A year after debuting an Islamic investment fund in Hong Kong, Malaysia's RHB Asset Management Sdn Bhd plans two more as it seeks to develop awareness in the mainland market.

The first of the new funds, which will target Shariah-compliant stocks and bonds, is due to start this month and the second by the end of September, according to Ho Seng Yee, chief executive officer of the Kuala Lumpur-based company.

The existing RHB-OSK Islamic Regional Balanced Fund, which invests in Islamic equities and fixed income, has 15.5 million ringgit ($4.3 million) of assets.

"Despite the global spread of Islamic finance, the development in China is still at the initial stage," Ho said. "We believe the market will continue to grow as it could be the start of a new financial relationship between China and the Islamic world."

As Hong Kong is prepares to sell a second sovereign "sukuk" (financial certificate) after rationalizing its tax laws in 2013, the mainland has yet to introduce fairer legislation for shariah-compliant finance. Bank of Ningxia Co Ltd stopped offering such products after starting a pilot program in 2009, as the nation struggles with a shortage of Islamic experts and an inflexible legal framework.

RHB set up the current fund in April last year and it delivered a 13.5-percent return in its maiden year, Ho said.

The Chinese mainland, where 1.8 percent of the 1.36 billion people are Muslim, is also attracting other Islamic money managers. Maybank Asset Management Group Bhd in Kuala Lumpur will register its existing Shariah-compliant equities fund in Hong Kong by the first quarter of 2016, Chief Executive Officer Nor' Azamin Salleh said earlier this month.

Qatar International Islamic Bank QSC and QNB Capital LLC signed an agreement last month with mainland-based Southwest Securities Co Ltd to develop Islamic finance products in the country. Potential deals include "sukuk" and infrastructure investments, according to Qatar International Islamic Bank.

"Hong Kong is an ideal market for Shariah funds looking for Chinese mainland exposure," said Davide Barzilai, the Asia Pacific Islamic finance head at law firm Norton Rose Fulbright based in the city. "The Chinese mainland is a heavily regulated market, so care needs to be taken when it comes to making investments there and structuring the fund flows."

The government of Ningxia Hui autonomous region in Northwest China, where a third of the 6.5 million people practice Islam, said in December last year it planned to raise up to $1.5 billion from a combination of "sukuk" and conventional debt, but they haven't yet been sold.

Ningxia and neighboring Xinjiang Uyghur autonomous region are home to the largest concentrations of Muslims on the mainland. Ningxia is aspiring to become a base for the production of halal food and is in discussions with Dubai's Jebel Ali Free Zone to become a trade hub connecting Northwest China and the Middle East.

The mainland represents an untested market for Islamic finance, according to Hong Kong-based Bosera Asset Management (International) Co, which is partnering with Maybank in offering the Shariah-compliant equities fund.

"We're proceeding with a lot of planning because they have not been served with any wealth-management products," Conrad Cheng, Bosera's deputy chief executive officer, said in Kuala Lumpur.

"There's always an issue about the harmony between ethnic groups. So, we also have to seek the advice of the government on how we proceed."

Bank Muamalat Malaysia Bhd said in July last year it had scrapped a plan to offer Islamic products at branches of Bank of Shizuishan in Ningxia after the Chinese lender asked the Southeast Asian lender to take a stake.

While the mainland presents significant opportunities for Islamic financial institutions, there are challenges, including "the need for changes to the tax laws", according to law firm Appleby Global Group Services Ltd.

"Coupled with growing individual wealth and disposable income, as well as the growth of the Ningxia region as an Islamic financial center, these factors present attractive potential," said Jeffrey Kirk, Appleby's head of Islamic finance.

A Muslim leaves the Niujie Mosque in Beijing. Hong Kong serves as a platform for international Islamic finance players which aim to tap into the Chinese mainland, as foreign funds lack the necessary knowledge and experience of operations in the heavily regulated mainland market. Asia News Photo

(HK Edition 05/15/2015 page9)