Standard Chartered Plc is in talks with potential corporate sukuk issuers from China and Hong Kong, as the city government debuts its Islamic bonds.
The lender, the fourth-largest Shariah-compliant debt arranger this year, sees Hong Kong as a “very unique opportunity as a gateway to China,” Afaq Khan, the Dubai-based chief executive officer at Standard Chartered Saadiq, said in an interview. The city’s entry to the Islamic market will see increased interest for assistance in setting up funds in line with religious tenets and structuring sukuk, according to law firm Appleby Global Group Services Ltd.
Hong Kong sold $1 billion of five-year sukuk, only the fourth Asian government to issue Islamic bonds after Indonesia, Malaysia and Pakistan. The sale drew orders for 4.7 times the amount on offer. The issuance will help meet demand in an
industry with $2 trillion in global Shariah-compliant banking assets, as Luxembourg and South Africa plan to follow the U.K. in tapping the market for the first time this year.
“There’s a desire for the Islamic finance industry to invest and grow in a fast-growing economy like China,” Khan said on Sept. 9. “I think it’s a very good move for the Islamic industry as China will continue to need capital for the next several decades.”
‘Significant Interest’
Hong Kong, which has a Muslim population of about 270,000, identified Islamic finance as a priority in 2007 and amended laws in July last year exempting sukuk issuers from paying tax on underlying assets and on capital gains. A bill was approved in March allowing the government to proceed with the sale.A plan by Airport Authority Hong Kong, which operates the world’s 10th busiest hub, to sell as much as $1 billion of Islamic bonds in 2009 never materialized. Malaysia’s sovereign wealth fund, Khazanah Nasional Bhd., became the first company to have sold yuan-denominated sukuk in 2011.
Hong Kong’s dollar-denominated notes were priced at a 2.005 percent profit rate, according to a government statement on its website. The U.K., which along with Hong Kong is rated the highest investment grade, sold sukuk for the first time in June at a coupon of 2.036 percent. Those securities yielded 1.76 percent yesterday, data compiled by Bloomberg show.
In the Islamic finance world, qualified scholars issue fatwas, or rulings showing products conform with Shariah law. Lawyers versed in the principles of Islam act as advisers.
“Hong Kong’s debut sukuk offering will raise significant interest among investors and corporates in Hong Kong,” Jeffrey Kirk, Appleby’s global head of Islamic finance, said in a Sept. 9 interview from his base in the British Virgin Islands. “In bringing such products to market, it is essential to have legal experts involved in the structuring, execution and ongoing phases.”
Spurring Issuance
The supply of Shariah-compliant bonds is insufficient to meet demand in an industry that Ernst & Young LLP forecasts will see global Islamic banking assets rise to $3.4 trillion by 2018.Global offerings of sukuk, which pay returns on assets to comply with Shariah law’s ban on interest, climbed 34 percent to $31.1 billion in 2014 from a year earlier, data compiled by Bloomberg show. Issuance totaled $43.1 billion in 2013 and a record $46.5 billion the year before.
The U.K.’s debut sukuk of 200 million pounds ($322 million) got orders for 10 times the amount on offer as the government became the first non-Muslim country to tap the market. Only 1.8 percent of the 1.36 billion people in China follow the religion, according to U.S. government data.
“I hope that the sukuk issuance will catalyse the further growth of the sukuk market in Hong Kong by encouraging more issuers and investors to participate in our market,” Financial Secretary John C Tsang said in the statement.
Market Development
Malaysia, which pioneered Islamic finance 30 years ago, saw its Shariah-compliant banking assets double to 543 billion ringgit ($169 billion) in 2013 from five years earlier, according to an October government report. The Southeast Asian nation is also the world’s biggest sukuk market.“Historically, it has also been the case that once an initial Islamic finance product such as a sukuk is launched in a jurisdiction, this often leads to other Islamic finance products being brought to market,” Appleby’s Kirk said. “As such, the launch of this initial sukuk is likely also to be closely monitored by finance professionals other than those involved solely in the debt market.”
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