Good morning, ladies and gentlemen

1   Let me first extend a warm welcome to our overseas friends and thank the organisers for inviting me here today.  I am glad to have this opportunity to meet with so many industry experts and practitioners in Islamic Finance in one place.

Impact of Financial Crisis of 2008 on Islamic Finance

2   These past twelve months have been extremely challenging for the financial industry, to say the least.  When this forum was last held in April 2008, JP Morgan had just announced that it was acquiring Bear Stearns.  Who could have known then the chain of events to follow?  Since then, we have witnessed dramatic changes to the financial landscape.  Many large financial institutions such as Lehman Brothers and Washington Mutual have failed or been taken over.  Others have been badly affected and had to be re-capitalised by their respective governments. Reflecting the seriousness of the financial and economic problems faced, governments worldwide have had to respond swiftly by providing fiscal, monetary and liquidity support on an extraordinary scale.

3   Experts have observed that Islamic Finance has been affected to a lesser extent by the global crisis for several reasons, including the general refrain from financial derivatives, in particular those linked to subprime debt, and limited exposure to failed institutions. Nevertheless, demand for Islamic products has been hurt by the same issues confronting conventional finance; namely tight liquidity, increased risk aversion, higher funding costs and the global economic slowdown.  For instance, global Sukuk issuance fell by more than 55% in 2008.

4   However, S&P recently reported that the long-term prospects for Sukuk remains strong with the market expected to recover later this year or in 2010 when financial market conditions and liquidity are expected to improve.  The pipeline for Sukuk issuance remains healthy and the market is attracting interest from an increasing number of issuers in both Muslim and non-Muslim countries keen to tap the growing pool of Islamic funds.  This has been borne out by the first Indonesian retail Sukuk which received a strong response last month. 
 
5   In Singapore, we have made important strides in this area.  In August 2008, City Developments launched Singapore’s first corporate Islamic MTN programme amounting to S$1 billion.  In January this year, the Monetary Authority of Singapore (MAS) announced the completion of its own sukuk issuance facility to provide Shariah-compliant regulatory assets to financial institutions in Singapore.  The facility marked a further milestone in our developmental efforts to promote Islamic Finance.  The MAS Sukuk is the Shariah-compliant equivalent of Singapore Government Securities (SGS) and is of the highest credit standing. The Sukuk will be given equal regulatory treatment as SGS, such as qualifying as an asset in the computation of capital and liquidity requirements.

Learning from the Financial Crisis

6   We can draw many learning points from the still on-going financial crisis.  Allow me to focus on just three this morning and draw their relevance to Islamic Finance.

7   The first is that Finance, as a whole, will need to return to its most fundamental role, that is, the allocation of capital for productive uses.  This “return-to-basics” move is being contemplated by many financial institutions as they re-examine their future positioning.  It could be simply focussing on channelling excess savings to fund useful investments in order to expand economic capacity.  Hence, the underlying Shariah precept in Islamic Finance of not using capital for speculation, but to build productive capacity and generate sustainable economic growth, becomes even more relevant and critical during these times when capital has become a “scarce commodity”.  Islamic Finance is therefore well placed to step in and fill the current vacuum of financing needs of businesses, supranationals and even governments, as the earlier Indonesian fund-raising through Sukuk has shown.  This is a window of opportunity for Islamic Finance to move itself more into mainstream banking and establish fully a long-term Shariah-compliant loan market.

8   The second point is that financial leverage is a double-edged sword.  In good times, borrowing or debt is the high octane fuel that supercharges returns.  As some financial institutions have found belatedly, excessive leverage in down markets and periods of market illiquidity can lead to death by a thousand cuts.  Again, it has been pointed out that Islamic Finance, due to its Shariah principles which explicitly forbids excessive leverage and speculation, have not encountered the magnitude of deleveraging currently taking place in conventional finance.

9   Third, the assumption that liquidity is easily available or can always be obtained at a price is mistaken.  In finance, trust and confidence are paramount.  Once confidence in a financial institution is shaken or lost, depositors and clients react quickly to pull out their funds and assets.  Islamic Finance, due to its reliance on real estate and private equity, are more exposed to these illiquid assets.  In addition, Islamic banks are generally subject to higher liquidity risks than their counterparts, as the range of liquid and hedging instruments at their disposal is more limited.  The Islamic Finance industry would do well to pay heed to such liquidity risks and take appropriate measures, including stress tests to determine its ability to withstand pullback by its liquidity providers. In this regard, the MAS Sukuk provides Singapore financial institutions with high-quality Shariah-compliant assets which are eligible collateral for tapping MAS’ liquidity.     

Other Islamic Finance Initiatives

10   MAS has undertaken several initiatives in recent years to create a conducive environment for Islamic Financial activities in Singapore.  Our policy intent has been to create a level-playing field between Islamic and conventional finance.  In this way, investors and users as well as financial institutions engaged in Islamic Finance will not be disadvantaged in terms of tax or regulation.  Since we first started working with the industry to develop Islamic Finance in 2003, we have increased the number of Shariah-compliant financing arrangements which Singapore-based financial institutions can enter into.  The latest two structures announced in January were the Ijara wa Igtina and Murabaha Interbank placements.  We will continue to work closely with industry players to review other Islamic financing structures so as to broaden the choice of Shariah-compliant instruments.

11   A commonly cited point is that Shariah-compliant financing can be more costly.  To promote Islamic Finance and to partially offset the higher costs, we had introduced in 2007 a 5% concessionary tax rate for Shariah-compliant trade financing, fund management and takaful activities.  I am confident that over time with more Islamic transactions and as players become more familiar with the structures, the unit cost will be brought down to a level comparable to that of conventional finance.

12   Another area which we are encouraging is education and training.  To emerge stronger and more competitive when the economy recovers, it is critical to have the necessary expertise and skills in place. Financial institutions should therefore take advantage of the current lull in activities to train and build up the competency of their staff in Islamic Finance. It is heartening that training providers such as CIMA^[1] and SII ^[2]  have brought in their respective Islamic Finance courses in the past year.  MAS has also increased our training support under the Financial Training Scheme (FTS).  We invite reputable universities and course providers to offer Islamic Finance training in Singapore so as to raise the overall competency of our professionals in this industry.

13   MAS is therefore pleased to be hosting the 6th Islamic Financial Services Board (IFSB) Summit in Singapore from 5th – 8th May 2009.  The Summit will bring together key regulators and institutions from the Middle East and local region to discuss the future of Islamic Finance.  We are delighted that the central bank governors of Bahrain, Jordan, Korea, Malaysia, Qatar, Saudi Arabia and the United Arab Emirates have confirmed their participation.  In addition, we will have the President of the Islamic Development Bank, H. E. Dr Ahmad Mohamed Ali Al-Madani as one of the keynote speakers.  The event is therefore an excellent opportunity to hear from the leading minds in Islamic Finance and to network with regional counterparts.  This event is open to non-IFSB members.  We have also extended the enhanced FTS training grant to Singapore-based financial institutions to participate in this Summit.

Conclusion

14   The financial industry should take the long view despite the daunting challenges and gloom from the current crisis.  They should make full use of this opportunity to build capacity, raise competencies and learn new skills so as to be able to participate fully in the upturn.  As an economist once said, “A crisis is a terrible thing to waste.”  This crisis offers a unique opportunity for Islamic Finance to introduce Shariah-compliant arrangements to local and regional businesses currently in need of financing and in so doing, tap new markets and diversify their funding sources.  On our part, the MAS will continue to create the environment and infrastructure to strengthen and further the development of Islamic Finance.  

15   I wish you a very successful forum and look forward to seeing you at the IFSB Summit in May.  Thank you.

^[1]  Chartered Institute of Management Accountants began offering the “Certificate in Islamic Finance” courses in Singapore from July 2008.

^[2]  Securities and Investment Institute began offering “Islamic Finance Qualification” courses in Singapore from August 2008.