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  • Oct 2, 2014
  • Updated: 2:53pm
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PUBLISHED : Tuesday, 03 December, 2013, 5:45am
UPDATED : Tuesday, 03 December, 2013, 8:23am

Why Hong Kong still a long way from being an Islamic finance hub

A new law would allow the city to issue sukuk but few institutions appear keen to follow suit

BIO

Enoch Yiu is the chief reporter of business pages at the Post. She writes feature stories with a focus on regulatory issues, stock exchanges, the Securities and Futures Commission, accountancy, insurance, pension and other financial industry development issuse. She has a weekly column, White Collar, covering the latest issues in the professional industry and also hosts podcasts and video programs on SCMP.com. She is the author of two books.
 

The government has started its latest effort to transform the city into an Islamic finance hub with a proposed new law next year allowing it to issue Islamic sovereign bonds here. This is a grand plan but maybe a little too ambitious.

This is not the first time the government has promoted Islamic finance. In 2007, Financial Secretary John Tsang Chun-wah announced a plan to capture part of the Islamic finance pie, now worth US$1.3 trillion and expected to double by 2017.

But except for several visits to countries in the Middle East to shake hands with local officials, not much has been achieved.

Only Hang Seng Bank has done anything to promote the finance hub idea, issuing a retail Islamic fund in November 2007. By contrast, yuan-denominated retail funds have become a trend and we have seen scores of such funds flowing into the market since Beijing encouraged more yuan products in 2010.

In terms of Islamic bonds, also known as sukuk, no local company has made any inroads here. This has been partly because of tax laws, which means the sukuk would be subject to more tax than conventional bonds. It was only in July this year that the law was changed allowing the sukuk to face equal tax treatment to other conventional bonds.

With the new tax law in place, the government now may think it is time to restart the Islamic finance engine. It is also set to follow the British government, which in October said it would issue sovereign sukuk next year. Investment, like fashion, also has a trend to follow.

This time, at least we will see a big sukuk bond issue as the Hong Kong government, with a AAA credit rating, is the issuer. But whether a government issue will encourage other companies to follow with their own offerings remains a big question mark. The government has already launched the government bond and ibond programme but that has not led to many local companies following suit. The local debt market is still not very active.

Malaysia is the world's largest issuer of sukuk at about US$80 billion last year, representing two-thirds of total issues last year. The sukuk to Malaysia is somewhat akin to H shares in Hong Kong. Hong Kong-based Noble Group last year issued Islamic bonds in Kuala Lumpur. This shows Malaysia is hard to beat as an Islamic finance centre.

Malaysia has a much wider population of Muslims and its investors and bankers understand much more about the rules related to their religion. Hong Kong, with only a few Muslims, will find it hard to compete. The Malaysian government also has education programmes to train bankers and financial experts in Islamic finance. In Hong Kong, there is little Islamic investment-related education or training.

Brokers speculate the Hong Kong government wants to promote Islamic bonds because Beijing wants to have a good relationship with Middle Eastern countries. If that is true, it may be up to some mainland companies to issue sukuk. If not, we do not see how sukuk can really take off here.

enoch.yiu@scmp.com

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This article is now closed to comments

chaz_hen
For Gawd's sake, HK, instead of trying to be the HUB for anything and everything that's trendy, just stick to what you're good at and improve upon it!
Then you can proudly wave the title "China's World City"!
fink
What's the point of Islamic finance? Even Malaysians, who live in an Islamic theocracy, are still allowed to use regular banks and insurers, so who exactly are these products for?
.
I know one group of Muslims they’re definitely not for: rich ones. Those dudes seem to be perfectly content banking in Switzerland (including even Osama bin Laden, of course).
.
The entire concept of Islamic finance is to offer a banking product that’s not usurious, so how is it possible that their products offer exactly the same economic risk/reward as conventional banking products? Either the Islamic banks are just as usurious as the conventional banks, and therefore not Islamic in any meaningful sense, or else the conventional banks aren’t usurious and the Islamic banks are pointless.
impala
We barely have a non-Islamic bond market in Hong Kong. Why are we so desperate to chase a sliver of a the Islamic one?

The 1.3 trillion in oustanding sukuks sounds like a lot until you realise that the total USD bond market has some 40 trillion USD in bonds outstanding. Islamic bonds are a <5% tiny part of that.

We have no competitive advantage in this area, unlike some other financial centres like Dubai, Singapore or even London, which are historically, physically and culturally closer to major Islamic populations in the Middle East and South-East Asia.

If they want to grow the bond markets in Hong Kong policy makers would be wise to focus on more sensible areas of it, like obviously the RMB bond markets (for which there is a lot of demand), real estate ABS, etc.
jd.salinger.3154
You shouldn't expect any independent or insightful analysis to come out of SCMP. This site is pretty good at churning out articles that aim at miraculously conducing your mind to shrink.
 
 
 
 
 

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