Islamic finance: Hong KongÆs latest asset

Hong Kong is making the right moves to attract Islamic finance, but will it work?
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 & PoorÆs 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 û the Islamic Bank of Britain û 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 ôready customersö 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 û 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 cityÆs desire to attract Islamic products in his 2007-2008 Policy Address: ôTo further consolidate Hong KongÆs position as a global financial centre, we should actively leverage on [Islamic finance] by developing an Islamic financial platform in Hong Kong.ö

Hong Kong hurdles
TsangÆs proclamation faces hurdles. Notably, figuring out taxes. Hong KongÆs tax structure when applied to SharÆiah-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 ôtechnicalö adjustments to Hong KongÆs tax code. The goal is to put Islamic finance on a ôlevel playing fieldö with conventional financial products. A spokesperson at the Financial Services and Treasury Board says: ôWith 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.ö

Islamic financial institutions are working with the government to adjust Hong KongÆs tax regime. One of those institutions, MalaysiaÆs CIMB Islamic, says this is a necessary step in any marketÆs development. CIMB Islamic's CEO, Badlisyah Abdul Ghani, says: ôIt 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.ö

Hong Kong is hoping to cash in on its greatest asset û its proximity to mainland China û 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 HouseÆs recent $275 million deal to invest in property developer Nan HaiÆs 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 KongÆs capital markets. While this diversification is good for the cityÆs marketers, Hong Kong should recall the economic rule of comparative advantage and stick to its strengths.

This feature first appeared in October issue of FinanceAsia magazine.
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