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Hong Kong sukuk to set yardstick as triple-A first – interview

By Paolo Danese
14 Apr 2014

The Hong Kong government’s upcoming sukuk issuance could set an international benchmark for Islamic bonds and encourage multinational companies to follow suit.

"People tend to forget that Hong Kong market has been exposed to sukuk from the time global sukuk was first launched in 2002. It was first roadshowed in HK,” said Rafe Haneef, chief executive officer at HSBC Amanah Malaysia.

The first Malaysian government Islamic bond, part of the Malaysia Global Sukuk programme, was the first of its kind twelve years back -  that programme opened the way, he added. “Now we have 60/100 issues a year.”

Amendments made by the Hong Kong government to its tax laws have laid the foundations for equal treatment of conventional and Islamic bonds. The framework in its current form covers the major Islamic bond product categories.

The HKMA is now looking at a potential issuance of $500m-$1bn to take place after the summer, according to statements made by HKMA deputy chief executive Peter Pang at the conference. The deal would be the first triple-A rated government sukuk boosting its chances of setting an international benchmark for further public and private sector sukuk issuance.

“It is one of the best frameworks I have seen both in terms of precision and breadth of coverage. It is well drafted and could be the model for other jurisdictions,” Haneef said, speaking to Asiamoney on the side of the Hong Kong Monetary Authority (HKMA) and Bank Negara Malaysia (BNM) joint conference on Islamic finance which took place in Hong Kong on Monday.

Sukuk know-how

But while Hong Kong has a strong regulatory base off which to forge its credentials as an Islamic finance centre, it remains a niche product in the city. As a result, Hong Kong should co-operate with Malaysia-based financial institutions to leverage off its access to investors, argues Haneef.

“Malaysia has the [sukuk] know-how, but Hong Kong has the US dollar investor base,” he said. That US dollar investor base, he added, is crucial, as so far all government sukuk have been denominated in the currency.

Already a typical stop for all major sukuk roadshows, Hong Kong can count on its law firms for expertise on drafting high-quality documentation for Islamic bonds. However, Malaysia is a natural partner with its Shariah law and bond origination expertise, all deriving from Kuala Lumpur’s position as the leading market for Islamic bond issuance.

In addition to setting an international benchmark, Hong Kong’s government sukuk could also stimulate interest from the private sector in Islamic financing. Among the candidates likely to follow in the government footsteps and issue a sukuk out of Hong Kong, are infrastructure companies. The key challenge however, according to Haneef, is to keep in mind that sukuk are just one funding option available. Now that regulatory and tax concerns are put to rest, it will ultimately be down to pricing.

“Loans could be a simpler option for corporates, but if the liquidity in the bank market becomes tighter we could see a push to alternative financing like sukuk,” Haneef said.

The substantial liquidity in the Islamic finance market, could help the Hong Kong government and future corporate issuers obtain even tighter spreads than conventional bonds. Further, the ability to tap the growing ranks of Middle-East and East Asia investors that only invest in Shariah-compliant products would add to the likely success of future sukuk issues in Hong Kong. 

Meanwhile, Malaysia, already the leading market for Islamic finance, is likely to experience further growth. Investors in Shariah-compliant funds are becoming proactive in encouraging companies to seek Islamic financing, even though the companies themselves may not be fully Muslim-owned. Despite this trend being more evident in Malaysia, where Islamic finance is the dominant source of capital, it hints at the direction for the wider Islamic finance market.

While Hong Kong is marching ahead, the region’s other Islamic finance advances are set to come from southeast Asia.“We are likely to see more issuance out of Brunei and Indonesia,” said Haneef. “Brunei is already dominated by Islamic banking. Indonesia is also gaining momentum. Regulations are already in place, the government is keen to act. Now it is all about implementation.”

By Paolo Danese
14 Apr 2014