In coming months, Hong Kong Chief Executive Donald Tsang and his financial secretary John Tsang will visit India, the Middle East and other parts of Asia to convince borrowers and investors that the Chinese territory is the best place to issue Islamic bonds.
The trip is part of Hong Kong’s bid – first announced in July – to establish the 1,100sq km enclave as another centre for Shariah-compliant debt to complement its strong position in conventional finance.
The move sees Hong Kong following belatedly on the heels of Malaysia which, for years, has been proactive in encouraging Islamic financing. More recently, Dubai and even London have been building on their respective strengths to attract Islamic cash.
But experts say Hong Kong could emerge swiftly as a contender since its business-savvy legislature can quickly implement necessary regulation. The former UK colony has a transparent legal system, a simple tax code and a concentration of international banks.
Moreover, its proximity to China and its position as a traditional financial gateway to the mainland also make the territory attractive as a place to do Shariah business, they say.
Islamic bonds – structured in accordance with Shariah, or Islamic law – differ primarily from their conventional counterparts in that they don’t pay interest, which Muslims consider to be usury. Instead, lenders receive a regular payment linked to the performance of underlying tangible assets.
“Hong Kong is late in coming into the game, but it’s just a matter of the legal system being put in place to accommodate the Islamic product,” said Edwin E. Hitti, president of Hong Kong’s Arab Chamber of Commerce and Industry.
Gulf investors – seeking to diversify their portfolios – would be keen to buy sukuk issued by Chinese companies as a way of gaining exposure to a country that is expected to expand around 11% this year, he added.
No Hong Kong or Chinese borrowers have yet sold Islamic bonds although some banks, including Kuwait Finance House, have been working with China government-related firms to raise cash through sukuk.
Other banks and financial firms are eying China’s more-than 20mn Muslims as a potential market for personal finance products.
“I think Hong Kong will be a formidable challenge (as a sukuk hub). Most of the foreign banks are there. They are very established in the conventional market and they just need to start looking at Shariah-compliant products,” said Ahmad Zaini Othman, chief executive officer of AmIslamic Bank Bhd in Kuala Lumpur.
Among them are Hong Kong and London-listed HSBC Holdings and Standard Chartered, which are already active in Islamic financial market, which some estimate to be worth around $1tn.
Since the government’s announcement in July, the Hong Kong Monetary Authority, which functions as the local central bank, has formed a working group to establish necessary laws, tax systems and other regulations to put Shariah financing on an equal footing with its conventional counterpart.
Meanwhile, the Arab Chamber of Commerce and Industry has set up a five-member Shariah advisory council made up of Islamic scholars and professionals – including Hitti and the chief imam of Hong Kong, Muhammad Arshad – which will assess and rule on Islamic products in the territory.
Shariah rulings are crucial to the success of Islamic products since Muslim investors want to be sure that instruments comply with their faith.
And some Islamic products are starting to emerge. The Securities and Futures Commission has approved the Hang Seng Islamic China Index Fund, the city’s first Islamic fund available to retail investors, run by Hang Seng Investment Management, a subsidiary of HSBC.
“Facilitating the development of the Islamic investment market is a high priority of the SFC,” Alexa Lam, executive director of intermediaries and investment products at the regulator, said in a statement at the time.
There is still work to do though. Among other things, Hong Kong needs to set up arbitration centre to deal with Islamic finance disputes. Its Shariah council needs to establish its credibility and bankers and ancillary financial services have to bolster their understanding of Islamic law.
Tim Lui, tax partner at accounting firm PricewaterhouseCoopers, says the government in Hong Kong will also need to consider altering accounting standards to bring local practices in line with those of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions.
And he predicted Hong Kong would consider incentives such as tax waivers on stamp duty and property transfers to raise the attractiveness of the country as a sukuk center.
Still, “any change could be put into place very quickly, probably in one or two years, as long as the government is committed,” he said. Under Hong Kong’s legislative process, new laws or amendments tabled by the government take between 12 and 18 months to finalise.
Moody’s Investors Service estimates that by the end of July this year, there were $82.36bn in outstanding sukuk, led by Malaysian issuers.
The fast-growing Gulf region is expected to be a huge source of bond issuance in coming years though as it attempts to transform itself from an oil-producing region into a financial and tourist hub.
Soaring oil revenues in the Middle East also need to be put to work.
“The center of the Middle East has the biggest advantage as most of the liquidity sits there,” said Shahzad Shahbaz, chief executive officer of NBD Investment Bank, part of National Bank of Dubai.
Still, borrowers there are marketing their deals increasingly widely to expand their investor base and dual listings are also becoming more popular.
The Dubai International Financial Exchange currently boasts the largest amount of listed international sukuk at $13.78bn. The Islamic Finance Information Service, a data and information provider, estimates London has $7.2bn in listed sukuk.
For their part, Chinese companies have easy access to the highly liquid local banks, warns Khalid Bhaimia, managing director of Hong Leong Islamic Bank in Kuala Lumpur.
Nevertheless, with domestic interest rates on the rise and the Chinese central bank cracking down on bank lending, would-be borrowers there could start turning toward the international market and sukuk, available to both Islamic and non Islamic investors, could be a good alternative.