Hong Kongs Legislative Council is considering a
bill that will ease taxes on transfers of underlying assets of
Islamic finance products, giving them equal treatment to
But Hong Kong lacks cultural connections and a large
shariah-compliant investor base. Investors might instead be
looking to invest in China;
The bill only covers assets located in Hong Kong. To
include assets in China, China would need to amend its relevant
laws for equal tax treatment of shariah-compliant
Hong Kong is competing with Singapore, which is closer
to large Muslim-majority countries like Malaysia and Indonesia,
as well as Malaysia itself, which boasts the worlds
largest Islamic finance market
Hong Kongs Legislative Council is considering a bill
that will ease taxes on the transfer of underlying assets in
shariah-compliant products, allowing the city-state to build an
Islamic finance market. But the move is unlikely to raise its
profile as an Islamic finance centre.
Although Malaysia is a widely recognised Islamic finance
centre buoyed by a steady flow of domestic issuers, Hong Kong
and Singapore are both vying to be destinations for
international corporates looking to raise Islamic
Singapore has already passed a similar law and has seen a
few issues, including
Axiatas dim sum sukuk in September 2012. But
Hong Kongs law may not spark a significant volume of
Islamic finance deals.
Latham & Watkins Craig Nethercott said there were
similarities between Dubai and Malaysia, and to a lesser extent
Singapore - underpinning those markets is a cultural preference
for shariah-compliant financing.
Where does Hong Kong find its unique spot in that market?
"In competition with those Islamic finance centres, the hope is
that Middle Eastern interests will see Hong Kong as a gateway
into the Chinese market," said Nethercott.
A debt capital markets banker agreed, noting that the move
would ensure Hong Kong had both the full suite of conventional
products as well as Islamic finance products.
Who will issue sukuk?
But it may be difficult to find issuers. The draft bills provisions
only include Hong Kong assets, or shariah-compliant portfolios with Hong
Kong shares. The laws do not apply to
The banker predicted
that the first issuer would probably be government-linked, as
there is little incentive for a corporate private issuer to
take that step.
Although many have predicted that an investment-grade
Chinese real estate developer might be the first corporate to
issue a Hong Kong sukuk ijarah (sale-and-leaseback
structure), it would need to hold significant Hong Kong assets
in order to do so.
Hong Kong doesnt have a natural investor base for
shariah-compliant products. As Nethercott said, it
lacks a cultural closeness to the Islamic finance market.
The city-state has seen Islamic transactions in the past,
most notably a shariah-compliant loan facility for
Noble Group that represented
the first Islamic funding transaction completed by a Hong
Regardless, Hong Kong will still have to contend with
Singapore as an Islamic finance destination for international
Singapore is ahead of where Hong Kong is in terms of
equality between conventional bonds and sukuk,
said Nethercott. The trading and other connections with
Malaysia and Indonesia probably makes them an interesting one
to watch but they havent had enough traction in the
sukuk market and arent yet a threat to Malaysian
Although some say that Indonesia is a jurisdiction to watch,
sources told IFLR it is likely to remain a domestic
On the other hand, Malaysias Islamic finance market is
much more developed than both Singapores and Hong
Kongs. But its currency controls create complications for
foreign investors. Practitioners have suggested that Malaysia
open up the euro, pound sterling and US dollar-denominated
markets to become a true global Islamic finance centre.
Nethercott agreed that the dominant Islamic finance market
in Asia was Malaysia.
"If the Malaysian market further develops its ability to
attract international investors, itll be out of sight
from the perspective of its regional competitors
its so far ahead," he said.
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