Hong Kong moves towards provision of Islamic financial services

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Possible changes in tax law to facilitate entry of Islamic fund market

By Chris Devonshire-Ellis

HONG KONG, Jan. 16 – Hong Kong’s Financial Secretary, Joseph Tsang, yesterday committed to the development of Hong Kong as an Islamic financial centre by seeking to attract more Muslim investors. The territory has just announced it has applied to join the Islamic Financial Services board, the international body established to develop standards for Islamic finance, and was looking at ways to modify its tax laws to attract Islamic finance to Hong Kong. The comments were made at yesterday’s Hong Kong Monetary Authority Islamic Finance Seminar.

Islamic law (Shariah) prohibits interest income but does permit profit sharing, meaning that international financial investments involving Muslim countries or investments are structured to show gains as profits rather than as interest. However, in Hong Kong, interest income is tax-exempt whereas profits are taxable. It is possible the government could waive tax on income on profits earned from Islamic bonds – a mechanism it already permits with government bonds and exchange fund debt papers. Malaysia also offers tax incentives in this manner to attract Islamic finance and to develop its Islamic financial services.

If implemented, the knock-on will also affect Mainland China, as it gives mainland debt issuers access to Shariah-compliant financial instruments – which would free up overseas capital to invest in border areas in China that are heavily Muslim, such as Xinjiang, Gansu and Ningxia, and further provides the government with opportunities to help further develop and stabilize these regions and keep them from external militant Islamic influences – a situation especially pertinent to parts of far Western Xinjiang, which shares a border with Afghanistan. China also has vested interests in Central Asia, Indonesia, and various African Islamic states, in particular over energy and other strategic resources, and the establishment of a healthy offshore trading market in Islamic bonds would suit its purposes well.

Useful further reading:

Hong Kong Government Islamic Finance Seminar Press Release

Islam & Muslims In China

History of Islam in China

Way Out West! (see July 2003 issue of China Briefing on the archives)

China Lays Its Stake On Central Asia

China Wants Stable Afghanistan