Published Date: 16 March 2005

"Singapore's Perspective on Islamic Finance" - Opening Keynote Address by Mr Ong Chong Tee, Deputy Managing Director, Monetary Authority of Singapore, at the Asian Banker Summit 2005, Wednesday, 16 March 2005, 2:00 p.m.

1   Good afternoon, ladies and gentlemen.  Allow me to express my thanks to the organisers, for inviting me to this Asian Banker Summit 2005, to share with you some perspectives on Islamic finance. 

2   As a number of you may know, MAS' Chairman, Senior Minister Goh, first commented on Singapore's interest with respect to "Islamic financial services" in August last year.  Since then, there have been a steady stream of queries from the industry as well as support from private sector participants to work with us to develop Islamic finance in Singapore.

3   Two weeks ago, our Deputy Chairman, Minister Tharman, also shared in parliament MAS' thoughts on developing Islamic financial services in Singapore. Allow me to use this occasion to reiterate and expand on some of the points, as well as to highlight some areas where we see opportunities for financial institutions to play a greater role.

4   Let me start with Singapore's positioning.


5   By way of background, it may be useful to highlight some global developments in Islamic finance, as we see them, to give you a sense of what shaped our internal thinking.

6   Although Islamic finance has existed for several decades, it was only in the more recent years that this "alternative concept" has received global attention.  Many financial observers and analysts remain optimistic of the growth potential of Islamic finance - and perhaps this is evident also by the sheer number of conferences and seminars on the subject globally, in the past year alone. 

7   Commonly cited figures place the overall market size of Islamic finance at between US$200 to US$300 billion, and growing at something like 15% per annum.  Islamic financial products may not only attract Muslim savings, but also other conventional and ethical based investors as well.

8   We see Islamic capital markets taking off quite nicely. Since the first global Islamic bond issued in 2002, total sukuk issuance now topped US$30 billion as of end 2004. There has also been an increase in the amount of Islamic project financing particularly in the Middle East. The Ettihad Etisalat's (telecommunication provider in Saudi Arabia) deal last year of US$2.35 billion is just one example.  Not surprisingly, many global financial institutions have set up dedicated Islamic finance units or windows to meet the growth in demand for Islamic financial products.

9   In other parts of the world too, there are signs that Islamic finance is seeing heightened demand. With the licensing of the first Islamic bank in UK, the UK FSA mooted the idea of licensing a wholesale bank as a possible next step.  Here in South East Asia, the 2nd most populous Muslim region, Malaysia has set a target of 20% of banking assets to be Islamic by 2010. To achieve this, they have awarded Islamic banking licenses to foreign players and encouraged the subsidiarisation of Islamic windows. Indonesia too has drawn up a blueprint in 2002 to develop Islamic finance.  There are currently Islamic banks operating in Brunei, Philippines and Thailand. In Singapore, there already exist Islamic products such as Al-Wadiah deposits, takaful products and Islamic unit trusts.

10   So how do we see this trend developing?

11   We believe that there is some momentum for Islamic financial services to become increasingly a globally recognised and accepted form of financing.  There are several other dynamics that suggest strong supporting factors to underpin that momentum.

12   Firstly, a higher degree of co-ordination between central banks and regulators, as well as the efforts of international organisations such as the IFSB (Islamic Financial Services Board), the IIFM (International Islamic Financial Markets), LMC (Liquidity Management Centre), the AAOIFI (Accounting and Auditing Organisation of Islamic Financial Institutions), and entities like the Islamic Development Bank (IDB).  Collectively, the various fora will create greater awareness of Islamic finance, and the closer collaborations of various market participants will help to facilitate its further development.

13   Secondly, apart from having more Islamic banks, a number of major international banks themselves are also beefing up their capability and services to include Islamic finance.  This has enlarged the pool of players in the Islamic finance space, and there are a wider variety of Islamic products and instruments.  From basic deposit products, Islamic product ranges have grown to include investment accounts, equity funds, capital-protected funds, Islamic bonds, and recently, I was also told of Islamic hedge funds and Islamic swap equivalents.

14   Thirdly, a related point is the participation of major financial centres, including London and New York, that will be pivotal in its continued growth. UK has its first Islamic bank, while Islamic mortgages continue to grow in the US, German Saxony-Anhalt state's issuance of the first Euro-denominated Islamic bond is further testimony of Islamic products receiving greater attention by new players and borrowers.

Singapore's position on Islamic financial services

15   In recognition of the global trend, we, at the MAS, have also begun to look at our own capabilities as a financial centre and how we can or should plug in.  As Senior Minister Goh described it, "Singapore cannot be a complete international financial centre, if we do not offer Islamic financial services."  This is however not the same as expecting Singapore to be an Islamic banking hub. With our small domestic market, the larger opportunity for the financial industry in Singapore is to leverage off the infrastructure we have in place, to offer wholesale market activities, in the areas of wealth management and capital markets activities. We are thus looking at financial institutions here to add Islamic financial products and services, to the broad range of services that are already available. 

16   We have previously preferred to let the market find its own pace and niche.  Increasingly though, we recognise that if Singapore, as a major financial centre, were to be a part in the global growth of Islamic finance, MAS has to be involved in the market's future development, and sooner rather than later.  To this end, let me highlight some of the specific initiatives being considered or taken.


17   One of the first steps we took, was to conduct a preliminary review of our regulatory framework.  Some jurisdictions have established separate banking regulatory framework for Islamic financial services.  Others, like the UK, have accommodated both Islamic and conventional banking within a common regulatory framework. 

18   We have consulted industry practitioners. At this point, there does not appear to be a need for us to create a separate Islamic banking regulatory framework, as the experience of the UK shows.  This could also be a function of where the major market opportunity for Singapore-based players lie; in fund management and capital markets activities.  Thus, as mentioned by Minister Tharman in parliament, we do not envisage any fundamental change to our banking regulations except to perhaps fine-tune our rules along the way to accommodate and facilitate the development of Islamic finance.  This of course does not rule out future regulatory reviews as the market develops further.


19   We also looked at the tax environment in Singapore for Islamic transactions.  Given the nature and structure of Islamic financial products, they tended to attract more tax than their conventional counterparts.  I mentioned an example at a recent conference in London where previously, transactions that involved financing of real estate in compliance with Shariah would typically be exposed to stamp duties tax twice under Singapore tax law because there would be a transfer of legal title of the property asset twice, when structured Islamically.

20   So one of our market development initiatives focused on leveling the playing field between Islamic and conventional financial services with respect to taxation.  The Finance Ministry had, at our latest Budget, announced a couple of changes.

(i)  One, we will waive the imposition of double stamp duties in Islamic transactions involving real estate.  This puts Singapore in line with the tax treatment adopted by the UK and Malaysia.

(ii)  We have also made clear that we will accord the same concessionary tax treatment on income from Islamic bonds, that we presently have for conventional bonds.  That is, local or foreign investors will enjoy the same tax concessions, on the interest income they earn from conventional bond or the payouts they get from Sukuk arranged out of Singapore

21   As to other possible measures, we will continue to actively consult our market participants for feedback.  We are very encouraged by the strong response to our consultation efforts and even offers of assistance.  Equally, we are internally deepening our own knowledge and familiarity with Islamic financial products and to be more in tune with the market's developments.  We will further organise an informal private sector advisory group that involve practitioners in a broad range of Islamic financial transactions, to help us better understand market trends and ascertain market needs. 

IFSB membership

22   Mindful and privileged that I am sharing this session with Professor Rifaat, I should note another aspect that involves the MAS' participation in key international bodies such as the Islamic Financial Services Board (IFSB).  Specifically, for the IFSB, we have been an observer member for the past year, and have found our participation at its conferences and interactions with other IFSB members helpful in our own understanding of the developments and trends in Islamic finance.  We intend to step up our participation and involvement, by applying to be a full member of the IFSB - and to be able to contribute to some of the work related to standard setting.

23   We hope that Singapore can contribute to this new "asset class" by sharing our own experience in other international regulatory working committee such as banking's BIS, securities' - IOSCO, and insurance's IAIS.

24   The nature of cross border co-operation can go beyond the official sector.  For example, the banking associations amongst countries in South East Asia perhaps can come together to discuss common issues.  This is where the private sector with the capabilities to facilitate future development and growth of Islamic finance can step up to meet evolving demands through products innovation, trading and market education.

Wealth management industry

25   For example, Singapore is an established wealth management centre.  Since 1990s, measures were taken to develop and grow the wealth management industry.  To date, we have a critical mass of over 200 global fund managers providing a good concentration of expertise and investible funds.  Total assets under management grew at double-digit growth rates annually over the last five years.  In 2003 alone, assets under management increased 35% to over S$460 billion.  For 2004, the fund management industry has grown further with AUMs exceeding S$500 billion. 

26   The private banking sector has also seen very strong growth, and we have the top 10 private banks in the world all having operations in Singapore. 

27   Similar to developments in London, we are seeing fund managers based in Singapore seizing opportunities to manage funds Islamically.  Conventional fund managers with their structuring and fund management expertise, have started to work in partnership with Islamic financial institutions and Shariah scholars to manufacture suitable Shariah compliant products and funds.

28   Last year, an Islamic pan Asia equity fund was launched by one of our local asset manager United Overseas Bank Asset Management (UOBAM) in partnership with Commerce International Merchant Bank (CIMB) of Malaysia.  We also saw ARA Asset Management based in Singapore work in partnership with Dubai Islamic Bank.  They launched a US$450 million Islamic Far Eastern Real Estate Fund with underlying assets located in Asia. 

Capital Markets

29   As a further sign, the large investor community in Singapore has also made our financial centre an attractive stop-over for the various Islamic bond roadshows.  For example, the recent Sukuk issues by Pakistan and Malaysian State of Sarawak have both held roadshows in Singapore to reach out to Singapore-based institutional investors.  These investors are quickly educating themselves on Islamic finance concepts and the investment opportunities in Islamic finance products.

30   Looking from the issuers' perspective, Singapore corporates are also keen to keep apprise of opportunities to diversify their investor base. Middle Eastern investors are looking to diversify into Asia and partake in the region's growth. Many of our companies, especially those with business dealings with Middle East, may see the benefits of raising Shariah compliant financing. We believe this would turn out to be a win-win situation for Middle East and Singapore.

Hedge Fund

31   The other strong growth segment in Singapore is in the hedge fund industry.  Although the absolute figures are relatively small, the hedge fund industry has grown rapidly in Asia and particularly Singapore.  A total of 70 hedge fund managers have chosen to domicile in Singapore.  They are attracted by Singapore's low business cost, conducive and clear tax environment, and our sound supervisory framework.  Now that Shariah-compliant hedge funds have made their appearance in the market place, I will not be surprised if more are established as this alternative fund becomes increasingly accepted over time.


32   Another segment within the financial services industry in Singapore that would complement Islamic finance is in REITs (Real Estate Investment Trust) industry.  The REITs market is doing well in Singapore.  Despite its short history, we currently have five REITs listed on the Singapore Exchange with market capitalisation of S$7 billion (at end December 04).

33   To further strengthen Singapore's position as the Asian REITs hub, the government in the latest budget announcement also waived the stamp duty on transfer of Singapore properties into REITs, as well as lowered the tax rate on income derived by the REIT and paid to foreign investors.

34   The Islamic finance industry can leverage upon this growth of the REITs industry.  REITs appear to me, to be a form of financial instrument that can easily be packaged to be Shariah-compliant.  REITs provide investors access to real estate assets by sharing with investors the benefits and risks of owning a portfolio of assets.  I am personally not aware of an Islamic REIT listed on any exchange yet but if preliminary feedback given to me is any guide, I think it is well possible for one to be set up and perhaps added to the growing list of REITs listed on our exchange.

Takaful Insurance

35   Singapore is also a leading Asian insurance centre.  A large number of major international insurers, reinsurers and intermediaries, that provide a full range of insurance services, are based in Singapore.  In addition to meeting the needs of domestic market, numerous reinsurers and captive insurers use Singapore as a base to write risks from the region.  A well-developed and responsive regulatory and supervisory framework underpins Singapore's insurance industry.  The same platform can be used for Takaful insurance.  Takaful insurance is presently available in Singapore, and we are seeing greater interest from Middle Eastern Takaful insurers to use Singapore as a base to tap the regional Takaful market.  The first re-Takaful company has also just set up operations in Singapore.  There are also opportunities for Takaful/re-Takaful companies to leverage on Singapore's fund management industry for their asset management needs.

36   These are just some ideas on how Islamic financial industry can leverage on the know-how in traditional asset classes to grow.  There are obviously differences between Islamic and conventional financial services, but we also see fundamental commonalities between them, such as those that determine the viability and efficiency of any financial transaction.  Singapore, as a major finance hub, can play a role to bridge expertise and capabilities across Islamic and conventional products.  This extends beyond product manufacturing, but also in areas of risk management, the use of technology and investor education.


37   So in conclusion, let me state that we believe Islamic finance is a development that will see further growth globally.  And as the sector develops, so will the regulatory issues that accompany them evolve.  Increasingly, it is recognised that Islamic finance will become a more integral component of the international financial system. 

38   Singapore intends to play a value-added role in such a development.  As a major international financial centre, we are well placed to contribute to capacity-building and understanding of Islamic finance products, leveraging on the expertise and talent base in conventional products. Singapore's open markets, efficient infrastructure, and transparent regulations will remain attractive to both conventional and Islamic financial services players. In Singapore, we are also seeing a growing number of ancillary service providers such as specialised lawyers, beefing up their Islamic finance expertise here.

39   So our aspirations in Islamic finance can be described as an affirmation of our position as an international financial centre.  One that is a full service centre with a broad range of intermediaries and products including Islamic ones that can meet the interest and demand from investors in Middle East, as well as the rest of the world.

40   Once again, let me thank Asian Banker for organising this conference in Singapore, and for inviting me here to share some comments. 

41   Thank you.