Past Performance

The definition of success in the Islamic finance industry tends to be driven by comparisons of volume of sukuk issuances or the number of Islamic banks present in a country. If we used these benchmarks, then Singapore would clearly not meet the mark. However, if we consider this industry as part of the overall status of Singapore as an international financial centre, then Singapore has every right to be proud of where it is today.

A good well-rounded financial center offers a full suite of financial services and products according to the needs of the market, and by that definition Singapore has clearly succeeded in developing this nascent industry in the wider context of the country as the marketplace of ideas and product development.

Several measures have been taken by the regulatory authorities to make available the necessary infrastructure to support the growth and development of Islamic finance. Regulatory and tax equalization are some of the measures that have been taken to level the playing field between Islamic financial products and their conventional equivalents.¹

Singapore has seen some bursts of success: the launch of more Islamic retail products in recent years by some of the banks as well as several sukuk programs being set up by Singapore-listed corporations such as City Developments Limited, Swiber Holdings Limited, and Vallianz Holdings Ltd. The world's largest Islamic real estate investment trust, by Sabana, was listed on Singapore's stock exchange in 2010, and several Shari'ah-compliant funds have been set up in Singapore in recent years.

Individuals and corporations now have the option of whether to use conventional or Islamic financial products; consequently, Islamic financial products will develop on their own merits and compete with their conventional equivalent. This can only be good for the industry as a whole.

However, the biggest limiting factor is the lack of consistency and absence of more corporations considering Islamic finance as an alternative form of financing. The same level-playing-field policy that benefits the financial ecosystem in the long run does not help the growth of the industry on a short-term basis.

Since conventional finance is entrenched and has a longer history and track record, and given the absence of any real incentive to adopt Islamic financing options, corporate issuers, institutional investors, and retail individuals have no real impetus to consider this alternative form of financing or investment. This may account for the apparent lack of growth in this sector vis-à-vis other financial products like the real estate investment trust market, which grew robustly since 2000.

Also, because of the newness of this industry, the start-up costs and time can be prohibitive, since financial institutions have to train their staff—from back-office support functions to front-office sales staff—on the nuances of Islamic finance. From a practical point of view, the conventional market is much deeper, and revenues can be readily made; thus senior management of financial institutions and ancillary services may not see a need to develop talent in a space whose growth and return on investments is uncertain.

Prospects

Islamic finance in Singapore will remain a niche market, and volumes will definitely pale when compared to the growth rates in the conventional system or with its larger neighbor, Malaysia. Policy makers, bankers, and investors need to look beyond the headline numbers and remain cognizant that as an international financial center, the financial system must be like a hypermarket, offering a whole suite of financial products and services and leaving it to borrowers and investors to choose which type will fit their risk appetites, cost considerations, or other unique requirements. In its own way, Singapore has succeeded in truly being an international financial center, and the policy makers have definitely gotten it right.

Asset Management

Singapore has one of the largest fund management industries in the world, with assets under management of S$1,626 billion at the end of 2012. However, according to a survey report, it is uncertain how many of these are Shari'ah-compliant funds or have a specific mandate to invest only in Shari'ah-compliant assets, such as sukuk or equity. Anecdotally, the Middle East and Brunei would be keen to have their funds (which would be a huge source) managed out of Singapore, and there already are a couple of family offices in Singapore that cater to a Middle Eastern clientele.

But having such a clientele alone does not dictate investment preferences. As was clearly demonstrated time and again, investors are still focused on returns, and only when these are equal will the investors consider a Shari'ah-compliant option. Hence, the asset management industry in Singapore will remain dominated by commercially driven objectives.

Singapore has a few Shari'ah-compliant equity funds, often using benchmarks such as the FTSE, SGX (Singapore Exchange), and Asia Shari'ah 100 Index to facilitate investors in screening Shari'ah-compliant equities from the Asia Pacific region. As mirrored in most other countries, Shari'ah-compliant equity-linked funds are usually more readily available for investors because of an ample supply and significant market information.

Sukuk funds, however, are harder to come by, with very few entities in Singapore offering such an investment product. Most noticeable are sukuk funds from Franklin Templeton, which offers investors the opportunity to invest in this market. However, one of the key obstacles to the growth of such funds is the general scarcity of sukuk worldwide. Sukuk investors tend to be investors who hold their investments to maturity, which results in an almost absent secondary market. The lack of supply of sukuk to meet worldwide demand further hampers the growth of the sukuk fund markets. After all, if such a fund were unable to find sukuk to meet its investment mandate, the fund would not have the critical mass to succeed commercially.

Tax and Accounting

An Islamic finance tax incentive was introduced in 2008, providing a concessionary tax rate for qualifying Shari'ah-compliant lending, fund management, takaful, and re-takaful activities. It was clear from the outset that this tax incentive would have a sunset clause and be available for only five years.

The expiration of this incentive created waves in the 2013 budget announcement, when this tax incentive was merged with other existing incentives. Singapore's approach to Islamic finance has always been based on the creation of a level playing field rather than on the provision of a crutch by means of tax incentives or tax holidays.

Islamic financial products in Singapore would therefore have to be commercially viable and attractive to users before they could take off. There are no special incentives such as a tax holiday to help push them along and tip the playing field in favor of Islamic financial products. Although detractors may claim that this has hampered the growth of Islamic finance through the absence of incentives, it also demonstrates how reliant the industry worldwide is on incentives.

In recent years, Singapore has seen successful launches of Islamic products in the market despite the absence of incentives. The commercial value of the product itself should be weighed against its conventional competitors, and its success can therefore be attributed solely to its own merits and marketability rather than being perceived as a government-inspired move.

Singapore does not aspire to be an Islamic finance hub in which this industry must demonstrate stellar growth. Instead, Islamic finance must be part and parcel of the greater financial system, where, as in a hypermarket, it is one of many products available to those who need or want it.

Retail and Takaful

Singapore's Muslim population is about 15 percent of the total population of 5 million. At first glance, this seems to be a limiting factor that could hamper any growth in Islamic finance for the retail space. Nonetheless, there have been some interesting growth trends in this area. OCBC Bank's Al Wadiah deposit was one of the earliest Islamic deposits to be offered to the average Singaporean.

Since then, other banks have made inroads offering Islamic finance solutions to retail clients. Maybank has offered a whole suite of Islamic products, including savings account, term deposits, home financing, and auto financing. It is also understood, anecdotally, that total Islamic deposits could be in the range of S$2 billion. This bodes well, and it also indicates that the non-Muslim population is opening up to such products as long as the returns are similar.

There are very limited initiatives by the government to encourage these developments. Most of the past incentives seemed geared to non–Singapore dollar–denominated loans and financing, which shows the emphasis of the government on Islamic wholesale banking types of business. This approach, however, is not without its merit, since incentives are a form of opportunity cost, and the government has to focus on areas where there is also greater return for the dollar invested. Singapore's role is as an international financial center and that should be the focus for greater development.

Sovereign Sukuk

Singapore is one of the few countries in the world that persistently runs current-account surpluses. It does not really require the issuance of debt to finance its operations, but for the purposes of developing the capital markets, many government agencies, such as the Housing Development Board, issue bonds on a regular basis. With regard to sukuk, only one entity has done this so far, and that is the Monetary Authority of Singapore. The Singapore sukuk, as it is affectionately called by market players, is limited in volume and scope and was issued primarily to allow Islamic banks to better manage their asset liability requirements. It is also not issued regularly and is based entirely on reverse inquiry.

The Islamic capital market lacks a certain depth and push from the government—there is a general reluctance by almost all government agencies to explore this alternative form of financing because it seems unnecessary, and these governmental bodies could easily tap the conventional bond market for financing.

Nevertheless, the government has taken steps to ensure that there is no regulatory arbitrage between Islamic and conventional bonds, and both are subject to the same regulatory and taxation treatment. This level-playing-field philosophy remains the guiding principle of the Singaporean authorities in developing Islamic finance.

Sukuk

Having created the necessary ecosystem, the regulators and authorities have largely left further development of new Islamic products to the industry and market forces. The Monetary Authority of Singapore (MAS) continues to play a supporting role through seminars and conferences to promote greater awareness of Islamic finance among Singaporean corporations. There have been some successes in this regard, with the first corporate sukuk issuance by Citydev Nahdah and the first Shari'ah-compliant real estate investment trust in Singapore by Sabana.

In 2010, the Malaysian sovereign wealth fund Khazanah Nasional issued a S$1.5 billion sukuk to fund its acquisition of Parkway Holdings, and in August 2013, Swiber Holdings Limited issued a S$150 million sukuk attracting new investors into Singapore's debt capital market. These issuances captured much media attention because of the rarity of Singaporean corporations tapping into Islamic finance and the introduction of new investors into the Singapore-dollar debt capital market space.

Islamic finance took hold in Singapore in the 1990s with several banks offering Shari'ah-compliant products to their retail customers through Islamic windows. Since then, other banks have gradually offered more of these products, but they remained largely small-scale and retail-focused. Majilis Ugama Islam Singapura, the Islamic religious body in Singapore, issued the country's first two sukuk in 2001 and 2002, but these were sporadic, and no consistent pipeline of sukuk issuances was developed.

In 2005, the MAS refined its regulations to facilitate Islamic financing activity in Singapore. In the same year, the MAS became a council member of the Islamic Financial Services Board (IFSB), the only non–Organization of Islamic Cooperation country to do so. MAS's contribution to the IFSB spanned areas like supervisory review, Islamic money markets, capital adequacy, liquidity management, and solvency requirements for takaful operations.

In 2006, further clarifications were also made on the tax treatment for Islamic financing, using some Islamic structures like murabahah, mudaraba, and ijarah. In 2007, murabahah deposits were accorded the same regulatory protection as conventional deposits, which allowed the depositors to be covered under the local deposit insurance scheme. This was a pivotal move; it was also during this time that the MAS made it very clear that the regulatory and tax framework would operate on the level-playing-field guiding principle.

After the five-year tax incentive described earlier expired, the Singapore Business Times, a leading local financial newspaper, ran an article on March 5, 2013, titled “Singapore's Islamic Finance Dream Is Fading Fast.” The article noted that there was a significant movement of professionals from Singapore to Malaysia, the reigning leader in Islamic finance worldwide. Detractors were quick to interpret the expiration of the tax incentive as a sign that the government's commitment to this sector was fast disappearing; however, the authorities were quick to reaffirm their commitment to continue growing this industry where it is needed.²

Another key milestone was the launch of a MAS sukuk facility in 2009 to help Singapore-based financial institutions meet the regulatory and liquidity requirements. Guidelines were also issued in the same year on the application of banking regulations to Islamic finance as well as the introduction of new guidelines and regulations permitting banks to conduct murabahah interbankplacements, ijarah, diminishing musharaka financing, and spot murabahah.

These guidelines are a clear indication of how the Banking Act is framed locally and how the authorities try to fit Islamic financing into the regulatory framework. A close reading of the guidelines will show that the Banking Act describes each Islamic financing structure without reference to the Arabic name or Islamic nature of the structure. This will also set the tone for how the authorities treat Islamic finance within a secular legal structure, another policy principle that will continue to govern how Islamic finance is perceived and treated in Singapore.

Cross-Border Financing

Singapore has always been an international financial center, and foreign and local firms have used Singapore as a capital-raising center to fund their operations locally and regionally. The conventional bond space is very well developed; however, we see limited growth in sukuk. In part, this is because of the newness of this industry as well as the general ease with which companies can tap the conventional capital markets. The depth of the conventional space and the time-to-market issues that plague Singapore sukuk issuances will remain key hurdles to the further development of Islamic finance in Singapore.

This time-to-market issue persists even for the most simple sukuk structures in Singapore because of the absence of a wide, principle-based approach to Shari'ah-compliant financing in both tax and regulatory matters. Companies wishing to issue sukuk in Singapore, especially local issuers, have to seek tax clarification from the authorities pertaining to the various tax implications as well as from the MAS to seek assurance and confirmation that the sukuk can be treated similarly to conventional bonds. Local issuers also have to seek confirmation from the tax authorities that there are no undue taxes that will befall the issuer as a result of the unique features of sukuk structures.

Foreign issuers have it slightly easier, because they are not subject to local tax issues. They still have to seek confirmation from MAS, however, on the necessary regulatory adherence under the Securities and Futures Act. This time-to-market issue may hinder the issuing of sukuk in the Singaporean market, and if the government intends to attract more Islamic issuers, something has to be done to solve this problem.

Conclusion

Islamic finance in Singapore remains a nascent industry and its growth will be slow and gradual without the provision of further government grants or subsidies. Islamic finance will remain just one of many options and not the main driver of growth of Singapore's financial sector. This must be kept in perspective; Singapore's development of Islamic finance will not be on the same scale as Malaysia's or in the Middle East's, but it will be a long-term, sustainable product that any financial center should be able to provide.

About the Authors

Lee Ka Sing heads up Maybank Kim Eng Securities Pte. Ltd., Singapore's newly set up debt capital markets division, covering syndicated loans, project/structured finance, and fixed income businesses in the region. He has more than 18 years of experience in the finance sector, including infrastructure financing, financial advisory and cross-border tax structuring, private equity, fundraising, and asset management.

Previously, Ka Sing was at OCBC Singapore, where he was head of project and structured finance. Prior to OCBC, he was at Babcock & Brown (“B&B”) as director of the Asia Infrastructure Fund based in Singapore. During his nine-year tenure with B&B, he was involved in numerous infrastructure transactions in the region, namely in the toll road, power, and energy sectors acting as an advisor, codeveloper, and/or principal investor. He was also involved in three of the largest Islamic medium-term note issuances in the region and won Best Bond Deal and Advisor of the Year awards from PFI magazine. He was also involved in aircraft financing for B&B and completed many transactions for major airlines in the region.

Prior to B&B, Ka Sing was with Fieldstone Capital based in Kuala Lumpur, Malaysia, and was responsible for infrastructure project development/advisory and cross-border mergers and acquisitions. Ka Sing started his career with Aseambankers Malaysia (now known as Maybank Investment Banking) where he was responsible for privatization, project, and corporate finance transactions.

Ka Sing holds a BSc(Hons) in economics and accounting from the University of Bristol, in the United Kingdom.

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Ian Yeo Tian Chiang is with Maybank Kim Eng Securities Pte. Ltd. (MKES) and has over seven years of experience in the financial industry. His scope of work at MKES covers origination and structuring of fixed income instruments as well as loan syndication.

Ian worked at MAS and OCBC before joining MKES. During his time with these two organizations, he had significant exposure to Islamic banking. While at the MAS, he was part of a team involved in setting up the necessary framework and infrastructure to support the growth and development of Islamic finance in Singapore. While at OCBC Bank, Ian was in charge of managing relationships with financial institutions and sovereign wealth funds from Malaysia, Brunei, and the Middle East.

Ian has a MSc in strategic studies from the Institute of Defense and Strategic Studies (now known as the S. Rajaratnam School of International Studies) and a B.Soc Science (Hons) in political science from the National University of Singapore.