Hong Kong has reiterated its desire to become a hub for Islamic bonds, finally changing its tax laws to be much more sukuk friendly. But with no natural investor or issuer base for the product, and rising competition from better suited Asian countries, Hong Kong will only ever be an also-ran.
After years of statements of intent, Hong Kong has finally amended its tax and stamp duty rules to make them more friendly to Islamic finance. As of July 19, any company that wants to issue sukuk will not have to pay extra stamp duty. That puts the instruments on a level playing field with conventional bonds, but there’s no need to start learning the difference between your ijara and murabaha bonds just yet. Hong Kong is unlikely ever to become a true hub for sukuk.
Hong Kong’s difficulty in attracting Islamic bonds is as much socio-political as it is fiscal. There is no natural issuer or investor base for sukuk in Hong Kong. Rightly or wrongly, the biggest buyers of Islamic financial products are Islamic themselves. Conventional investors, if they are interested at all, largely treat sukuk as an alternative asset class.
This is one of the reasons why Malaysia has been so successful in developing a sukuk market that now ranks as the biggest in the world — it has the infrastructure and local affiliation with sukuk that makes it a natural home for the product.
While tax neutrality in Hong Kong means sukuk are no longer at a disadvantage, when Malaysia made a decision to attract more Islamic debt it went a step further — providing tax incentives to make them cheaper than conventional bonds. The Hong Kong government is unlikely to consider such a change to its legislation.
That’s a problem, since jurisdictions like Hong Kong are going to need to offer some sort of incentive if they want conventional issuers to sell sukuk. The process of doing so can be a long and costly one. Any CFO wanting permission to sell them would need to convince the issuer’s board of the merits as well as explain how the various structures work. A new bond programme might have to be established and any forthcoming issue would need to be signed off by Islamic scholars.
Hong Kong is hardly going out on a limb in wanting to be Islamic hub — plenty of countries within and outside the region are vying for the moniker.
London is a case in point, but even the UK capital is struggling. It relaunched its initiative earlier this year, setting up a grand sounding Islamic Finance Task Force in March. And yet five years ago, when the UK Treasury announced plans to become the first western government to issue sukuk, the plan was scrapped after the Debt Management Office said it was not cost effective.
In Asia, Indonesia, Singapore and even Japan have expressed a desire to attract more Islamic financing. Indonesia would be an obvious choice because of its population and the fact that the sovereign has already issued a number of global sukuk. Singapore’s status as the regional centre for wealth management, meanwhile, means it is well placed to encourage greater investor participation.
Hong Kong could of course take advantage of its strong financial market credentials by offering secondary market trading of an instrument that remains highly illiquid as most investors tend to be buy and hold. And there is potentially a role for Hong Kong in making conventional investors more familiar with the products. However, these would only be ancillary services to those on offer from primary sukuk hubs such as Kuala Lumpur and Dubai.
As a financial centre, Hong Kong needs to show it is open to the widest choice of capital markets products. But when it comes to sukuk, it may have to live with being firmly in the second tier.