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Hong Kong Confirms Islamic Bond Market Aspirations

by Mary Swire, Lowtax.net, Hong Kong
22 October, 2014

The Secretary for Financial Services and the Treasury, K C Chan, confirmed that Hong Kong's Government and its regulators will continue to create an enabling environment for the development of an Islamic bond (sukuk) market in the territory, following a recent question in the Legislative Council (LegCo).

The question followed Hong Kong's successful offering last month of its inaugural USD1bn five-year sukuk under the Government Bond Program, which was also the world's first USD-denominated sukuk issued by an AAA-rated Government.

Chan pointed out that the Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Ordinance 2013, enacted by LegCo in July 2013, already provides a comparable taxation framework for sukuk compared to conventional bonds.

As Shariah law precludes the payment or receipt of interest, the issuance of sukuk involves more complex structures to achieve a similar Shariah-compliant outcome as for conventional bond issues, often using special purpose vehicles and multiple asset transfers. Without the tax provisions for sukuk, their issuance may have attracted additional profits tax, property tax exposure, or stamp duty charges.

Furthermore, he added, the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission have closely collaborated with relevant overseas regulators and international Islamic organizations, and have organized a series of seminars and workshops on Islamic finance over the past few years to enhance market players' understanding of sukuk.

The Government is to take every possible opportunity to promote Hong Kong's bond market, including the sukuk market, when meeting with institutional investors, issuers, and asset managers. In particular, the HKMA will share its experience in sukuk issuance with enterprises that have funding needs to encourage them to participate in the local market.

The issuance of the territory's first sukuk attracted interest from international investors in the Middle East and other Islamic countries who have seldom participated in Hong Kong's financial market in the past.

K C Chan said: "Hong Kong is well-positioned to provide a platform for financial intermediation between Islamic investors and the [Chinese] Mainland, transferring the savings and funds from Islamic investors to Asia (especially the Mainland) for investment, and vice versa. Given that there are strong funding needs for Mainland enterprises, Hong Kong can act as a springboard for them to 'go out' and expand their Islamic investor base."

As a leading offshore Renminbi (RMB) business center, RMB sukuk launched in the international market over the past few years have been over-subscribed, with strong demand also from domestic investors.

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