Dubai and Hong Kong sign Islamic finance agreement

Dubai - The Hong Kong Monetary Authority (HKMA) and the Dubai International Financial Centre Authority (DIFC) announced Monday that they signed an agreement to strengthen cooperation in the development of Islamic finance.

Both bodies signed a memorandum of understanding on Tuesday to work together in developing financial products in banking and investment, which are compliant with Islamic religious law, known as Sharia, according to a press release issued by HKMA and DIFC.

The two financial authorities will cooperate in finding ways to promote Islamic financial activities on a cross-border scale, such as trading in sukuk, which is a type of Sharia-compliant bonds.

Sharia-complaint finance firms do not collect interest on investments and are not involved in short-selling stocks and investing in companies that promote gambling, pornography or alcohol?all prohibited by Islam.

'The Memorandum of understanding gives us an opportunity to enhance cooperation between our financial infrastructures, in particular the payment systems of the two regions,' Nasser al-Shaali, the DIFC Chief Executive Officer said.

The Islamic finance market has been rapidly growing since its inception over 30 years ago.

Islamic financial institutions hold assets estimated at over 300 billion dollars with another 400 billion dollars in financial investments, according to a 2006 study by the US-based accounting firm KPMG.

The study found that Islamic finance is growing at a rate of about 15 percent a year.

Financial experts predict growth of at least 20 percent in the Islamic finance sector in the next five years.

The DIFC is home to over 600 firms, including leading international financial services firms and banks.

Hong Kong and Dubai sign Islamic finance pact

Rita Raagas De Ramos

Hong Kong’s Securities & Futures Commission has signed an Islamic finance pact with the Dubai Financial Services Authority (DFSA).

The memorandum of understanding calls for mutual cooperation on capacity building and human capital development in Islamic finance, as well as the promotion and development of their respective Islamic capital market segments.

Under the MOU, both parties will examine the possibility of establishing a framework for the mutual recognition of their regulatory regimes on Islamic funds to facilitate cross-border marketing and distribution of such funds.

Islamic funds aim to comply with the investment principles under the Islamic religious law of sharia. The sharia principles generally preclude investments in businesses such as conventional financial services, alcohol, pork-related products, gambling, leisure and entertainment. Sharia principles also preclude interest bearing investments and investments in companies with unacceptable levels of debt.

The MOU for cooperation on Islamic finance and capacity building was signed by Hong Kong SFC CEO Martin Wheatley and the DFSA CEO David Knott.

The DFSA is the independent regulator of financial services providers, financial services and products related to banking, securities, Islamic finance, asset management and insurance in the Dubai International Financial Centre. The SFC regulates Hong Kong's securities and futures markets and facilitates their development.

The SFC has been working with fund management companies interested in developing Islamic financial products in Hong Kong, in support of the government’s initiative to develop the territory as an Islamic finance centre in Asia.

In July last year, Hong Kong financial secretary John Tsang said the government wants to develop an Islamic bond market amid fast-growing investor interest in products that comply with sharia or Islamic law.

In his annual policy address in October 2007, Hong Kong chief executive Donald Tsang said he hopes to have a planned Islamic bond market in place as soon as possible.

In November 2007, the SFC authorised Hong Kong’s first Islamic fund for sale to retail investors, the Hang Seng Islamic China Index Fund.

Elsewhere in Asia, Malaysia also has a mutual recognition agreement with the DFSA. It is the first such agreement between two Islamic markets for the cross-border distribution and marketing of Islamic funds.

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.

CE: HK can be Asia's Islamic financial centre

Hong Kong is well-placed to become a centre for Islamic finance in Asia, Chief Executive Donald Tsang says, inviting Kuwaiti banks and financial-services companies to extend and diversify their global reach through the city.

Addressing the Kuwait Chamber of Commerce & Industry at a business lunch today, Mr Tsang said Hong Kong's sound financial services infrastructure and well-established legal system make it an attractive location for such investments.

The first Islamic retail fund launched recently in Hong Kong had attracted about US$45 million worth of orders by last December.

Noting Hong Kong is already a market of first choice for Middle Eastern companies, Mr Tsang said average annual bilateral trade with Kuwait grew 20.5% from 2002 to 2006 - in 2006 it was worth US$264 million.

"One way to further deepen the trading relationship is for Kuwaiti companies to capitalise on Hong Kong's special status within China. One of our biggest advantages is a unique free trade pact between the Mainland and Hong Kong, what we call our Closer Economic Partnership Arrangement, or CEPA for short."

"We welcome investment by sovereign wealth funds, which are becoming more prominent in financial markets and are a positive force for global markets. We can also learn a great deal from your expertise in the provision of Shariah-compliant services," Mr Tsang said.

The final day of his Kuwait visit, the Chief Executive later met Kuwait Investment Authority Managing Director Bader Mohammad Al-Saad and Kuwait Chamber of Commerce & Industry Chairman Ali Mohamad Al Ghanem. He also toured the Kuwait Aquarium & Scientific Centre.

Mr Tsang next heads for the Saudi Arabian capital Riyadh to continue his Middle East tour. He will return to Hong Kong February 1.

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.

HK to help ME oil investment in China

HONG KONG: Hong Kong aims to become a world centre for Islamic finance, luring Middle Eastern investors keen to grab a slice of the booming Chinese economy, the city’s financial secretary said Tuesday.

John Tsang said the southern Chinese city was ideally placed to help oil money from the Islamic world get access to infrastructure and other development projects in the mainland. “I believe Hong Kong can play an important role in generating new, reliable and potentially lucrative investment opportunities for this capital,” he told a conference on Islamic Finance here.

The huge demand for capital in the mainland, in particular infrastructure projects, could be funded by Islamic bonds, or Sukuk, which are suited to such large-scale investments, Tsang said.

“Hong Kong can be expected to play a significant role in structuring and financing Islamic investment products to meet the needs of mainland borrowers,” he said.

Tsang said the city’s financial institutions had already begun work on making sure the legal and taxation systems will allow products compatible with Muslim laws.

He added some banks had already started creating products to try and secure part of the worldwide market, which has swelled in recent years to between 700 billion and a trillion US dollars on the back of high oil prices.

Hong Kong’s Chief Executive Donald Tsang announced in his policy address last year that developing Islamic banking would be a priority for the territory. He will make a trip to Kuwait, Saudi Arabia and the United Arab Emirates next week to try and drum up business.

Malaysia is currently the leading global hub for Islamic finance, analysts say, with Indonesia, Pakistan, Thailand and Singapore competing along with Hong Kong. afp