The prospect of Hong Kong issuing sukuk has stirred the city's finance community.
Central bankers in Hong Kong held a joint conference with their Malaysian counterparts in mid-April to publicise the territory’s plans to issue an Islamic bond, known as a sukuk, later this year.
The event came a month after Hong Kong’s legislative council passed a bill that would allow the government to launch a $500 million to $1 billion transaction as well as create parity between the tax treatment of sukuk profit payments to investors and interest paid on conventional bonds.
“We look forward to sharing our Islamic finance marketplace with Hong Kong in terms of expertise in structuring, managing and distributing the sukuk, as well as providing advice on legal and Shariah matters,” Dato' Muhammad Ibrahim, deputy governor of Bank Negara Malaysia, told FinanceAsia.
The prospect of participation in the issuance of the first triple-A sukuk has excited bankers who, as the spokesperson of a leading international lender said to FinanceAsia, are “desperate to win the mandate”. Fearful of jeopardizing their chances, normally garrulous bankers were reluctant to respond to enquiries.
An exception was Badlisyah Abdul Ghani, CEO of CIMB Islamic, which has collaborated with the HKMA as a member of its Islamic finance working group since 2008 and which provided a speaker at the April conference.
An inaugural sukuk “will not only create a new benchmark, diversify the investor and funding base but also raise interest for corporates to explore sukuk issuance”, he told FinanceAsia.
Hong Kong’s recourse to Bank Negara Malaysia and a top sukuk arranger such as CIMB for help is unsurprising. Malaysia is the world’s biggest sukuk market, accounting for 58.1% of total outstanding volume of $281.3 billion at end-2013, according to data compiled by the Asian Development Bank. Last year, Malaysian foreign and local currency issuance amounted to $83.7 billion, making up 67.7% of global issuance for the year.
However, Ghani suggests that a sukuk deal would also presage the growth of Islamic finance in Hong Kong in general. After all, the Islamic banking sector accounts for almost 80% of international Islamic assets, estimates the Malaysia International Islamic Financial Centre. In contrast, the sukuk segment comprise just 15% of the total.
“Hong Kong has strong potential to be the market leader for renminbi to be channeled through the Islamic financial market. In this regard, market players from Hong Kong and Malaysia can establish strategic alliances in developing wide-ranging financial products through the diversification of Islamic banking business,” said Muhammad.
One of the first things that needs to be done is to create awareness amongst the market participants and public at large [about Islamic finance], Ghani said. Sukuk has been identified as one of the initial promotional tools and we are confident that this will be extended to include other offerings as things progress, he added.
This optimism is predicated on the enactment of legislation in July that would allow payments from sukuk to be tax-deductible in the same way that interest is treated.
At the April conference, Peter Pang, deputy chief executive of the HKMA, insisted that “we have put in place a tax framework for common types of sukuk to level the playing field between sukuk and conventional bonds”.
“Hong Kong’s financial platform is ready for sukuk issuance,” he added.
However, the actual passing of the law is essential to ensure that the recent fanfare doesn’t again herald a false dawn.
Back in 2007 Financial Secretary John Tsang announced that Hong Kong would try to develop a local Islamic bond market – albeit one that would fit within existing regulations – with the objective of providing a conduit for Middle Eastern investors seeking exposure to China.
Other initiatives followed, such as the setting up of a cross-border trading platform between Hong Kong and Malaysia in 2012, but the disparate tax treatment hurdle remained an insurmountable obstacle.
In addition, as the ADB points out (in its special report on the Asian sukuk market in its March Asia Bond Monitor), Islamic bank deposits in Hong Kong Islamic banking units are closer to equity holdings so the interest earned is classified as dividends under Hong Kong law. The pending legislation should change this classification.
But if Hong Kong is serious this time, then it might seem strange that Malaysia is keen to help set up a rival Islamic finance hub. The reason probably lies in the limitations and constraints of existing markets, with activity concentrated in the Gulf States and Malaysia.
Hong Kong’s participation in the Islamic financial market will enhance product innovation, efficiency and global connectivity in the Islamic financial industry, said Muhammad.
The Gulf States and Malaysia are open for business with others, says CIMB’s Ghani, and the only way this can happen is if other jurisdictions like Hong Kong develop financial market infrastructure and framework for Islamic finance.
“Hong Kong, as one of the leading global financial hubs, can help educate and market Islamic finance to others, especially those countries that have yet to be exposed to Islamic finance and the benefits it provides,” said Ghani.