Islamic Finance In Singapore
Governor's Table Panel Presentation by Ms Teo Swee Lian, Deputy Managing Director,
Monetary Authority of Singapore, 12th Annual World Islamic Banking Conference, 11th December 2005, Kingdom of Bahrain
Your Excellencies, distinguished guests, ladies and gentlemen.
1 I do not propose to speak at length about the development of Islamic finance. This is a subject in which you have a great deal more experience than we do in Singapore. Instead, I will focus my remarks on how Singapore, a major financial centre in Asia, views the developments in Islamic finance, why we attach great importance to it and what we are doing to facilitate its development in Singapore.
Growing Demand for Islamic Finance
2 Islamic finance has grown rapidly, especially in the past few years. This rapid growth has been fuelled by the strong performance of economies in the Middle East as well as some countries with large Muslim population, the high prices of energy which benefits energy producers in the Middle East, rapid financial innovation that led to the creation of a range of new shariah compliant products to meet the growing demand.
3 For us in Asia, the growing economic linkages between the Middle East and Asia is of great significance. Our two regions are among the most dynamic in the world today, growing at 5% and 7.5% respectively. Substantial wealth has been generated in both regions. Just as important, there are also substantial opportunities for investment and financing in both regions to fund economic development and growth, in such areas as infrastructure and trade finance, capital markets, managed funds, and real estate investment trusts. The potential for financial intermediation between pools of investment funds and economic opportunities in Asia and the Middle East are tremendous.
4 Responding to these opportunities, financial institutions in the Middle East are showing greater interest to establish operations in Asia. Investors in the Middle East are also showing increasing interest to diversify and to increase their exposure to Asia. On the other hand, financial institutions in Asia are responding by offering an increasing range of financial products that comply with Shariah principles, and planning to step up their operations in the Middle East.
5 It is heartening to see regulators in various jurisdictions - in the Middle East like Bahrain, Dubai, Qatar, in London and other parts of Europe, as well as those in Asia like Indonesia, Malaysia and Brunei, all working actively to promote Islamic financing.
6 As an international financial centre, Singapore cannot ignore the importance of growth of Islamic finance and we have to add Islamic financial products to the suite of conventional financial products that Singapore already offers. The depth and liquidity of the Singapore market is a source of strength. For example, the asset managers based in Singapore, with asset under management of close to US$350 billion, are a major group of investors. In the recent sukuk issues by Pakistan (US$ 600 million) and the Malaysian state of Sarawak (US$ 350 million), the issue managers held road shows in Singapore to reach out to institutional investors. Singapore is a leading insurance centre in Asia, with a large number of international insurers, reinsurers and intermediaries. Leveraging on the critical mass of reinsurers based in Singapore, takaful players can also seek to collaborate with reinsurers in Singapore to provide retakaful capacity.
7 Another segment within Singapore's financial services industry that would complement Islamic finance is in the Real Estate Investment Trust (REITs) industry. Singapore is a leading player in the REITs industry and REITs or property based funds are forms of financial instruments that can easily be packaged to be Shariah-compliant. Thus far, three Islamic property funds have already been set up in Singapore, with funds of over US$1.35 billion earmarked for investment in Asian real estate. Beyond real estate, Asia is estimated to need over US$1 trillion of infrastructure financing in the coming years, to build power plants, gas pipelines, toll roads, airports and telecommunications systems. Some of these project finance needs can also be structured in a Shariah-compliant manner.
8 In enabling the industry in Singapore and in the region to tap on the growing opportunities, the Monetary Authority of Singapore (MAS) is pleased to work in partnership with our fellow regulators and the industry to facilitate and grow the Islamic financial market. Allow me to highlight some of the initiatives being considered or taken.
Review of Regulations
9 First, MAS has conducted a review of our regulatory framework in relation to Islamic banking. Some jurisdictions have a separate Islamic banking regulatory framework that exists in parallel to their conventional framework, while others have regulated both Islamic and conventional banking within a common regulatory framework. As many of the supervisory processes and prudential measures are common to both conventional and Islamic banking activities, we have opted to accommodate Islamic banking within the existing supervisory framework for banks. We will not be making any fundamental changes to our supervisory framework, but will refine the rules along the way to facilitate the development of Islamic finance.
10 In that regard, MAS has fine tuned our rules to allow all banks in Singapore to offer Murabaha financing which is a common structure in trade finance. Previously, MAS regulations imposed broad restrictions on banks against conducting non-financial activities. MAS has now exempted Murabaha financing, which requires the bank to purchase goods at its customer's request and to sell the goods to the customer at a mark-up, from this restriction against non-financial activities.
Review of Tax Framework
11 We have also looked at the tax treatment in Singapore for Islamic transactions. Given that the nature and structure of Islamic financial products tend to attract more tax than their conventional counterparts, we have worked on leveling the playing field for Islamic transactions. The Finance Ministry had in February this year, announced a couple of changes.
a. First, we have waived the imposition of double stamp duties in Islamic transactions involving real estate.
b. Second, we have accorded the same concessionary tax treatment on income from Islamic bonds that are afforded to conventional bonds, which will provide opportunities for banks in Singapore to encourage local and foreign issuers to issue sukuk.
Participation in Standard-setting Bodies
12 Secondly, MAS is committed to deepen our knowledge and familiarity with Islamic financial services. We joined the Islamic Financial Services Board (IFSB) in December 2003 as an observer member and became a full member of the IFSB this year. Since then MAS has stepped up its involvement in the standard setting work of the IFSB. We support these efforts in cooperation among regulators as a strong supervisory framework for Islamic finance will foster its growth and development.
Growing Capabilities and Linkages
13 Third, MAS will work with the industry to grow capabilities and enhance linkages to support the work on Islamic financing. Knowledge and expertise are key drivers of success and we strongly encourage Financial Institutions to send their staff for training in Islamic Finance. We are also supportive of Islamic Finance research which would further spur the growth of the industry. For example, INSEAD's Asia Pacific Institute of Finance in Singapore, which was launched recently, offers executive education and research in this area.
14 In conclusion, let me reiterate our assessment that Islamic finance is set to grow. It is a positive development for Asia and the Middle East. Singapore will play our part, and work with our colleagues in other jurisdictions, as well as with the industry, to facilitate this development.
15 Let me thank the organizers of the 12th World Islamic Banking Conference for inviting the MAS to share our thoughts, and we look forward to the continued feedback and support of the industry.
16 I wish you all a fruitful time at this Conference. Thank you!