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FS's speech at Seminar on Islamic Finance (With photo)
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    Following is the speech by the Financial Secretary, Mr John C Tsang, at the Seminar on Islamic Finance, jointly organised by Hong Kong Monetary Authority (HKMA) and the Islamic Financial Services Board (IFSB) this afternoon (January 15):

Secretary-General Rifaat (Ahmed Abdel Karim), Your Excellencies, Distinguished Speakers and Delegates, Ladies and Gentlemen,

     Good afternoon.

     I am delighted to have the opportunity of welcoming you all to this Seminar on Islamic Finance.  A special welcome to the speakers and delegates from overseas, who have travelled far to be here today.  I am encouraged by your presence, and by the interest of everyone here in helping to develop Islamic finance in Hong Kong.

     I wish also to thank the Board for co-organising this event with the Hong Kong Monetary Authority.  I believe we are embarking on a new and exciting era in a city that thrives on new beginnings and fresh challenges.

     I shall in the next few minutes say a few words about why Hong Kong is well suited to develop Islamic financial services, the challenges that we shall need to overcome and progress so far.

Islamic Finance

     First, why are we so keen to introduce Islamic finance to the Hong Kong community?

     From relatively small beginnings in the 1980s, Islamic finance has emerged as an important global financial services sector.  Including banking assets and funds under management, global business is estimated at between US$700 billion to US$1 trillion.  The total value of assets of Islamic financial institutions worldwide is believed to exceed US$250 billion.  That is a 40-plus-fold increase since 1982.  These assets are held by over 300 financial institutions in more than 75 countries, with annual asset growth estimated at 15 per cent.  Islamic equity funds have recorded growth of more than 25% over seven years.

     So there is no disputing the potential for this sector.

     Shariah-compliant products and services have grown rapidly in both use and popularity during the past two decades.  More recently, this trend has accelerated with the emergence of the huge pool of oil-driven liquidity, which is about US$1 trillion in annual oil revenues, in the Middle East.  I believe Hong Kong can play an important role in generating new, reliable and potentially lucrative investment opportunities for this capital.  And that is why this Administration advocated the introduction of Islamic finance as one of our first initiatives back in July last year.

Hong Kong¡¦s Potential

     So where does our potential lie?

     First and foremost, we already have a well developed financial services sector, which is underpinned by an open and transparent regulatory regime.  There are roughly 140 licenced banks in Hong Kong, about 70 of which are among the world¡¦s top 100 banks.  A significant number of leading international banks have devoted considerable resources to the creation and servicing of a variety of Islamic financial products.  In some cases, this has taken the form of Islamic ¡§windows¡¨, which are specialised units, that provide banking and financial services to retail clients.

     Hong Kong also has deep and liquid markets for conventional financial instruments and a pool of experienced finance professionals with particular expertise in wealth management, capital markets and insurance.

     Our legal system is flexible and well adapted to supporting international financial transactions.  It permits freedom of contract subject only to various public law restrictions, none of which should inhibit the growth of a market in these instruments for legitimate purposes.

     A unique advantage for Hong Kong is our access to the markets of Mainland China.  Hong Kong remains the only jurisdiction outside of the Mainland in which banks may transact business using the Renminbi.  Roughly a quarter of our banks are authorised to offer Renminbi financial services, and last year, we became the first place outside the Mainland to operate a Renminbi bond market.  I mention this because it highlights our experience in developing new products and services that serve to strengthen our financial infrastructure.  It also provides an opportunity for Hong Kong to develop wholesale markets in Shariah-compliant instruments for Mainland-based issuers.

     As a Special Administrative Region of China, Hong Kong plays an important part in bridging the Mainland to the international market.  So we have a dual role to play as both an international financial centre in our own right, and as China¡¦s global financial centre.

     Here, I see another opportunity given the growing volume of Islamic financial business generated by capital market instruments, including the issuance of Islamic bonds, the Sukuk.  These have been used to finance a number of major investments in infrastructure projects.  This has led to the development of a variety of flexible financing mechanisms, and as a result, the market for Sukuk has grown four-fold since its introduction in 2003.  A record US$8.8 billion of Islamic bonds had been sold worldwide as of September 2006, surpassing the US$7.6 billion in 2005.

     Consider for a moment, the potential requirement for capital in the Mainland, especially for infrastructure development projects, which lend themselves well to Shariah-compliant financial structures. Hong Kong can be expected to play a significant role in structuring and financing Islamic investment products to meet the needs of Mainland borrowers and those from other jurisdictions in the Region.

     There will likely be strong demand for such Islamic investment products given the abundant liquidity held by Islamic financial institutions and their desire to diversify their assets into other markets.

     Islamic financial products appeal to both Muslim and non-Muslim investors and issuers.  They offer a flexible means of financing a variety of economic activities and provide a mechanism for risk sharing.  As a sign of the growing importance of the Islamic bond market, a number of non-Muslim issuers have entered the market in the past year including the Asian Development Bank, Nestlˆm¡¦s, and the Federal German State of Saxony-Anhalt, which became the first European public sector issuer.

     There is also evidence that a large part of the demand for Islamic bonds has come from non-Muslim investors who have found that the yield and structure of these products offer attractive investment opportunities.  

Government¡¦s initiatives in developing Islamic finance

     The Hong Kong Government is fully supportive of the development of Islamic finance in this city.  As I have mentioned earlier, we have a responsibility to diversify our financial markets to enhance our status as Mainland China¡¦s global financial centre.

     In his Policy Address last October, our Chief Executive highlighted the potential for introducing Islamic finance and urged the development of an Islamic bond market.

     Against this backdrop, the Hong Kong Monetary Authority and the Treasury Market Association set up a team, in conjunction with other market players, to study the possible challenges and implications of the growth of Islamic finance in Hong Kong, as well as the development of a wholesale market on Islamic finance.  

     The team concluded that there are no major legal and regulatory obstacles to transactions involving wholesale Shariah-compliant financial instruments in Hong Kong.

     So we are moving full-steam ahead, as evidenced by the staging of this Seminar.  I am sure that your discussions over the next two days will give us an even clearer picture of the work ahead.

Challenges ahead

     Issues that we are currently tackling include changes and/or clarifications that may be needed to our taxation regime to provide a level playing field for the issuance of Islamic bonds, as compared to other conventional bonds. We are aware that other financial centres that aspire to be Islamic financial centres have made moves in this regard.  Drawing from their experience, we are conducting a review to see whether our tax laws should be modified accordingly.

     While the government is working hard to put in place a conducive platform for Islamic finance, there has been an encouraging response from the market.  Since the Chief Executive¡¦s Policy Address last October, we have seen a number of seminars and conferences on Islamic finance being organised.  We have also received useful suggestions from relevant parties, and pioneer products have been launched in the market to cater for this demand.

     Recently, with the approval of the Securities and Futures Commission, the first Islamic retail fund for sale to retail investors in Hong Kong was launched.  The fund is an index-tracking fund, which aims to match as closely as is practicable, the performance of the Dow Jones Islamic Market China/Hong Kong Titans Index through investing primarily in the constituent stocks of the Index.

     The fund is a unit trust constituted by a trust deed between the manager, the trustee and a local bank.  The trust deed is governed by Hong Kong law.  By December 10 last year, the fund had already attracted some US$45 million worth of orders, mainly from local investors.  

Conclusion

     Ladies and Gentlemen, there is no doubt that Hong Kong should accord proper attention to Islamic finance, and that is exactly what we are doing.  

     Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth.  To further consolidate Hong Kong¡¦s position as an international financial centre, we should actively leverage on this new trend by developing an Islamic finance platform, and focus on, among other things, developing a wholesale Islamic finance market.

     Another reason is that Hong Kong remains the only jurisdiction outside of the Mainland where banks may transact business using the Renminbi.  This, I believe, provides Hong Kong with a unique opportunity to develop wholesale markets in Shariah-compliant instruments for Mainland-based issuers.

     And lastly, Hong Kong financial institutions operate within various market economies and the Muslim population is growing internationally. We need to understand their needs and be able to serve them properly.  This will require enhanced awareness and understanding of Islamic finance by the local financial community.

     As a key step in this direction, the Hong Kong Monetary Authority has recently decided to apply for Associate Membership of the Islamic Financial Services Board (IFSB).  Because the Board works consistently for the effective regulation and supervision of Islamic financial services, a closer relationship with this organisation will certainly help keep our financial markets abreast of the latest developments on Islamic finance.  

     Ladies and Gentlemen, the main purpose of this Seminar is to provide an opportunity for both local and overseas regulators and financial market players to get together to explore ways in which Islamic finance may best be developed and promoted in Hong Kong.  I am confident the Seminar will provide an avenue for open and frank discussions and the sharing of experiences between the distinguished speakers and delegates.

     I believe that Hong Kong possesses the required credentials to become an international centre for Islamic finance.  And, as the global financial centre for the world¡¦s fastest growing large economy, we have a ready-made market place for new investment opportunities.

     I wish this Seminar every success, and you can certainly look forward to the development of an exciting market for Islamic finance here in Hong Kong in the years to come.

     Thank you.

Ends/Tuesday, January 15, 2008
Issued at HKT 16:10

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