes place within two years following the acquisition, and • 4% or 6% if the resale takes place within four years following the acquisition. Specific rule when the deeds of acquisition and resale are presented to the authorities simultaneously: Only the difference between the transfer tax due and the transfer tax refundable is due on the first sale (from the client to the operator).

44. Registration duties (transfer tax) (cont’d): Non-application of transfer tax on “capitalised” interests • the difference between the acquisition price and the resale price is not liable to transfer tax. The resale price which the client pays the operator (usually an SPV) will in principle be higher than the acquisition price paid by the operator. The Circular states that this difference should be analysed as “capitalised interests”, Conditions: • the client must take immediate possession of the property; • the delay between the purchase of the property and its resale to the client must not exceed ten days; • the contract for the original purchase of the property must contain a clause stating that it is a murabaha, and a copy must be attached to the notarial deed.

45. Sukuk in Luxembourg • Listing of Sukuk with the Luxembourg Stock Exchange • Sukuk can be structured under the SecuritizationLaw of 22nd March 2004. Taxefficient capital market investments and transactions

46. Sukuk & Securitization Law • Securitization Law – Main features • Securitizationvehicle as a company or a fund (with a management co) • SV not supervised by CSSF unlessit issues securitiescontinuously to the public • All assets can be securitized such as: mortgages, trade receivables, commercial credits, current accounts, shares, debenture loans, buildings, etc… • No withholdingtax on interest or dividends • Expenses and payments to SV holders are taxdeductible • VAT exempt • No Luxembourg wealthtax • Benefitfrom DTT for Securitizationcompanies • Can belisted on the Luxembourg Stock Exchange • Possibility to have segregatedcompartments

47. Sales Advertisement : CSSF regulation as per 26th January 2011(Asset Backed vs Asset Based Sukuk) • Asset-backed securities in accordance with article 2.5 of the Commission Regulation 809/2004 (the “Prospectus Regulation”) if they are securities (a) representing interests in assets, including rights intended to assure financial servicing or receipt by the holder of such assets of payments ensuring timely discharge of payment obligations under the sukuk, or (b) secured by assets where the terms of the sukuk provide for payments related to payments or reasonable projections of payments calculated by reference to identified or identifiable assets, or • Debt securities guaranteed by a third party pursuant to article 23.2 and Annex VI of the Prospectus Regulation, provided that principal and periodical distribution are paid independently of the performance of the underlying asset(s);

48. Why listing sukuk in Luxembourg ? • To raise issuers profile in Europe by accessing the global debt market with its fast business growth and expansion. • Cost efficient • The issuer should seek to benefit from all the advantages that Luxembourg Capital market is offering: • An attractive international listing market place for securities • Support of international clearing and settlement entities (Clearnet, Euroclear, Clearstream) • A gateway to international issues and securities

49. Central Bank of Luxembourg part of IILM initiative (2010) • International IslamicLiquidity Management Corporation • Collaborative effort by 12 central banks or monetary agencies including Central Bank of Luxembourg, as well as two multilateral organisations to assist institutions offering Islamic financial services in addressing their liquidity management • The regulators collaborating for the setup of IILM would be the shareholders of the initiative, as well as sit on its board whom each would contribute USD 5 million • IILM will issue short-term papers in international reserve currencies, such as the US dollar and the Euro

50. Other initiatives • LFF working group: Islamic Finance Task Force • Education: IFBL – islamic finance educational program • IFPA: Islamic Finance Professionals Association • Luxembourg governmentalsukuk?