European retail and microfinance developments
2013 is a key year for the regulation of microfinance 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.
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 first
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 defined 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.
Offering 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 microfinance
investment vehicles (MIVs). In 1998,
Luxembourg was the chosen domicile of
the first 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 specifically dedicated institution
to microfinance, the Luxembourg
Fund Labeling Agency (LUXFLAG),
Luxembourg reassures investors that the
MIV actually invests in the microfinance
sector.
Furthermore, in order to enhance
dialogue, learning and competence
in microfinance, the Luxembourg
government created the Luxembourg
Round Table on Microfinance which
regularly organizes seminars in
collaboration with the European
Microfinance Platform in the aim of
facilitating exchange and discussion on
microfinance policy issues with European
institutions and governments. A technical
committee on responsible investing
has also been set up by Luxembourg
the Association of Luxembourg Fund
Industry (Alfi) in order to further develop
the microfinance market and provide
confidence and security to microfinance
investors.
Among the Luxembourg-regulated
investment vehicles subject to the
supervision of the Commission de
Surveillance du Secteur Financier
(CSSF), the Luxembourg financial sector
supervisory authority, four vehicles are
of particular interest for the microfinance
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
flexibility in terms of the choice of the
legal form of the investment vehicle
and also afford sufficient flexibility 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
financial resources to create an
investment vehicle for well-informed
investors without the sponsoring of
a sizeable financial institution. Under
AIFMD, SIFs manager could benefit
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
microfinance institutions. - Securitization vehicles under the law
of the 22nd March 2002 relating to
securitization. The Securitization Law
covers a very flexible scope as to cover
traditional securitization structures
as well as the most innovative ones,
including microfinance securitization.
Luxembourg also offers the possibility to
structure non-regulated structures under
the so-called SOPARFI regime (société
de participation financière). This type of
company is available for microfinance
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 specifically
dedicated to microfinance constitute key
differentiators which can be used to foster
the development of Islamic microfinance
schemes in Luxembourg.
Bishr Shiblaq is the head of Dubai
representative office of Arendt & Medernach.
He can be contacted at Bishr.Shiblaq@arendt.
com.
