Does sharia finance have prayer in HK? City eyes Mideast investors flush with money
South China Morning Posthttp://www.e-architect.co.uk/hong%20kong/jpgs/hong_kong_98.jpg
HONG KONG, July 20 — The government may be setting aside some bubbly to celebrate the proposed Airport Authority Islamic bond, scheduled for the third quarter, but there are mixed views about whether Hong Kong can emerge as an Islamic financial centre on a par with London or Malaysia.
Islamic finance refers to bonds or other financial products that conform to Islamic religious law, or sharia, which in general does not allow Muslims to accept interest, gamble or speculate on the stock market or engage in short selling. They are also banned from investing in industries related to pork, tobacco, casinos or firearms.
With oil prices having risen to more than US$140 (RM462) a barrel recently, the Middle East has become flush with wealthy investors and the Hong Kong government has been eager to capture part of that market.
Those who support Hong Kong’s efforts to become an Islamic financial centre believe the city’s enterprising spirit, effective banking industry and securities markets — as well as ties to the mainland — can be significant selling points.
But critics counter that our small Muslim community, unfamiliarity with the religion and its customs and our late start in the field, will dash the dreams of Chief Executive Donald Tsang Yam-kuen who began promoting Islamic finance last October in a policy address.
A major part of the debate is over the size of the Islamic finance market and whether it is large enough to support several centres, including a latecomer like Hong Kong.
Financial Secretary John Tsang Chun-wah estimated last September that the size of the Islamic finance market was US$1 trillion — and expected to grow by 15 per cent a year. But the Kuala Lumpur Islamic Financial Services Board indicates the market for Islamic finance is closer to US$700 billion, and most of that is in equities issued in Islamic countries, while Islamic bonds are only about US$45 billion.
A Deutsche Bank report cites a higher figure, saying Malaysia has issued US$125 billion worth of Islamic bonds since the mid-1990s, when the country started to promote Islamic finance.
Afaq Khan, chief executive of Islamic banking at Standard Chartered, said there was room for Hong Kong to catch up. Standard Chartered is a member of the Treasury Markets Association of Hong Kong helping to develop Islamic finance in the city.
“If it were a declining business, then I would not think it could accept latecomers,” he said during a visit to Hong Kong last week. “However, Islamic finance is a growing business. The demand is on a rising trend and new Islamic finance markets like Hong Kong will be developed.”
Mr Khan said that if the Airport Authority bond was issued, his bank would introduce it to its global Muslim clients, who are interested in using Hong Kong as a gateway to investing in China.
“Hong Kong also could develop wholesale Islamic banking services, such as project financing, leasing, asset management and corporate lending,” Mr Khan said.
Joseph Tong Tang, an executive director of Sun Hung Kai Financial — in which Dubai Investment Group holds a 9.9 per cent stake — also said Muslim investors could be interested in investing in Hong Kong’s financial products. The local brokerage is applying to set up an office in Dubai to capture Muslim clients.
“Muslim investors do not care where they invest — in Hong Kong or any other market,” he said. “The most important element they care about is whether they can make money from the bonds or other financial products that are tailor-made according to sharia law.”
Frank Kwong, chairman of the Asia Capital Market Association, said he expected Islamic bonds to be popular in Hong Kong.
“Investors care more about the credit risk of the issuers rather than whether the bond is an Islamic or conventional one,” he said. “They invest if the yield is reasonable.”
Mr Kwong said there were not many organisations in the city or on the mainland that had been tapping the international bond market, so new issues would be popular with international investors, including Muslims.
The last international bond issued by MTR Corp, for example, was in 2004, while the last international issue by the Airport Authority was in 2003.
“For investors who want exposure to bonds with relatively low risk, they would be interested in either an international or an Islamic bond, since there is so little supply,” Mr Kwong said.
He added that the Islamic bond business was likely to attract professional rather than retail investors.
“It will take a longer time to develop the retail market, as it takes time to educate retail investors.”
The Airport Authority is wholly owned by the government, so it is perhaps not surprising that it would support Donald Tsang’s mission to pursue
Islamic finance. However there is a big question mark about whether other listed companies will opt for the same route.
Mike Wong Ming-wai, chief executive of the Chamber of Hong Kong Listed Companies, said it would educate its members in a seminar on Islamic finance conducted by UBS.
“I think listed companies would welcome all sorts of funding sources, and the Middle East is a large capital pool that can be tapped,” Mr Wong said. “At present, only a handful of banks are offering Islamic investment products, indicating the critical mass of expertise will need to be developed further.”
There also needs to be a better understanding of sharia and what is and is not permitted. This includes restrictions on the industries that Middle East investors can be associated with and, on a technical level, how to account for the transactions on company books.
“So there needs to be broader education for the whole market,” Mr Wong said.
Another challenge for Hong Kong is its small Islamic community with only about 90,000 Muslims in the city, about 1.3 percent of a population of 6.9 million.
City of London Lord Mayor David Lewis, however, said Britain had only about 2 million Muslims, 3.3 per cent of its 60 million population, yet it had developed a thriving Islamic finance market.
“Hong Kong can develop the level of Islamic finance products despite its small Muslims community,” he said. “This is because the city has a good banking and financial system that is up to international standards.”
According to a new report by London-based International Financial Services on Islamic finance, the cluster of expertise in London includes 23 banks, nine fund managers and a number of international law firms offering Islamic services. There is also a secondary market in Islamic bonds, or sukuk, valued at US$2 billion a month last year, and a growing market for retail mortgage business.
The International Financial Services report also found that at 23, the number of British banks was four times more than any other country in western Europe. Switzerland has five and France and Luxembourg have four each.
In another sign that Hong Kong has the potential to develop Islamic products, Hang Seng Bank launched the city’s first Securities and Futures Commission-authorised Islamic fund in November. It is an index fund based on stocks tracked by the Dow Jones Islamic Market China/Hong Kong Titans Index. The index tracks listed companies in Hong Kong and the mainland that comply with sharia law.
Andrew Fung Hau-chung, the head of investment and insurance at Hang Seng Bank, said the investment strategy of Islamic funds was more defensive in nature.
They not only forbid investments in equities like alcohol or tobacco-related companies, they also ban investment in companies with high gearing.
Such an investment strategy, he said, might allow Islamic funds to outperform other equity funds in an unfavourable market environment.
The Islamic fund launched by Hang Seng was US$49.36 million at the end of May. It has fallen 2.3.