When Jawaher Al Sudairy began talking about the sands of Saudi Arabia, her audience listened attentively. At a recent luncheon meeting at the Hong Kong Chamber of Commerce, the China director of the Saudi Arabian General Investment Authority captivated Hong Kong business executives about the fortunes lying underneath the sands of the Kingdom. And she wasn’t talking about oil. Al Sudairy was pitching mining opportunities in Saudi Arabia.
There’s a hunger in Hong Kong to know more about the Middle East these days, fueled in part by the recent buzz created by the city’s leader, Donald Tsang, that Hong Kong will open its doors to Islamic banking and finance, promising to create an Islamic bond market and to bring in more of the Middle East’s petrodollars into the city.
The interest goes both ways. Middle Eastern financial institutions and companies have been investing in Hong Kong’s rising stock market and property sector. HSBC’s local unit, Hang Seng Bank, for instance, decided to introduce Hong Kong’s first Islamic fund after being approached by a Middle East financial institution in 2006 to help manage its investments in Hong Kong and China. Last year, Dubai Investment Group, part of the government’s Dubai Holdings, bought a roughly 10% stake in Sun Hung Kai Financial, one of the city’s largest non-bank financial institutions and a unit of one of Hong Kong’s biggest property developers.
Still, Al Sudairy says, the Greater China region remains unfamiliar territory to some back home.
“The interest is there, but the knowledge or the understanding is still building because Hong Kong and China are very new [markets],” she says. “A lot of them will come but they are still not clear how to penetrate the market, I think”.
Unlike its neighbors to the south – Malaysia, Indonesia and Singapore – Hong Kong is a latecomer in the highly lucrative and competitive Islamic banking and finance industry. Predominantly Muslim Malaysia has already gained a reputation as an Islamic financial center in Asia and as one of the world’s biggest sukuk markets.
Can Hong Kong compete?
Early this year, Tsang and Hong Kong’s financial secretary John Tsang (no relation), will be visiting the Middle East to sell Hong Kong. But some say it takes more than a high profile road show to attract a flood of Islamic funds, even if Hong Kong and mainland China’s prospects are bright.
The main drawback, at the moment, appears to be infrastructure. Although it possesses a sophisticated financial system, Hong Kong still has to build a support system for Islamic banking and finance alongside its Western financial infrastructure. That system, some say, is critical in creating a climate where Islamic investors can feel confident that their investments strictly follow Islamic principles. This includes shariah compliance certification, Islamic financial reporting standards, and a legal platform to settle disputes relating to Islamic investments or financial instruments.
Lord Edwin Hitti, a Lebanese businessman, has been at the forefront of setting up the building blocks of Islamic banking and finance in Hong Kong. As chairman of the Arab Chamber of Commerce and Industry, Lord Hitti last year helped form Hong Kong’s sole shariah compliance certification body, and the Hong Kong Islamic Stock Index.
“Hong Kong is ready from a psychological point of view. But from a practical point of view, Hong Kong still has to make certain accommodations,” he says. “Hong Kong still has to review and restructure its infrastructure to be able to accommodate Islamic finance, Islamic banking and shariah law within its current conventional settings.
He cites that two of the city’s largest banks – HSBC and Standard Chartered – are well-known players in Islamic banking and finance in the Gulf and in Malaysia but have yet to offer the same services in Hong Kong.
“Why the hesitation to say we offer these services in Hong Kong? It will not take major changes for them… The reason, I say, is because the Hong Kong legal system is not at this point able to deal with any area of conflict pertaining to shariah, and because the accountancy system and the tax system do not have any provisions at the moment to deal with Islamic practices,” says Lord Hitti.
Setting up the proper infrastructure may prove a tall order. After all, Malaysia started the development of Islamic banking and finance in the 1980s, first with the issuance of an Islamic Banking Act as a legal basis for the creation of Islamic banks.