Yves Mersch: About the role of central banks in financial stability and
prudential liquidity supervision, and the attractiveness of Islamic
Finance
Speech by Mr Yves Mersch, Governor of the Central Bank of Luxembourg, at the 2nd Islamic
Financial Services Board Public Lecture on Financial Policy and Stability, Kuala Lumpur, 8
February 2009.
The author thanks Li-Chun Yuan and Charles Hurt for their contribution to the preparation of this paper.
The original speech, which contains various links to the documents mentioned, can be found on the Central Bank
of Luxembourg's website.
* * *
Excellencies,
Ladies and Gentlemen,
Introduction
It is my honour and great pleasure to address this distinguished audience at the celebration
of the 50th anniversary of the Bank Negara Malaysia.
The current crisis has revealed very strong information-related synergies between the central
banking and the prudential supervisory functions. To discharge their core function of
maintaining systemic stability, central banks are searching for information relating to
individual institutions' liquidity and solvency positions, intra-group exposures, banks' liquidity
and funding policies as well as data related to potential channels of contagion. Supervisory
authorities on their side look for information on money and financial markets, banks' liquidity
positions and collateral provided by banks in open market operations, patterns of banks'
recourse to payment systems and volumes in post-trading systems.
To summarize, liquidity-related information is of the utmost importance both for central banks
and prudential supervisors.
This is also the reason why on 1 June 2008 the Ministers of Finance, the supervisory
authorities and the central banks of the European Union signed a Memorandum of
Understanding on cooperation between the financial supervisory authorities, central banks
and finance ministries of the European Union on cross-border financial stability. This
Memorandum applies both in times of financial distress and in normal periods. It has the
benefit of containing an allocation of tasks between the authorities in charge of financial
stability. Depending on the nature of the issues at stake, one of those authorities will
coordinate, as the activities in order to enhance preparedness in
"national coordinator",
normal times and facilitate the management and resolution of a crisis at the national level in
a particular crisis situation. The national coordinator is designated by virtue of its legal
competences in the field of financial stability. Consequently the Memorandum of
Understanding confers upon central banks the role of national coordinator in case a liquidity
crisis could affect a cross-border financial group with a potential for systemic implications1.
The role of central banks in financial stability
- Liquidity - a central bank remit for financial stability
- The BCL's new competences with regard to prudential supervision of liquidity
- The importance of liquidity supervision in ensuring confidence in the currency and in
the financial system
- Islamic Finance and Liquidity
Liquidity - a central bank remit for financial stability
Liquidity is defined as
"the ease and speed with which a financial asset can be converted into
cash or used to settle a liability. Cash is thus a highly liquid asset. The term "liquidity" is also
often used as a synonym for money"2.
In this respect, three fundamental tasks contained in the EC Treaty are designed to serve
financial stability. All of them evolve from the central banks' role with respect to liquidity.
• Monetary policy stands for liquidity injections in (a) normal times (monetary policy
operations) and also (b) in times of financial distress (lender of last resort).
• The smooth functioning of payment systems induces (c) the oversight of payment
and settlement systems as well as payment instruments.
The role of a central bank in financial stability or more accurately is to
"systemic stability"3
prevent the economy from systemic risk defined as being the risk that the failure of one
participant in a transfer system, or in financial markets generally, to meet its required
obligations will cause other participants or financial institutions to be unable to meet their
obligations (including settlement obligations in a transfer system) when due. Such a failure
may cause significant liquidity or credit problems and, as a result, might threaten the stability
of financial markets and the effectiveness of the monetary transmission mechanism4.
Liquidity is thus at the very heart of systemic stability. Due to asymmetric information, a
liquidity crisis at one bank can lead to increasing uncertainty in the wholesale and retail
markets with respect to the liquidity situation of other banks, which in severe cases could
lead to a drying-up of money market liquidity and/or to a bank run. In less severe cases, it
could raise refinancing costs for other banks and increase uncertainty with respect to future
cash-flows and market conditions, which would exacerbate liquidity management. Second,
the large and increasing share of interbank exposures and money market instruments in
banks' funding can cause a knock-on effect, as liquidity problems at one bank directly
translate into increasing liquidity pressure (e.g. due to reductions in cash-inflows and
unexpected refinancing requirements) on its interbank counterparties. Third, asset fire sales
can lead to a market meltdown under certain circumstances, which in turn decreases the
counterbalancing capacity of all banks and, consequently, their liquidity risk-bearing capacity.
In the potential emergence of a liquidity crisis, central banks need to assess the scale of the
liquidity problem and the potential systemic implications of liquidity stress5.
Therefore central banks act as overseers of payment systems which consist of a set of
instruments, banking procedures and, typically, interbank funds transfer systems which
facilitate the circulation of money6. As payment systems refer to the circulation of money7,
liquidity is thus also the essence of payment systems and the reason why central banks are
responsible for overseeing the smooth functioning of such payment systems. A major
malfunctioning of payment systems is likely to affect the stability of financial institutions and
markets. To prevent that, the Eurosystem operates Target 2 (the Trans European Automated
Real Time Gross Settlement Express Transfer System) that channels liquidity through
accounts held by financial institutions with central banks. The advantage in terms of systemic
stability is that Target 2 operates in central bank money and provides immediate
"risk-free"
intraday finality and thereby mitigates systemic risks.
A fortiori, central banks are also concerned with the oversight of private payment systems
operating in commercial bank money and with deferred settlement especially when they
carry systemic risk.
In general interbank markets can become a source of crisis, or even aggravate a crisis, if
fundamental uncertainty makes it too costly for banks to assess counterparty risks. This
possibility, observed in the current crisis, represents a clear example of the endogeneity of
liquidity.
The risk of a macro liquidity shock via contagion provides the rationale for central banks'
involvement in prudential supervision, liquidity regulation, supervision and macro-prudential
surveillance. As Walter Bagehot pointed out in 1873:
"In wild periods of alarm, one failure
makes many, and the best way to prevent these derivative failures is to arrest the primary
failure which caused them".
The EC Treaty recognizes this fundamental link between financial stability and the core
functions of the ESCB relating to liquidity and prudential supervision8. For that purpose the
EC Treaty requires the ESCB to "...contribute to the smooth conduct of policies pursued by
the competent authorities relating to the prudential supervision of credit institutions and the
and allows the EU Council to confer upon the ECB
stability of the financial system"9 "...
specific tasks concerning policies relating to the prudential supervision of credit institutions
While the
and other financial institutions with the exception of insurance undertakings"10.
extension of the present mandate into macro prudential supervision, including liquidity
supervision, risk concentration, stress testing and leverage ratios, seems uncontroversial,
different models are under discussion concerning regional coordination, mediation, advisory
and standardisation functions. A different set of solutions is available when it comes to
supervision of individual institutions, as suggested by the report issued by the
de Larosière
Group11.
The BCL's new competences with regard to prudential supervision of liquidity
According to the BCL's organic law:
"The Central Bank shall be responsible for supervising
the general liquidity situation on the markets as well as evaluating market operators for this
purpose..."12.
These core central bank tasks in the field of financial stability are accompanied by new
cooperation mechanisms between the Central Bank and the other prudential supervisors13
granting the Central Bank access to full supervisory information.
Moreover a new draft law (which is under way) confers upon the BCL a general oversight
competence over all payment and settlement systems as well as payment instruments14.
The scope of the BCL's competence in the field of liquidity embraces two aspects of liquidity
supervision. The first aspect focuses on market liquidity. Financial market liquidity is usually
thought of as a measure of the ability of market participants to undertake securities
transactions without triggering large changes in their prices. While it is challenging to
precisely measure financial market liquidity, it is generally agreed that highly liquid markets
are characterised by a myriad of buyers and sellers who are willing to trade. Moreover, prices
in such markets ordinarily carry low liquidity risk premiums - that is the compensation
demanded by investors (and bid into expected rates of return) for uncertainties associated
with the ease with which transactions can be executed in the future15.
Market liquidity and funding liquidity are strongly linked. Funding liquidity measures the ability
of a given financial institution to settle an obligation when due. As highlighted in the ECB's
financial stability review of December 2008, correlations between market liquidity and funding
liquidity become perceptible in times of financial crisis. Since the beginning of the financial
turmoil, an increase in funding liquidity risk has gone alongside a decrease in market
liquidity. Unfortunately this correlation can only be evidenced at the outbreak of a financial
crisis16.
A second aspect of liquidity supervision therefore covers financial operators' liquidity risk
management. A liquidity shock in a financial institution may disrupt the stability of the
moneymarket through contagion. This is due to asymmetric information, the ever larger role of
interbank markets and the well documented difficulty of economic agents in assessing and
measuring risk over time. So, liquidity itself can become a contagion channel by triggering
changes in asset prices, in the capital base of financial institutions, and thus by feedback into
banks' funding capacity.
12
Article 2 (4) of the law of 23 December 1998 concerning the monetary status and the Central Bank of
Luxembourg.
13
Article 2 paragraphs 4 and 5 of the law of 23 December 1998 concerning the monetary status and the Central
Bank of Luxembourg.
14
Under the current legislation, according to Articles 34-3 and 47-1 of the Law of 5 April 1993 on the financial
sector, the BCL only oversees payments systems in which it participates. The draft law on payment services,
electronic money institutions and on settlement finality in payment and securities settlement systems extends
the BCL's oversight competence to all payment and securities settlement systems as well as payment
instruments; see,
http://www.chd.lu/servlet/DisplayServlet?id=78979&path=/export/exped/sexpdata/Mag/094/712/079131.pdf
15
ECB, Financial stability review, June 2007, p. 10, also see p. 81.
16
Indeed, a negative relationship between high funding liquidity risk and low market liquidity can be observed
only after the start of the crisis, while in "normal" times the two indicators show no correlation. This supports
the thesis that interactions between the two measures emerge only when common shocks to funding liquidity
push banks to take analogous positions, so that forced asset sales lead to depressed asset prices and dire
consequences for overall market liquidity. The loop is then closed when lower asset prices and lower market
liquidity lead to higher collateral requirements in the money-market, which in turn increase funding liquidity
risk, contribute to further asset sales and increase the probability of a downward liquidity spiral.
4 BIS Review 59/2009
What is the subordinated aim of liquidity supervision?
The importance of liquidity supervision in ensuring confidence in the currency and in
the financial system
The current crisis is a liquidity crisis and thus a crisis of confidence. In January the EU
Commission registered the lowest confidence rate ever measured in the Eurozone17.
Everything started with the developing suspicions relating to the counterparty's solvency as a
result of the undervaluation of exposures to sub-prime related financial instruments and a
lack of transparency concerning reporting accounts. The deterioration of confidence infected
the entire financial system and its ability to assess the proper value of assets and liabilities.
In this context, consumption and investment decrease. Portfolio investments are reoriented
away from risk towards more liquid assets and banks do not lend to each other. Finally
lending to the real economy is negatively affected18.
Some observers blame the lack of liquidity as being the outcome of a shift from the classical
originate-to-hold to the modern originate-to-distribute model.
Through the originate-and-distribute model, banks are increasingly relying on market-based
funding and transfer a significant part of their credit risk off-balance sheet. However, this new
model raises several issues due in particular to the loosening of the link between the debtor
and the creditor. Whereas in the conventional model, banks favour customer relationships
meaning that banks have the necessary incentives to monitor carefully lending activities and
assess properly credit risks. The convergence towards the new business model stimulates
an increasing information asymmetry and uncertainty and thus affects the degree of market
efficiency.
Recent experience has shown the limits of this model and has revealed the opacity that
emerged from the use of highly complex instruments and derivatives. In this context, is the
substitution process between the two models reversible? If not, what are the possible
alternatives?
In this respect particular attention is drawn to Islamic finance grounded on fundamental
principles like risk-sharing, materiality (a financial transaction must be linked to a real
economic transaction), no exploitation, no financing of sinful activities19.
Islamic finance and liquidity
In the light of the previous developments liquidity supervision and regulation are a
cornerstone of financial stability. It is obvious that in conventional finance, the interest
element plays a very important role. Interest has been viewed not only as an integral part of
the price mechanism whereby savings and investments are regulated in a
"laissez faire"
system but also as an important policy instrument with which central bank interventions can
be made to influence and control inflation and in a wider sense the economy. Monetary
17
67,1 points.
18
See, Speech by Mr Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank, on
the panel: at the International Forum Economia e Società Aperta
"Society, State, Market: a European Answer"
organised by Bocconi University and Corriere della Sera in cooperation with University
"Uscire della crisi",
Carlos III de Madrid, Madrid, 25 November 2008.
19
See, Datuk Seri Panglima Andrew Sheng,
Islamic finance and financial policy and stability: an institutional
paper delivered at the 1st Islamic Financial Services Board Public lecture on Financial policy and
perspective,
stability, Kuala Lumpur, 26 March 2007, also see, LALDIN AKRAM Mohamad, Fundamentals and practices in
Islamic finance, ISRA Series in Contemporary Islamic finance, volume 1, 2008 ; also see, DUSUKI DATO'
WAJDI Asyraf, ISRA Series in Contemporary Islamic
Islamic Finance: An old skeleton in a modern dress,
finance, volume 2, 2008 ; also see, BAHRAIN MONETARY AGENCY, Islamic Banking & Finance in the
2002.
Kingdom of Bahrain,
BIS Review 59/2009 5
policy is equated with interest rate management by the central banks. In this respect the ECB
holds one outstanding instrument for regulating liquidity: determining the key interest rates20.
In order to preserve the effectiveness of our policy instrument, we have to avoid excessively
low levels.
On the other hand the core principle of Islamic finance is the prohibition of meaning
"Rhiba"
the prohibition of interest rates. Banks usually combine in their balance sheets short-term
liabilities with long-term assets, resulting in maturity mismatches. Banks try to minimize the
potential risks resulting from these mismatches by actively managing their liquidity needs
typically through interbank money markets. Given that conventional interbank markets are
interest-based markets, Islamic banks cannot use these markets to manage their liquidity
positions, and therefore an alternative market design is required21.
Does this mean that our concepts of financial stability are antagonistic?
No certainly not! Interest rates are not the only method to regulate the volume of money. The
Malaysian government pioneered the issuance of Islamic sovereign certificates known as
Government Investment Issues. These certificates were introduced to provide Islamic banks
with a sovereign instrument in which to invest their short-term excess liquidity. Another
method for central banks to regulate liquidity is to issue central bank securities22. The
interest-free Islamic Bonds can be regulated in such a way as to influence the monetary
situation by indirectly controlling the availability of funds.
The crux is the available market and funding liquidity.
Liquidity management as part of their risk management processes is crucial to banking
institutions and financial stability. This issue may be even more acute when it comes to
Islamic finance products, notably because Sukuk are overall still considered of low liquidity
"due to high originator concentration, large diversity of deal structures, and regional
Because there is virtually no global Shariah-compliant short-term money
fragmentation"23.
market and no Islamic repo market, Islamic banks face difficulties in managing mismatched
asset and liability portfolios24. At both extremities of the term structures, the very short term
money market and the long maturities in the capital market, Islamic finance products still lack
volume.
Differences in approaches to liquidity regulation and liquidity risk-management are in theory
merely differences in the use of instruments rather than differences in substance. After all the
aim is to control the volume of money and thus to protect the economy from systemic risk.
Whether this is done through quantitative measures as in a capital control environment or
through qualitative price measures like interest rates or through a scaling of risk distribution
20
Article 12.1 of the ESCB Statute states that: "The Governing Council shall adopt the guidelines and take the
decisions necessary to ensure the performance of the tasks entrusted to the ESCB under this Treaty and this
Statute. The Governing Council shall formulate the monetary policy of the Community including, as
appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of
reserves in the ESCB, and shall establish the necessary guidelines for their implementation. The key ECB
interest rates are: the interest rate on the main refinancing operations (the fixed rate in fixed rate tenders and
the minimum bid rate in variable rate tenders); the interest rate on the marginal lending facility; and the interest
also see, ECB,
rate on the deposit facility. These rates reflect the stance of the monetary policy of the ECB";
Glossary, http://www.ecb.eu/home/glossary/html/glossl.en.html.
21
SOLE Juan, Introducing Islamic banks into the conventional banking systems, IMF working paper WP/07/175,
p. 20.
22
Idem., p. 21-22.
23
HESSE Heiko, JOBST Andreas, SOLE Juan, Quo vadis Islamic Finance,
http://www.voxeu.org/index.php?q=node/2593.
24
EDWARDES Warren, Liquidity Management Issues, Institute of Islamic Banking & Insurance / New Horizon,
The Islamic Funds Conference, 18 February 2004, http://www.dc3.co.uk/IslamicLiquidity040218.pdf.
6 BIS Review 59/2009
is ultimately dependant on policy decisions influenced by market size, instruments availability
and global integration capacity or willingness. Liquidity is an elusive concept requiring the
supervisor to adopt a dynamic approach. The endogeneity of liquidity calls for a
case-bycase approach where the specificities of Islamic finance can be taken into account.
With respect to its specificities it is worth investigating how Islamic finance products and
institutions are affected by the financial crisis.
Islamic finance in the current turmoil
- Considerations concerning the impact of the current financial crisis on Islamic
finance products and institutions
- Highlights of the developments undertaken by Islamic finance stakeholders towards
financial stability
Considerations concerning the impact of the current financial crisis on Islamic finance
products and institutions
Analysts and commentators in the financial industry put the blame for the current crisis on
the intensive use of structured financial products, on derivatives and other assets whose
fundamentals are uncertain.
Conversely, Islamic financial institutions and products are singled out for being less impacted
directly by the turmoil due to their conformity with the Shariah principles since these
principles bring greater discipline to the markets25:
- by eliminating a large number of derivatives transactions,
- by putting a constraint on short sales,
- by motivating the creditor in a good evaluation of the credit risk, thereby minimizing
the moral hazard risk,
- by preventing the amount of debt to be far above the size of the real economy.
In effect, these principles are considered as inherent stabilizers.
Hence, some observers consider that Islamic financial institutions might rebound faster from
this crisis and be in better conditions than the banks, thanks to restricted
"conventional"
exposure to assets.
"toxic"
Still, Islamic finance products are not immune to adverse market conditions and could be
impacted by the credit crunch or suffer from a property bubble deflation.
Islamic finance has overall greatly expanded, and not merely in countries of Muslim
obedience. According to different rating agencies, Islamic finance accounts for $800 billions
of assets26. Gross issuance of sukuk has quadrupled over the past few years, reaching about
$30 billion by the end of 200727.
In 2008 volumes dropped however to around $15 billion28. Several causes are mentioned to
explain this severe fall: the global credit crisis, the rising costs of borrowing, the Gulf's
currency risk, the downtrend of oil prices and the diverging assessments of sukuk's
compliance to Shariah. Many observers consider the latter cause as the major reason for the
downturn. In November 2007 a Shariah scholar made a statement that 85% of the sukuk
issued were not Shariah compliant due to the repurchase agreements they included. In
February 2008, the AAOIFI (Accounting and Auditing Organization for Islamic Financial
Institutions) issued new recommendations on the sukuk structure, their issuance and trading.
Some market practitioners consider these recommendations as impediments to the issue of
sukuk due to the additional constraints and their subsequent impact on their tradability.
The judgment by the Kuala Lumpur High Court Justice in July 200829 on the validity of some
financing schemes also highlights the importance of Shariah compliance and legal certainty
for the long-term development of Islamic finance.
These examples demonstrate the need to reduce uncertainty with regard to the standards
and rules applicable to Islamic finance products and also the need to improve the resilience
of Islamic finance and its integration into the international financial system.
Not being an expert in Islamic finance, I wish to refer here to a speech made by the
Honourable Dr. Zeti Akhtar Aziz a few months ago, when she stated that
"There is a need for
the Islamic financial system to have the capital requirements, effective risk management and
strong governance that are fully equipped to manage the risks that are specific to Islamic
financial transactions"30.
Highlights of the developments undertaken by Islamic finance stakeholders towards
financial stability
Indeed, despite all the praise accorded to Islamic finance, Islamic finance professionals and
stakeholders are looking at the developments that are necessary to ensure further stability
and the resilience of Islamic products and institutions.
On the issue of capital requirements, I had the opportunity to share my views on the specific
question of the appropriate capital regulation for Islamic banks during the IFSB Summit in
2007. Introducing some modifications within the standard framework could enable the
adoption of an integrated regulation for both Islamic and conventional banks. The topic is still
under discussion, more specifically on the ways to determine its adequacy. The guidance
provided by the AAOIFI and by the IFSB brought useful clarification but has not closed the
debate, which also remains open as regards conventional banking.
The current turmoil prompted the importance of consumers' confidence in the financial
system and more specifically depositors' trust in their banks to avoid bank runs. This has
prompted authorities around the world to further improve existing depositors' protection
schemes, sometimes by incorporating deposits at Islamic banks. Considering that depositors
in Islamic banks face the same risks as in conventional banks, depositors' protection should
be protected at the same level. Otherwise, Islamic banks could be tempted to invest in riskier
projects31 and may trigger systemic risk.
Closely linked to the issue of depositors' protection is the topic of the Islamic finance
which provides a good example of disclosure and transparency
"investment deposit"
requirements. Considering that such deposits are based on a risk-sharing agreement and
could not be treated as a classical deposit which benefits from a protection scheme, the
Hong Kong Monetary Authority recommends improving
"financial disclosures on the risk and
return profiles of the different categories of deposits, as well as their status under the DPS
[Deposit Protection Scheme], will enable depositors, potential or otherwise, to make informed
Regarding the importance of overall good corporate governance, the IFSB has,
decisions"32.
in recent months, submitted for public consultation several documents in relation to
governance and to the conduct of business for Islamic finance products.
With regards to liquidity, constraints are raised by the specificities of Islamic finance. The fact
is that the issuer still has to pay a premium over a conventional issue to attract investors
particularly risk averse ones at this stage. The insufficient depth of the market could in theory
be addressed by the cooperation of different financial centres to create a regional liquidity
market, the issue of short-term sukuk or some level of central bank involvement. The same
central banks could in theory encourage standardisation of structures and documentation,
offer and invest in Islamic interbank securities, support the liquidity of a secondary market in
long-term Islamic investments, encourage trading and establish trading infrastructures.
Several interesting albeit limited solutions have been launched:
In 2007, Kuwait Finance House-Bahrain (KFH-Bahrain) and Fortis Private Real Estate
Holding S.A agreed to launch a Shari'a Compliant Overnight Fund (SCOF), as a solution for
managing short-term liquidity with the corresponding opportunity to invest on an overnight
basis. This fund was incorporated in Luxembourg last year. In a different vein, the Central
Bank of Bahrain implemented last year the Islamic Sukuk Liquidity Instrument in order to
enable financial institutions to access short term liquidity against Government of Bahrain
Islamic leasing bonds (sukuk), issued by the Central Bank of Bahrain. Also of importance in
terms of stability, efficiency and market development is the operational link between these
new instruments and real-time gross settlement and securities settlement systems.
Liquidity management is an important part of the overall risk management for which
"conventional" financial institutions may have recourse to derivatives instruments. But the
majority of Shariah scholars consider that derivatives instruments contradict Shariah
principles. But one can notice an evolution insofar as a number of academics33 could argue
that the admission of such instruments in Islamic finance depends mainly on the type of
contract used, their content and their trading format. Contracts on currencies, interest rate
and stock indexes are intrinsically barred. Otherwise, forward and swaps contracts on
commodities and shares could seamlessly be accommodated in Islamic finance. Even the
trading of options is not found incompatible with Shariah principles. However, further work is
still necessary to assess the implication for Islamic finance in terms of social welfare,
speculation and risk-sharing, and more specifically risk management.
Islamic finance in Luxembourg: opportunities and challenges34
-
Explanation of the business environment
-
Challenges for further development
Explanation of the business environment
The development of Luxembourg's international banking activities started in the late 60's with
the expansion of the euro bond market. The financial centre extended further in the 80's with
private banking services.
The other core activity of the Luxembourg financial centre is the investment fund industry.
Our practitioners developed acute expertise in the domiciliation, administration and
distribution of investment funds with the result that the Luxembourg financial sector is
positioned among the world's leading investment centres together with the US and France.
Islamic finance started to operate in Luxembourg as early as in 1983 with the establishment
of the first Shariah compliant insurance company in Europe (Takafol S.A.). Year by year,
other Islamic financial products developed and there are currently 31 Shariah compliant
investment funds (September 2008) domiciled and managed in Luxembourg.
Our stock exchange, started listing Islamic funds in 2002 and is thus the first stock exchange
in Europe to host sukuk. Its current listing of 14 sukuk with a combined value of $ 5.5 billion
put it in a competitive position with London. Several of these sukuk have issuers originating
from the Gulf countries, Malaysia or Pakistan.
Furthermore, local financial institutions lobby the Treasury to issue Luxembourg sukuk, but
the volume would be symbolic in international comparison.
On the operational side, Clearstream Banking, the Luxembourg International Central
Securities Depository (ICSD) holds under custody and offers the clearing and settlement of a
range of Islamic securities. It has slightly adapted its technical processes to sukuk's
requirements as regards the distribution of payments.
Earlier this year, Deutsche Bank announced the launch of a new platform "Al Mi'yar" whose
aim is to facilitate the issuance of Shariah compliant securities. This platform is domiciled in
Luxembourg.
It is also worth mentioning that several local market practitioners and support entities (mainly
law firms and investment funds service providers) are expanding to the Gulf region.
Competition for the global lead in the investment fund industry has attracted expertise in
domiciliation, administration and distribution