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Friday, February 27, 2015, 10:37

HK banks on Islamic finance

HK banks on Islamic finance
Hong Kong’s central business district. The city wants to develop into an Islamic finance hub and issued its first sovereign Islamic bond in September last year, just three months after launching its first Islamic investment fund. (AFP)

Qamar Zaman Minhas, chairman of the Islamic Community Fund of Hong Kong, had not expected that Hong Kong’s first-ever issue of a sovereign Islamic bond, or sukuk, would generate such a strong market response.

In September last year, Hong Kong sold sukuk amounting to $1 billion after attracting orders to the tune of $4.7 billion, or 4.7 times the amount on offer. The sharia-compliant bonds were allocated to more than 120 global institutional investors — 47 percent in Asia, 36 percent in the Middle East, 11 percent in the United States and 6 percent in Europe.

“It came as a pleasant surprise. The sukuk sale shows that there is a strong demand for Islamic financing in the region,” Minhas, who is also president of the Pakistan Association of Hong Kong, tells China Daily Asia Weekly.

The special administrative region, which provides a wide range of financial products and services to local and international customers and investors, is the fourth Asian issuer of a five-year sovereign sukuk, following Malaysia, Indonesia and Pakistan.

However, the Hong Kong sukuk is the first US dollar-denominated Islamic bond issued by an AAA-rated government, in a global Islamic financial market expected to surpass $2 trillion in 2014.

According to KFH Research, an Islamic investment research firm, the value of global Islamic finance assets will reach $6.5 trillion by 2020 compared to a total of $150 billion in the mid-1990s.

“Hong Kong cannot keep itself away from the expanding Islamic financing system if it wants to retain the status of an international financial center,” Minhas says. “New developments could encourage others to test the Hong Kong market as the city is a gateway to mainland China.”

Islamic banking and financing refers to a system of financial activity that adheres to the principles of sharia law — Islamic principles which prohibit speculative activities including interest, gambling and uncertainty.

The Hong Kong Monetary Authority (HKMA) has made no secret of its aspirations to develop the city as an Islamic finance hub, particularly in the capital markets segment.

Islamic financial assets with exposure to the Chinese mainland are already domiciled in Hong Kong. The number of banks in Hong Kong offering Islamic banking services, mainly in wholesale banking and asset management, has been increasing.

Active players are Kuala Lumpur-headquartered Hong Leong Bank, the first bank to launch Islamic banking in Hong Kong in 2008, and CIMB Islamic, which offers Shariah-compliant financial solutions through its strategic partner Bank of Yingkou in China.

“I hope that the sukuk issuance will catalyze the further growth of the market in Hong Kong by encouraging more issuers and investors to participate in our market,” says John Tsang Chun-wah, financial secretary of Hong Kong.

The investor demand for sukuk is a testimony to investor confidence in the city’s credit strengths and robust economic fundamentals, to participate in the Islamic financing field.

KFH Research says Hong Kong can be an ideal candidate to become a major Islamic finance hub, with its high liquidity, free economy, strong presence of foreign banks and simple tax system, coupled with its existing cooperation agreements with other centers of Islamic banking like Dubai and Malaysia.

“Islamic finance needs to be identified as a financial system with features which are not unique to Muslims only but beneficial to all people as an ethical banking system,” says Jamaladeen Faleel, assistant professor in the College of Business at Jeddah-based Effat University in Saudi Arabia.

In June last year, Hong Kong’s first Islamic investment fund was launched, operated by Malaysia-based RHB Asset Management. The fund was launched after an Islamic finance conference organized jointly by the HKMA and Bank Negara Malaysia, the country’s central bank.

Malayan Banking Berhad (Maybank) and Hong Kong-based Bosera International have joined hands to market an Islamic fund in the Chinese mainland. The fund will be launched in the first quarter of 2015.

Bosera International, a wholly owned subsidiary of Shenzhen-based Bosera Asset Management, one of the country’s largest asset managers, will promote the fund to retail clients, including an estimated 23 million Muslims who are predominantly in the Ningxia Hui autonomous region.

At present, the supply of Islamic financial products and services to the Chinese mainland is mostly in the form of capital market instruments traded through the Hong Kong financial market.

However, the China Banking Regulatory Commission is considering the creation of an Islamic banking framework and its first Islamic bank in the Chinese mainland. Meanwhile, Bank Muamalat Malaysia has already teamed up with China’s Bank of Shizuishan to establish its first Islamic bank in Ningxia.

Until a few years ago, there was little Islamic finance activity in China. However, analysts are of the view that China’s focus on building good trade relationships with Muslim-dominated Gulf countries is making Beijing move closer to Islamic finance.

Faleel says the adoption of Islamic banking and finance can help China attract investment from wealthy Gulf nations, which have already been targeted by the West.

Moreover, he says Islamic banking can help the Chinese currency, “as in my view the growth of Islamic finance will facilitate the speedy rise of the yuan as a dominant international currency”.

China also enjoys increasing trade and commerce with major Islamic banking and finance countries in Southeast Asia like Malaysia, Brunei and Indonesia.

The volume of trade between China and Indonesia exceeded $66 billion in 2013. And China has been Malaysia’s largest trading partner for five consecutive years, with bilateral trade reaching more than $106 billion in 2013.

“Having Islamic banking and finance facilities in China would surely assist trade and commerce between China and Southeast Asia,” Nik Shahrizal Sulaiman, Malaysia-based executive director at PricewaterhouseCoopers, tells China Daily Asia Weekly.

“Many corporate entities in Malaysia, Brunei and Indonesia have a specific preference for Islamic finance, driven by the needs of stakeholders and regulatory rules. In Malaysia, for instance, for listed entities it is a requirement to have at least two-thirds of (their) financial transactions conducted through the Islamic system,” Sulaiman says.

Hong Kong has been attempting to capitalize on the growing Islamic finance market since 2007, when the Airport Authority Hong Kong announced it was interested in selling $1 billion of debt that complies with sharia law.

The proposed sale never happened. Nevertheless, in September 2009 the HKMA signed a memorandum of understanding with Bank Negara Malaysia to promote Islamic finance in the city.

In 2013, Hong Kong made legislative changes, providing a taxation framework for sukuk issuance comparable to that for the issuance of conventional bonds.

Jeffrey Kirk, managing partner at Appleby, a leading offshore firm delivering law and fiduciary services, says in order for Islamic finance products to be on a level playing field with conventional finance products, “it is often necessary for legislation and regulation to be amended to facilitate the launch of such Islamic finance products”.

“The structure of Islamic finance products is more asset-backed in its framework,” Kirk says. He adds that Islamic investment funds offer non-Muslim investors a different investment opportunity and could provide greater protection in market downturns. For that reason they could appeal to a broad universe of investors, not only Muslims.


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