Published Date: 12 June 2006

Opening Address by Managing Director, MAS, Mr Heng Swee Keat, at The International Islamic Finance Forum Asia in Swissotel Merchant Court

Ladies and gentlemen, good morning.

1   I am delighted to be here this morning to address this very distinguished group of scholars and practitioners of Islamic Finance. To our overseas guest, let me bid you a very warm welcome, and I hope that you would have a productive and enjoyable stay in Singapore.  I understand that this is the first time that the International Islamic Finance Forum is holding its conference in Asia, and I thank the organiser for your special efforts to bring this forum here.

2   As you will be hearing from a number of distinguished experts on several key issues on Islamic finance in the following sessions, I shall focus my remarks on the efforts that Singapore is making to contribute to this development.

Current Growth Trends

3   Since the establishment of Islamic banks in the 1940s, the Islamic banking system has grown significantly, particularly in the last few years. A recent report by Moody's Investors Services1 estimate that there are about 300 Islamic financial institutions with over US$250 billion of assets, growing at 10 -15% annually.   In addition, another US$200 billion is estimated to be held in the Islamic 'windows' of conventional banks.

4   The increasing demand for Islamic financing will provide a strong impetus for the continued growth in the number of Islamic banks, particularly in the Middle East and in countries with large Muslim populations, as well as in the deposits of existing Islamic banks.   This growth will in turn demand a significant increase in the capacity of the Islamic banking system in managing short-term liquidity and investment needs.  Islamic banks need to be able to tap into an active inter-bank money market to manage their liquidity and funding needs. Over time, it is conceivable that a deep and liquid short term cross- border Islamic money market may develop to support and complement domestic capacity.

5   In addition, banks will need to have access to a wide-range of Shari'ah-compliant investment opportunities, to ensure that the funds are put to the best possible use.

6   From the investors' perspective, rising affluence in the Middle East and Asia will similarly drive the growth in demand for Islamic wealth management.  Already, there are 250 Islamic mutual funds in the world with US$300 billon of assets under management.   The development of a greater variety of Islamic financial products will be critical to the future growth in wealth management.  This will allow investors to construct an investment portfolio with proper risk-return diversification.  A wider range of Shari'ah-compliant equities, real estate products, commodities and asset-backed securities will add to the depth of the market.  The use of takaful and trusts appropriately structured to be compliant with Shari'ah law will also be needed for a holistic approach to Islamic wealth management.

7   In short, the development of Islamic banking and Islamic capital markets will be highly complementary and mutually reinforcing. A range of Shari'ah-compliant asset classes of different risk profiles and tenures are needed to deepen markets and allow for more efficient pricing of risks.

8   Indeed, the development of the Islamic bond or sukuk market has been very encouraging.  Middle Eastern and Malaysian financial institutions, as well as global financial institutions, have been at the forefront of innovation in structuring Shari'ah-compliant bonds.  The Sukuk market has grown from a virtually non-existent market prior 2000 to over US$50 billion2 of issuance globally today.  This development shows how a focused developmental effort can make a significant difference to the market development.

Singapore's effort

9   The financial community in Singapore is excited by the recent growth and developments in Islamic banking and finance.  At the Monetary Authority of Singapore, we are committed to supporting this development.   We believe that Singapore, as an international financial centre, can and should have a full suite of Islamic financial products that can meet the needs of banks and investors. Our current strengths in conventional financing can serve as a base for the growth of Islamic finance, especially in the wholesale and capital markets.   In this regard, we hope to make our modest contribution in 3 areas.

Working with Financial Institutions and Central Banks

10  First, we would like to learn from and work closely with financial institutions, as well as central banks, to collaborate on development initiatives and to adopt appropriate supervisory practices.

11   The Middle East and Asia are two of the most dynamic economic regions in the world today.  Both regions have ample liquidity and investment prospects.  These provide opportunities for financial institutions in both regions to play the critical intermediation role, and help investors diversify risk and reap higher returns.   Financial institutions in Asia are increasing the range of financial products that comply with Shari'ah principles and planning to step up their operations in the Middle East.  Middle Eastern financial institutions have also been expanding activities or establishing new presence in Asia to meet their investors' needs.  Central bankers in both the Middle East and Asia are working together to support the collective needs of the industry.

12   The Monetary Authority of Singapore is privileged to join the Islamic Financial Services Board (IFSB), where central bankers from Asia and Middle East with an interest in promoting Islamic finance come together to formulate guidelines and to develop the industry.  IFSB has issued standards and guidelines on risk management and capital adequacy.  The work on standards in corporate governance, transparency and market discipline, and in the supervisory review process, is nearing completion.   I believe these standards and guidelines will help the industry players by giving greater certainty and transparency.   Since becoming a member of IFSB, MAS has been involved in the task force on Islamic Money Markets, and the Working Groups on Supervisory Review Process and on Special Issues in Capital Adequacy.

Changing Regulatory and Tax Practices to Facilitate Islamic Finance

13   Second, to create and maintain a conducive environment for Islamic finance, MAS will work in close partnership with the industry to review regulatory and tax practices to facilitate its growth.

14   To this end, we have been systematically reviewing our policies to ensure that Islamic finance is not disadvantaged vis-à-vis conventional finance.  Our approach is to level the playing field and ensure the neutrality of rules applicable to conventional and Islamic financing wherever possible.  As the prudential objectives of adequate capitalization and liquidity, appropriate management of risks and concentration, corporate governance and controls are largely similar between Islamic financial activities and conventional financial services, our existing regulatory framework, with suitable refinements, can facilitate the development of Islamic finance in Singapore.   Where there are specific risks or impediments, we will refine rules to address these specific areas.

15   This approach also means that at this point, Islamic banks, Takaful and retakaful companies or Islamic capital markets players interested to operate in Singapore need not apply for a separate category of license; that is, the same licensing regime as that for conventional financial institutions will apply.

16   One example of our approach in making suitable refinements is that in September last year, MAS exempted Murabaha financing from the broad restriction that we had placed on banks with regards to engaging in non-financial trading activities.

17   As a further step to this earlier exemption for Murabaha financing, I am pleased to announce that with effect from today, banks may now offer Murabaha investment products.    The exemption is granted in recognition of the product's fundamental characteristics as a financial product.  We hope this will further expand the range of Islamic products available for both private and institutional Islamic asset management in Singapore and the region.

18   In the area of taxation, given the nature and structure of Islamic financial products, they tend to attract more taxes than their conventional counterparts.  The Minister of Finance announced several changes in last year's (2005) budget and again in this year's budget to level the playing field for Islamic transactions.

19   In 2005, the Ministry of Finance waived the imposition of double stamp duties on Islamic transactions involving real estate and accorded the same concessionary tax treatment on income from Islamic bonds that are afforded to conventional bonds.

20   In the 2006 budget announcement, Income Tax and GST (Goods and Services Tax) applications on some Islamic products are further clarified.   The Ministry of Finance has adopted an important approach to align the tax treatment of Islamic contracts with the treatment of conventional financial contracts that they are economically equivalent to.   Hence, the tax treatment of three Sha'riah-compliant financial concepts has been harmonized with the conventional products to ensure a level playing field with respect to tax.  In addition, for sukuk, remission will be granted on stamp duty on immovable property, incurred under a sukuk structure, that is in excess of that chargeable in the case of an equivalent conventional bond issue.

21   We are glad that Islamic finance has begun to take root in Singapore.  Over the last 2 to 3 years, we have seen a number of Islamic products and services emerging in Singapore. This includes the launch of Shari'ah-compliant real estate funds and Islamic securities funds.  The FTSE SGX Asia 100 Shari'ah Index was launched in February this year. The Index, made up of 100 stocks in the Asia Pacific that are Shari'ah compliant, will be used as a basis for the creation of financial products such as Exchange-Traded Funds and over-the-counter trading instruments. In addition, we are also witnessing the growth of Islamic trade financing, Islamic deposits and retakaful capacity.

22   With our continued efforts in reviewing regulatory and tax issues, and the active participation of financial institutions, we hope to further facilitate the development of Islamic capital market products out of Singapore, and contribute to depth and breadth of Islamic products needed by private and institutional investors. We hope that the critical mass of players here can facilitate this growth.  Besides being an active inter-bank hub for the Asian dollar market and a major foreign exchange market,  there are over 300 asset managers managing over S$600bn (approximately US$375bn) of assets out of Singapore.

Developing Expertise and Financial Education

23   The continued growth of Islamic finance depends critically on the availability of expertise in Islamic finance, and a high level of knowledge among investors and issuers on the specific characteristics of Islamic finance.  Hence, the Monetary Authority of Singapore will support efforts at developing the requisite manpower and expertise.

24   So far, the industry has developed much faster than the growth of expertise to support such growth.    Thankfully, a number of institutions have been established to meet this demand, such as the Bahrain's Islamic Finance Training and Research Centre which focuses on professional certification such as Certified Shari'ah Scholar and Certified Shari'ah Auditor, and Malaysia's International Centre for Education in Islamic finance, offering certification for Islamic finance professionals. We support these global efforts and would encourage the industry to tap MAS' financial sector development fund in developing Islamic finance expertise.

25   The significant rise in the number of Islamic conferences and seminars has further contributed to the sharing of information and knowledge in Islamic finance. To sustain growth, both investors and corporate issuers need to be educated.  I would also encourage financial institutions to continue to invest in educating potential corporate issuers on the merits and characteristics of Islamic financing.


26   Islamic banking and finance have grown rapidly, especially in recent years.  I hope that through our efforts in the 3 areas mentioned above- namely, in supporting global regulatory developments, in promoting the development of expertise, and in reviewing our own regulatory and tax regimes, we can make a contribution to this growth.  I hope that financial institutions can tap the highly developed and reputable financial infrastructure here, and our responsive regulatory approach, to add depth and breadth to the market.    The closer financial and economic relations will help bring a greater flow of ideas and people within and between the Middle East and Asia, and promote greater awareness and deeper understanding of each other.   This will certainly complement the efforts in the Asia-Middle East Dialogue last year to rekindle the ancient links between the two regions.

27   On that note, let me end by saying that we welcome your suggestions and feedback on areas where we should look into.  I wish you all fruitful discussions at this conference, and a productive stay in Singapore.   

28   Thank you!

1  Source: "Shari'ah and Sukuk - A Moody's Primer", 31 May 2006 Moody's Investors Service
2  Total global sukuk issuance is US$57 billion as of May 2006.  Sources: Islamic Finance Information Service and IOSCO Islamic Capital Market Fact Finding Report July 2004.