"Development of Islamic finance in Hong Kong"
Speech by Mr. Edmond Lau,
Executive Director, Hong Kong Monetary Authority
"Building a Vibrant Islamic Finance Market in Hong
Kong"
Organised by the City of London, UK Trade & Investment and British
Consulate-General Hong Kong
Hong Kong SAR, 7 July 2008
Lord Mayor, distinguished guests, ladies and gentlemen, good afternoon.
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. Thank you very much.
