The Chinese island enclave of Hong Kong, the world’s third largest financial center after New York and London, has consolidated its ambition of becoming a regional if not global Islamic capital markets hub with the signing of a memorandum of understanding (MoU) between the Hong Kong Monetary Authority (HKMA) and Bank Negara Malaysia, the central bank, on Sept. 28 to cooperate in the development of the financial services industry, especially in Islamic finance.
Hong Kong was one of the first non-Muslim regulators to join the Kuala Lumpur-based Islamic Financial Services Board (IFSB) as an associate member. To many pundits, the rise of Islamic finance is inextricably linked to the renaissance of the Silk Road. In ancient times, the famous Silk Road was China’s link to the outside world and a route for trade and exchange of art, music, culture and religion. In a speech last year, Zeti Akhtar Aziz, governor of Bank Negara Malaysia, alluded to the New Silk Road being spearheaded by the globalization of Islamic finance especially eastward. Chinese politicians similarly have stressed this ambition, and now Hong Kong sees itself “right at the heart of the New Silk Road providing a gateway to business and financial opportunities.”
Hong Kong indeed is bullish about developing Islamic capital markets and structured finance for investment and deals especially in Mainland China and in other countries in the region. Not surprisingly, the island is positioning itself as the natural choice as a gateway to doing business, including Islamic investments, in China. The Hong Kong Special Administrative Region’s Chief Executive Donald Tsang in his last two policy addresses has stressed his government’s full commitment to supporting the development of Islamic finance in the city. The government believes that being an Islamic finance hub especially for capital markets instruments and investments would diversify the island’s financial services offerings.
Under this latest MoU, the HKMA and Bank Negara Malaysia have agreed to further strengthen co-operation in a number of key areas including capacity building and human capital development; facilitating and promoting the development of an effective financial market infrastructure through the exchange of information and experience in developing legal, regulatory and supervisory frameworks for Islamic finance; and promoting cross-border financial activities through exploring harmonization of standards and documentation relating to Islamic finance transactions and promoting the consistent application of Islamic financial contracts for cross-border transactions.
“The signing of this MoU marks the beginning of a new area of cooperation between the HKMA and BNM,” said Joseph Yam, chief executive of the HKMA.
“It reflects our joint commitment to further developing the Islamic finance industry and paves the way for future initiatives that will benefit both Malaysia and Hong Kong.”
Malaysian Islamic banks have been active in China through Hong Kong. The Hong Kong government has publicly stated its ambition of developing the enclave into a global Islamic capital markets hub and as an investment gateway to Mainland China. The Hong Kong government is currently reviewing its legal and tax frameworks with the aim of introducing tax neutrality to facilitate Islamic financial transactions such as Sukuk (Islamic securities). Malaysian financial entities such as the CIMB Group have already structured an exchangeable Sukuk for Paxon against assets based in mainland China and which is listed on the Hong Kong Stock Exchange.
Not surprisingly, Zeti is confident that “this effort which extends the cooperation in the area of Islamic finance will provide further opportunities for increased economic and financial flows between Hong Kong and Malaysia.”
Earlier this year, Hong Kong’s chief executive announced in the 2009-10 Budget that his government will send a draft law to the Legislative Council during this year aimed at creating a level playing field between Islamic financial products and conventional ones.
The move was widely welcomed by Islamic finance market players in the region and further afield in the GCC countries and Europe. Although Hong Kong hitherto has had no official Islamic finance strategy, its government two years ago decided to develop the island enclave into a regional and international Islamic capital markets hub. This strategy would also fit in with Hong Kong’s aspiration of being a holistic global financial center, offering too opportunities in the fastest-growing niche Islamic finance industry.
However, several high-powered deals have been structured out of Hong Kong. For instance, most of the HSBC Sukuk mandates were structured by the Bank’s capital markets and debt markets teams in Hong Kong, who worked closely with its dedicated Islamic finance division, HSBC Amanah.
Banking sources stress that the law is making progress and is still on target to be adopted during this year.
Hong Kong Financial Secretary John C Tsang moving the Second Reading of the Appropriation Bill 2009 in February this year, confirmed that the government would further develop and increase financial cooperation with emerging markets in order to consolidate Hong Kong’s position as an international financial center. “Particular measures,” he told the Legislative Council, “are needed to improve Hong Kong’s regime as a platform for the growing area of Islamic finance. Since the structure of most Islamic financial products involves the sale and re-purchase of assets, such transactions may entail tax liabilities in Hong Kong. Therefore, we plan to submit to the Legislative Council in 2009-10 a proposal to create a level playing field for Islamic financial products vis-à-vis conventional ones.”
The proposal, he added, would include making changes to or clarifications of the arrangements for stamp duty, profits tax and property tax.
The rationale behind Hong Kong’s opening up to Islamic finance, stressed Eddie Yue, Deputy chief executive of HKMA, in an interview earlier this year, is the recognition that Islamic finance is one of the major growth areas in the financial services industry, and Hong Kong being an international financial center involved in financial intermediation activities to players all over the world, needs to provide a full suite of financial products to market participants round the world.
“If you don’t have Islamic finance you are missing a big market segment. Since the beginning of 2007, we have been talking to the market players about the opportunities, potential and the impediments in developing Islamic finance in Hong Kong. The market players came up with a very positive report, stressing that they see great potential in the Islamic finance sector. There is a lot of interest from Middle East investors wishing to invest into China. Hong Kong is the only fund-raising platform for China outside the mainland which is like a window that meets with the international markets. So if investors from the Middle East want to access China, they will look at Hong Kong, which we see as serving as a bridge between the Middle East and China. We believe that Hong Kong can provide that gateway to Middle East and Malaysian investors and serve as a platform with a critical mass of the market players. In the Islamic finance space, Hong Kong has been quick at reviewing its tax laws as soon as it took the decision at the highest levels of government to embark on promoting Islamic finance in its jurisdiction,” he added.
The good news, according to Yue, is that there is a greater awareness emerging amongst the Hong Kong financial community about Islamic finance. Instruments raging from retail Islamic investment funds and Islamic treasury placements at the interbank and corporate level, to Islamic syndication loans, have started to emerge in Hong Kong. With the result some institutions have set up Islamic banking windows to facilitate this development. However, the potential is much bigger especially as a viable fund-raising and investment alternative. Similarly, the Hong Kong Airport Authority has also confirmed that it is interested in issuing a Sukuk depending on the right timing and market conditions during 2009.
“I believe,” concluded Eddie Yue, “that there is endless potential for us to innovate in the area of Islamic finance, especially in deploying our special strengths — our close affinity to China, out experience as an international fund raising center and asset management hub, and our role as a testing ground for the Mainland’s financial liberalization. There is no obstacle to Hong Kong becoming a center for Islamic IPOs, given our distinct record as a leading IPO center in the region. Now is the time to lay down the groundwork for future growth and development.”