Good morning, ladies and gentlemen.

1   Let me begin by thanking the organizers for inviting me here today.  I understand that this is the first of a series that Islamic Finance News will be staging; after which the forum will travel to Hong Kong, Jakarta, Cairo, London and New York.  I would like to thank IFN for kicking off the roadshow in Singapore.  My remarks will focus on how Singapore, as a major financial centre in Asia, views the growth of Islamic finance and what the MAS is doing to facilitate its continued development here. 

Current State of Global Islamic Finance

2   The global Islamic finance industry has grown rapidly, especially in the last few years.  Today, the industry is estimated to be valued at US$750 billion and growing by more than 20% annually.  As such, its total size is likely to cross the US$1 trillion mark by the end of the decade^[1].   While the pace of expansion has been impressive and news-grabbing, the industry is however still relatively small when compared to the global financial services sector.  This in itself highlights the strong potential for future growth.  Indeed, Standard & Poor’s has estimated that the potential market for Islamic finance could reach US$4 trillion.

3   The rapid expansion of Islamic finance has been fuelled by mounting global demand for Shariah compliant financial products and services.  As recent as five years ago, Islamic finance was largely found in countries with significant Muslim populations.   Today, it has expanded to more than 75 countries with both Muslim and non-Muslim communities.  Islamic products and services attract not only Muslims, but also conventional and ethical-based investors. There is also an increasing range and sophistication of products to choose from.  Progressing beyond basic banking accounts, customers can now invest in capital market instruments such as Sukuks, Shariah compliant real estate and infrastructure funds, Islamic ETFs and mutual funds, and even Islamic hedge funds. 

4   The industry profile has also changed.  Attracted by the abundant liquidity in the Middle East and strong potential of the industry, an increasing number of conventional international banks have also established Islamic finance operations and subsidiaries.  Ever larger Islamic banks are also being established in the Middle East, Europe and Asia.

5   These industry trends are also being mirrored in Singapore.  In banking, from Waadiah deposits available through a window facility of a local bank in the 1990s, we now have our first full fledged Islamic bank – the Islamic Bank of Asia.  In insurance, from retail takaful products we now have an established retakaful company.  In capital markets, starting with Islamic unit trusts, we have seen the launch of Shariah compliant property and private equity funds and the FTSE-SGX Asia Shariah 100 Index. 

Singapore’s Stance and Value Proposition

6   Let me now outline Singapore’s stance and value proposition in Islamic finance, and what we have done to further facilitate the development of the industry here.

7   As Islamic finance becomes an increasingly integral component of the global financial system, we already see an accompanying rise in Shariah compliant financing activities in Singapore.  We therefore seek to develop an Islamic finance industry that will leverage on our existing strengths in wealth management, trade financing and capital markets.  Being an international financial centre, our institutions should be able to offer a complete suite of Shariah compliant products and services.

8   Singapore offers a strong value proposition as a centre of innovation and development for Islamic finance.  We already have mature and sophisticated financial markets with a ready pool of financial expertise, technical know-how, and global connectivity.   This is underpinned by a strong regulatory framework, a robust payments and clearing system, and a competitive tax structure.  As a major trading and financing hub, Singapore offers exposure to several key drivers of growth to financial institutions, especially those that offer Islamic financial services.
 
9   The first key driver is the healthy growth of trade between Asia and the Middle East, particularly with the Gulf Cooperation Council (GCC).  Total trade between Asia^[2] and the GCC grew by 17% annually since 2000 to exceed US$328 billion in 2006^[3].Singapore’s involvement in this inter-regional trade looks set to rise with the successful conclusion of negotiations on a free trade agreement with GCC in January.  The increased trade flows between the Middle East and Asia can only mean larger financing and risk management needs to be met by financial institutions operating from these two regions.  Middle East and Asia are likely to continue to be the two most dynamic regions in the world in the face of banking and economic uncertainties currently faced in the US and Europe.  

10   Another key driver is the desire amongst GCC countries towards building more diversified economies.  Rising oil prices have provided GCC countries with the opportunities and revenues to break away from their historic reliance on the energy sector.  Massive developments are taking place in the region, ranging from major infrastructural projects in roads, ports, power generation and water treatment facilities to the building of entire new cities in Saudi Arabia, UAE, Qatar and Bahrain.  More than US$2 trillion worth of projects have been announced or are under construction in the GCC^[4], and a larger number of Singapore-based companies are participating in them.  Press reports place the total value of GCC projects with Singaporean participation at more than US$4 billion^[5].   These include the Doha North Sewage Treatment Works in Qatar by Keppel Corporation, Raffles City Bahrain by Capitaland and SMRT’s successful bid to manage the monorail system on the famed Palm Jumeirah in Dubai.  The potential for financial intermediation between pools of investment funds and economic opportunities in Asia and the Middle East are therefore tremendous. 

11   We already have well-developed capital markets and working frameworks for real estate investment and business trusts.  In addition, our institutions have begun to leverage on its conventional expertise to structure Shariah compliant versions of their products and services.  For instance, our fund management industry has applied its expertise in Asia to develop, manage, and market Shariah compliant Asia-Pacific funds to Middle Eastern investors.
 
Regulatory and Tax Treatment of Islamic Finance in Singapore

12   MAS has opted to accommodate Islamic banking within the existing regulatory and supervisory framework for banks, as the prudential objectives are largely similar between Islamic and conventional financial services.  This approach to Islamic banking has made it possible for us to give the industry the attention which it deserves. 

13  We have worked with financial institutions and other industry players to review our regulations and tax framework to ensure a level playing field between Islamic financing and conventional financing deals. 

14   We announced in 2005 that additional stamp duties incurred by qualifying Islamic financing arrangements for immovable property would be remitted.  In that same year, we also refined our rules to allow banks to offer Murabaha financing in Singapore.

15   In 2006, MAS clarified income tax and GST treatments for Shariah compliant financing arrangements involving the cost-plus, investment-partnership, and lease-with-option-to-purchase concepts, which are based on the Murabaha, Mudaraba, and Ijara wa Igtina structures respectively.   At the same time, we also clarified treatment for Sukuks based on the concept of sale-and-leaseback.  These treatments were enacted so that Shariah compliant deals based on these structures would not be disadvantaged vis-à-vis their conventional counterparts.  That year, MAS also allowed banks to offer Murabaha investments, and in 2007, we accorded retail Murabaha investors the same regulatory protection under the Banking Act as conventional depositors, for example in priority of claims ahead of general unsecured creditors.

16   More recently, the Finance Minister in his February budget announced that we will offer a 5% concessionary tax rate on the income derived from qualifying Shariah compliant financial activities such as lending, fund management, insurance, and reinsurance businesses.  In addition, all investors will receive enjoy tax exemption on income derived from qualifying Sukuks.  The details are being prepared and will be issued in due course, and they shall be aligned with existing concessions to create a seamless framework for the Islamic finance industry in Singapore.

17   Moving forward, we will continue to provide clarity of the application of our banking laws to Islamic finance products and seek to ensure that Islamic products are not disadvantaged where they are similar in terms of economic substance and risks. We have already provided regulatory clarification on the most common Islamic financing structures with banks offering such products in Singapore.  Regulations and guidance are currently being prepared to make more transparent the regulatory treatment across a whole range of Islamic finance products.  We are also committed to continue reviewing our regulatory framework as new structures emerge in this highly dynamic industry.

18   As the Islamic industry develops, we foresee that there will be a need for an adequate supply of talent and expertise in Shariah compliant concepts and structuring, as well as Shariah law.  We urge more training institutes and other ancillary service providers to offer such training out of Singapore. MAS will also work with interested parties to tie up with local educational institutes and bodies to offer such programmes here.

Conclusion

19   We hope that Singapore’s well-developed financial markets, strong regulatory framework, and broad talent base will contribute positively to the growth of the global Islamic finance industry.  Our commitment to further develop this industry is underscored by MAS’ full membership at the Islamic Financial Services Board (or the ‘IFSB’).  The IFSB was established in 2002 to formulate the international regulatory and prudential standards for Islamic finance.

20   I am pleased to announce that Singapore will host the Islamic Financial Services Board’s 6th annual Summit in May 2009.  This summit will be a landmark event for Singapore and the Islamic finance industry here.  We welcome all of you to be a part of the exciting developments which will be planned for the Summit and help to grow the Islamic finance industry, which remains a bright spot amidst the present turmoil in the conventional financial markets embroiled in the credit crunch and sub-prime crisis. 

21   On this note, I wish you many fruitful discussions and a successful forum.  Thank you.

^[1] McKinsey & Company:  The World Islamic Banking Competitiveness Report 2007-08.
^[2] "Asia" in this context refers to the following 11 countries: China, India, Hong Kong, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.
^[3] Based on IMF and CEIC statistics.
^[4] Middle East Economic Digest
^[5] The Straits Times, 19 Feb 08.