Signaling its interest to develop the Islamic finance market, Hong Kong has amended a local law to give Shariah-compliant debt equal tax treatment.
Islamic bonds in Hong Kong.
The amendment is expected to play a key role in encouraging sukuk issuance in the city, as sellers of “common types of Islamic bonds” will be exempted from paying tax on the transfer of underlying assets. Henceforth, Islamic securities will be given equal treatment with other non-Shariah-compliant instruments. The move is expected to attract attention from issuers and investors from China and the Middle East as they seek new market avenues.
Hong Kong has followed into the footsteps of Thailand and Tunisia to change regulations and to tap the growing demand for Islamic securities. Until four years ago, the sukuk issuance market was heavily skewed towards the GCC and Malaysia. Over time, Australia, north Africa, Jordan, Oman and Singapore are also expected to try to attract sukuk investment.
Figures from Islamic investment research house KFH Research suggest that total sukuk issuance for 2012 totaled USD 131 billion. This figure was about 54 percent higher compared to the previous year. However, the global sukuk sales have fallen by 27 percent to about USD 20 billion compared to the same period last year. Yet, there is strong demand for sukuk issuance and investor demand far outstrips supply. The demand for sukuk is mainly driven by double-digit growth of the Islamic banking industry and interest in credible, sharia-compliant, liquid securities.
A recent report by Ernst & Young forecasts that the Islamic notes market will touch USD 950 billion by 2017. The Islamic finance market has also shown great greater resilience compare to emerging-market debt in volatile economic times. During the current year, the sukuk market has declined by 0.7 percent, while a decrease of 5.9 percent was noted in JPMorgan Chase & Co.’s EMBI Global Index.