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Thursday, 27 November 2014

IFR Comment: UK needs to move faster to capture Dim Sum market

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I do hope London’s efforts to develop into a global hub for offshore renminbi debt issuance (aka Dim Sum bonds) are pushed forward more aggressively than similar efforts to promote London as a global centre for Islamic capital markets.

That may sound a little harsh, given the existence of five fully Sharia-compliant UK-registered banks plus Islamic windows at a host of other banks in the UK. But Islamic finance continues to operate in something of commercial/wholesale backwater in the UK, while on the investment side, it’s kind of been pushed into the ethical investment bucket.

I watched an interview recently with Peter Sands, chief executive of Standard Chartered Bank. HSBC and StanChart basically have the Dim Sum bond market wrapped up – the two have a 50%-plus underwriting market share. Sands’ thrust was that London could start transacting RMB business this year but that a number of things would have to come together to make it possible.

Therein lies the issue. Before we can get to marquee products such as RMB corporate bond issuance, London needs to attract a much larger pile of RMB deposits (there actually aren’t a lot of renminbi in London at the moment and I don’t see a lot of UK banks actively pushing RMB business), put the clearing and settlement plumbing in place, and create hedging and risk lay-off products. The Bank of England also needs to get everything straightened out with the People’s Bank of China at the regulatory and supervisory level. Once the building blocks are in place, it’s all about marketing.

A UK government or quasi-government Dim Sum bond would be a fabulous advertisement, but I doubt it’s on the immediate horizon. The thing is: UK government has been toying with the idea of issuing Sukuk for almost five years and the story has lost any interest. The Treasury is now blaming its non-appearance in the market on rock-bottom conventional Gilt yields, which it says it can’t ignore in the current circumstances where every basis point of cost saving counts.

But the idea of UK government Sukuk was always much more a statement of support and intent than it ever was about funding per se. That said; look at issuance levels as well as levels of over-subscription for the right names today in primary Sukuk. Gulf accounts are open for business and I would bet that a UK government issue – with a retail tranche thrown in – would be massively popular and that the DMO could get good proxy levels.

In the meantime, Hong Kong, the de facto home of Dim Sum bonds, has brought in new rules for Islamic financial products. As IFR’s story on this points out, this is an important step in the development of its own Islamic bond market. This, plus the fact that Emirates NBD recently sold and retapped the debut Dim Sum bond from the Middle East – thereby creating a potentially highly lucrative flood of similar issuance – definitely gives the advantage to Hong Kong in the financial hub stakes.

A UK government or quasi-government Dim Sum bond would be a fabulous advertisement, but I doubt it’s on the immediate horizon.

HK’s efforts are no more than a consultation on legal amendments designed to put in place a more effective operating infrastructure and level the playing field between conventional and Islamic products. Bankers in the Gulf used jokingly to call the differential between conventional and Islamic financing costs the CBM – the cost of being Muslim. Before the financial crisis, costs between conventional and Sharia-compliant financing products had been whittled away to zero as Islamic finance caught a strong following wind and was the market of the moment.

Dubai’s fairly serious woes, a smattering of Sukuk defaults, plus the global financial crisis took the sheen off the market; the more recent eurozone crisis and the risk-off environment it created pushed Islamic finance off the agenda. But assuming we’re through the worst – possibly a big assumption – could this be the moment to take up the issue again? Possibly.

It’s highly unlikely that Hong Kong monetary authorities have in mind a bid to usurp Kuala Lumpur’s position as Asia’s pre-eminent Islamic finance centre. But being a financial centre is all about a flexibilised regulatory regime that offers opportunities to issuers and investors to transact mutually beneficial business. London shouldn’t forget that it’s also about opportunism and jumping on the moment.

● On a slight tangent, and speaking to my point at the top, I was interested to see that Ethical Asset Management in London has launched what it calls the world’s first investment sukuk, bringing to the fore the equity characteristics that are truer to the spirit of the instrument. The manager plans to raise £200m over time, with an initial £50m needed to start acquiring the UK student housing that will provide buyers with their profit share over the five to seven-year life of the fund.

I have no idea if the fund is a world first or not, but what struck me about it – and put this down to my slightly wicked sense of humour – is that while Sharia law forbids, amongst other things, any association with alcohol-related activities, and while student housing in London has offered up some pretty solid returns in the past year, I can’t help smile at the thought that while housing is distinctly not alcohol-related, the amount of alcohol consumed in student housing is multiple times the national average! Happy hunting.

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