HK cautious on Islamic finance drive

HONG KONG • Hong Kong will tread carefully in its drive to become a platform for Islamic finance products and does not see itself as competing with existing centres for a piece of the business, a senior official at the Hong Kong Monetary Authority said yesterday.

HKMA’s Executive Director Edmond Lau, who is responsible for monetary management, said it was difficult to predict when the territory would amend its tax laws to accomodate the fast growing asset class but added that authorities would grant exemptions to Islamic finance transactions on a case by case basis.

“We don’t believe this is going to be a big bang event – It’s going to be a long drawn out process ... It takes years for an Islamic finance hub to form,” he said.

Hong Kong’s government has been showcasing the territory as a potential centre for Islamic finance, under which interest is prohibited, in a bid to attract petrodollars from booming Middle East economies.

A study last year on developing an Islamic financing platform in Hong Kong found that tax laws needed to be changed or clarified to provide a level playing field for the issuance of sukuk, or Islamic bonds.

For example, in a mortgage under Islamic finance, a typical structure requires the financer to first buy the property and then sell it to the borrower on a cost-plus basis, so that the lender gets a profit rather than interest.

Since that entails two sales, stamp duty is incurred twice. Hong Kong plans to change its tax laws to prevent double taxation.

“Even before we introduce any changes to the tax laws, it is possible under the taxation framework to grant exemptions in relation to certain types of taxes,” Lau said.

That exemption could benefit borrowers like Hong Kong’s Airport Authority, which could become the city’s first issuer of Islamic bonds.

Last month, the airport operator’s chief executive told Reuters it wants to sell an Islamic bond in the third quarter, and the publicly owned organisation was in the process of sorting out tax issues with the government.

Media reports have said other borrowers in the territory could also issue sukuk in the fourth quarter of this year if credit market conditions improved.

Hong Kong Mortgage Corp and railway operator MTR Corp were named as possible issuers.

But Hong Kong does not intend to dangle carrots in order to encourage the industry, which was nearly non-existent 30 years ago and is now worth over $700bn in assets.

“We do not see, at least at this stage, the need to provide incentives. We believe the Hong Kong platform is attractive already,” he said.

Singapore, which is also positioning itself as an Islamic finance hub, in February introduced a 5 percent concessionary tax rate on income derived from sharia-compliant fund management, lending and insurance.

Malaysia, which has the world’s largest Islamic bond market, accounting for about 60 percent of the $100bn global outstanding, also has a wide range of incentives for the Islamic finance industry, some of which are not available to conventional modes of finance.