Tsang's religious vision destined to be unholy flop
Chief Executive Donald Tsang Yam-kuen has seen a vision of Hong Kong's future. Judging by his recent fervour, it went like this:
Lo! a cloud descended from the heavens and out of it spake a mighty voice, saying: 'Go forth and preach my message unto the merchants of the city that they may build a great market of Islamic finance. So shall the prosperity of the people be accomplished.' And Donald replied: 'So be it.'
Or something; in recent weeks Mr Tsang has been banging on about Islamic finance with all the enthusiasm of a recent convert who, although he may not fully understand all the finer theological points of his new faith, is determined to impress with his zeal.
'Islamic finance offers huge potential for development,' Mr Tsang declared in his policy address last month. 'We should actively leverage on this new trend by developing an Islamic financial platform in Hong Kong.'
Last week, he bought the subject up again in a speech to local bankers, promising: 'Our focus will be on the bond market.'
Some explanation may be needed for readers who wonder what on earth he is talking about. In Islam, as indeed in Christianity and Judaism, usury - or gouging vulnerable borrowers with excessive interest rates - is frowned upon. Some of the stricter interpretations of Islam take that to mean all forms of interest payments should be forbidden.
This is inconvenient because today, as in the time of the Prophet, money has a price, which is usually expressed as an annual interest rate. To get around the problem, clever bankers have developed a variety of dodges which allow the faithful to avoid the appearance of either charging or paying interest.
These might involve the borrower selling assets to the lender and then buying them back in instalments at a premium to their market value. Perhaps not surprisingly, the premiums paid by borrowers seem to correlate remarkably closely to the market interest rates that would be charged on loans of the same tenor by ungodly infidels.
In fact, when these transactions are securitised with the issue of Islamic bonds or sukuk, the pretence of not charging interest is almost entirely abandoned. Like ordinary bonds, the majority of sukuk in circulation are priced either at a fixed rate of return or at a premium to Libor, the London interbank offered rate.
This is the market Mr Tsang wants to target. To give him his due, our evangelical chief executive is correct about one thing: Islamic finance is indeed a fast growing business. It may not, however, be quite the glittering prospect he imagines.
Last week, Mr Tsang told Hong Kong bankers that the market in Islamic finance was worth US$700 billion to US$1 trillion. The Kuala Lumpur-based Islamic Financial Services Board, which sets standards for the industry, is rather more cautious. It bases its estimates on the lower end of this range.
Even then, the greatest portion of its US$700 billion figure consists of equities in Islam-compatible companies. However, beyond the obvious stipulation that breweries and pork butchers should be excluded, no one seems quite sure what the criteria for inclusion should be.
Most of the rest of the US$700 billion consists of loans made by Islamic banks. At the end of last month, the Islamic bond market was worth US$45 billion. Almost half that amount consisted of ringgit-denominated debt in the Malaysian domestic market. According to the Bahrain-based Liquidity Management Centre, the total value of the 79 outstanding internationally traded Islamic bond issues was just US$24.7 billion.
To put that amount into perspective, it is only slightly larger than the value of shares traded yesterday on the Hong Kong stock exchange; hardly an enormous market.
Even so, issuance is growing quickly, and it might be worth trying to capture a portion of the business. Unfortunately, Mr Tsang appears to have overlooked one crucial detail: Hong Kong's dire shortage of Muslims.
A quick glance down the list of outstanding Islamic bonds shows a clear pattern. The vast majority of issuers were from Muslim countries, mostly in the wealthy Gulf. A tiny handful were issued by borrowers in Britain and Germany, but those are still countries with sizable populations of well-heeled Muslim investors.
Alas, Hong Kong simply cannot qualify for membership of this club. According to last year's government Yearbook, Hong Kong's Islamic population numbers just 90,000 souls. However, given that other government figures indicate most of these are Indonesian domestic helpers earning a slender HK$3,480 a month, it seems unlikely our Islamic community has a huge demand for specialist financial services beyond regular remittances to Jakarta and Surabaya.
Of course it is conceivable that Hong Kong companies would be interested in issuing Islamic bonds if the cost of funding were significantly cheaper than conventional debt. But, in that case, they would head straight to the established markets and existing investor bases in the Gulf, rather than attempting to issue bonds here.
It seems Mr Tsang's glorious vision is simply another flight of fancy. Last year, he proposed that Hong Kong should establish a commodities exchange, despite the city's glaring lack of oil wells, mines, plantations, transshipment facilities, refineries, factories and other things generally associated with commodity trading. Like that idea, this one too is destined to be an unholy flop.
Jake van der Kamp is on holiday