Hong Kong should not miss out on growing Islamic finance market

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)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Morocco Weighs Pursuing $1.7 Trillion Islamic Finance Industry

Morocco plans this year to allow Islamic banking for the first time as the only North African nation with an investment-grade rating at Standard & Poor’s seeks to tap the $1.7 trillion industry.

The country’s cabinet approved a draft Islamic finance bill on Jan. 16, according to Abdeslam Ballaji, a lawmaker who worked on the proposed legislation and a member of the ruling party. The draft, which also regulates Islamic banks and allows for sukuk sales, is pending parliamentary approval and may be enacted within five months, he said last week.

Demand for financing that complies with Islam’s ban on interest is accelerating worldwide, with assets expected to climb to $3.4 trillion by 2018 from about $1.7 trillion last year, according to Ernst & Young LLP. More than 95 percent of Morocco’s population of 34 million back the introduction of banking that adheres to Shariah, according to Said Amaghdir, secretary general of the Moroccan Association of Participative Financiers, an Islamic finance business association.

“Given the choice, Muslim retail customers on the street generally prefer to bank Islamically, even if there are higher costs,” Khalid Howladar, a senior-credit officer at Moody’s Investors Service, said by phone from Dubai yesterday. “Islamic banks historically have tended to grow at twice the rate of conventional banks in Muslim countries, and as such they tend to take a market share from the conventional system.”

Billions Required

The Moroccan Association of Participative Financiers estimates total investment in Shariah-compliant products to reach $7 billion by 2018, provided the law comes into effect by the middle of the year, Amaghdir said by phone yesterday.

“Plans to expand solar and wind energy, tourism and industrial parks will require billions, and the Gulf Cooperation Council will be keener on putting money here when the law is enacted,” he said. The six-nation GCC, which includes Saudi Arabia and the United Arab Emirates, is predominantly Muslim.

Banks may also sell short-term sukuk to fund Islamic subsidiaries, Amaghdir said.

Morocco’s central bank allowed lenders and insurers to sell three Islamic products in 2007 to help develop the nation’s financial industry. The country is “almost” ready to sell its first sukuk, Prime Minister Abdelilah Benkirane said in October.

Regional Competition

“We can’t afford to drag our feet any longer because regional competition for the Islamic finance pool is heating up, not just from our Muslim neighbors,” Ballaji, the lawmaker, said in a phone interview Jan. 20.

The U.K. plans to sell debut Islamic bonds this year as Prime Minister David Cameron seeks to revive a blueprint that’s been stalled since at least 2007. The Hong Kong government this month gazetted legislation to allow the sale of Shariah-compliant notes.

Moroccans may be misinformed about the benefits of Islamic banking, Ismail Douiri, co-chief executive officer of Casablanca-based Attijariwafa Bank, said in May.

“Islamic finance is often portrayed as low-cost type of finance,” Douiri said. “Islamic finance is not charity. One should not expect financing costs to decline.”

Shariah-compliant products are typically more expensive when they’re first introduced, Howladar of Moody’s said.

“Islamic products tend to come at a premium, because the creation of the products requires substantive investment,” he said. “Orthodox customers are willing to pay more to bank Islamically. Eventually, in the face of competition, those costs fall and are comparable to conventional products.

(Bloomberg News / 22 Jan 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com