Hong Kong visits Dubai to promote Islamic Finance opportunities in China

Hong Kong visits Dubai to promote Islamic Finance opportunities in China

This sounds a little absurd but actually makes perfect sense. This morning a high-level delegation of Hong Kong financiers held a seminar for 200 guests in Dubai to promote the Chinese special economic zone as a gateway to Shariah-compliant fund-raising and investment in China.

Deputy chief executive of the Hong Kong Monetary Authority, Eddie Yue said: ‘Some people have expressed skepticism about a role in Islamic Finance for Hong Kong. But local market players have been quick to develop Shariah compliant products.’

The first Islamic fund introduced by a local bank was approved late last year and is an index-tracking fund for the Dow Jones Islamic Market China/Hong Kong Index. Then in December the Hong Kong Mortgage Corporation signed a joint venture agreement with Malaysia’s Cagamas Berhad to develop Islamic mortgages.

‘What makes Hong Kong a natural destination for Islamic funds is our deep and highly liquid capital markets,’ Yue added. ‘Almost all the most actively traded financial instruments are available for exchange in Hong Kong, and that gives Islamic investors a much wider choice of where to place their funds.’

In a keynote address, Dr Nasser H. Saidi, chief economist of the Dubai International Financial Centre Authority said that Hong Kong could also have role for developing ‘straightforward or convertible sukuks’ for sale to burgeoning Chinese savers to fund projects in the Middle East.

‘There is a rapid integration of Shariah compliant products into mainstream global finance,’ he added. ‘In Dubai the next move will be to centralize Islamic finance with a single DIFC Shariah Board to simplify and standardize the issuing of sukuks. We will be developing our links with Hong Kong.’

However, Chinese IPOs have dried up in Hong Kong this year, after a record $76 billion was raised in local capital markets in 2007. Some attendees at the seminar thought Hong Kong was now looking for the next big thing in global finance and was late in catching on to Islamic Finance.

‘It may be true that Hong Kong has started development more recently,’ said Yue. ‘But so long as the demand is there, it is never too late for Hong Kong to contribute to this vibrant growth sector.

‘The abundance of oil-driven liquidity generates a huge appetite for investments that comply with the tenants of Islam, which can not be satisfied within the Gulf area alone. Such investments can be found in the emerging markets of Asia, especially in China which is best accessed from Hong Kong.’

With a population of 1.3 billion people and a GDP that has been growing in excess of 10 per cent for the past decade, it has hard to argue against investment in China as a long term proposition.

Several other speakers stressed the scale of the opportunity and the strengths of Hong Kong as a platform with its strong commercial links and legal system. But it is clear Islamic finance in China will be a two-way process both for investment into the Middle East through sukuks and for investment into the growth story of China.

Hong Kong To Ride On Mainland For Its Islamic Finance Growth

Hong Kong To Ride On Mainland For Its Islamic Finance Growth

Hong Kong’s access to mainland China will be key in its ambition to develop an Islamic financial hub, Financial Secretary John Tsang said Tuesday.

“We are moving full steam ahead,” he told a two-day seminar on Islamic finance which was also attended by Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz and other central bankers from Gulf countries and the region.

Hong Kong announced its foray into Islamic banking late last year and Chief Executive Donald Tsang said yesterday he will lead a mission to three Middle East states – Kuwait, Saudi Arabia and United Arab Emirates – from January 25 to February 1.

John Tsang underlined Hong Kong’s intention to get a slice of the huge pool of the oil-driven liquidity in the rapidly growing Islamic funds valued at between US$700 billion and US$1 trillion, saying: “I believe Hong Kong can play an important role in generating new, reliable and potentially lucrative investment opportunities for this capital.”

Hong Kong, according to him, is aiming to be a wholesale player and in structuring Islamic products to seize on the global strong demand, including for sukuk or Islamic bonds.

“And China will be key,” he told the seminar co-organised by the Hong Kong Monetary Authority (HKMA) and the Malaysia-based Islamic Financial Services Board (IFSB).

“The unique advantage for Hong Kong is our access to the markets of the mainland of China. Hong Kong is the only jurisdiction outside of the mainland in which banks may transact in the reminbi.”

He pointed out that a quarter of the banks in Hong Kong are authorised to offer services using the Chinese currency and last year, Hong Kong was the first place outside China to offer a reminbi bond market.

The access to the mainland provides Hong Kong with the opportunity to develop syariah-compliant instruments for mainland-based issuers with Hong Kong as the bridge between the world’s fastest growing economy and the international Islamic finance market, he said.

To shore this up, he added, HKMA will apply to raise its status in IFSB to associate member from its current observer status.

Islamic finance development underway in Hong Kong

Islamic finance development underway in Hong Kong

The Government is fully supportive of the development of Islamic finance in Hong Kong and is moving full-steam ahead, Financial Secretary John Tsang says. As a key step in this direction, the Monetary Authority will apply for Islamic Financial Services Board associate membership.

A closer relationship with the board will help keep Hong Kong’s financial markets abreast of the latest developments in Islamic finance, he added.

Speaking at a seminar on Islamic finance today, Mr Tsang said the Government has a responsibility to diversify Hong Kong’s financial markets to bolster the city’s status as the Mainland’s global financial centre.The Monetary Authority and the Treasury Market Association set up a team, in conjunction with other market players, to study the possible challenges and implications of the growth of Islamic finance in Hong Kong, as well as the development of a wholesale market for Islamic finance. The team concluded that there are no major legal and regulatory obstacles to transactions involving wholesale Shariah-compliant financial instruments in Hong Kong.

Tax law review

Mr Tsang said issues that are being tackled include changes and/or clarifications that may be needed to Hong Kong’s taxation regime to offer a level playing field for the issuance of Islamic bonds, as compared to other conventional bonds. A review is underway to see whether Hong Kong’s tax laws should be modified.

He pointed out the first Islamic retail fund for sale to retail investors in Hong Kong had already attracted about US$45 million worth of orders by December 10, mainly from local investors.

“Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth. To further consolidate Hong Kong’s position as an international financial centre, we should actively leverage on this new trend by developing an Islamic finance platform, and focus on, among other things, developing a wholesale Islamic finance market,” Mr Tsang said.

Unique opportunity

“Another reason is that Hong Kong remains the only jurisdiction outside of the Mainland where banks may transact business using the renminbi. This, I believe, provides Hong Kong with a unique opportunity to develop wholesale markets in Shariah-compliant instruments for Mainland-based issuers.

“I believe that Hong Kong possesses the required credentials to become an international centre for Islamic finance. And, as the global financial centre for the world’s fastest growing large economy, we have a ready-made marketplace for new investment opportunities,” he added.

Monetary Authority Chief Executive Joseph Yam said the importance of Islamic finance is rising in the global financial market.

“As an international financial centre, Hong Kong is stepping up its efforts to promote its financial services to major Islamic countries and regions, and developing an Islamic bond market,” he added.

Hong Kong’s Islamic New Year

Hong Kong’s Islamic New Year

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.

Hong Kong seeks to become a sukuk hub

Hong Kong seeks to become a sukuk hub

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.