TYC Finance ALI GUO

What sparks when “Islamic Finance” meets Hong Kong’s pension fund?

Hong Kong’s Mandatory Provident Fund (MPF) is the main source of retirement savings for workers. Its core operation involves investing a portion of workers’ income into various investment funds (such as equity funds, bond funds, and conservative funds), which can be withdrawn in full upon retirement at the age of 65.

In recent years, Islamic Finance, as an investment model compliant with Shariah law, has been gaining global popularity. Hong Kong is also facilitating the employment of “Islamic Finance Specialists” by including them in the talent list, in an effort to develop its Islamic finance sector.

What new opportunities would the combination of these two bring to the market?

1. What is Hong Kong's Mandatory Provident Fund (MPF)?

MPF is not a “fixed deposit.” Instead, it is managed by recognized trustee companies, and employees can choose from various investment funds (such as equity funds, bond funds, and conservative funds), with returns fluctuating according to market conditions.

When Hong Kong workers contribute to their MPF every month, is there a Shariah-compliant investment portfolio available for them to choose from? 

The current answer is no.

With hundreds of thousands of Muslims in Hong Kong having no Shariah-compliant (Shariah-compliant) pension investment options, this situation is not only inconsistent with Hong Kong’s positioning as an international financial center but also out of line with the HKSAR government’s vision of expanding into the Middle Eastern market.

Amid the global ESG investment trend, Islamic Finance is growing rapidly, yet Hong Kong’s MPF system still does not include Shariah-compliant investment choices. Is this a potential opportunity?

2. Core Principles of Islamic Finance

Islamic Finance is not merely “religious investment” but a financial ethical system based on the Quran and the Hadith, with its core principles including:

 Prohibition of Interest (Riba): No fixed interest can be charged or paid, making traditional bonds (such as Hong Kong dollar bonds) non-compliant.

 Industry Restrictions: Investments in industries such as alcohol, gambling, pork, and weapons are prohibited.

 Risk Sharing: Investments must be based on physical assets or profit-sharing (such as the Mudarabah and Musharakah models).

 Shariah Compliance Certification: Approval from a Shariah Board, composed of Islamic scholars, is required to ensure compliance with Islamic teachings.

Fun Fact: The global scale of Islamic finance assets has exceeded 3 trillion US dollars. They are mainly distributed in Southeast Asia (Malaysia, Indonesia) and the Middle East (Saudi Arabia, UAE). Hong Kong issued its first Islamic bond (Sukuk) as early as 2014, but the MPF market has yet to follow suit.

3. Why Has Islamic Finance did not expand to Hong Kong’s MPF?

(1) Lack of Shariah-Compliant Fund Options in the MPF Market

Currently, none of the approved MPF funds offer Shariah-compliant options.

Muslim employees can only choose traditional equity or bond funds, which may violate Shariah recommendations.

(2) Overlooked Market Demand

Hong Kong has a Muslim population of about 300,000 (including expatriates and local communities).

Some ESG investors also prefer ethical investments, and Shariah-compliant funds could serve as a complementary choice.

(3) Policy and Structural Barriers

MPF regulatory restrictions: The current Mandatory Provident Fund Schemes Ordinance has not been adjusted for Islamic finance, for example, how to handle “interest income.”

Cost issues: Establishing an independent Shariah review mechanism may increase fund management costs.

4. Status of Shariah-Compliant Pensions in Other Countries/Regions

United Kingdom: NEST (National Employment Savings Trust) Pension Islamic Fund Option

Background:

The UK has a Muslim population of about 4 million (as of 2023), accounting for 6.5% of the total population, making it one of the largest Muslim communities in Europe.

NEST (National Employment Savings Trust) is an auto-enrollment pension plan launched by the UK government, managing assets of approximately 30 billion pounds.

Islamic Fund Practice:

NEST Islamic Fund (launched in 2019)

Investment strategy: Strictly selects global equities that comply with Shariah, excluding industries such as finance (traditional banks/insurance), alcohol, and gambling.

Bond alternative solution: Uses “Commodity Murabaha” and Islamic bonds (Sukuk) to provide stable returns.

Key Success Factors:

Government support: The UK Financial Conduct Authority (FCA) has included Islamic finance in its “inclusive growth” strategy.

Market demand: Over 120,000 NEST members have chosen the Islamic fund, accounting for about 4% of the total.

Malaysia: EPF Islamic Savings Plan (Simpanan Shariah)

Background:

Malaysia is one of the global centers for Islamic finance, with Muslims accounting for 63% of its population.

The Employees Provident Fund (EPF) has total assets exceeding 1 trillion Malaysian ringgit (about 1.6 trillion Hong Kong dollars), making it the world’s largest Islamic pension system.

Islamic Investment Practice:

Simpanan Shariah (launched in 2017)

Asset scale: As of 2023, the Islamic savings account has reached RM150-160 billion (about 249-265.6 billion Hong Kong dollars), accounting for 30% of EPF’s total assets.

Return comparison:

Traditional EPF account: Dividend rate of 5.5% in 2023

Islamic account: Dividend rate of 5.65% in 2023 (returns are generated through the Mudarabah profit-sharing model)

Policy support:

Flexible conversion: Members can transfer their traditional savings to Islamic accounts at any time without any fees.

United Arab Emirates: DIFC Employee Workplace Savings (DEWS)

Background:

The Dubai International Financial Centre (DIFC) has launched the DEWS plan to replace the traditional pension scheme, covering expatriate employees.

The UAE requires all financial institutions to provide Islamic finance options.

Islamic Fund Features:

DEWS Sharia-Compliant Fund

Participation rate: About 35% of DEWS participants have chosen the Islamic option, far exceeding expectations.

5. Lessons for Hong Kong from International Experience

Market Size Determines Feasibility:

The UK (with 4 million Muslims) and Malaysia (with 20 million Muslims) have demonstrated that even niche demands can create a scale effect in the long run.

Hong Kong's 300,000 Muslims, combined with ESG investors, are sufficient to support 1-2 MPF Islamic funds.

Policy First is Key:

Malaysia has promoted Islamic savings through tax incentives, while the UK has lowered compliance costs through regulatory inclusiveness.

Hong Kong's MPF Authority needs to clarify the definition of "Islamic funds" and streamline the approval process.

6. Opportunities and Challenges for Hong Kong

Opportunities

- Attracting Middle Eastern funds: If Shariah-compliant MPF is introduced, it can attract Islamic investors to allocate funds to the Hong Kong market.

- Strengthening the status of a financial center: Compete with Singapore and London as an Islamic finance hub.

- Aligning with the Belt and Road Initiative: The Middle East is an important partner, and financial connectivity can promote economic and trade cooperation.

Challenges

- High compliance costs: Establishing a Shariah review mechanism may increase fund fees.

- Liquidity management difficulties: Traditional MPF relies on bond income, while Islamic funds need to find alternative stable return assets (such as real estate leasing and infrastructure investment).

- Investor education: Islamic finance knowledge needs to be popularized to avoid misunderstandings.

7. Future Outlook

For Hong Kong to become a true “international financial center,” a diverse range of financial products is essential. Introducing Shariah-compliant options into the MPF system would not only meet the needs of the Muslim community but also promote in-depth cooperation between Hong Kong and the Middle Eastern market.

Possible breakthroughs:

- The MPF Authority could lead pilot projects by allowing MPF trustees to launch 1-2 Islamic funds.

- Government policy support: Provide tax incentives or streamline the approval process.

- Market education: Enhance public understanding of Islamic finance and eliminate prejudices.

8. Conclusion

Hong Kong’s MPF system has been in operation for over 20 years, and it is time to consider more inclusive options. A Shariah-compliant retirement fund is not only a religious need but also a manifestation of financial innovation.

As an international financial center under the “one country, two systems” principle, successful Islamic finance practices in Hong Kong could further broaden the horizons of domestic financial practitioners. In the right timing and regulatory conditions, it could pave the way for Mainland China’s 21 million Muslims and the broader domestic market to plan for Shariah-compliant investment options.