The promising prospect of Islamic finance is well recognized by the Hong Kong government and the financial sector as a very significant factor in Hong Kong’s maintenance of its international financial center status when encountering fierce competition from countries like Singapore and Malaysia.
However, after the changes in tax rules that provided a level playing field for conventional bonds and Sukuk as well as two sovereign Sukuk issuances totaling US$2 billion from 2013 to 2015, the pace of Islamic finance development in Hong Kong has slowed down for the entire 2016, which needs more catalysts from both governmental bodies and financial institutions to strengthen this specialized segment of the market.
Review of 2016
Since the Hong Kong government announced on the 1st March 2016 that its third Sukuk issuance will be happening sometime in the second half of the year, the market has been looking forward to its implementation, but it is yet to happen in the city as of today; the same goes for corporate Sukuk offerings. Apart from the aforementioned long-awaited Sukuk issuance, there are still no clues or updates regarding other areas such as Islamic REITs, Islamic exchange-traded funds and Takaful in Hong Kong.
Preview of 2017
Some local brokers have said that, although some government efforts existed during the past few years, a small Muslim population of 270,000 people and a lack of understanding of Islamic finance products in Hong Kong have contributed to the sluggish outcome. Nevertheless, the Hong Kong Monetary Authority has said that it is endeavoring to examine practical issues in order to formulate a Sukuk issuance plan that takes into consideration market conditions. Further, it would definitely encourage corporates to consider issuing Sukuk, although it will depend very much on demand and pricing eventually.
On the other side of the coin, the Hong Kong government should consider offering tax incentives, for instance, the exemption of interest income on profits tax, for those companies which hold debts. The incentives should include the extension of a tax exemption on interest income and profits derived from debt instruments issued by governments and multilateral agencies in various currencies.
Nowadays, it is widely accepted that Islamic finance plays an essential role in ‘One Belt, One Road’ (OBOR) project financing. The Hong Kong government did a great job in providing equivalent tax treatment for conventional bonds and Sukuk by amending its tax laws in 2013. However, more tax incentives on Islamic debt securities are also expected to pave the way for Hong Kong to become a flourishing Islamic financial center.
Hong Kong has the potential to position itself as the super-connector between China and OBOR countries. To make it happen, Hong Kong should speed up its process in Islamic finance development by making the best use of its tax regime advantage to strive for those Chinese companies, which are planning to issue their dollar Sukuk in overseas jurisdictions, to come to Hong Kong, especially when it is fiercely competing with Singapore and other counterparts to be the top international financial center in the Asian region. If Hong Kong is proactive enough, there will be ample opportunities in Sukuk financing for OBOR infrastructure projects, which will be worth tremendous economic benefits in the long run.
In addition, Hong Kong should start to formulate relevant policies and holistic solutions to help promote other Islamic financial products such as Takaful, in order to make its Islamic finance portfolio more comprehensive and robust. Most importantly, Hong Kong should also fully support its financial talents to receive Islamic finance education in renowned tertiary institutions such as the International Center for Education in Islamic Finance (INCEIF) in Malaysia, since a pool of seasoned experts can make a huge difference in shaping Hong Kong’s Islamic finance development.
Wilson Yeung is a certified tax advisor and a member of the Taxation Institute of Hong Kong. He can be contacted at [email protected].