Hong Kong tries to lure Islamic Funds

Mention sukuk to a Hong Kong resident and you would likely get a blank stare. Islam exists on the fringes of this wealthy Chinese territory, and until recently there had been no need for Islamic bonds.

But sukuks could find their way into Hong Kong's markets soon if an ambitious plan by the government of Chief Executive Donald Tsang takes off. Tsang recently announced that Hong Kong would open an Islamic bond market to bring Islamic funds into the territory, as a way to diversify its financial markets.

Without missing a beat, HSBC's local unit, Hang Seng Bank, launched an Islamic China Index fund within days of the announcement, offering Middle Eastern investors the opportunity to buy into shariah-compliant Chinese and Hong Kong stocks.

But Hong Kong's salvo into the highly lucrative Islamic banking and finance industry comes years after similar moves by Malaysia, Indonesia and Singapore. Malaysia now boasts the world's biggest sukuk market.

However, it only reached pole position after about two decades of cobbling together the foundation of an Islamic banking industry.

So is Hong Kong jumping on the bandwagon too late? How can it compete?

To draw Islamic funds, Hong Kong authorities are banking on the territory's reputation as one of the world's freest economies, its Western banking system, rule of law, market liquidity and most importantly, its niche position as China's premier financial centre.

The China gambit could indeed make Hong Kong attractive to Islamic investors. And Hong Kong's push comes at a time when Arab companies and investors are increasingly stepping out of their comfort zones by investing in less familiar markets. As the US dollar weakens, Hong Kong - where the currency is also pegged to the greenback - offers an alternative and affordable investment destination for dollar-linked Arab wealth.

But it is not as simple as it looks. Lord Edwin Hitti, president of the Arab Chamber of Commerce and Industry in Hong Kong told Arabian Business International that the territory may be "psychologically ready" to start Islamic banking and finance, but in practical terms, it has some ways to go before creating an environment that Islamic investors would truly be comfortable in.

Part of the problem, he says, is infrastructure. While Hong Kong's conventional banking industry is among the best in the world, Hong Kong needs to accommodate Islamic finance and banking, and shariah law within its current system. Like Malaysia did in 1980s, Hong Kong has to establish banking, accounting and tax regulations to govern Islamic investments.

Until last October, Hong Kong did not even have a shariah compliance certification body. It has also recently created a Hong Kong Islamic Financial index made up of shariah-compliant Hong Kong listed companies, including mainland companies, as a benchmark for Islamic investors.

But if there's one thing Hong Kong is good at, it's seizing opportunities to make money. Malaysia may be the leader in Islamic banking in Asia today, but it is not anywhere close to China's fast growing economy.

Hong Kong stands as a bridge linking two powerhouses - fast-growing China and the petrodollar-rich Middle East. Only if it succeeds will Hong Kong finally achieve its long time goal of becoming a truly international financial centre.