LONDON: Another sign that the Chinese island enclave of Hong Kong, the world’s third largest financial center after New York and London, means business in facilitating Islamic finance in its jurisdiction is the announcement in the 2009/10 budget that the Hong Kong Special Administrative Region 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 has been widely welcomed by Islamic finance market players in the region and further afield in GCC (Gulf Cooperation Council) 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 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.
Hong Kong Financial Secretary John C. Tsang moving the second reading of the Appropriation Bill 2009 on Feb. 25, 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.
Hong Kong government Chief Executive Donald Tsang in his last two policy addresses has stressed the 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.
The development in Hong Kong follows the launch in January 2009 of the local currency Rupiah retail Sukuk by Indonesia and a reverse enquiry Sukuk facility by the Monetary Authority of Singapore. Similarly, the Japan Bank for International Cooperation (JBIC) has confirmed that its planned $500 million Sukuk in the Malaysian market is back on track after a delay due to the impact of the credit crunch. South Korea recently announced that it too was reviewing its banking framework to see how Islamic finance can be accommodated. Indeed, market players are quite heartened to see the high level of interest throughout East Asia in Islamic Finance.
At the recent Asia Sukuk Summit in Hong Kong in February, Eddie Yue, the deputy chief executive of the Hong Kong Monetary Authority (HKMA), further explained the government’s Islamic finance strategy. The HKMA and the Treasury Markets Association, he stressed, have devoted considerable time and resources into establishing an appropriate infrastructure framework and developing an (Islamic finance) education and awareness program both locally and worldwide.
“Islamic finance, at least for locations like Hong Kong, means change - a change in perception, a change in skills, structures and techniques, in contracts, standards and so on. Change in all its forms is happening within the global Islamic finance arena even as we speak. In the area of regulations and taxation rules, the government has concluded that the legal system in Hong Kong is flexible enough to meet the demands of Islamic financial transactions. There is therefore little time to spare, in the run up to the revival of the Sukuk market and the lead time it takes to promulgate tax exemption rules for Islamic finance transactions. Financial market players in Hong Kong must gear themselves up to embrace the change coming their way,” urged Yue.
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 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 (initial public offerings), 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.”
