A report issued by KFH-Research highlighted high potential for Islamic banking in Hong Kong, because Hong Kong has high liquidity, free economy, strong presence of foreign banks, and simple taxes system, which makes it a great candidate to become a major Islamic financial hub.
Hong Kong is also considered to be a gate to China that has a robust market. In addition, Hong Kong held cooperation agreements with Dubai to reinforce cooperation in the field of promoting and developing sectors of Islamic banking, in order to take advantage of the liquidity in the GCC region. Hong Kong works on issuing a legislation that organizes Sukuk, so that it can attract more Sukuk issuance from neighboring countries, such as Malaysia that took many initiatives in Hong Kong for the past six years.
The Arab Chamber of Commerce and Industry (ARABCCI) was established in Hong Kong in 2006 as an organisation to promote commercial ties and greater economic and bilateral cooperation between Hong Kong/Greater China and the Arab World. The organisations provided a platform for trade links and increased business understanding. Its members include international corporations, as well as trade and commerce related government organisations.
Honk Kong Institute of Islamic Studies was also set up in 2008 with an aim to offer courses and training in the areas of in Arabic language, Shariah and Islamic finance. Amwal Credit Union was also formed to facilitate Shariah-compliant financial service offerings and to establish feasible joint venture partnerships with the members and organisations with similar goals.
Hong Leong Bank and CIMB Group of Malaysia made humble beginnings in Islamic finance in Hong Kong by establishing Islamic banking windows (IBWs) in their Hong Kong branches in 2008 with the approval of the regulators, Bank Negara Malaysia (BNM) and HKMA. With the technical expertise in the field of Shariah, Malaysian banks have an edge over other jurisdictions to expand their presence and synergise their competencies in the region. The Banks' IBWs in Hong Kong currently offers Shariah-compliant wholesale and investment banking solutions. Liquidity management instruments are also offered based on Commodity Murabahah principle that facilitates Islamic money market transactions in Hong Kong.
In September 2012 Axiata group of Malaysia successfully launched a two-year RMB1bln sukuk in which Hong Kong investors took 55.0% of share. The sukuk was oversubscribed 3.5 times. Chinese offshore Renminbi denominated debt securities are commonly known as Dim-Sum Bonds.
In October 2012 Hong Kong's Noble Group issued a Malaysian ringgit denominated sukuk in its efforts to tap into the Islamic finance space in Malaysia. This three-year sukuk is priced at a profit rate of 4.50% and is structured on the principle of Murabahah.
Governmental Support and Initiatives
In November 2007, the Securities and Futures Commission (SFC) authorised the first retail Islamic fund called the Heng Seng Islamic Investment Series for sale in the Hong Kong market. The index fund tracks the Dow Jones Islamic Market China/Hong Kong Titans Index (DJMCHK). As at end-October 2012, the total market capitalisation of the DJMCHK was USD701.3bln. As at 20 November 2012, there are 400 Shariah-compliant securities with a market capitalisation of USD398.42bln. There are also two Islamic funds in Hong Kong (as at end-2011) with AuM (assets under management) worth USD29.7mln.
The Dow Jones Islamic Market China/Hong Kong Index (DJICHK) has shown an increase since the global financial crisis. In November 2012 it gained 137.8bps from the last year during the same month, closing at 1,614.6bps Dow Jones Islamic China Offshore Index (DJICHOF) touched 3,886.78bps in April 2011 up from the lowest 928.41 in August 2008 before closing at 2820.7 as at end-October 2012.
In support of the Hong Kong government's initiative to develop Islamic finance, Hong Kong's SFC entered into a Memorandum of Understanding (MoU) with the Dubai Financial Services Authority (DFSA). The MoU aims at mutual cooperation on capacity building and human capital development in Islamic finance, as well as promotion and development of their respective Islamic capital market segments. This has led to increased synergies in facilitating cross-border marketing and distribution of Islamic funds.
Hong Kong being an important access point to the PRC has a strong influence on the PRC's economic dynamics and vice-versa. With the encouragement of the China Banking Regulatory Commission (CBRC) in 2009, the Ningxia Hui Autonomous Region took the initiative in pioneering Islamic finance in the PRC. This development was meant to cater to the financial needs of the about 2.2 million Muslims in Ningxia province which is approximately 10.0% of the PRC's total Muslim population. Hong Kong's gradual and full-fledged entry into Islamic finance may provide much needed impetus to the CBRC's ambitions in the Ningxia Hui region and also to the larger Muslim population of PRC.
The HKMA is an Associate member of Islamic Financial Services Board (IFSB). HKMA has hosted workshops conducted by IFSB on capital adequacy standards for Islamic financial institutions, capital adequacy requirements for sukuk, securitisations and real estate investments.
The Hong Kong Financial Services and Treasury Bureau (FSTB) initiated public consultations for Islamic bond proposition earlier this year and concluded the same in the month May. It further indicated that the government is in the process of finalising the amendments to its Internal Revenue Ordinance and Stamp Duty Ordinance to facilitate sukuk issuances in the administrative region. Subsequently the bill will be tabled in the next legislative session in early 2013 in the Legislative Council.
The amendments seek to draw level playing field for sukuk profits tax, property tax and stamp duty liabilities. Especially, a new term would be introduced which would be known as alternative bond scheme and will have bond arrangement and investment arrangement. While the former refers to the bond issuer and the bondholders, the later refers to the bond-issuer and the originator.
In each of these arrangements a set of essential features and qualifying conditions need to be fulfilled in order to avail the tax and other stamp duty deductions and exemptions. The government of Hong Kong will ensure that sukuk will have similar legal, tax and regulatory outlays as that of bonds.
Hong Kong has gathered significant amount of momentum in the field of Islamic finance in the last four to five years. It would have exploited the market by now had it not been effected by the global financial crisis and formulated enabling laws and regulations for Islamic product offerings.
Opportunities
Hong Kong being among the world's top export-import destinations there is a huge potential in the areas of Islamic trade finance.
With immense liquidity in the Middle-East region, Hong Kong will be able to tap into the Middle East market with Islamic propositions and open up channels to a larger investor base for capital market products such as sukuk.
A developed securities market in Hong Kong will be able to synergise its strengths with the south-east Asian markets where Islamic finance has seen much growth and development in the past few decades.
Islamic wealth management and Islamic private equity will find a flourishing market in Hong Kong's developed market with existing robust legal and regulatory environment.
Hong Kong may provide a window to access large Muslim customer base in mainland China to market various Shariah-compliant financial products and services.
Islamic microfinance institutions have a greater opportunity to complement and tap Hong Kong's newly formulated microfinance schemes.
Challenges
As of now, initiations were concluded to accommodate a limited number of capital market products. The scope of an all-round introduction of Islamic financial products may take more time and effort, both from the market players and the regulators' perspective, requiring more amendments in terms of financial services laws and regulations.
Friendly and tax neutral regimes for the treatment of Islamic finance products will be needed that does not unfairly penalise them for the structure and techniques they employ. Amendments may be required to facilitate other Shariah-compliant commercial and retail products to compete in the market. In addition to sukuk, Shariah-compliant risk and liquidity management products would be needed with for better mobilisation and management of Islamic funds.
A recurring challenge in the Islamic finance industry has been the lack of skilled Islamic finance professionals. Individuals who are able to understand the dynamics of the modern financial product offerings together with their Shariah implications will be required for a smooth and uninterrupted growth of the industry.
(Zawya / 02 Jan 2013)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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