Singapore’s Islamic finance industry has welcomed this week’s amendments to the Banking Act, which allows Shariah compliant banks to undertake Istisna or project financing with immediate effect.
With the Monetary Authority of Singapore (MAS) clarifying the application of Istisna, banks based in the city state will be able to use this Shariah compliant tool to establish contracts between buyer and the seller, which forgo the specified manufacturing, construction, assembling or packaging processes but are merely based on the price determination and the pre-agreed delivery date.
A partner at Allen and Gledhill law firm, Yeo Wico, commending MAS’ efforts, said: “This will be a significant development in the correct, consistent direction that MAS has been taking to promote Islamic finance in Singapore. Infrastructure development projects are ideally suited for Istisna and will be the next area of focus for Islamic banks.”
The Islamic Bank of Asia managing director for corporate banking and capital markets Tan Jeh Wuan told Islamic Finance news that this constructive step would augment the growth of Islamic finance in Singapore, enabling Islamic banks to offer a wider range of Shariah compliant finance products to meet customers’ needs.
According to Regulation 23E of this amendment, there are several conditions to be met by a bank prior to entering into an Istisna with a customer. First would be to commission the customer’s agent or the appointee to start manufacturing or the respective construction, based on progress payment method.
Concurrent with this commissioning, the bank will have to ready itself to transfer the ownership upon completion of constructions to the customer in the form of an Ijarah or using the undertaking provided by the customer to commit to purchase of the asset from the bank.
The amendment also prevents both the bank and the customer from being involved directly in the construction or the manufacturing process, which needs to be handled by a third party.
However, a senior official of OCBC Bank Singapore, who didn’t want to be named, said: “In principle, Istisna should not be allowed on the basis of Qiyas since it is a sale of a non-existent product. Neither is it qualified on the basis of Salam. But Istisna can be used under Maslahah. Public interest and benefit is an area which is not highly regulated in Shariah laws.”
MAS executive director Tai Boon Leong disclosed the new measure in his opening address at the Islamic Finance news roadshow held in Singapore on Tuesday.
The banking amendment regulation 2010 was published on Tuesday, with the guidelines for Istisna accessible on the MAS website, along with the updated procedure for the application of banking regulations on Islamic banking.
Reports by Ashwin Hemmathagama