Published Date: 29 September 2005

Keynote Address by Mr Heng Swee Keat, Managing Director of MAS at International Islamic Enterprise ForumOn 29 September 2005

Ladies and gentlemen,

1   It is a privilege for me to speak at this International Islamic Enterprise Forum, and for our overseas guests, may I warmly welcome you to Singapore.   You will be hearing from several distinguished speakers on the subject of Islamic finance in the world and in Asia.  Hence, I would only briefly touch on these, and focus my remarks on what the Monetary Authority of Singapore is doing to facilitate the development of Islamic banking and finance.

Growing Demand for Islamic Finance

2   Islamic finance has grown rapidly, and I believe it will continue to grow strongly.  There are several reasons for this - the strong growth 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 and which leads to a high level of accumulation of reserves and wealth; and the specific features of Islamic financial products which make them suitable for certain investors and borrowers.    

3   Globally, we see all areas of the Islamic capital markets growing rapidly.  Global asset size for Islamic finance is estimated at between US$200 and US$400 billion, and growing at 15% per annum.   Global issuance of sukuk is expected to top US$10 billion this year, compared with just US$2 billion in 2003.  Apart from financial institutions in the Middle East, global banks are also responding to tap the opportunities of this huge pool of capital. Today, over 200  Islamic financial institutions offer a wide range of Shariah compliant products.  These include Sukuk, takaful insurance, murabaha financing, as well as deposits and property funds structured using Shariah principles.

4   For us in Asia, the growing economic linkages between the Middle East and Asia is of great significance.    These are the two most dynamic regions in the world today, growing at 5% and 7.5% respectively.  Trade and investment are set to grow between these two regions.   With the growing wealth in both regions, investors on both sides will want to diversify.   These developments have produced an increasing flow of funds between the two regions.  We expect both the volume and the sophistication of financial flows between the two regions to increase. 

5   For example, since the first US$ Islamic bond issue by Malaysia back in 2002, sukuk issues have grown rapidly. In 2004, the stock of US$ denominated sukuk stood at around US$7bn.  What is noteworthy is that sukuk issuers are not confined to Islamic institutions - the German state of Saxony Anhalt and the World Bank both recently issued sukuk.  This reflects the value and features of sukuk.

6   In Singapore alone, three Islamic property funds  have been set up, with funds of over US$1.35 billion earmarked for investment in Asian real estates.   Beyond real estates, 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.  These projects are well suited for Islamic financing. 

Singapore's Contribution

7   Responding to these opportunities, financial institutions in the Middle East are keen to establish operations in Asia.  Investors in the Middle East are showing increasing interest to diversify and to increase their exposure to Asia.  On the other hand, financial institutions in Asia are also 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. 

8   It is heartening to see regulators in various jurisdictions - in the Middle East, in Europe, as well as in Asia, all working actively to promote Islamic financing.  

9   As a major financial centre, Singapore can play two useful roles to support and complement the efforts of other regulators and the industry. First, we can add breadth and depth to the range of Islamic products, to complement those offered by other centres. Given our multi-ethnic and multi-religious make-up of our society, Singapore has the cultural software to facilitate and integrate different practices.

10   Second, as a global financial centre, Islamic financial products will add 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 here, with asset under management of close to S$600 billion, are a major group of investors.  In the recent sukuk issues by Pakistan (US$ 600 million) and the Malaysian state of Sarawak (US$ 350 million), the issue managers held road shows in Singapore to reach out to these institutional investors.  Singapore is a leading insurance centre in Asia, with a large number of international insurers, reinsurers and intermediaries. Takaful insurers can use Singapore as a base to tap the regional Takaful market. 

11   To enable the industry here and in the region to tap on the growing opportunities, the Monetary Authority of Singapore 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

12   First, MAS has conducted a review of our regulatory framework in relation to Islamic banking.  Some jurisdictions have an Islamic banking regulatory framework that exists in parallel to their conventional framework, while others, like the UK, have accommodated 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, MAS' assessment is that there is no need to create a separate Islamic banking supervisory framework.  Hence, MAS is open to admitting Islamic banks based on our prudential criteria for admission.  We also need not make fundamental changes to the supervisory framework, but will refine the rules to accommodate and facilitate the development of Islamic finance.

13   In that regard, I am pleased to announce that MAS will finetune our rules to allow, from today, all banks in Singapore to offer an important and common form of Islamic financing known as Murabaha.  Previously, MAS regulations imposed broad restrictions on banks against conducting non-financial activities.  MAS will exempt Murabaha financing, which requires the bank to purchase goods on behalf of its customer and to sell the goods to the customer at a mark-up, from this restriction against non-financial activities. MAS welcomes feedback from industry players on further refinements to our supervisory framework to facilitate Islamic finance.

Review of Tax Framework

14   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. They are:

(i) First, we have waived the imposition of double stamp duties in Islamic transactions involving real estate.

(ii) 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

15   Secondly, MAS is keen to deepen our knowledge of 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. I would like to take this opportunity to express our appreciation to the existing Board members for approving the admission of MAS.  We are participating in the IFSB standard setting working group on Supervisory Review process, as well as the IFSB Human Resource working group relating to human capital issues for Islamic financial services. We will take part in the planned task force on products for monetary management and facilitating and regulating Islamic money market.  These cooperation initiatives among regulators augur well for the future development of Islamic financing.  Strong legal and supervisory frameworks provide certainty which is a key ingredient of growth. 

Growing Capabilities and Linkages

16   Third, MAS will work with the industry to grow capabilities and enhance linkages to support the work on Islamic financing. We will provide funding, under the Financial Sector Development Fund (or FSDF), to build up Islamic finance expertise and to support research in Islamic finance.  For example, INSEAD's Asia Pacific Institute of Finance, which was launched recently, offers executive education and research in this area.

17   The Ministry of Trade and Industry is currently negotiating Free Trade Agreements with several countries in the Middle East. We have concluded an agreement with Jordan, while ongoing FTA discussions include those with Egypt, Bahrain, Kuwait, Qatar and the United Arab Emirates.  We will support these efforts to deepen linkages in financial services.


18   In conclusion, let me reiterate that our assessment that Islamic finance is set to grow, and grow strongly.  It is a positive development for the region, and for the Middle East.   Singapore will play our part, and work in partnership with our colleagues in other regulatory jurisdictions, as well as with the industry, to facilitate this development.   

19   Let me thank the organizers of the International Islamic Enterprise forum 2005 for inviting me here today to share our thoughts, and we look forward to the continued feedback and support of the industry.

20 I wish you all a fruitful time at this Forum.  Thank you!