No Islamic bonds despite 4-year push

PUBLISHED : Saturday, 29 October, 2011, 12:00am
UPDATED : Saturday, 29 October, 2011, 12:00am


Four years after trumpeting a dream to turn Hong Kong into an Islamic financial centre, Financial Secretary John Tsang Chun-wah concedes only modest progress has been made.

No company has issued any sukuk bonds, and only Hang Seng Bank has launched an Islamic fund.

But Tsang is refusing to give up on his ambitions. He told fund managers at a Hong Kong Investment Funds Association conference yesterday the government would hold a second round of consultation on changing tax laws in a bid to encourage more companies to issue sukuk bonds, which are designed according to Islamic religious rules.

'Since we started to promote Islamic finance in Hong Kong in 2007, there has been modest progress,' Tsang said. He blamed the global financial crisis in 2008 and 2009.

Islamic finance refers to bonds or other financial products that conform to Islamic religious law, or sharia, which in general does not allow Muslims to accept interest, gamble or speculate on the stock market or engage in short selling. They are also banned from investing in industries related to pork, tobacco, casinos or firearms.

In September 2007, Tsang said the government wanted to help Hong Kong lenders tap into the US$1 trillion Islamic bond market, which he expected to grow 15 per cent annually. This was followed by numerous seminars and roadshows by the Hong Kong Monetary Authority, the Hong Kong Securities Institute and assorted banks all eager to jump on the bandwagon.

A month after Tsang announced his plan, Chief Executive Donald Tsang Yam-kuen touched on Islamic finance in his 2007 policy address, and led delegates to the Middle East.

Tim Lui Tim-leung, a partner at PricewaterhouseCoopers, said local tax laws discouraged firms from issuing such bonds in the city. Because of their special structure, bondholders are subjected to stamp duty, income tax and profit tax. Normal bonds pay interest, which is not taxable. The government two years ago consulted the market about waiving the tax and John Tsang said the legislative process would begin after a second round of consultation.

Paul Chan Mo-po, the legislator for the accountancy sector, said the government did not need to hold another consultation. 'The first round showed many supported the law change and the government should proceed immediately,' he said.

Lui said that even with the law change, it would not be easy for Hong Kong to develop an Islamic financial centre.

'Other markets such as London and Kuala Lumpur have developed sukuk bonds over a long time. It is hard for Hong Kong to compete,'' he said.

Brokers said investors preferred 'dim sum' bonds, which are denominated in yuan, than sukuk bonds as they could bet on the rising value of the yuan.