Hong Kong made history recently as far as Islamic finance was concerned. The Hong Kong government recently issued its inaugural sukuk, a Shariah compliance Islamic bond based on Ijarah structure. HSBC and Standards Chartered were the joint lead arranger and bookrunners for the issuance along with the National Bank of Abu Dhabi.
The sukuk structure was based on ijarah (sale and lease back structure). It is an operating lease structure which does not involve the purchase of the asset by the lessor upon maturity of the sukuk (no financial lease feature in the issuance). The Hong Kong government has created an SPV for the purpose of selling government properties to the investors and leasing the properties back based on agreed upon rental for tenor of 5 years.
The sukuk issuance attracted various investors from Asia, Middle East and Europe, where a total US$4.7 billion order accounts book were received by the government, which exceeded the volume of the issuance. More than 120 global institutional investors participated in the purchase of the sukuk; 47% in Asia, 36% in the Middle East, 11%i n the US and 6% in Europe.
Early this year, the Hong Kong government has embarked on a series of legal amendment and adjustment on its legal infrastructure and tax regime to accommodate the Islamic financial services, and meet the Shariah requirements in the Islamic business activities. In March 2014 Hong Kong has amended the existing law on government bonds programme to accommodate the issuance of sukuk. Because Islamic finance has unique features, the government in July 2014 amended the tax structure to accommodate the nature of the Islamic financial transaction to make it more competitive, hence no tax embedment in the process of issuance.
As a matter of fact Hong Kong has the needed infrastructure and incentive to compete in Islamic finance globally especially by leveraging on its strength in the conventional space where Hong Kong is regarded as one of the global financial hubs, and among the top countries in the world when it comes to competency of their legal infrastructure.
However being a strong and sound hub, Hong Kong has to work closely with other financial hubs in the region to keep its self on the right track of competency and leadership. We believe that Malaysia as the Islamic financial hub in sukuk issuance globally remains the best partner for Hong Kong in the area of Shariah advisory, Islamic legal practices, joint Shariah research, Shariah standards, Shariah guidelines, Shariah resolutions, human capital development and best practices in Islamic finance. Such partnership between the two countries can ensure that both countries are at the forefront of Islamic finance globally
According to Thomson Reuters, the bonds priced at a spread of 23bp over US Treasuries, is a reflection of the appeal of Hong Kong’s top credit rating. No other Asia country, ex Japan, has a government printed a US dollar benchmark bond so tight. The spread, 7bp tighter than original guidance of around 30bp, translated into a coupon of 2.005%. It sets a new benchmark for Hong Kong and the rest of Asia. (IFR Asia, Thomson Reutors).
The recent US$1 billion sukuk issuance is a landmark for Hong Kong on the Islamic financial map as the government pursues its desire to be the number one Islamic finance hub in the Asian region. The sukuk issuance in Hong Kong is a promising indication about the future direction of Islamic finance in its jurisdiction. We hope that this just the beginning to more sukuk issuance in Hong Kong (sovereign and corporate) with more expansion of Islamic finance products and services.
By Assoc. Prof. Dr. Ahcene Lahsasna