Seven years after Hong Kong authorities first spoke of making the city a hub for "Islamic finance", they may finally do so in 2014. After making changes to local tax laws last summer, the government announced last month that it will issue an Islamic bond through its government bond programme, which makes regular issuances to the public and institutional investors.
Once it crosses the final hurdles in the Legislative Council, the government could issue its first Islamic bond later this year.
Yet, why should Hong Kong go to all this trouble when the government has no need to raise funds? Why does it think an issuance would be attractive to investors? And why is it appropriate for a non-Muslim country to risk taxpayers' money promoting Islamic finance?
The government's response to such questions is that Hong Kong wants to position itself as a global centre for the US$1.3 trillion Islamic finance market. "A government issue of sukuk [a financial paper that complies with Islamic law] would tell the world that Hong Kong provides the platform for overseas companies to come here and issue Islamic bonds," said Jackie Liu, a principal assistant secretary for financial services and the treasury.
Islamic financing is a fast-growing part of the global financing business. The International Institute of Islamic Finance estimates annual growth rates of 15-20 per cent.
Further, Islamic financing carries a higher profile in the media than conventional financing. This might be because it is novel or, more likely, it can be seen as a political move since religion, government and politics are brought together in the eyes of the public.
Any positive increase in media exposure can be seen to be good for a business hub. For these reasons alone, it is natural for any global financial centre to want to increase its offering to keep up or stay ahead of other centres around the world. Nor should the seven-year delay be considered a red flag. Outside the Muslim world, government-level Islamic finance began to mature just before the global financial crisis hit and governments turned their attention to the more pressing needs of the day. Now that the global economy has apparently stabilised, it makes sense for governments to re-engage with Islamic finance.
It makes further sense because banks worldwide are now subject to the tougher capital requirements of Basel III. This new regulatory regime poses particular difficulties for Islamic banks because they can't amass the required high-quality equity through conventional government bonds that don't comply with Islamic law. Hence, the appeal of the Islamic financing that Hong Kong will begin to offer.
Highly rated government issuances of sukuk can expect to attract significant demand not only from the Islamic finance market itself, but from all the other conventional fixed-income investors who regularly invest in Islamic bonds for commercial rather than ethical reasons.
Conventional fixed-income investors have always featured among the purchasers of sukuk, since financial institutions compliant with Islamic standards were too small to take up some of the large issuances.
As for the costs of executing this Hong Kong sukuk issuance, they will be offset by the indirect gains of maintaining Hong Kong's strong financial profile. As more capital flows through the city, increased income flows not just to local banks but to lawyers, accountants, consultants, secretaries, cleaners and everyone else.
Hong Kong should continue along the path it started all those years ago. It is an investment for the future that will reward the city by way of ensuring its place as the pre-eminent Asian financial market.
(South China Morning Post / 22 Jan 2014)---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com