Hong Kong Sharia finance goals remain elusive

Monetary Authority announced plans this week to sell $1b of five-year sukuk

As Hong Kong readies a second sovereign Islamic bond sale, its goal of becoming a Sharia-compliant financing hub for Chinese companies remains elusive.

The Hong Kong Monetary Authority announced plans this week to sell $1 billion (Dh3.67 billion) of five-year sukuk, the same size and tenor as its debut issue in September that drew $4.7 billion of bids. Those notes last yielded 2.06 per cent, almost the same as the rate at issue and about twice the level of the government’s similar-maturity non-Islamic securities.

Hong Kong is vying with cities including London and Singapore to be a hub for the global Islamic finance industry, whose assets are forecast by Ernst & Young LLP to double to $3.4 trillion by 2018 from 2013. While the city government’s AAA- rating will ensure demand, Hong Kong is unlikely to host any corporate offers in the next one to two years as sukuk is seen as an “exotic instrument,” said Sergey Dergachev, a portfolio manager at Union Investment Privatfonds Gmb H.

“It’s a journey for companies to tap the Islamic finance market as the Sharia concept is still a novelty there,” said Nik Norzrul Thani, chairman of Kuala Lumpur-based law firm Zaid Ibrahim & Co. “We have some enquiries from Chinese companies based in Hong Kong on the possibility of selling sukuk.”

Narrow spread

HKMA’s second offer should be well received given the oversubscription rate for Malaysia’s dollar sukuk last month, Nik Norzrul said. There were $9 billion of bids at that sale, compared with the $1.5 billion of 10- and 30-year notes sold.

Hong Kong will probably pay about 1.85 per cent on the fiveyear sukuk, Union Investment’s Frankfurt-based Dergachev said in an email interview on Tuesday. That would compare with the 2.005 per cent profit rate at its debut sale, which was 23 basis points above similarmaturity US Treasuries, according to a September 11 government statement. That was the narrowest spread ever achieved on a benchmark dollar issue from an Asian sovereign outside Japan, the statement said.

The main objectives of Hong Kong selling sukuk are to demonstrate that the legal framework for issuance in the city is widely accepted internationally and to attract more issuers and investors to the local market, the HKMA said in an emailed response to questions.

The city has been trying to develop an Islamic financial market since 2007, with Airport Authority Hong Kong announcing the following year that it was looking to sell as much as $1 billion of sukuk, an offer that never occurred.