Hong Kong has been talking about Islamic finance for seven years with little to show for it.
The essential logic of Islamic funding is compelling. China's capital needs are growing exponentially. China's bond market is projected to soon become the world's second largest. The global financial crisis showed the US dollar and euro markets of the West are vulnerable to crisis and shutdowns, showing the value of diversification to other capital bases, such as the Middle East's.
"There are two important developments for the global financial market. One is the internationalisation of the yuan … and [the fact that] Islamic finance is getting more prominent in the global market," said Peter Pang Sing-tong, deputy chief executive of the Hong Kong Monetary Authority (HKMA).
The member states of the Gulf Co-operation Council and their sovereign wealth funds collectively control US$2 trillion of assets. Islamic finance restructures assets so they do not pay interest - forbidden under Islam - and instead pays out income in the form of profits or rental income.
It was notable that the British government last week announced a plan to bring a £200 million (HK$2.6 billion) sukuk, the first Islamic bond to be issued by a Western government. This stole the thunder from Hong Kong's own sukuk issuance planned this year to raise up to US$1 billion - but it showed Hong Kong to be on the right track.
"We are expanding into the sukuk market. It's important for Hong Kong," said Pang.
The reality is that Hong Kong has made little progress. Hang Seng Bank marketed an Islamic retail fund, six Islamic bonds have started trading on the Hong Kong exchange, and two issuers marketed yuan sukuks in Hong Kong. This week RHB Asset Management launched another Islamic retail fund into Hong Kong.
Hongkongers could be forgiven for not tracking any of these developments, all small deals on the periphery of the market.
Amir Ahmad, a Dubai-based lawyer who specialises in Islamic transactions, said this market needs relentless promotion to take root. He gives the example of Dubai, where leaders are continuously talking up the city as an Islamic funding hub. Dubai in any given year will host dozens of Islamic banking conferences and related industry gatherings. In 2014 Hong Kong has scheduled just one event, a Bank Negara-HKMA co-hosted conference that took place in April.
"Islamic bankers find it difficult [to do deals in Hong Kong]," said Ahmad. "The driving force is the political will. But if the political will is lacking, [Islamic finance] won't happen."
Lawmaker James To Kun-sun, who sits on the Legislative Council's financial affairs panel, said Hong Kong needs to do more work promoting itself as an Islamic hub.
All the promotion in the world will not be any use unless Hong Kong can persuade mainland issuers to use Islamic structures. A bond banker at a universal bank with Islamic capability said this was unlikely.
"I can't see this being much interest to mainland issuers at all," he said. "Issuers would want to see a pricing benefit from that and we would need to demonstrate a pricing benefit. If you go and say this is a new instrument that gives you tighter pricing, then they would consider it … but we can't do that."
In the best-case scenario, Islamic issues yield the same as equivalent conventional bonds. Often, however, the instruments have to offer more yield to investors to compensate them for the fact that sukuk bonds trade with less liquidity than conventional debt (all things being equal) and because Islamic instruments are not included in mainstream bond indices, such as the benchmark JP Morgan Emerging Markets Bond Index.
The diversification argument is also not persuasive. Chinese firms have access to ample liquidity in the Hong Kong and US markets. If they wanted to tap other pools of capital, the vastly liquid euro and yen markets remain largely unused by them.
Islamic debt flourishes in countries where issuers and investors are strongly motivated - for political or religious reasons - to use the structure. Essentially, these are Islamic nations.
"I struggle to see where the mainland authorities are going to see value in supporting [Islamic finance], given their stance towards religion in general. Some of the unrest recently has come from Islamic quarters and politically it's not something that [the Chinese government] want to see their state-owned enterprises doing," said the banker.
(South China Morning Post / 18 June 2014)---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com