13 April 2010

Professor Michael Furmston, Dean of the School of Law, Singapore Management University
Ladies and gentlemen
A good morning

1   I would like to extend a very warm welcome to our overseas friends visiting Singapore and thank the organisers for inviting me to Singapore Management University (SMU) for this year's roadshow.  SMU has been promoting education and research in Islamic finance and law.  The university has also been reaching out to the industry and other universities internationally.  Hence, it is an excellent location to share Islamic finance expertise and learn from one another's experience.

Expanding the Realms of Islamic Finance

2   Just twelve months ago, the prevailing mood globally was of fear and uncertainty.  Investor confidence was badly shaken. Many financial institutions were struggling to recapitalise and repair their balance sheets.  Due to timely and decisive intervention by governments and central banks, confidence has been restored and financial and economic activities have rebounded strongly.

3   While Islamic financial institutions were not directly struck by market distress from toxic assets and high degree of financial leverage due to conservative Shariah principles, they did not escape the ensuing effects of the economic downturn.  The negative impact arose from their portfolio concentration in real estate and other illiquid assets.  Despite the tough economic environment, the Islamic finance industry has held steady.  Industry estimates place the current level of Shariah-compliant assets at around US$950 billion.  Sukuk issuance has rebounded to about US$20 billion in 2009 due mainly to sovereigns and quasi-sovereign entities re-entering the markets. 

4   Today's theme of  "Expanding the Realms of Islamic Finance" is highly appropriate as Islamic finance has broadened its geographical reach to many new markets in recent years.  Starting off from Singapore, I understand that the Islamic Financial News (IFN) roadshow this year will visit a total of 17 countries, including Australia, Canada and France.  This clearly demonstrates the growing acceptance of Islamic finance beyond jurisdictions with large Muslim population base.  More conventional financial centres have recently announced development plans to facilitate the growth of Islamic finance due to its growing attractiveness as an alternative open to all investors and as a form of sound ethical financing.
 
Serving the Growing Needs of New Investors

5   With the entry into non-traditional markets, the Islamic finance industry will encounter a larger proportion of new-found investors who are more accustomed to conventional finance.  To be persuaded to take up Shariah-compliant financial products and services, these investors, whether institutional or retail, would expect the following:

6   First, these investors and issuers would likely be seasoned consumers with more exacting demands and a wider choice.  While it may not be realistic for them to expect the same broad range of products and services found in conventional finance, they nevertheless expect Shariah-compliant products and services to meet closely their financing or investing needs.  In recent years, the industry has been steadily broadening the range of Islamic products available to include Sukuk and equity funds, Shariah-compliant Exchange Traded Funds (ETFs) based on broad-based market indices.  Greater creativity and innovation are needed to expand the present product range, especially those with a Pan-Asian focus as investors want exposure to this dynamic and rapidly growing region.  In this respect, the Islamic finance industry can tap on the rich pool of structuring expertise in Singapore who understand Asia well and to also leverage on its existing market infrastructure for efficient payments, clearing and settlement during the Asian time zone.

7   Secondly, Islamic financial products have to offer comparable returns on a risk-adjusted basis in order to encourage stronger take-up.  While it is not unexpected for markets in the early stages of development to experience higher unit costs, institutions must pay close attention to their cost structures so as to provide investors and clients with better pricing and competitive returns. This is achievable.  For instance, City Developments not only issued its last S$50 million tranche of Sukuk at a longer tenure, it was launched at a competitive pricing vis-à-vis its conventional equivalent. 

8   Thirdly, financial institutions offering Shariah-compliant products should strive to improve on their overall service quality.  High standards for transparency and disclosure are already well-known hallmarks of Islamic finance.  Institutions can make use of this edge, together with transparent and fair allocation of shared risks and reward among the transacting parties to appeal to new clients.  In this regard, we encourage industry participants to take advantage of the financial sector incentives available to develop their business capacity as well as to raise the quality and competency of their staff through educational courses and training programmes.

Islamic Finance in Singapore

9   In Singapore, interest in Islamic Finance has been growing.  Last September, the Islamic Development Board (IDB) placed its inaugural S$200 million Sukuk, which won the IFN's Cross-Border Deal of the Year Award.  Keppel T&T and AEP Investments also announced that they are putting together the world's first Shariah-compliant data centre fund. At the beginning of this year, industry players and Singapore Business Federation (SBF) organised an Islamic Banking and Finance Seminar to raise awareness amongst SBF members.  The event attracted more than 140 participants.

10   Following the Islamic Financial Services Board Summit last May, we are pleased that Singapore will be hosting another major event - the first Asian Summit of the premier World Islamic Banking Conference (Asia WIBC) in June 2010.^[1]  Central bankers, financial regulators, industry practitioners and academicians from Asia and the Middle East will meet to discuss the theme of "Seeking New Growth Horizons" for Islamic Finance.  We welcome all industry stakeholders to participate actively to set the future direction for the industry and to share their vision for Islamic finance in Asia and the Middle East.

11  In Singapore, MAS has progressively provided greater certainty and transparency in our regulatory framework.  Our fundamental approach is to level the playing field between Islamic and conventional finance.  We have worked with the industry and other government agencies to ensure that Islamic financial players and users are not disadvantaged in terms of regulation and taxation. 

12   Since 2003, we have provided clarity on the application of our regulatory framework for an increasing number of Shariah-compliant financing arrangements permitted under our integrated regulatory framework.  We issued regulations clarifying the treatment of Ijara wa Igtina and Murabaha Interbank placements in January 2009.  In May, the MAS issued a comprehensive set of guidelines on how our banking regulations apply to Islamic banking, along with two regulations clarifying that banks may undertake Diminishing Musharaka financing and Spot Murabaha transactions.

13   I am pleased to announce that MAS will today issue new banking regulations to clarify Singapore-based banks may enter into Istisna or project finance transactions.  Istisna financing is typically applied to infrastructure development projects, an area that is of significant growth potential in a rapidly developing Asia.  In providing such financing for their customer's specified made-to-order projects, banks must ensure that they manage their risks prudently and have in place effective risk mitigation measures.  With the issuance of the Istisna regulations, the MAS has extended Islamic finance into the field of participatory finance for economic projects. We have also largely completed our review of the main Islamic structures commonly used by the industry.  Nevertheless, we recognise that the Islamic finance space is constantly evolving, and we remain committed to working with the industry to refine our rules where needed to keep our regulatory framework responsive and relevant. 

Conclusion

14   Prospects for the industry remain bright as we see Islamic finance take shape in more countries.  Companies and investors in Singapore and abroad are increasingly more aware of Shariah-compliant structures and have used them to access new markets and a broader range of international investors.  But the overall level of understanding is still basic in many places and some still believe that Islamic finance is just for Muslims. This will change if the industry develops suitable, competitive Shariah-compliant financial products with the right focus and are able to provide equal, if not better, levels of service. 

15   I thank you for your attention, and wish you a productive day at SMU. 

^[1] The inaugural Asia WIBC will be held on 14 - 15 June 2010 in Singapore. Over the past 16 years, the WIBC held annually in the Kingdom of Bahrain has firmly established itself as the largest and most important gathering of its kind, attracting more than 1,000 industry leaders and delegates from over 35 countries. Asia WIBC will have a special focus on Asia and provide a unique platform for the industry to share experience from established centres for Islamic finance. More details can be found at: http://www.megaevents.net/islamic_banking/asia/

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