Hong Kong's Central business district. The city wants to develop into an Islamic finance hub and issued its first sovereign Islamic bond in September last year, just three months after launching its first Islamic investment fund.[Photo/IC]

Qamar Zaman Minhas, chairman of the Islamic Community Fund of Hong Kong, had not expected that Hong Kong's first-ever issue of a sovereign Islamic bond, or sukuk, would generate such a strong market response.

In September last year, Hong Kong sold sukuk amounting to $1 billion after attracting orders to the tune of $4.7 billion, or 4.7 times the amount on offer. The sharia-compliant bonds were allocated to more than 120 global institutional investors - 47 percent in Asia, 36 percent in the Middle East, 11 percent in the United States and 6 percent in Europe.

"It came as a pleasant surprise. The sukuk sale shows that there is a strong demand for Islamic financing in the region," said Minhas, who is also president of the Pakistan Association of Hong Kong.

The special administrative region, which provides a wide range of financial products and services to local and international customers and investors, is the fourth Asian issuer of a five-year sovereign sukuk, following Malaysia, Indonesia and Pakistan.

However, the Hong Kong sukuk is the first US dollar-denominated Islamic bond issued by an AAA-rated government, in a global Islamic financial market expected to surpass $2 trillion in 2014.

According to KFH Research, an Islamic investment research firm, the value of global Islamic finance assets will reach $6.5 trillion by 2020 compared to a total of $150 billion in the mid-1990s.

"Hong Kong cannot keep itself away from the expanding Islamic financing system if it wants to retain the status of an international financial center," Minhas says. "New developments could encourage others to test the Hong Kong market as the city is a gateway to the Chinese mainland."

Islamic banking and financing refers to a system of financial activity that adheres to the principles of sharia law - Islamic principles which prohibit speculative activities including interest, gambling and uncertainty.

The Hong Kong Monetary Authority has made no secret of its aspirations to develop the city as an Islamic finance hub, particularly in the capital markets segment.

Islamic financial assets with exposure to the Chinese mainland are already domiciled in Hong Kong. The number of banks in Hong Kong offering Islamic banking services, mainly in wholesale banking and asset management, has been increasing.

Active players are Kuala Lumpur-headquartered Hong Leong Bank, the first bank to launch Islamic banking in Hong Kong in 2008, and CIMB Islamic, which offers shariacompliant financial solutions through its strategic partner Bank of Yingkou in China.