22© 27th November 2013

SPECIAL REPORT

In addition to the entry into force of the Alternative Investment Fund Manager Directive (AIFMD), two new pieces of European regulation will become directly applicable throughout Europe and might be of particular interest to Islamic fund managers: with the fi rst relating to venture capital investments funds and the other relating to social entrepreneurship investment funds.

European social entrepreneurship funds are aimed at creating a label for investment funds which are dedicated to investing in social enterprises (EUSEF). This label will permit the marketing of EUSEF throughout Europe, on the basis of a passport, to institutional and professional investors as well as to high net worth individuals investing at least EUR100,000 (US$135,286).

In order to become eligible under the new label, EUSEF shall be established in one EU member state and must have the intention to invest 70% of their capital in social undertakings. Social undertakings are defi ned as undertakings which are not listed and the primary objective of which is the achievement of measurable, positive social impacts. They may be established in an EU member state or in a third country. However as far as third countries are concerned, a number of restrictions are likely to limit the opportunities open to EUSEF to invest in social businesses outside the EU.

Off ering a full variety of fund structures ranging from regulated investment vehicles to unregulated structures, Luxembourg is the world’s leading center for the domiciliation of microfi nance investment vehicles (MIVs). In 1998, Luxembourg was the chosen domicile of the fi rst registered MIF. In October 2012, approximately 40 MIVs were registered in Luxembourg gathering more than 50% of the worldwide MIVs’ assets under management. Seven of the world largest 10 MIVs are based in Luxembourg.

With a specifi cally dedicated institution to microfi nance, the Luxembourg Fund Labeling Agency (LUXFLAG),

Luxembourg reassures investors that the MIV actually invests in the microfi nance sector.

Furthermore, in order to enhance dialogue, learning and competence in microfi nance, the Luxembourg government created the Luxembourg Round Table on Microfi nance which regularly organizes seminars in collaboration with the European Microfi nance Platform in the aim of facilitating exchange and discussion on microfi nance policy issues with European institutions and governments. A technical committ ee on responsible investing has also been set up by Luxembourg the Association of Luxembourg Fund Industry (Alfi ) in order to further develop the microfi nance market and provide confi dence and security to microfi nance investors.

Among the Luxembourg-regulated investment vehicles subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg fi nancial sector supervisory authority, four vehicles are of particular interest for the microfi nance industry:

• Undertakings for collective investment (UCIs) governed by Part II of the law of the 17th December 2010 on undertakings for collective investment. The UCIs Law grant the broadest fl exibility in terms of the choice of the legal form of the investment vehicle and also aff ord suffi cient fl exibility as regards eligible investments and their limited liquidity and at the same time, ensure protection of investors mainly through the supervision performed by the CSSF and last but not least, will fall within a favorable substantially neutral Luxembourg tax environment. However, the requirement for UCIs regulated by 2010 law to have a well reputed promoter can represent an obstacle for MIFs.

• Specialized investment funds (SIFs) governed by the law of the 13th February 2007. The SIF law

allows investments managers and entrepreneurs without substantial fi nancial resources to create an investment vehicle for well-informed investors without the sponsoring of a sizeable fi nancial institution. Under AIFMD, SIFs manager could benefi t from a European passport to market EU or non EU SIFs to professional investors in Europe.

• Investment companies in risk capital (SICARs) governed by the law of the 15th June 2004 relating to investment companies investing in risk capital. The SICAR is not as the case for Part II UCI subject to the requirement to invest in accordance with the principle of risk spreading and may therefore constitute an appropriate investment vehicle if it is considered to invest in or provide funds to a limited number of microfi nance institutions.

• Securitization vehicles under the law of the 22nd March 2002 relating to securitization. The Securitization Law covers a very fl exible scope as to cover traditional securitization structures as well as the most innovative ones, including microfi nance securitization.

Luxembourg also off ers the possibility to structure non-regulated structures under the so-called SOPARFI regime (société de participation fi nancière). This type of company is available for microfi nance investment programs which are limited to a restricted circle of investors.

The strong support from the Luxembourg Government, the regulatory oversight and the presence of organizations specifi cally dedicated to microfi nance constitute key diff erentiators which can be used to foster the development of Islamic microfi nance schemes in Luxembourg.

Bishr Shiblaq is the head of Dubai representative offi ce of Arendt & Medernach. He can be contacted at Bishr.Shiblaq@arendt.com.

European retail and microfinance developments 2013 is a key year for the regulation of microfi nance investment funds (MIFs) and social impact investments funds (SIIFs). Several EU regulations came into force which on the one hand strengthen the regulatory requirements for MIFs and their managers and on the other hand facilitate distribution at European Level by granting a passport for cross-border marketing. BISHR SHIBLAQ takes us through the changes.