Hong Kong eyes Islamic finance products

HONG KONG: The Hong Kong Special Administrative Region government is finalizing new tax laws which would facilitate the introduction of Islamic finance on a par with equivalent conventional products, and there is a strong possibility that the Hong Kong Airport Authority (HKAA) will issue the debut quasi-sovereign Sukuk from the island enclave during 2009...Read More

Opportunities lurk in financial gloom

News.gov.hk:The Asian Financial Forum was launched in 2007, partly to celebrate the 10th anniversary of Hong Kong's reunification with the Mainland of China, and partly to address the challenges of a rapidly changing economic environment in Asia.

At that time the sub-prime lending problem in the US was beginning to take hold, but no one could have predicted how deeply rooted the problem was or how quickly things would unravel in what some people like to describe as a "flat" world.

This year the forum has an added significance given the full-blown global financial turmoil that is affecting economies around the world, including Hong Kong.

This forum is a great chance to share expertise and reaffirm our collective commitment to economic growth and prosperity in Asia and beyond.

The overriding message from recent summits including the G20 Summit in Washington and the APEC Economic Leaders Meeting in Peru last November was a call for unity. More significantly, a call for a unified approach and greater international co-operation in bringing our economies back on an even keel.

I encourage you to use this forum as a stepping stone to achieving this goal....CONTINUE READING

Islamic finance: Hong Kong’s latest asset

FinanceAsia magazine:Once a niche banking product of the Muslim world, Islamic finance is becoming a global financial darling. Finance hubs from London to Hong Kong have expressed interest in, or initiated programmes aimed at, attracting Islamic assets and Islamic banks have stepped up, opening offices around the world. Islamic finance is becoming mainstream, even if some critics still think it is little more than a marketing gimmick.

Islamic finance began in the Middle East during the 1970s. The first Islamic banks were launched in Saudi Arabia and the United Arab Emirates. Malaysia joined the fray in 1983 with the Islamic Banking Act and the launch of the Bank Islam Malaysia.

By the mid-1990s, global Shar'iah-compliant assets totalled $150 billion, but by the end of 2007 those assets had grown to more than $700 billion. Standard & Poor’s estimates Islamic financial assets could eventually grow to $4 trillion.

Not to be left out, other financial centres began looking at how to attract their own Islamic finance assets. London approved its first Islamic bank – the Islamic Bank of Britain – in 2004. Singapore is actively encouraging its private banks and lenders to develop Shar'iah-compliant products to compete with neighbouring Malaysia. Hong Kong is still in the process of perfecting its tax code for Islamic products, but launched its first Islamic retail fund in November 2007.

London and Singapore have obvious demographic or geographic advantages over Hong Kong in the development of Islamic finance. The UK has up to 300,000 “ready customers” for Islamic banking products, according to S&P, while Singapore borders Malaysia and Indonesia where a majority of the population is Muslim. Hong Kong lacks any such magnets for Islamic assets – although it does have a huge investor base that may be drawn to the new products if they are competitive.

Regardless, Hong Kong chief executive Donald Tsang expressed the city’s desire to attract Islamic products in his 2007-2008 Policy Address: “To further consolidate Hong Kong’s position as a global financial centre, we should actively leverage on [Islamic finance] by developing an Islamic financial platform in Hong Kong.”

Hong Kong hurdles
Tsang’s proclamation faces hurdles. Notably, figuring out taxes. Hong Kong’s tax structure when applied to Shar’iah-compliant financial products levies additional stamp duties, profits and property taxes compared to traditional counterparts.

Hong Kong's Financial Services and the Treasury Bureau is trying to make the necessary “technical” adjustments to Hong Kong’s tax code. The goal is to put Islamic finance on a “level playing field” with conventional financial products. A spokesperson at the Financial Services and Treasury Board says: “With the required credentials for Islamic finance development, we look forward to witnessing the launch of an array and a variety of Islamic financial products in Hong Kong.”

Islamic financial institutions are working with the government to adjust Hong Kong’s tax regime. One of those institutions, Malaysia’s CIMB Islamic, says this is a necessary step in any market’s development. CIMB Islamic's CEO, Badlisyah Abdul Ghani, says: “It has to start out this way first, [financial institutions] working with the regulators so they understand the needs of the industry, before you can bring your products to the market.”

Hong Kong is hoping to cash in on its greatest asset – its proximity to mainland China – to attract Islamic capital. While now at a disadvantage compared to its Malaysian and Singaporean counterparts, Hong Kong hopes to attract Islamic real estate funds bound for China. So far, there has been no mainland China Islamic real estate deals executed out of Hong Kong. However, Kuwait Finance House’s recent $275 million deal to invest in property developer Nan Hai’s Peninsula project in Shenzhen is an example of the kind of transactions Hong Kong hopes to attract.

Hong Kong may be making the right moves but it is late to the game. Existing Islamic financial hubs, notably Malaysia, offer Islamic banks both a mature regulatory regime and access to China that is nearly equal to that of Hong Kong. What Islamic financial products the city attracts will most likely be token assets rather than a significant force in Hong Kong’s capital markets. While this diversification is good for the city’s marketers, Hong Kong should recall the economic rule of comparative advantage and stick to its strengths.

HK to settle Islamic finance tax issues in 2-3 mths

Reuters - Hong Kong said on Wednesday it aims to resolve tax issues relating to the issue of Islamic bonds within two to three months, potentially paving the way for the first issue in the territory as soon as October.

The city is positioning itself as a centre for the rapidly expanding global Islamic finance market, hoping to attract Middle East investors keen to invest in mainland China.

But it faces stiff competition from established centres such as Malaysia -- home to two-thirds of the estimated $100 billion Islamic bond market -- the Middle East and a new market in London.

Hong Kong's Airport Authority, which is government owned, said it wants to issue an Islamic bond, or sukuk, by the end of the year but did not give details about the size of the issue.

Under existing tax laws, it could be subject to stamp duty twice. Because sharia law forbids investments involving interest payments, many products require the financier to buy the product and then sell it to the borrower on a cost-plus basis, so that the lender gets a profit rather than interest.

A spokesman for Hong Kong's Treasury Secretary said the city aimed to resolve the issue of double taxation within two to three months to provide a level playing field between Islamic bonds and other bonds.

Initially it will look at enabling issuers to avoid double taxation on a case-by-case basis. Tax issues surrounding the Airport Authority's planned bond could possibly be resolved by October, the spokesman said.

'In the long run, we'll review the tax laws to facilitate Islamic finance but that will take time,' the spokesman said.

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.

Tax issues pose big obstacle in HK push into Islamic finance

Maria Chan

In its race to tap into the estimated US$1 trillion Islamic finance market, Hong Kong faces a sizeable hurdle - taxes. And, said Eddie Yue Wai-man (pictured), a deputy chief executive of the Hong Kong Monetary Authority, it is an issue both the Inland Revenue Department and the legislature may have to tackle. ...

Hong Kong makes late bid to become Islamic hub

By Rupert Walker

According to PricewaterhouseCoopers (PWC), the Hong Kong government is keen to develop Islamic finance in the territory after the financial secretary, John Tsang, made a statement of intent six months ago. However, as PWC tax partners Florence Yip and Jennifer Chang made clear at a forum discussion on April 30, Hong Kong has a long way to go in order to realise an ambition to become a significant hub for Islamic banking and finance.

Globally, there is a strong impetus to expand Islamic financial services to access funds from the Middle East and to meet the demand of a growing Muslim middle class by providing retail and takaful (insurance) as alternatives to conventional riba (interest-based) products and services.

Although the move has been driven by key Organisation of the Islamic Conference (OIC) players, different jurisdictions, from Singapore to the Gulf States and from Malaysia to the United Kingdom, are competing for a dominant position. Hong Kong is a late entrant to the burgeoning markets in Asia, far behind Malaysia and even Singapore, but ahead of Indonesia, which, with its vast Muslim population, probably has the greatest potential.

Hong Kong has no specific legislation on Islamic finance, and it must decide whether to enact a legalistic or economic form of legislation to accommodate the special features of Islamic finance and to ensure tax neutrality with conventional financial products
The territory’s legacy as a former British colony and hence its adoption of the “spirit” of UK law means that it might be more likely to adopt the legal form for transactions, whereby the specific features of a product rather than any religious or philosophical parameters are accommodated.

But, although the intention would be to avoid favouring one form over another, the danger is that this might create loopholes for sellers of conventional products to exploit. For instance, common Islamic structures such as istisna (purchase order) often used for sukuks (bonds), or murabahah(cost-plus sale) used for short-term financing, involve a sale and purchase agreement with a price mark-up to circumvent interest payments.

If legislation was drafted to allow a tax deduction of those price differences to create parity with the tax treatment of interest, then without an explicit requirement of shariah compliance, conventional sale-purchase or sale-leaseback arrangements could also claim tax deductions – obviously leading to lower government revenues. Similarly, many Islamic products are underpinned by layers of transactions which would all currently attract stamp duty, making them commercially unviable in Hong Kong. However, isolating one transaction among them to apply the duty would again open the system to abuse.

An alternative route would be to follow the Malaysian model of enacting legislation that would specifically give Islamic financial transactions equal treatment to conventional financing arrangements. In Malaysia, this requires approval both from the country’s Securities Commission and shariah authorities made up of a board of Islamic scholars.

Malaysia has additionally provided tax incentives, including extra deductions and exemptions for Islamic products, which are not enjoyed by riba-based products, as it is especially keen to attract Middle Eastern banks to use Kuala Lumpur as a spring board into the large Asian markets.

Whatever form the future legal framework takes, Hong Kong has a lot of catching up to do, but it can be reassured by the fact that Islamic finance is still in its infancy compared with conventional finance. Nevertheless, it’s growing fast. According to PWC, it is now present in 75 countries and the Islamic private capital pool in the Middle East is greater than $1.5 trillion.

Assets in Islamic banks or “windows’ [within conventional banks] exceed $560 billion, Islamic mutual funds are worth more than $300 billion and sukuks more than $50 billion, while the equity capitalisation of companies included in the Dow Jones Islamic Index exceeds $1.5 trillion.

Oversight and transparency: the antidote of Islamic finance to the market crisis

Hong Kong - With growth of 20% per year, and the prospect of reaching 2 trillion dollars by 2010, the resources of Islamic finance are growing exponentially, and the financial model considered 'halal' according to sharia law is attracting investors from Great Britain to Hong Kong.

The economic crisis sparked by American subprime mortgages has affected many investors, who have distanced themselves from high risk investments like those involving hard-to-measure outstanding debt.

In spite of the crisis, the Islamic finance market is taking hold thanks to both the extremely high liquidity guaranteed by petrodollars, and the structure of the Islamic model, which provides for absolute transparency and is capable of offering investors advance warning signals.

According to sharia, the agreement between lenders and borrowers must be made on the basis of tangible goods, and the Islamic financial system requires constant and accurate oversight of debt levels.

What happened with Enron (an American energy company) and WorldCom (a telecommunications company) is an indicator of the efficiency of the Islamic system, which is capable of foreseeing crises in companies months before their collapse, and therefore excluding them. Both Enron and WorldCom were part of the Dow Jones Islamic Market (DJIMI) index.

"They were excluded from the DJ Islamic market index months before the crash - the high level of debt indicated ineffectiveness of control", says Aznan Hasan, sharia adviser to investment bank Aseambankers Malaysia Berhad. "You don't simply give loans to the client", Hasan added, "allowing him to do whatever he wants, and this can have a lot of impact on credit vigilance".

Analysts, in fact, believe that the success of the Islamic model is mainly due to transparency and oversight, which offer protection for the investor and, not least, in the sharing of responsibility. According to Islamic law, risks and profits are shared by all parties, while any form of economic speculation is in theory prohibited.