Sovereign Islamic bond issued in HK generates wide response(2)

"Islamic finance needs to be identified as a financial system with features which are not unique to Muslims only but beneficial to all people as an ethical banking system," said Jamaladeen Faleel, assistant professor in the College of Business at Jeddah-based Effat University in Saudi Arabia.

In June last year, Hong Kong's first Islamic investment fund was launched, operated by Malaysia-based RHB Asset Management. The fund was launched after an Islamic finance conference organized jointly by the HKMA and Bank Negara Malaysia, the country's central bank.

Malayan Banking Berhad (Maybank) and Hong Kong-based Bosera International have joined hands to market an Islamic fund in the Chinese mainland. The fund will be launched in the first quarter of 2015.

Bosera International, a wholly owned subsidiary of Shenzhen-based Bosera Asset Management, one of the country's largest asset managers, will promote the fund to retail clients, including an estimated 23 million Muslims in the Ningxia Hui autonomous region.

At present, the supply of Islamic financial products and services to the mainland is mostly in the form of capital market instruments traded through the Hong Kong financial market.

However, the China Banking Regulatory Commission is considering the creation of an Islamic banking framework and the first Islamic bank in the Chinese mainland. Meanwhile, Bank Muamalat Malaysia has already teamed up with China's Bank of Shizuishan to establish its first Islamic bank in Ningxia.

Until a few years ago, there was little Islamic finance activity in China. However, analysts are of the view that China's focus on building good trade relationships with Gulf nations is improving the prospects for Islamic finance.

Faleel says the adoption of Islamic banking and finance can help China attract investment from wealthy Gulf nations, which have already been targeted by the West.

Moreover, he says Islamic banking can help the Chinese currency, "as in my view the growth of Islamic finance will facilitate the speedy rise of the yuan as a dominant international currency".

China also enjoys increasing trade and commerce with major Islamic countries in Southeast Asia like Malaysia, Brunei and Indonesia.

The volume of trade between China and Indonesia exceeded $66 billion in 2013. And China has been Malaysia's largest trading partner for five consecutive years, with bilateral trade reaching more than $106 billion in 2013.

"Having Islamic banking and finance facilities in China would surely assist trade and commerce between China and Southeast Asia," said Nik Shahrizal Sulaiman, Malaysia-based executive director at PricewaterhouseCoopers.

"Many corporate entities in Malaysia, Brunei and Indonesia have a specific preference for Islamic finance, driven by the needs of stakeholders and regulatory rules. In Malaysia, for instance, for listed entities it is a requirement to have at least two-thirds of (their) financial transactions conducted through the Islamic system," Sulaiman said.

Hong Kong has been attempting to capitalize on the growing Islamic finance market since 2007, when the Airport Authority Hong Kong announced it was interested in selling $1 billion of debt that complies with sharia law.

The proposed sale never happened. Nevertheless, in September 2009 the HKMA signed a memorandum of understanding with Bank Negara Malaysia to promote Islamic finance in the city.

In 2013, Hong Kong made legislative changes, providing a taxation framework for sukuk issuance comparable to that for the issuance of conventional bonds.

Jeffrey Kirk, managing partner at Appleby, a leading offshore firm delivering law and fiduciary services, said in order for Islamic finance products to be on a level playing field with conventional finance products, "it is often necessary for legislation and regulation to be amended to facilitate the launch of such Islamic finance products".