Islamic Finance is a big new area of interest for banks and financial services. Not only does it offer opportunities for new products and services, but it is also one of the fastest growing areas of finance. Despite the global economic slowdown, analysts estimate that the market for Islamic assets will grow by 10 to 15 percent in 2009. While this is not as fast as the 20 to 30 percent growth experienced in 2008, it nonetheless is an important opportunity for banks, particularly in Hong Kong. Hong Kong has made a point of being an attractive destination for investors and marketing participants of Islamic Finance.
With a worldwide market size of US$400 billion and no clear leader in the market for Islamic Finance, Hong Kong stands to gain considerably from boosting its market presence, infrastructure and capabilities in this area. While Dubai, Kuala Lumpur and London all have sizeable markets for Shariah products, no one can claim global leadership in Islamic Finance. And with over 1.6 billion Muslims in the world, this is an important and growing market that no financial center can afford to ignore. Islamic law (Shariah) prohibits taking or giving interest (Riba) which is the most essential feature of Islamic banking. Because of this, other approaches such as profit-sharing and fee-based financing have developed to comply Shariah laws.
These special modes of financing have emerged in retail, private and commercial banking for debt and capital markets, insurance, asset management, structured finance, project finance, derivatives, and other areas. To capture this opportunity, it is important that market participants in Hong Kong are well-trained and properly versed on the intricacies of Islamic Finance.
Broadly, Shariah investing prohibits taking or paying interest (Riba), speculative transactions or gambling (Masir), selling something with uncertain contract terms or which you do no own (Gharar), and investments in businesses that have non-Islamic behaviors (such as businesses dealing in alcohol, drugs, gambling, weapons, and so on). Financial services companies that want to get into the Islamic Finance market need to ensure that their staff members are trained on the fundamentals of:
- Bai’ al-inah- sale and buy-back
- Bai Ad-Dayn – sale of debt
- Ijarah – leasing
- Istisna – contract of exchange with deferred delivery
- Mudarabah – profit sharing
- Musharaka – equity participation
- Murabaha – cost plus
- Sukuk – Shariah compliant bonds
- Takaful – Islamic insurance
- Jualah – service charges
- Kafalah – guarantee
- Qard – loans
- Wakala – Agency
In addition to developing domestic business, Hong Kong can be seen as a gateway to China for Islamic Finance. With the large number of petrodollars and Chinese sovereign funds looking for investments, the creates a unique opportunity for Hong Kong (which is the fund-raising platform for Chinese companies outside of the China).
Hong Kong has already developed financial products that are Shariah compliant and has several tracker funds and exchangeable sukuks in its markets. While proven structures will continue to flourish in a the Islamic Finance market, there are signs that some of the more sophisticated originators and investors are looking for more value-added and innovative structures. As a center for financial innovation in Asia, Hong Kong is well-positioned to capture this opportunity.
However, my analysis shows that Hong Kong’s banks and financial services firms do not have the human capital, skills or knowledge to truly engage in the Islamic Finance market. Banks should therefore invest in broad-based employee training initiatives so that their staff understands the market opportunity and potential approaches to Islamic Finance. This can only be done if top leaders truly believe in the potential for Shariah compliant products and embrace effective training as a way to drive change.