Hong Kong: Setting the right Islamic finance framework priorities

By Suapi Shaffaii, 12 August 2008

Chronology of Islamic Finance related Events in Hong Kong:

November 2006 – Hong Kong Monetary Authority (HKMA) became an observer member of the Islamic Financial Services Board, an international standard setting body for Islamic finance.

October 2007- A policy address by HK’s Chief Executive Donald Tsang marked a significant milestone in setting the clear path of Islamic finance in Hong Kong.

November 2007 – HK’s first retail Islamic fund launched

November 2007 – SFC joined the IFSB as an observer member.

March 2008 – USD 550 million convertible sukuk listed on the Stock Exchange of HK.

March 2008 – HKMA was upgraded to an associate membership of the IFSB.

April 2008 – HK’s Securities and Futures Commission (SFC) entered an MOU with Dubai Financial Services Authority to cooperate on capacity building and human capital development in Islamic finance as well as promotion of respective Islamic capital market segment.

May 2008 – HKMA and Dubai International Financial Centre Authority signed an MOU to foster cooperation in the development of Shariah compliant financial products (sukuk) and the financial infrastructures in their respective jurisdictions.

May 2008 – New Shariah compliant index featuring HK-listed Mainland China stocks was introduced.

May 2008 – HKMA, Hong Kong Treasury Markets Association (TMA) and HK Trade Development Council jointly had showcases on Islamic finance during a road show in UAE and Jordan.

July 2008 – The Government announced for a waiver of certain taxes on the HK’s first Islamic bond which would be issued by HK Airport Authority.

1. Hong Kong has indisputably what it takes to be an Islamic financial centre. It is already an established

Hong Kong as viewed from the Peak

international financial centre. Like Singapore, its progression to Islamic finance is a natural completion of the existing financial components.

2. However, judging from the developments of Islamic finance in Hong Kong, the city has indeed a long and challenging journey to accomplish to. Notwithstanding, Hong Kong has been on a consistent strategic approach vis-a-vis Islamic finance since 2006 or may be earlier prior to its announcement of a full adoption of Islamic finance in 2007.

3. Today, Hong Kong looks set to commit itself with Islamic finance by actively engaging prominent Islamic finance stakeholders via a series of mutual cooperation and human capital as well as product developments. The memorandum of understanding inked between Hong Kong’s regulatory and supervisory authorities and United Arab Emirates’ Dubai Financial Services Authority and Dubai International Financial Centre Authority manifest Hong Kong’s strategic move to create a ready pool of talents and leverage on the existing expertise in the industry.

4. This will rapidly steer Hong Kong for a dynamic embrace of Islamic finance.

5. Membership with an international standard setting body for Islamic finance will lend credibility to Hong Kong’s bid to become an Islamic financial centre. The Hong Kong Monetary Authority and Securities Futures Commission joined the Islamic Financial Services Board (IFSB) in 2006 and 2007, respectively.

6. At present, there are 175 members of the IFSB comprising 42 regulatory and supervisory authorities, 6 international inter-governmental institutions and 127 participants of the Islamic financial services. All of these institutions originate from 34 different countries. This will provide easy access for Hong Kong authorities to forge business networking and foster knowledge sharing with the Islamic financial services stakeholders who are fellow members of the IFSB.

7. The roadshows held in the Middle East which showcased Hong Kong as a vibrant Islamic financial centre and the city’s aggressive efforts to promote Islamic finance events in Hong Kong will definitely pay off in the long run.

8. The rolling out of Islamic investment products and the listing of USD 550 million convertible sukuk on the Stock Exchange of Hong Kong sets the right ambiance for Islamic finance in Hong Kong.

9. However one cannot help but notice that Hong Kong has been embarking on a marketing and promotional trip without substantial infrastructures in tow.

10. Not much is known about Hong Kong’s legislative plans to accommodate Islamic finance in the former British colony.

11. If there is any consolation, Hong Kong has recently announced that it is reviewing the tax law to induce a fair tax treatment for Shariah compliant products relative to its conventional counterparts.

12. Under the same development, the Secretary for Financial Services and the Treasury, Chan Ka Cheung has declared that the Government will waive certain taxes on Hong Kong’s first Islamic bond which would be issued by Hong Kong Airport Authority. The proposed issuance date is not yet announced.

13. The tax law review is a right step to ensure that Islamic finance products will not be disadvantaged by their nature of business which will trigger the tax provisions under ordinary business circumstances. But this is just an accessorial legislation. Hong Kong will be on a speedy path to become an Islamic financial centre if it thrusts the main components of Islamic finance legislation into its existing legal system.

14. The Islamic finance which covers banking, takaful (Islamic insurance), money market and capital market, will require a set of relevant legislative provisions to address its specificities. The existing legislation may accommodate these special attributes.

15. The main Islamic finance legislation, not withstanding its type of business, will set out common provisions, among others, to validate the conduct of Islamic finance business in Hong Kong and impose unique features for the regulation and supervision of Islamic finance. The legislation will also provide for the Shariah compliance requirements. The industry related dispute resolutions mechanism is also part of the game. All these features form the crux of Islamic finance system which an Islamic financial centre cannot afford to be without.

16. Hong Kong is on its way to become a significant Islamic financial centre. Considering its shift towards Islamic finance only started last two years, it has done a remarkable effort to have Islamic finance gaining ground in Hong Kong within such a short period of time. Definitely, the substantial legislative efforts will be next to watch.