Sukuk and the city

"Such issuances will also assist in providing sufficient market breadth and depth for secondary trading.

This will contribute to increasing the efficiency of Islamic financial markets. Also, they will provide benchmarks for the pricing of other Islamic financial instruments and the measurement of the performance of Islamic banks."

As interest in Sukuk increases, more countries are lining up to compete to host new corporate Islamic bond issues. The UK is not the only non-Muslim government to be doing so. A significant proportion of international Sukuk issuance to date has been in US dollars, but 14 different countries have performed them in 10 different currencies so far.

The likes of Thailand, Japan and Singapore have raised the prospect of sovereign issuances, while experts are also hoping for the development of a Euro-based Sukuk market, helped by greater activity in the UK.

Edmond Lau, director of monetary management at the Hong Kong Monetary Authority (HKMA), says the country is part of a growing group seeking to introduce Islamic services into their mainstream financial systems.

He hopes to have the necessary regulatory framework ready "within months... The Islamic financial services industry, however substantial it already is, has not been growing fast enough to match growth in Islamic wealth. It therefore calls for new entrants into the market.

"Our objective is to make Hong Kong a platform for wholesale Islamic financial activities. We are trying to nurture a level playing field so that Islamic financial transactions can take place in Hong Kong."

By preparing the ground for Sukuk issues, countries like the UK and Hong Kong hope to tap into Middle East wealth and regional investors' ongoing need to diversify their investments.

As evidence of growing ties between the Gulf and Far East, Lau cites an Economic Intelligence Unit (EIU) survey of Middle East financial service professionals, in which over a fifth said they expected Asia-Pacific to account for the largest portion of equity investment from their clients within three years.

The HKMA aims to use Sukuk to provide Gulf investors with better access to China's growth market, particularly the numerous ‘red chip' companies from the mainland that are listed in Hong Kong. Lau points to the success of a recent Malaysia-based issue that was linked to some of these firms.

Nasser Al Shaali, CEO of the Dubai Islamic Financial Centre Authority (DIFCA), which has partnered with Malaysia and Hong Kong on Sukuk rollouts, argues that "the centre of gravity in capital markets is shifting eastward". He says: "There has been tremendous wealth accumulation in the last 10 years and multinational companies are locating in the Middle East and Asia in reverse globalisation.

"More and more countries are putting their hats in the ring to compete in the Sukuk market. This competition between cities is generally very good. It will help develop the industry, innovation in products and services and it will help foster more work in standardisation."

Back in the UK, the government is grappling with the complications of enabling its Sukuk market to flourish amid this level of competition. It has been encouraging the development of Islamic financial services for years, and recently assumed powers to introduce new guidelines to encourage corporate Sukuk issuance.

But discussions continue around issues such as stamp duty and VAT. Any changes, experts say, are likely to be introduced in the UK's Finance Bill 2009.

Some have suggested that political concerns have persuaded the government to back-pedal on the Sukuk issue, but this was denied by a Treasury spokeswoman: "We're not suggesting that Britain will be ruled under Islamic law. We are working towards creating a Sukuk issuance that would allow people, regardless of their faith, to have access to financial services.

READERS' COMMENTS

MORE FROM ARABIANBUSINESS.COM