Hong Kong and the hookah of Islamic investment
By Kent Ewing

HONG KONG - This city has a well-deserved reputation as a financial center catering to a diverse range of international investors, but so far the Muslim world has been left out of the picture. Realizing the tremendous potential of Islamic investment, however, officials are now acting to correct that oversight with the launch of Hong Kong's first Islamic retail fund.

Hong Kong comes late to the game of Islamic finance - cities such as London and Singapore have already jumped far ahead - but the opening of the Hang Seng Islamic China Index Fund, run by Hang Seng Investment Management Ltd, signals an important start. Hong Kong's Securities and Futures Commission (SFC) authorized the fund's launch last week, and for months the city's financial secretary, John Tsang, has been talking up Islamic investment - estimated to be worth as much as US$1 trillion and growing 15% annually - as a way for Hong Kong to enhance its international portfolio of financial services. The SFC hopes the world's Muslims will see the new fund as the beginning of Hong Kong's commitment to serve as the gateway for Muslim investment on the mainland.

"Facilitating the development of the Islamic investment market is a high priority of the SFC," said the regulator's executive director of intermediaries and investment products, Alexa Lam, adding: "The introduction of Islamic retail funds gives us added variety to our retail fund market and underscores the versatility of our asset management industry."

Tsang made Islamic investment a priority in a speech he delivered in September at the Annual Conference of the Hong Kong Investment Funds Association, saying "now is the time" for Hong Kong to wake up to the financial potential of the Muslim world.

"There is enormous potential for Islamic finance to expand and develop," the financial secretary said. "Many leading international banks, most of which have offices in Hong Kong, devote considerable resources to creating and servicing a variety of Islamic financial products to meet this demand."

Tsang pointed out that Hong Kong is well equipped and positioned to serve as middleman for investors in the Middle East looking for opportunities in the mainland market.

"As the mainland's financial center, we are in a unique position to attract investors in the Middle East and elsewhere," he said. "Many investors in the Middle East are already eyeing opportunities in the Chinese market. In this connection, Hong Kong is best placed to be the most effective intermediary for structuring and marketing Islamic investment in products to meet the needs of mainland enterprises and Middle Eastern investors."

Hong Kong Chief Executive Donald Tsang also pushed Islamic investment in his annual policy address last month, calling for the development of an Islamic bond market. Now, with the launch of the Islamic retail fund, the leadership's vision may be turning into reality. That said, however, Hong Kong still has a lot to learn about Islam if it wants to win over the hearts, minds and capital of the Muslim world.

While Hong Kong is home to 300,000 Muslims, most of the city's population of 7 million - including those working in the financial sector - remain largely ignorant of Islamic traditions and habits of life. Ramadan passes largely without notice, and mosques are few and far between. Moreover, there are not many financial experts schooled in the special rules of Islamic finance.

Many Muslims plan their investments according to Islamic law, or sharia. That means they are prohibited from investing in companies involved in gambling or the sale of pork or alcohol. While sharia allows profit sharing, it forbids interest payments - regarded as a form of usury in the Koran. Indeed, even credit cards, which sharia permits, can be tricky.

Muslim-investor.com offers this advice: "For the Muslim, a credit card can be had, but extreme care must be taken not to be late in paying the statement balance in full so as not to incur interest. If you travel on a regular basis, you may miss a statement, so maybe you want to talk to your bank about this and explain that you travel and make other arrangements."

It is clearly time for Hong Kong's financial services sector to bone up on the rules of Islamic investment, but Muslim voices in the city are also calling for this greater awareness to extend beyond their money to their spiritual and culinary needs, as well to their entertainment preferences. Saeed Hamad Aljunaibi, consul general for the United Arab Emirates in Hong Kong, was quoted in the South China Morning Post, the city's leading English-language newspaper, as saying Hong Kong needs to become more "Muslim-friendly" if it hopes to attract investors from the Middle East.

He has a point. For example, it is far easier for Muslims traveling to Singapore, Bangkok and Kuala Lumpur to find hotels that supply a bedside copy of the Koran, Arabic translators, arrows on the ceiling pointing toward Mecca and prayer rooms to accommodate the Koran's dictum of five daily supplications. In these cities, Muslims are also much more likely to find restaurants that have received halal certification, making them acceptable under Islamic law, as well as fashion and entertainment tailored to their tastes.

Among Western cities, London is considered the most accommodating to the Muslim lifestyle and to Islamic investment, despite the terrorist attacks on the city's transport system by Islamic extremists in July 2005, which killed 52 commuters and injured more than 700.

So Hong Kong starts its quest to attract Muslim investors at a disadvantage and faces a steep learning curve, but the payoff could be big. No doubt one quick lesson the city should learn is to offer potential investors easy access to the hookah - a water pipe that, when filled with aromatic tobacco, has become a social institution in the Middle East. The Hong Kong deal-striking standard of cognac and a Cuban cigar may, at times, have to give way to sweetened tea and a shisha pipe.

No interest, no gambling, no pork and no alcohol - that is asking a lot of a city that loves them all. Above everything, however, Hong Kong values the bottom line - which in this case is a share in the US$1 trillion, plus 15% annual growth, that Muslims have invested in the world economy. That is something to smoke about - and the preferred instrument should be the hookah.

Kent Ewing is a teacher and writer at Hong Kong International School. He can be reached at kewing@hkis.edu.hk.