Strengthening the Environment for Islamic Finance in Hong Kong – A Regulatory Analysis

Abstract

Islamic finance has become of increasing interest within the last several decades, given the significant economic rise of many Islamic nations and their growing economic engagement with the People's Republic of China. Major Islamic nations such as those in the Middle East, South Asia, and Southeast Asia have multiplied their investment and trade volumes with China, with Hong Kong naturally acting as a middleman in terms of financing. Furthermore, most of these nations have become more adamant in aligning their religious beliefs together with their investment and financing principles. Hong Kong's banking ordinance represents the major regulatory framework in connection with the SFC's requirements on securities. The article represents a regulatory analysis of the Hong Kong banking and securities framework utilizing a descriptive approach. While existing regulations may provide a basic framework to assist the provisioning of Islamic financial products, a separate regulatory framework that addresses the specific requirements of Islamic financial products and provides targeted regulations is needed. Given the nature of risk sharing between creditors and debtors, in addition to the absence of the charging of interest, this requires that both transactions can be conducted efficiently, as well as that contractual implementation of the connection of assets to the lending requires little overhead. A dedicated regulatory framework for Islamic finance represents a unique opportunity for Hong Kong to place itself at the center of Islamic finance engagement with the People's Republic of China and support the growth of the sector.