By Mushtak Parker
LONDON: The world’s third-largest financial centre after London and New York is the latest place to warm to Islamic finance. Hong Kong has embarked on a series of initiatives in this respect that may yet give it a competitive edge on rivals, such as Singapore, Japan and Dubai.
To many pundits the rise of Islamic finance is inextricably linked to the renaissance of the Silk Road. In ancient times, the famous Silk Road was China’s link to the outside world and a route for trade and exchange of art, music, culture and religion.
In a speech last year, Zeti Akhtar Aziz, governor of Bank Negara Malaysia, the central bank, alluded to the New Silk Road being spearheaded by the globalization of Islamic finance especially eastwards. Chinese politicians similarly have stressed this ambition. And now Hong Kong sees itself “right at the heart of the New Silk Road providing a gateway to business and financial opportunities.”
Hong Kong indeed is bullish about developing Islamic capital markets and structured finance for investment and deals, especially in mainland China and in other countries in the region. Not surprisingly, the island is positioning itself as the natural choice as a gateway to doing business, including Islamic investments, in China.
“There is a lot of interest from Middle East investors wishing to invest into China,” explained Eddie Yue, deputy chief executive of the Hong Kong Monetary Authority (HKMA), the central bank.
“Hong Kong is the only fund-raising platform for China outside the mainland which is like a window that meets with the international markets. So if investors from the Middle East want to access China, they will look at Hong Kong, which we see as serving as a bridge between the Middle East and China,” he added.
But what is the rationale behind Hong Kong’s drive to become an international Islamic capital markets hub? Eddie Yue is emphatic:
“We recognize that Islamic finance is one of the major growth areas in the financial services industry, and Hong Kong being an international financial center involved in financial intermediation activities, we feel that we need to provide a full suite of financial products to market participants round the world. And obviously if you don’t have Islamic finance you are missing a big market segment. Since the beginning of 2007, we have been talking to the market players about the opportunities, potential and the impediments in developing Islamic finance in Hong Kong. The market players came up with a very positive report, stressing that they see great potential in the Islamic finance sector.”
Due to the very rapid GDP growth in China over the last few years, which last year touched 11 percent to 12 percent per annum, Hong Kong’s economy has similarly benefited from this growth. In 2007, GDP growth in Hong Kong totaled six percent, although this year it is projected to slowdown slightly to four percent or five percent because of the uncertainty in the international financial markets due to the global credit crunch as a result of the subprime mortgage crisis in the US.
HKMA’s Eddie Yue, however, is adamant that the exposure of Hong Kong banks to the collateralized debt packages in the subprime mortgage market is very small and as such the Hong Kong market per se is very little affected.
“The Hong Kong money market is not affected because there is plenty of liquidity in the local market. Of course there is a certain degree of impact from the US market to the Hong Kong market via the China market because of the strong economic and trade relations between China and the US,” he said.
He believes that Hong Kong can provide that gateway to Middle East and Malaysian investors and serve as a platform with a critical mass of the market players. In the Islamic finance space, Hong Kong has been quick at reviewing its tax laws as soon as it took the decision at the highest levels of government to embark on promoting Islamic finance in its jurisdiction.
“Hong Kong does not talk. Hong Kong does,” says Eddie Yue. “We have a top down vision and a bottom up operation where the market is doing work for you. Once you come up with this consensus on promoting Islamic finance, the market is already doing things for you.”
In November 2007, Hang Seng in Hong Kong launched an Islamic China Offshore Index Fund off the Dow Jones Islamic Market (DJIM) Index. Within the first five weeks, the fund amassed $50 million and is expected to top $100 million before end 2008. DJIM last year also launched an Islamic BRIC (Brazil, Russia, India and China) Index.
Malaysia’s CIMB Group also listed its pioneering Exchangeable Sukuk on the Hong Kong Stock Exchange - the third Sukuk to be listed on the exchange thus far - earlier this year. The underlying assets are in China through a company, Paxon, which is listed on the Hong Kong Stock Exchange and which operates a number of department stores in Mainland China. Market players also see huge potential for Islamic long products and plain vanilla Sukuk issuances.
HKMA’s Yue also confirms that the Hong Kong government is currently reviewing the legislation pertaining to Islamic financial products with the aim at creating a level playing field with equivalent conventional products.
“The main area in our review is stamp duty and similar taxes. The Treasury and market associations in a report submitted to the Hong Kong government at the end of 2007 stressed that more has to be done to provide clarity in terms of facilitating Islamic financial products.”
The government as such is studying the report with the Hong Kong Financial Services and Treasury Bureau (FSRB) and the Justice Department to see how these departments can cooperate in this respect. “They are also looking at the experiences of other jurisdictions such as Singapore and the UK. It is now clear to them what further measures need to be taken. We are hopeful that the necessary legislative amendments will be enacted within this year. If there is a need maybe for primary legislation, then it may take up till the early part of 2009 for these changes to come into play. However, the government is also exploring the possibility that there may be some flexibility in the current legal set-up which would allow for Sukuk originations out of Hong Kong immediately,” he said.
The good thing is that the Hong Kong government acts autonomously from mainland China and does not require the nod from Beijing to enact its laws.
June 20, 2008 Arab News
Source: Arab News