Published Date: 23 June 2008

Speech by Mr Tai Boon Leong, Executive Director, Monetary Authority of Singapore at The 5th Annual Islamic Finance Asia Summit 2008


Good morning, Ladies and Gentlemen.

1   I would like to thank the organisers for inviting me to this Summit.  It is a pleasure to be here and speaking in front of such a distinguished gathering of regulators, Shariah scholars, leaders and practitioners from the Islamic finance industry. 

Islamic Financial Services in Asia

2   The Islamic financial industry is growing by some 15 to 20% annually. Demand for Shariah-compliant financial products has increased sharply in recent years, due partly to strong economic growth in Asia which has led to an unprecedented accumulation of wealth. According to the IMF, Asian growth is expected to remain strong at 6.2% in 2008 and 6.4% in 2009[1]. The number of high net worth individuals in the Asia-Pacific region has increased 8% year-on-year to reach 2.6 million in 2006, with a combined wealth of about US$8.4 trillion[2]. Robust economic conditions in Asia have also generated sizeable demand for capital investments.  The Asian Development Bank estimates that Asia will require about US$300 billion of investments in infrastructure annually. A study by UNESCAP[3] suggests that the shortfall in financing could be as large as US$180 to 220 billion.  Some of this shortfall could undoubtedly be financed via Shariah-compliant means.
3   The rising demand for Shariah-compliant products in Asia can also be attributed to the growing wealth in the Middle East. Three Gulf Cooperation Council (GCC) countries – the UAE, Qatar and Kuwait – were ranked 1st, 3rd and 4th respectively in the world with the highest percentage of millionaire households[4]In case you are wondering, Switzerland was 2nd and US 5th. Investors from the GCC and Asia Pacific regions already hold US$267 billion in Shariah-compliant assets[5]. Record energy prices can only sustain this demand. As such, the number of Shariah-compliant funds worldwide is forecasted to double to 1,000 by 2010. The growing pool of liquidity in the Middle East portends well for Asia as much of it is reportedly looking for suitable investments in Asia. 

4   And Asia is taking notice of these flows. The Indonesian Parliament last week passed a new Islamic banking law that will allow commercial banks to be converted into Shariah-compliant ones and for foreign entities to set up Islamic banks in cooperation with Indonesian partners. Other than catering for its domestic Muslim population, it has been reported that the new law is also intended to draw investments from the Middle East into the country’s infrastructural development.  In Japan, the Financial Services Authority has proposed an amendment to the banking law that will allow Japanese banks to offer Islamic finance products through a subsidiary[6]. In addition to legislative initiatives, governments and other entities in Asia plan or have announced Sukuk issuances[7]. The Indonesian Government said that it would issue US Dollar and Rupiah Sukuks later this year. Separately, it has been reported that the Hong Kong Airport Authority is considering a Sukuk issuance. In Singapore, we aim to play a complementary role by adding Shariah-compliant products to the broad range of financial services offered by our financial institutions. To this end, MAS announced in May that we are developing a facility to make available Singapore Dollar sovereign-rated Sukuk to financial institutions in Singapore conducting Islamic finance. In Malaysia, you already originate 67% of outstanding Sukuks worldwide[8].  Malaysia has long played a leading position in developing Islamic Finance and acts as a role model for many in the region.

5   As a financial centre located at the heart of Asia, Singapore is in the middle of these exciting developments.  In line with global demand, we are also seeing greater interest for Islamic financial services, especially after the necessary regulatory and tax frameworks were put in place.

Regulatory and Tax Treatments

6   In Singapore, Islamic financial services are regulated under the same framework as conventional financial services since the supervisory processes and prudential measures are common to both.  To ensure that Islamic financial activities are no worse off than their conventional counterparts when they are similar in terms of economic substance and risks, MAS works in partnership with financial institutions and other industry players to review our regulations so as to provide a level playing field between Islamic and conventional finance.

7   In terms of tax treatment and framework, we have taken a similar approach such that Islamic finance is not at a disadvantage.  For example, we have granted investors in qualifying Sukuks the same income tax exemption as investors in conventional Qualifying Debt Securities.  We have also provided income tax concessions to certain qualifying Islamic finance activities such as asset management, Takaful and Retakaful, and lending activities.  Moving forward, the MAS will continue to provide clarity on the application of our regulatory and tax treatments to Shariah-compliant activities and instruments so that they will be on par with their conventional counterparts.   

Leveraging on Singapore’s Position

8   Singapore is in a good position to leverage on its existing critical mass, market depth and liquidity in conventional finance to play a wider role in the development of Islamic finance.  We see a larger opportunity for the financial industry in Singapore to capitalise on our existing infrastructure, financial talent pool, transparent regulations, and open markets to offer wholesale Shariah-compliant activities in areas such as asset management, commodities, REITs and lending. 

Asset Management

9   Asset management has been an integral part of our financial sector’s recent growth story.  Since 2000, assets under management in Singapore have more than tripled, increasing from S$276 billion to S$891 billion at the end of 2006[9].  The figures represent compound annual growth rates of more than 20%.  Preliminary indications suggest that the industry continued to expand at a healthy pace in 2007, despite the ongoing market turmoil.  Being deeply integrated within Asia, Singapore-based asset managers know intimately Asia and its companies and markets.  It is therefore not surprising that more than half of the assets managed in Singapore have been invested in the Asia-Pacific region.

10   Increasingly, more Middle Eastern investors are looking towards opportunities in Asia as they seek to diversify their portfolios and search for new opportunities that provide higher returns.  There is widespread interest in Singapore both as an investment destination and as a gateway for Asian investments.  As such, Singapore-based asset managers have structured Shariah-compliant funds and other investment products to meet the needs of their clients, Muslim and non-Muslim who have gravitated towards such funds as a form of ethical investing.  In recent periods, Shariah-compliant equity funds have in fact outperformed their conventional equivalents.  Examples of Shariah-compliant funds in Singapore include DBS Asset Management’s Mendaki Global Fund, the ARC-Capitaland Japan Shariah Fund, and HSBC Singapore’s family of Takaful funds. 

Commodities Trading

11   Another area of interest to Islamic finance is the commodities trading market.  Singapore is recognised as a leading Asian hub for physical trading of oil and soft commodities.  We are currently the Asia-Pacific centre for the pricing and trading of oil, with about 20% of the world’s physical oil trade.  Our strength as a physical commodities trading centre stems from our prime location on major shipping routes, a vast oil refining and storage capacity, and close proximity to major agricultural producers in Asia.  The trading volumes and flows can be utilised by financial institutions to structure Shariah-compliant products based on energy and commodities.

REIT Market

12   Real Estate Investment Trusts (REITs) are another financial instrument that lends itself well for Islamic finance.  Singapore’s REIT market is now the largest in Asia outside of Japan, with 19 listed REITs and 1 property trust, with a total market capitalization of S$27 billion at end of 2007.  The rapid growth of the market can be attributed to Singapore’s appeal as a listing venue for property companies from the region, our deep and liquid capital markets, and the ability to access foreign assets from Singapore.  Structuring a Shariah-compliant REIT, I understand, is fundamentally no different to that for a conventional REIT, with the main difference being in the selection of suitable assets.  We believe that there is budding market interest to explore Shariah-compliant REIT listings and property players are looking to the Singapore REIT market to access quality assets in the region.  

Lending Activities

13   Trade finance is an area that enjoys good growth prospects, owing to the surging volume and value of commodities and to the rise in intra-Asian trade. Singapore has long established trade links with the rest of the world.  In 2007, Singapore’s total trade grew 4.5% to reach S$847 billion[10] and is well intermediated by more than 160 local and international banks in Singapore.  Our trade with the Middle East has doubled to S$50 billion since 2003.  The rate of expansion is expected to improve with the successful conclusion in negotiations of the Singapore-GCC free trade agreement.  As more Muslim-owned companies and businesses in the GCC seek Islamic solutions for their financial needs, banks in Singapore can look to service this demand arising from the expanding trade and economic links with the Middle East.  For this reason and others, the number of Middle Eastern banks in Singapore has doubled to 12 in just the past 2 years.  

14   Project finance is another promising area.  With numerous industrial and infrastructural projects underway and many more in the pipeline, Asia has seen a take-off in project financing.  There is a healthy pipeline of projects in Singapore that require financing.  Recent deals include SinoSing Power’s S$2.2 billion bid for Tuas Power[11], and the construction of the S$800 million new Sports Hub[12].  The amount of non-SGD project financing by banks in Singapore has doubled, from S$47 billion in 2004 to S$94 billion in 2007. 

15   As with trade finance, the same success factors are applicable to Shariah-compliant project finance.  Like Asia, the GCC is also in the midst of an infrastructural boom.  At least US$78 billion of project finance deals are scheduled to begin in 2008[13].  We have already seen Asian companies secure Shariah-compliant financing for developmental projects in the Middle East.  For instance, Capitaland has raised such funding to build the multi-billion dollar Raffles City Bahrain.  More Singapore-based companies and financial institutions will tap Islamic finance for future projects given the larger pools of liquidity available. 

Connectivity & Infrastructure

16   Singapore possesses good connectivity to global financial markets and excellent business infrastructure.  Financial institutions and other businesses in Singapore enjoy political and economic stability, strong rule of law, and ample access to ancillary services such as lawyers and accountants.  Furthermore, Singapore’s corporate tax regime is highly competitive, and business surveys have consistently ranked Singapore tops in areas such as corporate governance, ease of setting up businesses, public sector efficiency and convenience of location.  Most recently, Mastercard Worldwide ranked Singapore as the 4th best centre of commerce after London, New York and Tokyo[14].

17   Businesses and the financial institutions that serve them also benefit from Singapore’s extensive network of free trade agreements (FTAs) and avoidance of double taxation agreements (DTAs).  Singapore has signed 13 FTAs, either bilaterally or as part of a multilateral forum.  These FTAs allow Singapore-based exporters and investors to enjoy tariff concessions, preferential access to certain sectors, intellectual property protection, and overall fast-tracked access to major economies and new markets.  Other than FTAs, we have DTAs with more than 60 jurisdictions around the world, including GCC.  These agreements have facilitated the flow of investments, trade, and business spending by alleviating some of the tax uncertainty faced by global businesses and investors.

Going Forward

18   Islamic finance is still nascent but developing rapidly.  As such, there is a need for regulatory and corporate governance practices and mechanisms to keep pace.  MAS is committed to continue reviewing our existing regulatory framework as new structures emerge in this highly dynamic industry.  As a member of the Islamic Financial Services Board (IFSB), MAS also works with other IFSB countries to set regulatory and prudential standards to ensure the sound development of the industry.  We have participated in the IFSB Supervisory Review Process Working Group, the Money Market Taskforce, and the Capital Adequacy Working Group.  We look forward to hosting the 6th IFSB Summit in May 2009, which will be a landmark event for Singapore and our Islamic finance industry.

19   As often reported, the Islamic finance industry is currently facing a global shortage of manpower and expertise.  Training institutes and other ancillary service providers should step up their programmes to fill the gaps now faced by the industry.  On our part, MAS will work with interested training institutes to tie up with Singapore-based educational institutes and bodies to meet this rising demand.


20   To reach the next stage of its development, I believe that Islamic finance needs more players, end investors, and a wider product range.  All three are inter-related and mutually-reinforcing.  The entry of more players in terms of financial institutions, intermediaries and centres will grow the overall pie, promote greater market efficiency, and allow for wider sharing and diversification of risks.  It would also bring fresh skill sets and thinking to bear to structure new and more innovative Islamic products and solutions.  In this way, we can draw in more investors with a wider range of Shariah-compliant products and solutions that better match their investment needs, risk appetites and pricing hurdles.  Overall demand then increases and the entire industry benefits from the virtuous cycle.

21   We are already seeing greater market access for Islamic service providers to operate across borders.  Regulators in the Middle East and South-East Asia have been very supportive in this respect.  Several Islamic banks from the Middle East have set up operations here in Malaysia.  Middle Eastern financial institutions are expanding throughout the MENA region and also into Singapore.  The first Islamic bank in Singapore – the Islamic Bank of Asia which recently celebrated its 1st anniversary – has opened a representative office in Bahrain.  In UK, the FSA has just given their approval for a 5th Islamic bank.  France has recently expressed similar interest to grow an Islamic financial industry.  These are all encouraging signs that augur well for Islamic finance. 

22   On this positive note, I would like to wish all participants a fruitful sharing experience at this conference and successful endeavours as you seek to grow this emerging and vibrant field of finance.  Thank you.

[1] International Monetary Fund:  Regional Economic Outlook for Asia and Pacific
Note- "Asia" refers to Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan, Thailand, and Vietnam.
[2] Merrill Lynch & Capgemini:  11th Annual World Wealth Report
[3] United Nations Economic and Social Commission for Asia and the Pacific
[4] Boston Consulting Group.
[5] Ernst & Young 
[6] Zawya
[7] Islamic Finance News, 18 April 08
[8] MIFC website
[9] MAS:  2006 Singapore Asset Management Industry Survey
[10] IE Singapore
[11] Thomson Financial
[12] Singapore Sports Council 
[13] Middle East Business Intelligence
[14] Mastercard Worldwide:  Worldwide Centers of Commerce Index 2008