Development of Islamic Finance in Hong Kong
Speeches
07 Jul 2008
Development of Islamic Finance in Hong Kong
Edmond Lau, Executive Director (Monetary Management), Hong Kong Monetary Authority
(Speech at the "Building a Vibrant Islamic Finance Market in Hong Kong" organised by the City of London, UK Trade & Investment and British Consulate-General Hong Kong in Hong Kong)
Lord Mayor, distinguished guests, ladies and gentlemen, good
afternoon.
- I wish to thank the City of London, UK Trade and Investment,
and the British Consulate-General Hong Kong, for inviting me to
speak today on Islamic finance in Hong Kong. It is my great honour
and pleasure to be here with you this afternoon. It is also a great
honour for Hong Kong to be chosen to host this event, which
provides great opportunities for us to further explore with you
areas of mutual interest and benefit.
- The theme of today's event is "building a vibrant Islamic
finance market in Hong Kong". Islamic finance has become an
outstanding feature of international financial markets and is
receiving more and more attention and attracting ever greater
resources, fuelled by the rapid development in Islamic capital
markets in the past five years. With over thirty years of
experience in developing Islamic financial markets, the city of
London has made significant achievements in building a
comprehensive Islamic financial system in the UK.
- As far back as the 1980s, London had already sowed the seeds of
an Islamic finance market when Shariah-compliant transactions first
began in the London financial markets. Although the growth of the
retail market remained modest throughout the 1990s and early 2000s,
much has changed in both the wholesale and retail areas since then.
As the quality and variety of products improved and more players
entered the market, London is now widely regarded as an
increasingly important global centre for Islamic finance. The
Islamic financial system in London has also become a competitive
component of the overall financial system, complementing the
conventional financial system as a driver of economic growth and
development. Hong Kong can learn a great deal from the UK
experience in building a framework to facilitate the conduct of
Islamic finance.
- Like London, Hong Kong is also a major international financial
centre that has built and developed its financial architecture
around our shared core belief in free markets. For many years, Hong
Kong has been serving as a centre for conventional finance,
matching investors and fund raisers from many different places,
leveraging on our deep and liquid capital markets and well
established financial services industry. As we see the trends for
mainstreaming Islamic finance into global financial systems
beginning to take shape and the broader reach of capital providers
and investors made possible by Islamic finance, we see a role for
Hong Kong to contribute to the development of this new sector of
financial markets.
- The Administration in Hong Kong has emphasized the priority of
introducing Islamic finance. The HKSAR Chief Executive identified
the development of an Islamic bond market in Hong Kong as a key
policy initiative in his 2007 Policy Address. In essence, we see
Islamic finance is seen as yet another impetus for Hong Kong to
expand the services it offers to investors and fund raisers - that
is Hong Kong should position itself as a platform to channel funds
from the Islamic economies to tap investment opportunities in Asia
and China, and in the other direction, to serve as a centre for
overseas issuers to tap the funds made available by the high
savings rate in this part of the world.
- I would like to spend the next few minutes talking about the
approach adopted by the Hong Kong Monetary Authority to support the
Government's initiatives in developing Islamic finance in Hong
Kong. I also very much hope that by sharing our thoughts on our
future development, I can contribute to a useful exchange of views
and discussions about how Hong Kong should collaborate with London
to bring growth to both our financial markets.
- First and foremost, we have looked into the
elements that are necessary for a market infrastructure in which
Islamic finance transactions can operate on an equal footing with
conventional transactions. Levelling the playing field for the
conduct of Islamic finance and conventional activities was a major
theme of the HKMA's study on developing Islamic finance in Hong
Kong carried out in conjunction with the local financial sector.
The study found no major legal and regulatory impediments to
transactions involving wholesale Shariah-compliant financial
instruments in Hong Kong. Yet further clarifications and
fine-tuning in the tax laws in Hong Kong are needed to ensure that
Islamic finance transactions, which are primarily asset-based, can
be treated fairly without incurring extra tax obligations that do
not apply to their conventional counterparts. This led to a
sophisticated mapping exercise for assessing the implications under
Hong Kong's taxation framework.
- Hong Kong is moving full steam ahead in providing a tax neutral
environment for Islamic finance transactions. We fully understand
that clarity in this area is important to the development of
Islamic finance in Hong Kong. Through its access to the financial
industry, the HKMA is assisting the Government in its review of the
taxation regime. Of course, it is not straight forward for any
policy maker to identify an optimal framework for we have yet to
see convergence on what exactly constitutes Shariah compliance.
There are also important differences in the adoption and
implementation of tax neutrality treatment by different countries
because of variations in market structure, legal system and policy
objectives.
- For example, regulations in Singapore require the endorsement
of the relevant financial product by a Shariah board or committee
of the issuer or arranger. In Malaysia, the authorities have even
set up a national Shariah Advisory Council for approving all
Shariah instruments, thereby harmonising the standards at least
within the country. In the UK, the law describes the salient
features of different types of Islamic financing arrangements
without any specific reference to Shariah or any religious label
for the purpose of granting tax exemption. The onus seems to rest
on the issuer or arranger to satisfy himself that the requirements
of the law can be met without the need for an approval mechanism.
Different countries have adopted different approaches owing to
their own circumstances and there are no hard and fast rules.
- In the absence of a global standard or at least convergence of
opinion on the appropriate tax and regulatory frameworks, it is
important for new markets such as Hong Kong, to carefully consider
what will best suit the development of their own economies and the
implications for the domestic legal system and financial market.
Hong Kong is now reviewing its tax regime with a view to providing
tax neutrality to Islamic finance transactions and will take into
account the experience of other financial centres in this
regard.
- Second, as a new entrant, it is necessary for
Hong Kong to project itself internationally to the Islamic
financial community and explain its strategy for developing a
platform for Islamic finance. Much effort has been devoted to
establishing co-operative links with other Islamic finance centres,
regulators and standard-setting and business organisations. The
HKMA has undertaken a number of initiatives in this respect. We
have staged the Seminar on Islamic Finance together with the
Islamic Financial Services Board (IFSB) in January this year. A
roadshow to the Middle East initiated with the Treasury Markets
Association and Hong Kong Trade Development Council to present the
Hong Kong Showcase on Islamic finance was well received in the Gulf
economies. Greater participation and concerted efforts with
economies in the Middle East are anticipated following the HKMA's
taking up of associate membership with the IFSB earlier this
year.
- There has also been encouraging progress in promoting
partnerships with other Islamic financial centres. A framework of
co-operation was established between Hong Kong and Dubai
International Financial Centre (DIFC) in May that calls for
co-ordinated efforts by the central banks and financial regulators
of the two centres to jointly explore mutually beneficial
development items for Islamic finance. These initiatives
demonstrate that Hong Kong is devoting much effort in forging
business links in the light of the challenges brought by the
integration of Islamic finance with the international financial
system.
- Third, we acknowledge the need to nurture a
bigger talent pool by deepening market knowledge on Islamic finance
in Hong Kong. I do not think that the relatively small Muslim
population in Hong Kong would be a hindrance to the development of
Islamic finance in the city, as demographic factors have not in any
way undermined our performance as Asia's international financial
centre in the past. Hong Kong is home to the one of the world's
biggest and most influential clusters of international and regional
banks, which possess vast experience in serving Islamic finance
businesses around the world either as windows or subsidiaries. What
Hong Kong needs to do is to connect them to the business
opportunities here.
- On increasing market knowledge of Islamic finance products, the
professional accounting and treasury associations in Hong Kong have
a key role to play. A good illustration is the Islamic finance
education workshops that the Treasury Markets Association has
organised for its members and regulators in Hong Kong. Through
these opportunities, the TMA effectively provides an avenue for
experience sharing and useful discussion from experts in this field
to enhance the knowhow of market players in Hong Kong.
- Last but not least, much effort has been put
into encouraging the development of Islamic finance products in
Hong Kong. The first Shariah-compliant retail fund was introduced
by a local bank in late 2007. It is an index-tracking fund based on
the performance of a Shariah-compliant index of the shares listed
in Hong Kong. In March 2008, a Malaysian issuer launched an
exchangeable sukuk listed in the Hong Kong Exchange. The sukuk
offers exposure to the shares of a Mainland Chinese company listed
in the Hong Kong Exchange, and attracted a high subscription from
Middle Eastern investors. This demonstrated the keen demand of
investors for access to China's growth prospects through the Hong
Kong platform. In May 2008, a new Shariah-compliant equity index
featuring Mainland China stocks listed in Hong Kong was introduced,
further facilitating the development of Shariah-compliant indexed
funds. Indeed, in our interaction with market players, they have
reaffirmed our belief that Hong Kong, strategically located at the
centre of Asia and an international financial centre within China,
provides investors with unique access to markets in the Asia
Pacific time zone, in particular China.
- In closing, Islamic finance deals are now conducted on a global
scale, so it is important that the infrastructural framework and
human capital allows leading international banks and financial
institutions to gear up their Islamic finance products. With a
robust yet flexible regulatory regime, our market players are
already drawing on expertise in other parts of the world in
structuring Shariah-compliant products in response to new market
demands and opportunities. The authorities concerned will also have
a crucial role in ensuring a conducive environment for the
development of Islamic finance.
- I have talked today about the current development of Islamic
finance, and you will realise that it is not very different from
the early stage development of conventional finance. As a regulator
and facilitator in this market, I hope that sharing what we have
done so far can fuel a more vibrant discussion and deeper
reflection in this marketplace of what more needs to be done to let
major international financial centres like London and Hong Kong
play a larger role in this global development.
- Thank you very much.