Luxembourg's parliament passed a bill that will allow the AAA-rated government to issue its first Islamic bond later this year, becoming only the second European sovereign after Britain to tap the market for sukuk.
The bill allows Luxembourg to securitise three government properties to back a sukuk worth €200 million ($275 million), designed to boost its Islamic finance credentials to attract more business from cash-rich Gulf countries.
The law was adopted with 55 votes in favour and 5 against, a parliament spokesperson said late on Wednesday.
A revised bill was presented last month which addressed issues such as the economic rationale for using sukuk instead of conventional bonds and clarified its tax treatment, paving the way for the finance ministry to begin work on the transaction.
"The issuance of the sukuk will be done later this year," said Guy Arendt, a member of Luxembourg's legislature, the Chamber of Deputies.
Luxembourg's finance ministry did not respond to Reuters requests for comment on its sukuk plans, but such an issuance would comes on the heels of Britain's own sukuk.
In June, Britain became the first Western country to sell sukuk, raising £200 million ($342 million) from a five-year deal, attracting £2.3 billion in orders.
Unlike Britain, which has six full-fledged Islamic banks, Luxembourg does not have a domestic Islamic banking industry although that could soon change.
A new Islamic bank, named Eurisbank, is in the advanced stages of launching operations in Luxembourg, according to a source familiar with the matter.
"The license process is still in progress, but significant advances have been made and it should be finalised in the next few weeks. Capital is firmed up...first semester next year seems very realistic."
Luxembourg has sought to build a wider role in the industry: it remains a popular domicile for Islamic mutual funds with London-based Arabesque registering its new funds in June.
Luxembourg's central bank also remains the only regulator in Europe that is a member of the Malaysia-based Islamic Financial Services Board, one of the industry's main standard-setting bodies.