Pacific Money

The Rise of Islamic Finance on China’s Belt and Road

The BRI in the Gulf has given rise to Chinese investment in developing the Islamic financial sector.

By Muhammad Zulfikar Rakhmat for
The Rise of Islamic Finance on China’s Belt and Road
Credit: Christoph Schulz on Unsplash

The Gulf may not be highlighted on maps of China’s Belt and Road Initiative (BRI), but the region has certainly experienced a rise in relations, particularly in the economic sphere on which the BRI is predicated. It is not widely reported that the BRI in the Gulf focuses on Islamic finance.

Since the launch of the BRI in 2013, Chinese banks, including the Asian Infrastructure Investment Bank (AIIB), have made efforts to establish outbound Islamic financing frameworks and to encourage relevant entities to provide Islamic financing products. This is perhaps not surprising as in the past few years, the Gulf, particularly the United Arab Emirates (UAE), has become one of the most prominent Islamic financial centers in the world and in recent years has made important strides toward becoming the capital of the world Islamic economy.

One crucial example comes from the AIIB, which engaged in discussions with the Saudi Arabia-based Islamic Development Bank (IDB) regarding Islamic finance projects in the region. The plan was finalized in early last year, with the partnership between the two banks to provide infrastructure loans in the “Islamic world,” which comprises the IDB’s member states.

Previously, the Industrial and Commercial Bank of China (ICBC) has also agreed to establish Sharia-compliant banking products in the Gulf and China and, in April 2016, Fullgoal Asset Management in Hong-Kong partnered with the UAE Sharia-compliant company Mawarid Finance to issue Islamic finance.

In 2015, Chongqing-based Southwest Security also signed a cooperation deal with Qatar National Bank (QNB) and Qatar International Islamic Bank (QIIB) to develop Islamic-compliance finance products in Qatar. The deal focuses on establishing a framework for Chinese markets to access investor markets in the Gulf, and to open the Chinese market to the Gulf’s capitals.

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As an outcome of the expanding interest among Chinese banking and financial institutions in the Islamic financial market, in 2015 it was reported that, according to financial officials in Hong Kong, the AIIB was considering Hong Kong as the first financial hub to issue sukuk (an Islamic financial certificate, similar to a bond in Western finance) for large development projects*. This is the result of a series of policies introduced by the Hong Kong government to cater to the growing activities related to Islamic finance in China.

For example, the government of Hong Kong passed a law in March 2014 to enable the issuance of sukuk by the Hong Kong Monetary Authority (HKMA). The Loans (Amendment) Bill 2014 followed the introduction of the Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) Ordinance 2013. Both laws together offered a taxation framework for sukuk, similar to that issued by Hong Kong for conventional bonds.

As a consequence, in 2014, Hong Kong became the first government in the world to issue a dollar-denominated sukuk and debuted its first placement worth $1 billion. The sukuk was listed on Hong Kong, Malaysia, and Dubai bourses and created a crucial global benchmark. Several banks from the Gulf including National Bank of Abu Dhabi (NBAD), the Abu Dhabi Islamic Bank (ADIB), Emirates NDB, and QInvest were involved in the placement. A year later, the Hong Kong Monetary Authority announced that it had sold another $1 billion five-year sukuk.

Such developments also take place on the soft-power side. The China-UAE Conference on Islamic Banking has been held since 2015. The conference, which is held by various Chinese and Gulf institutions, such as China Islamic Finance Club as well as the Dubai Center for Islamic Banking and Finance, discusses issues such as ways to enhance the Islamic finance aspect of the BRI’s implementation in the Gulf.

China’s encounter with Islamic finance began in earnest after the 2008 global financial crisis, after which there was a renewed debate on the role of Islamic finance in helping to stabilize the global financial system because of its strong ethical and religious principles. While the conventional banking sector was estimated by the IMF to lose around $3 to $4 trillion due to the financial crisis, no Islamic bank necessitated bailouts at the scale experienced by some of world’s banking industries in developed countries.

Gradually understanding this phenomenon, the Chinese government introduced a series of Islamic funds to attract foreign investors. The Gulf was one of the fastest to respond, with Bahrain’s Shamil Bank establishing its $100 million Shamil China Reality Mudarabah, the first-ever Islamic property endowment for investment in China’s real estate market. After China joined the Islamic Financial Services Board, one of the world’s main standard-setting bodies for Islamic finance in 2009, a proposal was made to study the amendments necessary to the law to facilitate the development of Islamic finance in China. While the Chinese government has only made limited follow-up efforts on amendments, Islamic banks from around the world have begun to invest in China.

As the industry has expanded, Chinese banks and institutions have increasingly acknowledged the importance of tapping into this increasing market, which represents approximately 1 percent of global assets (worth about $2 trillion) and which is expected to increase to around $3 trillion by 2020. The HNA Group, which owns the well-known Hainan Airlines, for example, planned to increase borrowing to $150 million in Islamic loans in October 2015, to buy a number of new ships. The purchase made the HNA Group the first firm in mainland China to obtain financing through Islamic finance. It is reported that “Gulf-based banks are working on this transaction.”

Looking into the future, it seems that Islamic finance will continue to be a crucial element of the implementation of the BRI in the Gulf and in other parts of Islamic world. As asserted by then-financial secretary of Hong Kong, John Tsang, since many countries in the BRI are Muslim-majority countries, it is important for Chinese banks to become more involved in the Islamic finance sector.

Dr. Muhammad Zulfikar Rakhmat is a lecturer at Universitas Islam Indonesia and is a research associate at Jakarta-based Institute for Development of Economics and Finance (INDEF)

*In an email to The Diplomat, Laurel Ostfield, head of communications for the Asian Infrastructure Investment Bank, responded that the AIIB has not made a decision or any announcement regarding the use of Hong Kong as a financial hub to issue sukuk.