Hong Kong Closes on Indonesia in Dollar Sukuk as Silk Road Alive

Hong Kong’s possible third Islamic global bond in three years brings it closer to Indonesia and Malaysia in terms of sovereign sukuk presence, a boost to the market that coincides with China’s Silk Road revival.

The finance center has already raised $2 billion from sales in 2014 and 2015, which attracted $6.7 billion in total orders, while Indonesia plans to tap investors for the sixth year running and Malaysia is returning for its seventh offering. While the city only has 270,000 people following the teachings of the Koran, it’s positioning itself as a vital port and financing hub for China’s ‘One Belt One Road’ policy announced by President Xi Jinping in 2013.

“The announcement is a great sign of Hong Kong’s continued wish to be at the center of people’s minds when it comes to Islamic financing in Asia, particularly as momentum builds around China’s belt and road initiative,” said Davide Barzilai, Hong Kong-based head of Islamic Finance for Asia Pacific at law firm Norton Rose Fulbright. "We will find that Islamic-compliant investors will see the attractions.”

Hong Kong, which is losing its role as a gateway to China as Shanghai’s financial market opens, is keen to become the launchpad for the global ambitions of Chinese companies, including building roads, railways and ports along the traditional Silk Road to the Middle East, Africa and Europe. While the ex-British colony is making progress after putting in legislation for Shariah-compliant bonds in 2013, Singapore’s aspirations are stalling, highlighting the difficulties posed to countries or cities with small Muslim communities.

The city is considering selling a third sukuk, Financial Secretary John Tsang said in budget comments, brightening the outlook after a 29 percent slump in global issuance in 2015 from $49.6 billion the previous year, when the U.K., Luxembourg and Hong Kong sold such debt for the first time.

2016 is off to a better start, with $5 billion in worldwide sales compared with $1.8 billion a year earlier, data compiled by Bloomberg show. Kenya, Nigeria, Ghana and Morocco are also planning debuts. Offerings climbed to a record $51.6 billion in 2012.

Singapore’s DBS Group Holdings Ltd. closed its Islamic unit last year and despite introducing laws for Shariah-compliant bonds in 2006, sales have so far been limited to energy company Swiber Holdings Ltd., Sabana Shariah-Compliant Industrial REIT, the central bank and home builder City Developments Ltd.

In a sign the ancient Silk Road is coming back to life, the first cargo train from China to Iran completed its journey in February following the lifting of international economic sanctions. President Xi toured Saudi Arabia, Egypt and Iran in January to discuss energy cooperation, industrial parks and diversifying trade. To fund its global push, China is setting up the Asian Infrastructure Investment Bank, pushing for the yuan to be included in global reserves and opening its bond market to foreign investors.

China’s road policy offers opportunities for Islamic financing and sukuk, said Barzilai at Norton Rose Fulbright. While Hong Kong is in a strategic position to access China’s large Muslim population, it needs stronger efforts to harness investor demand and improve liquidity, said Angus Salim Amran, the Kuala Lumpur-based head of markets at RHB Investment Bank Bhd., Malaysia’s second-biggest Islamic bond arranger.

“There is no doubt that Hong Kong is positioning itself as the gateway to China as currently sukuk investors have limited opportunities to tap into China’s potential,” said Johar Amat, head of Treasury at OCBC Al-Amin Bank Bhd., the Shariah-compliant unit of Singapore’s second-largest lender. “The diversity in demand for sukuk as a financing instrument is crucial for the growth of Islamic finance worldwide.

(Breaking News / 01 March 2016)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong Sharia finance goals elusive as second sukuk readied

Hong Kong: As Hong Kong readies a second sovereign Islamic bond sale, its goal of becoming a Sharia-compliant financing hub for Chinese companies remains elusive.

The Hong Kong Monetary Authority announced plans this week to sell $1 billion (Dh3.67 billion) of five-year sukuk, the same size and tenor as its debut issue in September that drew $4.7 billion of bids. Those notes last yielded 2.06 per cent, almost the same as the rate at issue and about twice the level of the government’s similar-maturity non-Islamic securities.

Hong Kong is vying with cities including London and Singapore to be a hub for the global Islamic finance industry, whose assets are forecast by Ernst & Young LLP to double to $3.4 trillion by 2018 from 2013. While the city government’s AAA- rating will ensure demand, Hong Kong is unlikely to host any corporate offers in the next one to two years as sukuk is seen as an “exotic instrument,” said Sergey Dergachev, a portfolio manager at Union Investment Privatfonds GmbH.

“It’s a journey for companies to tap the Islamic finance market as the Sharia concept is still a novelty there,” said Nik Norzrul Thani, chairman of Kuala Lumpur-based law firm Zaid Ibrahim & Co. “We have some enquiries from Chinese companies based in Hong Kong on the possibility of selling sukuk.”

Narrow spread

HKMA’s second offer should be well received given the oversubscription rate for Malaysia’s dollar sukuk last month, Nik Norzrul said. There were $9 billion of bids at that sale, compared with the $1.5 billion of 10- and 30-year notes sold.

Hong Kong will probably pay about 1.85 per cent on the five- year sukuk, Union Investment’s Frankfurt-based Dergachev said in an email interview on Tuesday. That would compare with the 2.005 per cent profit rate at its debut sale, which was 23 basis points above similar-maturity US. Treasuries, according to a Sept. 11 government statement. That was the narrowest spread ever achieved on a benchmark dollar issuance from an Asian sovereign outside of Japan, according to the statement.

The main objectives of Hong Kong selling sukuk are to demonstrate that the legal framework for issuance in the city is widely accepted internationally and to attract more issuers and investors to the local market, the HKMA said in an emailed response to questions on Wednesday, declining to give a time frame for the sale.

Competing hubs

The city has been trying to develop an Islamic financial market since as far back as 2007, with Airport Authority Hong Kong announcing the following year that it was looking to sell as much as $1 billion of sukuk, an offer that never eventuated.

“I hope that the sukuk issuance will catalyse the further growth of the sukuk market in Hong Kong by encouraging more issuers and investors to participate in our market,” Financial Secretary John C Tsang said in the September 11 statement.

As Islamic finance begins to expand outside of its strongholds in the Middle East and Southeast Asia, a number of financial centers are hoping to lure Sharia-compliant debt sales. UK and Luxembourg sold their debut sovereign Islamic bonds last year. Singapore, which introduced equal tax treatment for sukuk in 2006, had attracted S$4.4 billion ($3.3 billion) of sukuk sales as of last October, according to data from the Monetary Authority of Singapore.

Those numbers still pale in comparison to neighbouring Malaysia, which accounted for 58 per cent of the $300 billion of total outstanding sukuk worldwide at the end of November, according to the Malaysia International Islamic Financial Centre. The Gulf Cooperation Council countries of Saudi Arabia, UAE, Kuwait, Qatar, Bahrain and Oman made up 30 per cent.

Excellent Infrastructure

The extent to which Hong Kong will be able to fulfil its Islamic finance ambitions will depend on whether the industry can gain traction in China. Ningxia, an autonomous region in northwest China, has said it’s considering a sukuk sale, while Qatar International Islamic Bank QSC signed an agreement last month with Chongqing-based Southwest Securities Co to develop Sharia finance products in Asia’s largest economy.

“Companies in Hong Kong and China can easily model their sukuk to that of Hong Kong’s government,” said Mohammad Azahari Kamil, chief executive officer of Asian Finance Bank Bhd in Kuala Lumpur. “I would expect more firms, especially the better quality ones, to tap the sukuk market as demand will be there given the bigger pool of investors.”

Hong Kong is one of the world’s major financial centres and the Bank for International Settlements ranked it as the fifth- largest currency trading hub in a 2013 survey. The city, which has a Muslim population of 270,000, changed its tax rules in July 2013 to put corporate sukuk sales on an equal footing with non-Islamic bonds.

“Hong Kong has very strong regulation and excellent infrastructure,” said Union Investment’s Dergachev. “There is huge scope for raising more investor awareness for sukuk in Hong Kong.

(Gulf News Market / 07 May 2015)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: Hong Kong to launch first sukuk this month, more sukuk issuances to come

KUALA LUMPUR, Sept 29 — Hong Kong is expected to see more sukuk issuances in the near future, following the launch of its first Islamic bond this month, says a Chinese banker. 

“Going forward, it is safe to say that there will be more sukuk issuances, such as renminbi-denominated ones in Hong Kong,” said Bank of China (Hong Kong) Deputy Chief Executive, Zhu Yanlai.

She added that while Malaysia is undeniably a leading Islamic financial centre, Hong Kong has spared no efforts to develop its Islamic finance as well.

“The efforts have paid off with the Hong Kong government issuing its first-ever sukuk under the Government Bonds Programme.

“This is also the first US dollar-denominated sukuk originated by an AAA-rated government,” Zhu said in a keynote address at the “Asean Fixed Income Summit”, hosted by Bank Negara Malaysia, here today.

Hong Kong will launch the pioneering sukuk to raise US$1 billion (RM3.27 billion) in the city’s latest effort to promote Islamic finance.

The five-year sukuk, oversubscribed by 3.7 times, will be listed in Hong Kong, Malaysia and Dubai.

Hong Kong is vying for a piece of the global Islamic finance business which is now worth US$1.3 trillion and expected to double by 2017.

Zhu, 59, a high-profile banker, joined Bank of China Hong Kong in 2001, having previously worked at Bank of China, Royal Bank of Canada and Nesbitt Burns, a wealth-management unit of the Bank of Montreal Group.

(The Malay Online / 29 September 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

City sukuk opens door to more Islamic finance in Hong Kong

The launch of the Hong Kong government's first sukuk last week is seen as paving the way for private firms to follow suit in promoting the city as a centre for Islamic finance, now a global business worth US$1.3 trillion and expected to double by 2017.

The government's US$1 billion, five-year sukuk offered on Thursday was oversubscribed 3.7 times with US$4.7 billion in orders received. It attracted a mix of mainly international institutional investors, with 36 per cent from the Middle East, 47 per cent from Asia, 6 per cent from Europe and 11 per cent from the US. The bonds will be listed in Hong Kong, Malaysia and Dubai.

Amir Ahmad, a Dubai-based partner with international law firm Pinsent Masons, said the Hong Kong government-issued sukuk was popular with Middle East investors because of its high credit rating.

"This is the first time to have a government entity with AAA credit rating issue a sukuk in US dollars," Ahmad told the South China Morning Post.

"Many Islamic investors have strong demand for high credit rating sovereign bonds which comply with the Islamic religious investment law but the supply is limited. This is why the Hong Kong government issue is popular."

He said the buyers from the Middle East are mainly institutional investors such as banks, fund managers and pension fund companies.

"The Hong Kong government issue is a milestone as the successful launch of the first Islamic bonds in Hong Kong would help encourage other companies to follow suit," Ahmad said.

"We are looking forward to seeing more Islamic bonds issued by other Hong Kong and mainland companies in future."

While other issuers may not have Hong Kong's high credit rating, he said other Islamic bonds could still attract buyers as long as they offered good pricing for investors.

Ahmad added that although Hong Kong is far from the Middle East, it still could be an ideal global Islamic finance centre due to its active market and sound banking and legal system.

A change to the tax laws last year to provide fair tax treatment for Islamic bonds and conventional bonds was an important step for the city to promote Islamic finance.

In 2007, Financial Secretary John Tsang Chun-wah announced a plan to secure part of the Islamic finance pie. However, the city had no sukuk issue until the government offering last week, largely due to the tax issue.

Taxation had been the obstacle in Hong Kong because the special structure of sukuk, which must conform to sharia law, does not allow Muslims to accept interest payments, so the bonds were structured as assets or property.

That meant they were subject to stamp duty, income tax and profit tax. Ordinary bonds pay interest, which is not taxable in Hong Kong.

"The tax law change in 2013 has allowed the sukuk to be treated as conventional bonds in terms of tax payment. This has provided a level playing field for sukuk issuance in Hong Kong," Ahmad said.

"If the Hong Kong government and other companies continue to issue Islamic products, Muslim investors will come," Ahmad said.

A banker involved in the deal said the offering showed that the city has the ability to be an Islamic finance centre.

"Hong Kong does not have many Muslim followers but if the city can attract Islamic followers to trade here, we can also be an Islamic finance centre. The government bond issue has taken the first successful step," he said.

The challenges ahead, the banker said, include whether there would be enough issuers in Hong Kong willing to deal in Islamic bonds.

"The Islamic religions have restrictions which exclude some companies from issuing sukuk, including supermarkets and retailers who sell pork or related products as well as those involved in the entertainment business," the banker said.

"Even if the companies are qualified to issue sukuk, they may prefer to issue conventional bonds which do not have any restrictions."

Ben Kwong Man-bun, a director of brokerage firm KGI Asia, said the sukuk would have difficulty attracting local retail investors.

"For many retail investors in Hong Kong, it is much easier to buy in the stock market than trade in bonds," Kwong said.

"The timing is also not good for bond offerings as interest rates could go up and this would hurt bond prices. Sukuk are not likely to attract many retail investors to trade even after they are listed on the local stock market."

(South China Morning Post / 15 September 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong to list $1b sukuk on Nasdaq Dubai

Dubai: The Government of Hong Kong has announced plans to list its first offering of $1 billion (Dh3.68 billion) sukuk on Nasdaq Dubai.

Dubai Crown Prince and Chairman of the Executive Council Shaikh Hamdan Bin Mohammad Bin Rashid Al Maktoum welcomed the decision to list the Hong Kong sukuk on Nasdaq Dubai.

“Choosing Nasdaq Dubai as a platform to list the world’s first US dollar sukuk issued by a AAA-rated government falls in line with the initiative launched by UAE Vice-President, Prime Minister and Ruler of Dubai His Highness Shaikh Mohammad Bin Rashid Al Maktoum to position Dubai as the centre of the Islamic Economy,” Shaikh Hamdan said.

The Dubai Crown Prince welcomed the successful launch of the sukuk. “We are also pleased to have worked with Hong Kong on this important issue and delighted that it has attracted such strong demand. We look forward to closer working relations with Hong Kong in developing global Islamic financial products,” Shaikh Hamdan added.

The step further highlights Dubai as one of the most important platforms for trading Sharia-compliant financial products.

By the end of the first half of 2014, the total value of Sukuk listed on Dubai’s exchanges was close to $22 billion, out of this Nasdaq Dubai alone accounted for more than $18 billion. Currently Dubai is the world’s third largest venue for sukuk listings by value.

Sovereign issuance

Credit rating agency Moody’s estimates global sukuk issuance this year will exceed the 2013 level to reach around $70 billion, with sovereign issuance increasing to around $30 billion.

According to Standard & Poor’s, although corporate and infrastructure issuance has faltered so far this year, a healthy increase in government and financial institution issuance has more than compensated for the drop.

Majority of recent sukuk issuances from the GCC region have been from government-related borrowers. The UAE issuers collectively lead international issuance globally with over $26.8 billion.

“The proportion of sukuk versus conventional issuance is rising. And similar to other GCC sovereigns, this trend is likely to continue given the Dubai government’s explicit ambition to become the centre of the Islamic Economy” said Khalid Howladar, Moody’s Global Head for Islamic Finance.

(Gulf News.Com / 12 September 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Investor roadshows pave way for Hong Kong’s first sukuk issue

The HKMA said HSBC and Standard Chartered Bank have been mandated as joint global coordinators, lead managers and bookrunners of the proposed dollar-denominated sukuk offering. HKMA said other joint bookrunners include Asia-Pacific investment bank CIMB and the National Bank of Abu Dhabi.

The banks will arrange a series of “roadshows” in Asia, the Middle East, Europe and the US starting in September for the 144A/Reg S-registered Islamic bond.

‘Hong Kong Sukuk 2014’, a special purpose vehicle fully owned by the government and established for issuing shariah-compliant securities in international markets is set to raise the debut note.

The HKMA said in its annual report for 2013 (18-page / 1.56 MB PDF) that the development of the sukuk market in the territory “forged ahead” with the enactment of legislation in 2013. HKMA said amending Hong Kong’s tax laws was necessary to provide “a comparable tax framework for common types of sukuk, vis-a-vis conventional bonds”.

The HKMA said it also “took another important step in promoting the development of Islamic finance in Hong Kong by collaborating with Bank Negara Malaysia to set up a private sector-led Joint Forum on Islamic Finance to strengthen collaboration between market participants in Hong Kong and Malaysia.”

Hong Kong’s fund management industry grew 27.2% year-on-year to a record high of 16 trillion Hong Kong dollars (HKD) ($2.06tn) at the end of 2013, according to figures released earlier this year by the territory’s Securities and Futures Commission (SFC).

The survey said other private banking business increased by 2.7% to HKD 2.75tn ($387bn) in 2013 while fund advisory business grew by 11.6% to HKD 1.67tn ($250bn). The market capitalisation of SFC-authorised REITs (real estate investment trust) increased by about 1.7% to HKD 177bn ($23bn).

(Out-Law.Com / 30 August 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic finance still a pipe dream for Hong Kong

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

Hong Kong to issue sukuk of up to $1 billion after summer

Hong Kong's government plans to issue as much as US$1 billion worth of Islamic bonds later this year, a spokesperson for its central bank said, suggesting the territory's debut sukuk issue might be larger than initially expected.

Lawmakers in Hong Kong passed a bill last month that will allow the AAA-rated government to issue sukuk for the first time. A report by the territory's Legislative Council indicated the size would be around $500 million.

But a spokesperson for the Hong Kong Monetary Authority, responding in an email on Tuesday to questions from Reuters, said the preliminary plan was for a U.S. dollar-denominated issue of at least $500 million and maybe as much as $1 billion.

"The sukuk is expected to be launched after the summer holidays," the spokesperson said; this would imply an issue as soon as September.

Details of the plan are subject to confirmation but the sukuk are expected to have a maturity of five years or below and use the ijara structure, a common sale and lease-back format in Islamic finance, the spokesperson added.

The sukuk, aimed at international institutional investors such as central banks, sovereign wealth funds, and pension and other funds, would use state-owned properties in commercial premises as their underlying assets. They would be listed in Hong Kong and some other major Islamic centers, the HKMA said.

A debut sukuk from Hong Kong would boost its Islamic finance credentials and help position the territory as a gateway between mainland China and investors in the Gulf and southeast Asia, the two main centers for Islamic finance.

Other conventional banking centers are also seeking to burnish their Islamic credentials with debut sovereign sukuk issues. Prime Minister David Cameron said last year that Britain intended to issue sukuk worth around 200 million pounds ($335 million), while Luxembourg envisages a roughly 200 million euro($275 million) issue.

(Reuters / 15 April 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong, Malaysia Spread The Word On Islamic Finance

On April 14, the Hong Kong Monetary Authority (HKMA) and Bank Negara Malaysia (BNM) held a joint Islamic finance conference in Hong Kong, to raise the level of interest in sukuk as a viable financing and investment instrument amongst the business and financial community in Hong Kong and Mainland China.

The conference saw regulators and market leaders in the Islamic finance field discuss a wide range of issues, from the latest trends in the global sukuk market to business opportunities for Islamic finance in Hong Kong, the practical issues in structuring sukuk and the Islamic market's investment appetite.

In his opening remarks, Peter Pang, Deputy Chief Executive of the HKMA, said: "With the tax framework for sukuk in place, Hong Kong's financial platform is ready for sukuk issuance. We highly welcome local and overseas entities to make use of Hong Kong's platform to issue sukuk."

He confirmed that, "to play a lead-off role for this market, we are working closely with the Hong Kong Government to prepare for the inaugural issuance of Government sukuk under the Government Bond Program and, thereby, promote the further development of the sukuk market in Hong Kong. We very much appreciate the close partnership we have established with Malaysia in developing Islamic finance and look forward to more co-operation opportunities in the future."

Muhammad Ibrahim, BNM's Deputy Governor, added that "this inaugural conference is set to mark a significant step to enhance collaboration and deepen financial linkages in Islamic finance between Malaysia and Hong Kong. We look forward to sharing our Islamic finance marketplace with Hong Kong in terms of expertise in structuring, managing and distributing sukuk, as well as providing advice on legal and Shariah matters."

He emphasized the importance of adopting international standards and best practices in new markets, with a proper governance framework to facilitate the execution of transactions and instill investors' confidence in the industry. Potential areas of collaboration between Hong Kong and Malaysia will therefore include the dual listing of sukuk, leveraging on Malaysia's Shariah governance framework and arbitration platform.

The conference followed the first meeting of the private-sector led Joint Forum on Islamic Finance between Hong Kong and Malaysia held in December 2013. Its next meeting will be held in Kuala Lumpur in the second half of this year.

Hong Kong's tax framework for sukuk, compared with conventional bonds, went into operation in July 2013. Amendments have given tax and stamp duty relief for transactions underpinning the structure of sukuk products, which cannot involve the payment or receipt of interest, and might, otherwise, attract additional profits or property tax exposures, or stamp duty charges.

It has not been intended that Hong Kong should confer special tax favors on sukuk, but that financial instruments of similar economic substance should be afforded similar tax treatment. On the other hand, Malaysia, which has established itself as the major Islamic financial hub in the region, has gone beyond the provision of a level playing field, and has established tax exemptions for income derived from Islamic financial products and structures.

(Global Tax News / 15 April 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong passes key sukuk bill

HONG KONG: Hong Kong legislators passed a bill that will allow the AAA-rated government to raise around $500 million via sukuk, or Islamic bonds.

A debut sukuk from Hong Kong would help boost its Islamic finance credentials and position itself as a gateway between mainland China and investors in the Gulf and Southeast Asia.

The task of issuing the sukuk now rests with the Hong Kong Monetary Authority under the territory's Government Bond Programme, which has a borrowing ceiling of HK$200 billion ($25.8bn).

As of February, the programme had 14 listed bonds currently outstanding worth a combined HK$94bn, with tenors of up to 10 years.

Hong Kong's sukuk plan comes at a time of increasing competition among financial centres for a slice of Islamic finance business, which is centred in southeast Asia and the Middle East.

A $500m sukuk issue would be larger than debut sovereign issues planned by Luxembourg and Britain, which are at different stages of development.

Legal filings describe the proposed sukuk issuance as "inaugural", suggesting it would not be a one-off like Britain's plan for a £200m ($333m) sukuk issue.

Sukuk proceeds would be placed with the territory's Exchange Fund, which is managed by the Hong Kong Monetary Authority.

(Gulf Daily News / 28 March 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong passes Islamic bond bill, paves way for $500m Sukuk

HONG KONG: Hong Kong lawmakers passed a bill on Wednesday that will allow the AAA-rated government to raise around $500 million via Sukuk, or Islamic bonds.

A debut sukuk from Hong Kong would help boost its Islamic finance credentials and position itself as a gateway between mainland China and investors in the Gulf and Southeast Asia.

The Legislative Council's bills committee confirmed the bill was passed in an email response to Reuters.

The task of issuing the sukuk now rests with the Hong Kong Monetary Authority under the territory's Government Bond Programme, which has a borrowing ceiling of HK$200 billion ($25.8 billion).

As of February, the programme had 14 listed bonds currently outstanding worth a combined HK$94 billion, with tenors of up to 10 years.

Hong Kong's Sukuk plan comes at a time of increasing competition among financial centres for a slice of Islamic finance business, which is centred in southeast Asia and the Middle East.

A $500 million Sukuk issue would be larger than debut sovereign issues planned by Luxembourg and Britain, which are at different stages of development.

Legal filings describe the proposed Sukuk issuance as "inaugural", suggesting it would not be a one-off like Britain's plan for a 200 million pound ($333 million) Sukuk issue.

(The Star Online / 27 March 2014)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong must attract Islamic finance to remain a global market

Peter Forsythe denounces Islamic banking practices as being "the work of global Islamists" ("No place for 'sukuk' bonds in HK market", November 22).

The adjective "Islamic" refers to rules of procedure (as "kosher" refers to Judaic procedures for food and is commonly patronised by Muslims overseas, not only by Jewish people). It is simply advertising to buyers that here is a product which is of a certain nature. The word "halal" would do just as well. The fundamental premise is that money not be allowed to grow by time alone, i.e., by interest. The lender must accept some risk in the venture being financed.

It also makes foreclosure on "pledged" assets somewhat difficult, and is in general more lenient towards the borrower than conventional debt.

Islamic financing tries to, or is at least designed to, link social benefits to purely monetary ambitions, which is hardly a bad thing in the "me-my" culture of today. Let us not denounce it just because it is associated with the current Western hype regarding Islam.

The ethos of Islamic financing is related to the concept of social justice, and is not limited to Islam: the Old Testament categorically forbids interest. Several Catholic popes have historically condemned the practice, as have Plato, Gautama Buddha, Moses, and Thomas Aquinas, among others.

Philosophy aside, on a fully practical note there is obviously a large population of Muslims worldwide, and therefore Islamic financing is seen by some banks and financial institutions as a good market (US$1.3 trillion by some estimates). Hong Kong is now trying to actively tap into this market, and very rightly so, in my opinion.

At 1.62 billion, Muslims are 23 per cent of the world's population, and more than 40 per cent of Southeast Asia's. As a global financial centre, without any doubt Hong Kong must try to attract this large and growing market. You can hardly be a global centre while ignoring a quarter of the world and almost half your largest neighbouring region.

Mr Forsythe is plainly fatuous in connecting Islamic financing to some global religious conspiracy. His labelling of Islamic financing as "inefficient" is hardly credible, especially in light of the "efficiencies" of Wall-Street-type banking practices as seen over the last few years.

(South China Morning Post / 07 Dec 2013)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong's Islamic finance goal boosted by Basel III rules

Tougher international banking requirements should help the Hong Kong government achieve its goal of turning the city into an Islamic finance centre to capture a large slice of the US$1.3 trillion market.

The Hong Kong and the British governments next year plan to issue sukuks, bonds structured according to the tenets of Islam.

Bankers and lawyers said the sukuk market has been given a new lease of life by Basel III, under which Islamic banks must load up on sukuks as they are barred from buying conventional government bonds. This, they say, would mark a major difference from 2007, when the government tried but failed to make Hong Kong a centre of Islamic finance.

"The Hong Kong government's plan to issue sukuks comes at the right time as many Islamic banks would like to invest in government-issued sukuks to meet the tough Basel capital requirements," said Davide Barzilai, partner at international law firm Norton Rose Fulbright.

Barzilai said Basel III, which will be implemented this year, stipulates international banks should hold more high-quality equity, meaning they would need to invest more in highly rated government bonds. This has created a problem for Islamic banks as they cannot buy government bonds that do not comply with the sharia, or Islamic code.

The bonds need to be specially structured as payment of interest is unacceptable under sharia. In addition, the money raised through the bonds cannot be invested in gambling, derivative trading, pork or tobacco-related retail businesses.

"Sukuks to be issued by the Hong Kong or British government would thus meet the demand of Islamic banks and other investors from the Gulf," Barzilai told the South China Morning Post. The Hong Kong government had made the right choice in deciding to take the lead in issuing sukuks, he said.

"Sukuk is very complicated. It would be good for the government to take the lead so that others can follow it," he said.

Barzilai attributed the failure of the government's 2007 attempt for a sukuk market to the financial crisis that followed. Another reason was that the structure specified under sharia would subject these bonds to higher taxes than conventional bonds.

As interest payment is forbidden under sharia, Islamic bondholders are subject to stamp duty, income tax and profit tax. Ordinary interest-paying bonds are not taxable in Hong Kong.

The government changed the law in July to bring taxes for sukuks in line with those of other bonds. That, along with the Basel III regulation from this year, made this the perfect time for Hong Kong to reboot its Islamic finance development, Barzilai said.

However, Christopher Cheung Wah-fung, legislator for the financial services sector, said Hong Kong would find it hard to compete with Malaysia, which handles two-thirds of sukuk issues worldwide. "Malaysia has a much wider Muslim population than Hong Kong," Cheung said.

Barzilai countered that Malaysia's sukuk market is mostly domestic, unlike Hong Kong or London, which host international investors.

The Islamic finance market, which is expected to double to US$2.7 trillion by 2016, could support more than one international centre, Barzilai said.

Potential investors have mostly positive views about Hong Kong's sukuk thrust.

Badlisyah Abdul Ghani, executive director and chief executive of CIMB Islamic Bank, said the Hong Kong government sukuk would create a new benchmark as well as work as a lead for private issuers to follow.

Raja Teh Maimunah, chief executive of Hong Leong Islamic Bank, said the Hong Kong government sukuk would be popular if the pricing was right.

She said Hong Kong was suitable as an Islamic finance centre because it has a "huge cradle of potential issuers from both Hong Kong and mainland China and it has large flows of US dollars, the main Islamic market currency".

Tim Lo, managing director of French private bank CIC Investor Services, said that from a pure investment point of view, whether the bond was sukuk or not was irrelevant. "If the Hong Kong government issues a sovereign Islamic bond, investors will price it based on its probability to default, which is extremely low in Hong Kong given its top AAA credit rating," Lo said.

Daud Vicary Abdullah, president and chief executive of the International Centre for Education in Islamic Finance, said that "a lot of work is required in the areas of sharia governance, regulatory reform and human capital development".

(South China Morning Post / 16 Dec 2013)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Hong Kong, Malaysia eye closer Islamic finance ties

Bankers in Hong Kong and Malaysia are strengthening ties to boost Islamic business by focusing on the issuance of Islamic bonds and mutual funds to target investors in both markets.

A private-sector forum hosted by regulators this week is part of growing efforts to boost cross-border business between the two Asian financial centres, as competition heats up for a slice of Islamic finance business.

Identifying potential sukuk issuers which can benefit from broadening their funding sources is one area of focus, said a joint statement from Malaysia's central bank and Hong Kong's Monetary Authority.

Those plans are being spurred by Hong Kong enacting a tax bill in July to facilitate sukuk issuance, while regulators aim to present a bill in the first quarter of next year to allow the government to issue sukuk of its own.

Islamic finance, centred in southeast Asia and the Middle East, follows religious guidelines such as a ban on interest and monetary speculation. Such transactions often need clarification on their tax status as they can face heavy taxation because they involve multiple transfers of the assets backing them.

Getting traction on Islamic funds is another priority, capitalizing on a mutual recognition agreement signed in 2009 between both regulators.

Malaysia is already encouraging funds to be marketed to the Gulf region through a similar agreement with the Dubai Financial Services Authority.

Malaysia has the largest base of Islamic mutual funds in the world, with 210 retail and wholesale funds that had 79.6 billion ringgit ($24.6 billion) in assets under management as of December 2012.

The forum was attended by eight commercial banks and three fund management companies, with a conference in Hong Kong now planned for the first half of next year to raise awareness of Islamic finance.

(Trade Arabia / 06 Dec 2013)
---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysia: Support for Hong Kong Islamic financial market

PETALING JAYA: More measures to encourgae the development of the Hong Kong’s Islamic financial market, particularly the sukuk and the Islamic fund management industry were discussed during the first meeting of the Joint Finance Forum which was held in the special administrative region.

The forum was held yesterday following an agreement between the Hong Kong Monetary Authority (HKMA) and Bank Negara in August to strengthen collaboration between Hong Kong and Malaysia in the area of Islamic finance.

The forum participants agreed to identify potential sukuk issuers and encourage cross-border sukuk issuances between Hong Kong and Malaysia.

In particular, corporations located in the region could be one of the key sources of potential sukuk issuers.

“Hong Kong market players supported that sukuk should be offered as one of the possible options or solutions to their clients who have funding needs, as sukuk can be a means for potential issuers to expand their investor base.

“Participants also welcomed the initiative of the Hong Kong government to consider issuing sukuk, which will showcase Hong Kong’s Islamic financial platform to local and international issuers and investors,” said HKMA and Bank Negara in a joint statement.

The participants also agreed to consider launching Islamic funds and make use of the established mutual recognition framework for Islamic funds between Hong Kong and Malaysia to facilitate cross-border Islamic financial activities.

This will encourage a wider range of syariah-compliant fund offerings in Hong Kong and Malaysia.

The meeting also agreed to enhance the strategic financial linkages between Hong Kong and Malaysia aimed at facilitating cross-border investment flows and creating greater opportunities for investors from the region and other parts of the world, the statement said.

HKMA and BNM acted as facilitators, while the Financial Services and the Treasury Bureau of the Hong Kong Government, the Securities and Futures Commission and the Hong Kong Exchanges and Clearing Ltd also participated in the meeting.

(The Star Online / 04 Dec 2013)

---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com