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Monday, 28 July 2014

BONDS: Hong Kong welcomes sukuk rules

Market participants have welcomed Hong Kong’s move to introduce new rules for Islamic financial products as an important step towards the development of its own Islamic bond market.

Source: Reuters/Bobby Yip

K.C. Chan, Hong Kong’s Secretary for Financial Services and the Trea

Hong Kong launched on March 29 a two-month consultation on legislative amendments designed to level the playing field between conventional and Islamic products.

“It is an important step forward in the right direction as it will establish an appropriate infrastructure for Islamic products in Hong Kong,” said Davide Barzelai, a partner at Norton Rose. “It will level the playing field between Islamic and conventional bonds.”

However, bankers warned that the city was unlikely to rival Malaysia as Asia’s hub for Islamic instruments.

“The main drive for Hong Kong, and for many non-Islamic countries, to introduce Islamic financing rules is to position itself as a financial centre, which has the availability and capacity of conducting Islamic financing,” said Rafe Haneef, CEO HSBC Amanah Malaysia. However, “Malaysia will probably remain the Islamic financing hub, but there is no harm that other places can offer Islamic products.”

Malaysia is expected to capture around 60% of the global sukuk market, expected to top US$44bn in 2012.

The legislative amendments will be in the areas of profits tax, property-tax and stamp-duty liabilities. Many people see the suggestions as reasonable and acceptable.

A lack of Islamic bond-friendly legislation has hindered the creation of a sukuk market in Hong Kong, despite Chief Executive Donald Tsang’s strong support for the development of an Islamic financial centre in the city since 2007. Because of the financial crisis in 2008, the Hong Kong Government shifted its priority to more urgent matters. Now, building an Islamic financial centre is back on the agenda.

“This will, in turn, help diversify our financial platform and consolidate our role as an international financial centre,” said Professor KC Chan, the Secretary for Financial Services and the Treasury of the SAR, at the launch of the consultation exercise.

Religion-neutral approach

Basically, Hong Kong is adopting a prescriptive and religion-neutral approach on Islamic rules, following a UK model, which has attracted many Islamic funds and allows Islamic financing for buying properties, in addition to issuing sukuk bonds.

Under this approach, there will not be any specific reference to or mentioning of Shariah in the legislation. The advantage of this approach is that more certainty can be provided to market players, as prescriptive legislative provisions, without mentioning Shariah, would avoid incorporating religious concepts into Hong Kong’s tax laws.

“It is a good start, although the current market conditions may not be the best time to launch Islamic bond issues in terms of pricing, as the cost of conventional financing is cheaper”

This will help prevent any possible disputes arising from different interpretations of the Shariah principles by Shariah scholars in the context of implementing the relevant provisions, particularly given the fact that there is not yet a standardised approach to Shariah compliance around the world. In addition, this approach would also avoid the possible issue of discrimination, religious or otherwise.

In other words, the government just provides the framework and relevant provisions. It is the responsibility of an issuer and an investor to seek respective advice from their lawyers and Shariah scholars on whether the assets and/or the transactions are Shariah compliant.

Apparently, Hong Kong has learned from the experience of other non-Islamic countries which have introduced Islamic financing rules. For example, Japan has also adopted the neutral approach to avoid the religious related issues, while Korea and France which have adopted different approaches have encountered some hot debates in Islamic terms.   

Wakala please!

In the consultation paper, four sukuk types, namely Ijarah, Musharakah, Mudarabah and Murabahah, are proposed. These four sukuk types collectively represented almost 80% of global sukuk issuances in 2011. The government hopes those instruments will provide a reasonable starting point for the sukuk market to grow in the city.

However, some sukuk pros point out that another Islamic instrument Wakala has become quite popular in the past two years, after the Hong Kong Monetary Authority formed a task force to study Islamic rules and set its initial target on the four more conventional sukuk types. So, one suggestion to the Financial Services and the Treasury Bureau which is conducting the consultation is adding Wakala to the menu “to meet the latest market development needs”.

“It is a good start for Islamic bond market in Hong Kong, although the current market condition may not be the best time to launch Islamic bond issues in terms of pricing, as the cost of conventional financing is cheaper than Islamic at this time,” said Haneef.

Perhaps, the Hong Kong Government or government-linked entities should take the lead to issue sukuk bonds in local currencies and US dollar, in a way to set the benchmark and raise market awareness. That was the tack taken by Malaysia, which issued a US$2bn dual-tranche Global sukuk in June 2011 to help the development of its own sukuk market.

The only sukuk Dim Sum to ever hit the market was a Rmb500m (US$79m) three-year 2.9% issue from Khazanah in October 2011. The deal was off Khazanah’s existing sukuk issuance programme set up in Malaysia, and, more significantly, the underlying assets are in Malaysia. So, no Hong Kong tax or stamp duty applied.

Market participants and other stakeholders will send their comments to the FST Bureau until May 28 2012. After that, the government expects to finalise the legislative amendments and introduce the bill into the Legislative Council within this year.

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