The Hong Kong Monetary Authority, which supervises the market in debt instruments has taken an interest in Islamic finance for several years, but has been unsure how to take it forward. Hong Kong is seen as a natural financial intermediary between mainland China and the outside world, including the Muslim world. However, Shanghai is well placed as a business rival and Singapore lies in greater proximity to Muslim countries, has close connections with the Gulf and a significant local Muslim population, unlike Hong Kong. Nevertheless, there is scope for a market in US dollar denominated corporate Sukuk in Hong Kong. Chinese companies could tap the market to raise funds against their dollar receivables. Gulf Shariah compliant institutional investors want to diversify their asset holdings geographically and increase exposure to China, and Sukuk issuance from Hong Kong may be a relatively safe and attractive way of doing this. Possible issuers could be Chinese oil and gas companies that are already active in the Gulf such as Sinopec, which has extensive interests in Saudi Arabia. Such companies are unlikely to want to raise funds through Gulf financial centers where there is no Chinese presence, but they may feel more comfortable with Hong Kong.
PROFESSOR RODNEY WILSON:
As the gateway to China, and with its huge need for funding, it comes as no surprise that Financial Secretary John Tsang wants Hong Kong to develop capability in Islamic finance. To be “Asia’s financial hub”, Hong Kong needs this as part of the arsenal of financial instruments at its disposal. Already, Hong Kong institutions have taken a lead. HSBC has capabilities in both GCC and Malaysia, and Bank of East Asia has gained access through its shareholding of Affin. The success of Hong Kong’s drive will depend upon creating suitable instruments and attracting qualified personnel to take the project forward. Malaysia is obviously the Asian market leader for Islamic finance. The recent increase in volumes has been equaled, if not surpassed, by the build-up in institutions. Even so, GCC investors have been frustrated by the range of available investments. Differences in Shariah interpretation between jurisdictions have resulted in disappointing cross-border flows. In order to unlock the doors of Middle East, Hong Kong will have to tailor the instruments it produces to the needs of this client base. Hong Kong is full of well qualified conventional banking personnel, but in order to advise and structure Islamic products additional skill sets are required. Sourcing and attracting those with sufficient experience to make Hong Kong’s drive a success will be the first hurdle to overcome. There is already an outflow of Islamic banking talent from Asia, particularly to GCC. Liquidity is a crucial factor in giving a market more depth and transparency. Secondary trading, where GFI is an active player, has become an integral part of the growing Sukuk market in the Gulf region, but has not yet been evident in Asia. A secondary market attracts a wider variety of investors, allows participants to switch in and out of issues, and is crucial for price discovery. To achieve more liquidity in Asia, the market needs larger issues. The market can also benefit from the use of rating agencies, becoming more prevalent and important in promoting liquidity in GCC markets. Moody’s has their methodology in place, and although they cannot comment on Shariah compliance, they are able to judge the ability of the underlying assets to perform. In short, once the regulatory environment is established, Hong Kong needs to attract the right people to develop the right product for the investors that the city wants to access. If a liquid product is created through this effort, then they will have taken the market in a new and exciting direction. PHILIP CHEW: Broker — Credit & Fixed Income Asia, GFI
Hong Kong needs to focus on its objective credentials as a global-standard expert at a transaction and capability level. There is a need to respect the fiscal issues Islamic finance requires and Hong Kong should be well placed to make these adjustments where necessary. There is a further need to attract Islamic finance expertise from the Asian region and Middle East and this will prove a challenge to meet lifestyle and Shariah conditions but in no way impossible for a dynamic place like Hong Kong. KEITH DRIVER: Chief Executive Officer, HSBC Amanah Takaful (Malaysia)
Hong Kong will face stiff competition from cities like London, Dubai, Bahrain and Kuala Lumpur. Its competitors have been in the business for some time, what with Kuala Lumpur being the trailblazer in the region. For Hong Kong to attract investors, it would need the necessary regulations similar to Malaysia’s fully regulated Islamic financial market — a point already understood by London as the latter seeks to legislate in order to allow for tax relief for Sukuk issuers, placing them on par with conventional bond issuers. It would also need to attract qualified professionals to work in the city. Currently, most Islamic banking professionals are based in Dubai, Bahrain, Malaysia and London. Geographically speaking, Hong Kong is well placed as it is located midway between the Middle East and Far East and could attract investors from both sides of the globe. Another crucial point is the types of Sukuk that would dominate the Hong Kong market. Hong Kong should focus on Middle Eastern-attractive products, which would depend on the structure or underlying Islamic contract. For example, if the Sukuk were based on principles like Bai Bithaman Ajil, then they may be unattractive to Middle Eastern investors and may not have a secondary market. Basically, for Hong Kong to establish itself in this highly competitive market in any way, a lot of groundwork would be required. HALIZA ABD RAHIM: BMB Islamic, London
Not having a substantial Muslim population for a “home market” and, consequently, not having sufficient Shariah background, it looks a daunting endeavor to claim a part in the already competitive market. On the other hand, we already see Chinese business gather at Malaysian Islamic markets. Relevant tax exemptions (interesting) and liberal listing regulations (not promising neither for quality nor for supervision guarantees) probably will be needed to convince or lure the outside world. It rather makes sense to go to “nearby” existing Islamic capital markets to tap into compliant funding. On the other hand, demand being substantial enough, compliant funds might be tempted to go there. I am curious about these plans. PAUL WOUTERS Partner, BENER
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