HK Wants To Be Major League Player In Islamic Finance

KUALA LUMPUR-Hong Kong has now jumped into the fray to offer itself as a viable market for Islamic finance.

It has just hosted a seminar on Islamic finance and the Hong Kong Monetary Authority together with Hong Kong's Treasury Market Association have set up a team, in conjunction with other market players, to study the possible challenges and implications of the growth of Islamic finance in Hong Kong as well as the development of a wholesale market on Islamic finance.

John C. Tsang, Hong Kong's Financial Secretary, in an opinion piece on the subject for Bernama, said Hong Kong was making good progress in developing a market for Islamic finance.

Next week, its Chief Executive, Donald Tsang, will lead a high-level business mission to the Middle East to, among other things, promote Hong Kong as a centre for Islamic finance in Asia.

John Tsang said the Hong Kong government was fully supportive of the development of Islamic finance and would support the development of an Islamic bond market.

Against this backdrop, he said the Hong Kong Monetary Authority and the Treasury Market Association set up the team to study the challenges and implications of the growth of Islamic finance.

From a relatively small beginning in the 1980s, Islamic finance has emerged as an important financial services sector with global business estimated at between US 700 billion and US 1 trillion.

The total value of assets of Islamic financial institutions worldwide is believed to exceed US 250 billion, a 40-plus-fold increase since 1982.

These assets are held by over 300 financial institutions in more than 75 countries, with annual asset growth estimated at 15 percent. Islamic equity funds have recorded growth of more than 25 percent over seven years.

Syariah-compliant products and services have grown rapidly in both use and popularity during the past two decades.

More recently, this trend has accelerated with the emergence of the huge pool of oil-driven liquidity, which is about US 1 trillion in annual oil revenues, in the Middle East.

"For an international financial centre such as Hong Kong, this represents an opportunity not to be missed," said Tsang.

He said Hong Kong already has the credentials to develop a market for Islamic finance.

"First and foremost, we have a well-developed financial services sector, which is underpinned by an open and transparent regulatory regime. There are roughly 140 licensed banks in Hong Kong, about 70 of which are among the world's top 100 banks," he added.

A significant number of leading international banks have devoted considerable resources to the creation and servicing of a variety of Islamic financial products, such as Islamic "windows", Tsang said, adding that these are specialised units providing banking and financial services to retail clients.

"We also have deep and liquid markets for conventional financial instruments and a pool of experienced finance professionals with particular expertise in wealth management, capital markets and insurance. Our legal system is flexible and well adapted to supporting international financial transactions," he said.

According to Tsang, a unique advantage for Hong Kong is its access to the markets in Mainland China.

"Hong Kong remains the only jurisdiction outside of the mainland in which banks may transact business using the renminbi, and last year we launched the first renminbi bond market outside the mainland," he said.

"This highlights our experience in developing new products and services that serve to strengthen our financial infrastructure. It also provides an opportunity for Hong Kong to develop wholesale markets in Syariah-compliant instruments for mainland-based issuers."

Tsang said Hong Kong could be expected to play a significant role in structuring and financing Islamic investment products to meet the needs of China borrowers and those from other jurisdictions in this region.

"There is likely to be strong demand for such Islamic investment products given the abundant liquidity held by Islamic financial institutions and their desire to diversify their assets into other markets. Islamic financial products appeal to both Muslim and non-Muslim investors and issuers. They offer a flexible means of financing a variety of economic activities and provide a mechanism for risk sharing," he said.

"As a sign of the growing importance of the Islamic bond market, a number of non-Muslim issuers have entered the market in the past year, including the Asian Development Bank, Nestli's, and the federal German state of Saxony-Anhalt, which became the first European public sector issuer."

Tsang said there was also evidence that a large part of the demand for Islamic bonds came from non-Muslim investors who had found that the yield and structure of these products offered attractive investment opportunities.

"There is still much work to be done. Issues that we are currently tackling include changes and/or clarifications that may be needed to our taxation regime to provide a level playing field for the issuance of Islamic bonds, as compared to other conventional bonds," he said.

"While the government is working hard to put in place a conducive platform for Islamic finance, there has also been an encouraging response from the market."

Recently, with the approval of the Securities and Futures Commission, the first Islamic retail fund for sale to retail investors in Hong Kong was launched.

The index-tracking fund aims to match as closely as is practicable the performance of the Dow Jones Islamic Market China/Hong Kong Titans Index through investing primarily in the constituent stocks of the Index.

The fund is a unit trust constituted by a trust deed between the manager, the trustee and a local bank. The trust deed is governed by Hong Kong law.

By December 10 last year, the fund had already attracted about US 45 million worth of orders, mainly from local investors.