Originally appeared in Islamic Finance News

The Correlation

Any correlation between Greater China (PRC and Hong Kong), Taiwan and Islamic finance may not, at first, be readily identifiable but such connections exist and are continuing to grow. This is not surprising. The reasons for the growth in importance of each of China, Hong Kong and Taiwan in the context of the global economy as financial centres and inward- and outward investment target jurisdictions have been well documented.

Whilst the Muslim populations in each of these China States and regions is negligible in comparison to the MENA region, Indonesia and Malaysia, it is more the motivation of growing these jurisdictions as international financial centres, which offer a myriad of specialist products and services, that drives this correlation. This is especially the case for Hong Kong which, in December 2011, leapfrogged both the US and the UK to top the World's Economic Forum's Financial Development Index for the first time, after being ranked fourth in 2010. The new top ranking renders Hong Kong even more attractive (notwithstanding its number 1 ranking for listings and being the major offshore yuan/renminbi trading centre) for capital raising, product launch and distribution, and centre for specialised financial services.

Past Developments

The fact that it is more the growth of the sophistication of services and products to be offered and supported that drives the correlation between Greater China, Taiwan and Islamic finance; it is not to say that there is currently an insubstantial market for Islamic finance products, particularly in the PRC.

Apart from numerous developments in the mainland, in 2009 the Ningxia Hui Autonomous Region, with the encouragement of the China Banking Regulatory Commission ("CBRC"), took the lead in pioneering Islamic finance in the PRC. This development was seemingly to cater to the needs of the 2.2 million Muslims in Ningxia, comprising approximately 10% of the PRC's total Muslim population. Notwithstanding that the growth of this project may not have been exponential as would be hoped (unsurprisingly considering the stresses facing global and local markets); the indications are that the CBRC intends to enlarge the scope of this project.

The Taiwanese economy is driven, primarily, by external trade particularly in its technology products industry. Accordingly, the global financial crisis and the resultant decrease in demand from the US and Europe for Taiwanese products has dented external demand. Taiwan has not been complacent in responding to the fall in demand and has sought other external markets, including the MENA region, Malaysia and Indonesia. In the Middle East Taiwan has a strong mutually beneficial trade relationship with Saudi Arabia in terms of which technology products are exported into the Kingdom and crude oil and natural gas are imported into Taiwan. Further, the Taiwanese Stock Exchange Corporation has established exchange traded funds with both the Abu Dhabi Securities market and the DIFC and has also established a Taiwan Shari'ah Index.

From the Hong Kong perspective, the Hong Kong Monetary Authority has clearly and repeatedly stated its objective to develop the special administrative region as a hub for Islamic finance. This development has been reflected in the steps proposed to change Hong Kong's tax regime to facilitate Islamic finance, the numerous sukuks which have been listed on the Hong Kong Exchange (and which have been favourably received in the market), the introduction of the Hang Seng Shari'ah Compliant China Index Fund and the growth in the number of banks and financial institutions providing Islamic banking and finance services.

The Challenges

Consistent with the experiences of other States and financial centres in developing Islamic finance, specific challenges need to be faced and overcome in order to create a conducive environment. These challenges include:

  • Circumstances where the scope of the Islamic finance and services to be provided falls beyond the parameters of the existing financial services laws, regulations and accounting regimes, therefore requiring amendments to be introduced or special dispensation to be granted.
  • The recurring issue of tax treatment of Islamic finance products and the need to provide a tax environment which does not unfairly penalize these products for the structure and techniques employed. Particularly as these structures and techniques are shown to often provide better downside protection and be more conducive to the development of a fiscally sound economy. Accordingly, changes are required to stamp duty, property and other taxes regime in order to enable Islamic finance products to compete.
  • A further recurring challenge is the lack of skilled Islamic finance professionals, whether in the context of Islamic scholars, accountants, lawyers or other professionals.

Perhaps the clearest indicator of the above challenges is the lack of Islamic finance products currently available in the market, whether sukuk, Islamic REITs or equity funds, Ijarah or Murabahah. The consensus is that the more products that come online and are distributed, the greater the momentum of the development of Islamic finance.

The Future

Islamic assets are currently estimated to stand at US$1 trillion. This figure may be extremely small relative to assets under management in the global funds industry but is three times the size of the assets under management in the PRC's funds industry. Further, this figure is anticipated to grow to up to US$5 trillion by 2015. Jim O'Neill, chairman of Goldman Sachs Asset Management division noted in 2011 that the Arab world could emerge as one of the future BRICS states. These growth predictions are more (rather than less) likely following the Arab Spring revolutions.

For the PRC, the initial steps have been taken. Whether Islamic finance will grow in the mainland from being purely a niche market to possibly being an alternative to mainstream finance will depend upon the momentum gathered within the next few years.

The Taiwanese perspective is to develop and cement the relationships and markets for future products. The island is well placed to build on its current relationships with the MENA region and also with the mainland.

Unsurprisingly, the development of Hong Kong's capital markets and offshore yuan/renminbi trading centre status has dominated the attention of the markets and the regulators. Opportunities for Hong Kong abound. The special administrative region is the largest source of foreign direct investment into the Ningxia Hui Autonomous Region. This is one area where Hong Kong can be at the forefront of Islamic finance in the PRC.

However, in the context of the global Islamic finance arena, the space is a lot more crowded. If Hong Kong is to compete in the future with London, New York, Kuala Lumpur and Dubai in this arena, the time is at hand to take the necessary steps.


In the final analysis, much has been said in the preceding five years as to the predicted growth of Islamic finance. Unsurprisingly due primarily to the global financial crisis, the predicted exponential growth did not materialize. This does not mean that it will not happen. The twenty first century has been dubbed the "Asian Century"; time will tell whether this encapsulates Islamic finance, particularly in Taiwan, Hong Kong and PRC.

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