Luxembourg is poised to test demand for Shariah-compliant bonds (sukuk) as the issuer of the lowest-yielding sovereign sukuk on record plans to become a regular borrower.

Luxembourg, one of the smallest economies in the 28-member European Union, sold 200 million euros ($254 million) of five-year Islamic bonds in September priced two basis points below midswaps. That compared with 10 basis points above the swaps for notes of similarly rated Islamic Development Bank.

The market for bonds that adhere to Islam’s ban on interest is growing 17 percent a year and may be valued at $2.67 trillion by 2017, according to PricewaterhouseCoopers LLP. The U.K.’s debut sovereign Islamic bond issue — the first from a non-Muslim nation — received orders worth more than 10 times the amount it sought, while Luxembourg’s sukuk was two times oversubscribed. South Africa got at least $2.2 billion in demand for a $500 million issue, and Hong Kong’s $1 billion debut sukuk was almost five times oversubscribed.


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