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Thursday, 13 September 2007

Hong Kong Developing Islamic Bond Market

HONG KONG - Hong Kong authorities are moving toward establishing an Islamic bond market to funnel oil money from the Middle East into the flourishing Chinese economy. "Many investors in the Middle East are already eyeing opportunities in the Chinese market. In this connection, Hong Kong is the best place to be the most effective intermediary for structuring and marketing Islamic investment products to meet the needs of mainland enterprises and Middle Eastern investors," John Tsang, financial secretary of Hong Kong, told investment executives at an annual conference of the Hong Kong Investment Funds Association on Monday.
The Islamic financial market is estimated to be worth $1 trillion globally and is expected to grow 15% a year, according to Tsang. As a major international financial center, Tsang stressed, "Islamic finance must be among our portfolio of products and services." Hong Kong officials have recently visited the Middle East and Malaysia to learn more about Islamic finance, the finance secretary said. "To take the matter forward, our financial regulators will look at ways to develop a local Islamic bond market under our existing financial, legal and regulatory regimes." It is forbidden under Islamic law to charge or pay interest, so Muslim financiers have developed an Islamic version of bonds, called sukuk, which are structured to carry coupon payments based on profits rather than interest. As trading of debt is also banned under Islamic law, sukuk are backed by physical assets — arguably making them more secure than most Western structured financial products. The sukuk market was pioneered by Malaysian banks over the past decade under the encouragement of the government, which saw creating Islam-compliant financial instruments as key to fostering entrepreneurship among the country’s Muslim majority. The Malaysian government has attracted offshore banks to float Islamic bonds in the country by offering tax breaks. According to a Moody's report issued in late August, by the end of July this year, outstanding sukuk globally totaled $82.36 billion, of which close to 62% was denominated in Malaysian ringgit. Moody's expects rapid development of the sukuk market in Asia. "Globally, the Malaysian market now accounts for most outstanding sukuk, but interest is growing in the rest of Asia, obviously in jurisdictions such as Indonesia and Pakistan, but also, for example, in Singapore and most recently Hong Kong," says Dominique Gribot-Carroz, assistant vice president of Moody's in Hong Kong.
Moody's started rating sukuk in Asia last month. Islamic bonds are getting popular among western investors. Banks issued $25.5 billion worth of sukuk in the first half of this year, surpassing the total issuance of 2006. According to the Islamic Finance Information Service, Western investors now buying about 70% to 80% of the new sukuk issued in the Middle East, compared with 20% to 40% last year. - (Forbes, 11 Sep 07)
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