Opening Remarks by Mr Tai Boon Leong, Executive Director, Monetary Authority of Singapore at the IFSB Seminar on Strategies for Development of Islamic Capital Markets, Singapore, 7 June 2011
Mr Jaseem Ahmed, Secretary-General, Islamic Financial Services Board (IFSB)
Ladies and gentlemen
1 I would like to extend a warm welcome to our overseas friends and thank the IFSB for providing the Monetary Authority of Singapore (MAS) the opportunity to host this year’s Islamic Capital Markets Seminar. It is also an honour to welcome Mr Jaseem Ahmed, the new IFSB Secretary General to Singapore.
2 The growth of Islamic capital markets has been robust in recent years. Global sukuk issuance, after falling to about US$20 billion in 2008, has rebounded to around US$50 billion in 2010. Assets managed by Islamic funds too have reached around US$52 billion as at first quarter of 20101. Despite the global financial crisis, the industry has displayed remarkable resilience and offered another avenue for funding when liquidity in conventional markets became constrained.
Need for Islamic Capital Markets
3 The distinguished panel of speakers at today’s seminar will be sharing their expert insights and ideas on strategies to develop Islamic capital markets. Hence, allow me to focus my remarks on the importance of Islamic capital markets and what can be done to accelerate its development from the Singapore perspective.
4 Firstly, the need to foster the orderly development of Islamic capital markets is clear from an overall macroeconomic perspective. The Asian financial crisis in the late 1990s had underlined the risks of relying solely on the banking sector for corporate financing and intermediation. The more recent global financial crisis also exposed the dangers of banks over-depending on inter-bank funding for liquidity.
5 Secondly, Islamic financial institutions face a general shortage of high quality Shariah-compliant assets to invest their growing deposit base. From a longer-term market development perspective, it is good that more countries and corporate entities are showing interest to issue sukuk. As more jurisdictions are at various stages of developing their regulations and supporting infrastructure to facilitate the issuance of sukuk, the work of multilateral agencies like the IFSB, the Islamic Development Bank and Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and seminars like the one today are important in sharing the successful experiences of other countries and their best practices.
6 Thirdly, there is a need to expand the breadth and depth of Islamic capital markets in terms of products and capacity to absorb larger flows from a growing industry. The Islamic capital market today is largely focused on and synonymous with the sukuk market. While sukuk is certainly one of the most promising instruments due to its international reach in terms of issuers and investors, a broader range of instruments is needed to meet different funding requirements of borrowers and diverse investment needs of participants. It is also prudent to reduce the over-reliance on a single instrument or market. I am sure many of you will remember that the sukuk market was embroiled in controversy in 2008.
7 Lastly and most importantly, sukuk and other short-term market instruments are sorely needed to enhance the liquidity available to Islamic finance players. This handicap has plagued the industry since its modern re-birth four decades ago. Liquid instruments such as sukuk allow isolated pools of Islamic funds in certain centres to flow cross-border to seek better returns; thereby unlocking the full international potential of Islamic finance.
8 I would like to share several perspectives to further develop the Islamic finance industry.
9 Foremost, there should also not be any hesitancy in leveraging on the experience of conventional markets, and drawing the appropriate lessons from the many crises that these markets have weathered through. Considerable savings in time, effort and costs can be achieved by not having to re-invent the wheel or committing the same mistakes. In Singapore, real estate players had worked with conventional and Islamic banks to structure, finance and list the Sabana Real Estate Investment Trust (REIT). Sabana is presently the world’s largest Islamic REIT and the first to focus on industrial properties. Last year, the Securus Data Centre Fund was launched by Keppel T&T and AEP Investment, which introduced technology into a new asset class for Islamic investments. These developments highlight the potential of creating new Islamic products from the close collaboration of Shariah knowledge and understanding with the critical mass of conventional financial expertise in Singapore’s financial centre.
10 However, we recognise the need to weave a stronger understanding of Islamic finance principles into the financial sector in Singapore. Educational institutes here have taken the cue, even at an early stage, to develop the human capital needs of the industry. The Centre for Islamic Management Studies (CIMS) has since 2002 offered Islamic finance courses in collaboration with Malaysia’s International Islamic University. The Singapore Management University (SMU) has established an Islamic Law and Finance Centre, combining Islamic law, banking and finance programmes in a single, multi-disciplinary centre. The Centre will launch its new post-graduate Masters programme in Islamic Law and Finance next year to cater to the needs of lawyers and non-lawyers interested in pursuing a career in this industry. To meet the growing need for Shariah expertise, PERGAS - the Singapore Islamic Scholars and Religious Teachers Association, has leveraged on their training in Shariah to start developing expertise among its members to apply Shariah to business and finance. These initiatives will however need time to bear fruit and require the active support of Islamic finance industry players.
11 As most of you are aware, Islamic financial industry is known to be inclusive and its products and services are open to non-Muslims as well. In Malaysia and Indonesia, many participants of Islamic finance are in fact non-Muslims. Singapore companies such as City Developments and Olam International too have tapped the Islamic finance markets in order to broaden their investor base. Last year, Malaysian sovereign wealth fund, Khazanah Nasional, issued the single largest and longest tenured S$ sukuk in Singapore. Eventually re-sized to S$1.5 billion, the issuance was four times subscribed and has found its way into many conventional fixed income portfolios in Asia and Europe.
12 The listing of the Shariah-compliant Sabana REIT in Nov 2010 also saw strong domestic and regional demand from both Muslim and non-Muslim investors. There is therefore good demand for Islamic assets from the more than 600 financial institutions based in Singapore where assets under management (AUM) by fund managers grew 13% year-on-year to reach a new high of US$1.1 trillion. However, banks and other players must offer Islamic financial products that are competitively priced vis-à-vis conventional instruments of comparable quality and risk characteristics.
13 To ensure that Singapore’s financial centre is able to offer Shariah-compliant financial services, the MAS has worked closely with the industry and other government agencies to ensure that Islamic financial players and users are not disadvantaged in terms of regulation or taxation. MAS’ fundamental belief is in a level playing field approach since many of the same risks can be found in both conventional and Islamic finance. Hence, we look through the form of Islamic products and assess the economic substance and risks involved. Using this approach, MAS has progressively provided clarity on the application of our regulatory framework to the main Shariah-compliant financing arrangements such as Murabahah, Mudarabah, Ijara, Diminishing Musharaka and Istisna.
14 In 2009, MAS also launched our own sukuk facility; issuing to enable Islamic financial players in Singapore to meet their capital and liquidity requirements. The MAS sukuk is the Shariah-compliant equivalent of the Singapore government securities. As such, we have also made sure that the sukuk also qualifies as eligible asset under MAS liquidity framework for banks in Singapore. Recognizing that the industry is young and still evolving, the MAS remains committed to working with the industry to refine our regulations where necessary to ensure that our framework stays responsive and relevant.
Progress thus far
15 The progress achieved so far has been encouraging. For a small but internationally-orientated market, a wide range of Islamic financial instruments and products has already been launched. These range from retail-based unit trusts to exchange-traded fund (ETF) and real estate investment trust (REIT), from institutional-targeted equity and property funds to regionally-marketed sukuk. While the frequency and size of these instruments are low and smaller than their conventional equivalents, these deals underscore that there are no regulatory or market impediments to their origination in Singapore.
16 The level of activity can be partly attributed to the low understanding and awareness of Islamic financing structures. We have therefore taken steps to address this gap. For instance, the MAS has actively supported events such as the IFSB Summit and WIBC Summit Asia in order to showcase the industry and to also bring in regulators and practitioners from elsewhere to share their knowledge and experience with our local players. We have just produced a brochure that traces Islamic finance developments in Singapore and the MAS’ work in making the regulatory and fiscal environment more conducive for the structuring of Shariah-compliant transactions.
17 Together with the Singapore Business Federation and the IFSB, we have conducted outreach programmes to educate more companies and financial institutions on the potential of this alternative form of financing and to profile the industry. Given the encouraging turnout and the broad range of participants at today’s event, I believe that we have taken another step forward in this learning journey.
18 On this note, I wish you a productive seminar, and to our guests from overseas, an enjoyable stay in Singapore. Thank you.
1 The CityUK Islamic Finance Report, May 2011.