In his Budget Speech on Wednesday, 25 February 2009, the Financial Secretary John Tsang devoted a whole paragraph, number 46 to be exact, to the continued development of Islamic Finance in Hong Kong. To quote:
“To consolidate Hong Kong’s position as an international financial center, we will further develop and increase financial co-operation with emerging markets. Particular measures are needed to improve Hong Kong’s regime as a platform for the growing area of Islamic finance. Since the structure of most Islamic financial products involves the sale and re-purchase of assets, such transactions may entail tax liabilities in Hong Kong. Therefore, we plan to submit to the Legislative Council in 2009-10 a proposal to create a level playing field for Islamic financial products vis-à-vis conventional ones. The proposal will include making changes to or clarifications of the arrangements for stamp duty, profits tax, and property tax.”
Great words, and encouraging to boot, at least for those of us who have been promoting Islamic Finance as well as Hong Kong as a suitable financial center for it. Unfortunately, the measures now pointed out by the Financial Secretary as requiring change were indicated to the government repeatedly ever since the Chief Executive Donald Tsang first mentioned it in his Policy Address in 2007, but were continuously ignored by the departments concerned.
To give, you some idea as to how long the process may take, consider the case of the UK. Over the last 5 years the United Kingdom has enacted the necessary legislation (similar to what is required in Hong Kong) to put Islamic Finance on the same footing as its conventional alternatives. And there it was a conscious decision based on the notion that the UK could not afford to ignore this rapidly growing sector of finance. It appears to me that this is not, (yet?), the case in Hong Kong, where the advice and recommendations of locally resident Islamic Finance experts (and there are some!) are being continuously ignored. If the required legislative changes take the same 5 years, then Hong Kong will definitely have lost out on this promising opportunity. I would expect the government to push the required legislative changes through the Legislative Council as soon as possible rather than only “looking at the proposals carefully”, a tendency that I have unfortunately witnessed too often, and have now come to the conclusion is natural to the city’s civil service. Please, Mr Tsang, be bold, and take the plunge. Enact the required legislation as soon as possible. Just in case you require advice on any additional changes required, my email address is shown at the bottom of this article. The financial services’ industry will thank you for it!
Now that I have got this off my chest, let’s look at more basic issues with Islamic Finance. In my previous articles you will have noticed that I continuously refer to “Shariah compliance”. The obvious questions are, firstly, what does this mean, and secondly, who decides what is and is not Shariah compliant?
There are several source documents to turn to in order to determine Shariah compliance (and this is where it gets a bit technical but please bear with me). The first and foremost primary sources are the Holy Quran, the Hadith (the sayings of the Prophet Muhammad) and the Sunnah (the practices and traditions of the Prophet Mohammad). Secondary sources include Qiyas (analytical deductions and reasoning), Ijma (consensus of Shariah Scholars) and Ijtihad (legal reasoning) Genius Zone.
As you can see, quite a lot goes into the analysis. It requires extensive knowledge of the religious writings of Islam at the very least but would normally also include a good working knowledge of law. The people who decide whether something is Shariah compliant or not, therefore need to be conversant in all of these aspects of Islam. These experts, known as Shariah Scholars, get together in something called a Shariah Advisory Council. The Council members would review the evidence and then come to a consensual decision based on their interpretation of the Islamic writings and the evidence before them.
There certainly are differences of interpretation between various Islamic scholars which can create some confusion to the outside observer. There is a considerable debate about creating common standards but this is in the very early stages and I think unlikely to be successful. Just like in any other religion in the world, there will always be differences, and maybe that is a good thing.
In recent times, the complexities of the products, primarily financial products, that are being analyses has added another dimension to the qualifications required. The Shariah Scholars are now also required to have a significant understanding of modern finance. This latter condition in particular is quite challenging to fulfill which is why there is considerable shortage of suitably qualified Shariah Scholars globally. For interested parties, Hong Kong does have its own Shariah Advisory Council, which is an integral part of the Arab Chamber of Commerce and Industry.