Peter Pang: Sukuk as a viable fund-raising and investment instrument
Opening remarks by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary
Authority, at the HKMA-BNM Joint Conference on Islamic Finance, Hong Kong, 14 April 2014.
* * *
Dato' Muhammad Ibrahim, distinguished speakers and guests, ladies and gentlemen,
1. Good morning. It gives me great pleasure to welcome you all to this Islamic finance
conference jointly organised by the Hong Kong Monetary Authority and Bank
Negara Malaysia (BNM), with the support of the Treasury Markets Association. I am
particularly grateful to Dato' Muhammad Ibrahim, Deputy Governor of BNM, who
leads a delegation of Islamic finance experts from Malaysia to share with us their
experience and knowledge on a wide range of matters concerning sukuk, from the
latest developments of the global sukuk market to the practical issues in structuring
sukuk products.
2. This conference marks the third Islamic finance-related event organised in
collaboration with BNM within the past year or so, following an Islamic finance
workshop held in March last year and the first meeting of the Joint Forum on Islamic
Finance between Hong Kong and Malaysia held last December. This series of
events is a testament to our determination to deepen co-operation with Malaysia in
the development of Islamic finance.
3. The theme of today's conference is "Sukuk as a viable fund-raising and investment
instrument". Looking around, I am delighted to see many friends from corporates,
banks, fund management firms and other industry professionals sitting here, keen to
learn more about sukuk. I am sure that the experts gathered here today will be able
to shed light on how sukuk can be a viable fund-raising tool and an attractive
investment instrument. Before that, allow me to take this opportunity to say a few
words, from a policy perspective, on why developing an Islamic finance platform is
important for Hong Kong, and our plans in building this platform.
What's in it for Hong Kong to develop Islamic finance?
4. Islamic finance has become increasingly important in the global financial market,
registering exponential growth over the past few years. Compared with a size of only
US$700 billion in 2008, the global Islamic financial industry has expanded
remarkably to an estimated US$1.8 trillion by the end of 2013, representing an
annual average growth rate of 21%.1 According to market estimates, there is huge
potential for further growth, with Islamic financial assets expected to reach
US$6.5 trillion by 2020.2
5. A major growth area for Islamic finance is the sukuk market. Ten years ago, new
sukuk issuance was only a modest US$5 billion. In just ten years' time, annual
sukuk issuance has already surpassed US$100 billion, amounting to US$117 billion
in 2013 which was more than 20 times higher than the figure in 2003.3
6. The strong momentum of the sukuk market is underpinned by the increasing
demand for sukuk, especially sukuk of high credit ratings, from Islamic investors.
Over the years, the Gulf region has accumulated a huge amount of oil revenue. The
current account surpluses in the Gulf Cooperation Council (GCC) countries last year
were estimated to be more than US$300 billion,4 while assets under management
by sovereign wealth funds in those countries amounted to as much as US$2 trillion
at the end of last year.5 Islamic investors in the Middle East and other Islamic
countries generally have a preference for investing in Shariah-compliant assets.
With the expanding liquidity pool in the Islamic world, naturally, there is a
commensurate increase in the demand for Islamic investment instruments globally.
7. As an international financial centre and given our unique role as a gateway to China,
Hong Kong is well-positioned to provide an effective platform to channel the surplus
funds from the Islamic world to this part of the world where there is a huge financing
need to sustain the high growth of the Asian economies. Our platform will enable
Islamic investors to access investment opportunities in Asia, particularly China,
while at the same time allowing fund raisers to tap into the liquidity pool in the
Islamic world.
8. What's more, sukuk are becoming a mainstream asset class in the global financial
system. Financial innovation and tax reform in major international financial centres
have made sukuk largely comparable to conventional bonds. Apart from Islamic
investors, sukuk are increasingly appealing to conventional investors as a way to
diversify their investment portfolios. With such promising growth potential,
developing Islamic finance would open up vast business opportunities and bring
tremendous benefits to the financial services industry in Hong Kong. It would also
help widen the range of financial products and broaden the types of market players
here, adding to the breadth, depth and diversity of our financial market and
consolidating our role as an international financial centre.
Platform building for sukuk issuance
9. With this in mind, we have taken concrete steps over the past few years to build a
conducive platform for sukuk issuance. Just last July, we have put in place a tax
framework for common types of sukuk to level the playing field between sukuk and
conventional bonds.
10. Generally speaking, sukuk are no different from conventional bonds in terms of
economic substance, enabling issuers to raise funds while giving investors
interestlike return. However, the more complicated structure of sukuk, which involves the
setting up of a special purpose vehicle and multiple transfers of underlying assets,
had led to additional tax liability for sukuk issuers. The tax law amendments have
overcome this obstacle by removing the additional profits tax and stamp duty
charges incurred in issuing sukuk as compared with conventional bonds.
11. With the tax framework in place, Hong Kong's financial platform is ready for sukuk
issuance. We highly welcome local and overseas entities to make use of
Hong Kong's platform to issue sukuk.
12. To play a lead-off role for this market, we took another important step recently by
putting in place a legal framework for the Government to issue sukuk under the
Government Bond Programme. We are very pleased to see that the relevant bill was
passed by the Legislative Council a few weeks ago, paving the way for the launch of
the inaugural Government sukuk.
Inaugural HKSAR Government sukuk
13. The Government sukuk is intended to meet two important objectives.
14. First, it aims to demonstrate to the global financial markets that the legal, regulatory
and taxation frameworks in Hong Kong can well accommodate sukuk issuance.
Leveraging on the HKSAR Government's triple-A credit rating, the expected low
funding cost of Government sukuk will provide a useful benchmark for other
potential sukuk issuers in Hong Kong. Hopefully, this will in turn encourage more
sukuk issuers to participate in our market, providing impetus to the sustainable
development of the sukuk market here.
15. Second, we hope to attract more international investors to our financial market.
Given the shortage of high-quality sukuk in the global market, the strong credit rating
of the HKSAR Government is well-positioned to fill the gap by providing high-quality
sukuk to meet the strong demand from investors. The global roadshows of the
Government sukuk will also provide an ideal opportunity for us to reach out to global
investors and showcase our credit strengths and Islamic finance capability.
16. As the Government's representative under the Government Bond Programme, the
HKMA is now working closely with the Government to prepare for the inaugural
issuance of Government sukuk. A detailed issuance plan is being devised with
reference to international practices and market conditions. According to our current
plan, the inaugural Government sukuk would be based on the Ijarah structure and
target institutional investors globally.
What's in it for fund raisers to issue sukuk?
17. As I have mentioned earlier, the key objective of the Government sukuk is to play a
catalytic role, paving the way for local and international fund-raisers, no matter from
the public or private sector, to follow suit.
18. For the potential sukuk issuers sitting here today, you may wonder what benefits
you will get by issuing sukuk. Well, let me highlight two key benefits here.
19. First, you would be able to broaden your investor base. By issuing conventional
bonds, you will only be able to tap conventional investors. But by issuing sukuk, you
will be able to get both conventional and Islamic investors to participate. In
particular, issuing sukuk will help you to gain access to the large pool of liquidity in
the Middle East and other Islamic countries, where investors are progressively
looking for Shariah-compliant assets in this part of the world. At the same time, more
and more conventional investors are also looking to diversify their portfolios into
sukuk as a new asset class. So, issuing sukuk would enable fund-raisers to enjoy a
wider and more diverse investor base.
20. Second, you would be able to diversify your funding sources. With the additional
option of sukuk in your arsenal, you can choose to issue either conventional bonds
or sukuk, depending on the pricing and liquidity in the market at the time of
issuance. This would provide more flexibility and a more stable source of funding to
fund-raisers, particularly at a time when the funding cost of sukuk is more attractive
than that of conventional bonds or when there is difficulty in obtaining liquidity in
certain markets.
21. Having said that, sukuk remain a relatively new product type in Hong Kong's
financial market. Some of you may have questions about the mechanics of sukuk,
such as what would be suitable underlying assets, how to ensure
Shariahcompliance, etc. Malaysia's experience has clearly shown that there are readily
available solutions to address these issues. In particular, while sukuk are
assetbased, a number of different sukuk structures are available. So, for companies that
do not have much fixed assets, some asset-light sukuk structures may be utilised to
overcome issues concerning availability of tangible assets. I am certain that the
experts present here today will be able to provide more guidance and address such
questions in detail in later sessions.
Concluding remarks
22. Ladies and gentlemen, I hope that you now have a better idea on the opportunities
and benefits brought by the development of Islamic finance in Hong Kong. It is
essential for all of us to get well-prepared in order to make the most out of these
upcoming opportunities. Your presence at this conference today is highly
encouraging and reflects that you are actively gearing yourselves up. I am confident
that you will have a lot to take away from the advice of the experts gathered here
today.
23. At the same time, we will continue our efforts to promote market awareness of
Islamic finance in Hong Kong. In particular, today's event demonstrates the
concerted efforts of Hong Kong and Malaysia in creating market awareness and
promoting understanding of Islamic finance. We very much appreciate the close
partnership we have established with Malaysia in developing Islamic finance. I wish
this conference every success and I certainly look forward to more co-operation
opportunities in the future.
Thank you.