YEO WICO and SUHAIMI ZAINUL-ABIDIN discuss Singapore as a case study offering the potential for Islamic finance to flourish in a predominantly non-Muslim country.
The Islamic finance industry has grown rapidly since its inception in the 1970s and is currently estimated as being a US$1 trillion industry. However, it is still a common but erroneous impression that Islamic financing is only for countries with a large or majority Muslim population. In this respect, Singapore is an interesting case study, holding out the promise of having Islamic finance take root and flourish in a predominantly non-Muslim country.
Capitalizing on core strengths
Singapore’s fund management sector, wealth management sector and its established and active stock exchange and deep capital markets are some of the core strengths of its banking and finance industry, and it is in these areas and through leveraging on these core strengths that Singapore stands the best chance of developing its own viable Islamic finance industry. In the opening address at the 2nd World Islamic Banking Conference: Asia Summit 2011 on the 8th June 2011, Lim Hng Kiang, the minister for trade and industry and the deputy chairman of the Monetary Authority of Singapore (MAS), identified three areas where Singapore could offer its services as an established financial sector to support the growth of Islamic finance: namely in wholesale banking services, asset management and capital markets; and there have been encouraging signs in this respect.
There have been a number of Islamic funds established in Singapore in recent years, including Maybank’s Singapore Unit Trusts Ethical Growth Fund investing in Shariah compliant growth equities; the Daiwa Asset Management (Singapore)’s exchange traded fund offering investors access to the top 100 Shariah compliant Japanese companies by market capitalization; and more recently the Securus Data Property Fund, established and managed in Singapore with big-name international cornerstone investors, which invests in the unique asset class of data centers. The continuing financial crisis has led investors to seek safe haven countries such as Singapore for investment purposes, and whenever there is interest in funds investing in specific sectors or assets in the region Singapore comes to mind as the ideal jurisdiction for the establishment and management of the fund.
The rise of Islamic wealth management
Singapore has in recent years buttressed its reputation as a safe haven, especially in the eyes of those seeking an oasis of stability and security. With the growing accumulation of wealth, both local and international banks in Singapore have correspondingly focused on expanding their private banking operations. One spot that is yet to be tapped in Singapore is Islamic wealth management. Globally, Islamic wealth management is a relative green field as compared to Shariah compliant retail banking and corporate finance.
The unique needs of Shariah compliant investors who seek wealth management are primarily due to the requirements to pay zakat and the special rules for inheritance and, ultimately, the need to truly comprehend the meaning and purpose of wealth in Islam. These under-served needs offer opportunities for Islamic wealth management in Singapore. If a holistic approach to Islamic wealth management is taken in Singapore to address these needs, Singapore could grow into an Islamic wealth management center as well.
Lacking a critical mass for Islamic consumer banking
One area where Singapore has a relative dearth of Shariah compliant products is in its consumer banking space. While in many other Islamic finance-friendly jurisdictions it is common for Shariah compliant products to be available to mass market consumers for home mortgages or automobile financing, the same cannot be said for Singapore.
Many industry watchers are also keen to see further developments in the Islamic consumer banking space in Singapore, so that Singapore can offer a more complete Islamic banking and finance ecosystem.
Singapore remains a relatively new market participant in Islamic finance and there are challenges ahead in its bid to develop the industry. Most importantly, Singapore’s domestic catchment for Islamic financing is relatively small as compared to conventional banking and finance.
While government support is critical, it is but one piece of an ecosystem. Singapore’s other advantages are its standing as an international financial center, its high regulatory standards, robust governance and strong legal and regulatory framework, its highly trained industry professionals, the strong partnership between the government and the industry, and its geographical proximity to Malaysia and Indonesia. In the relatively untapped areas of Islamic fund and wealth management, Singapore has a golden opportunity to develop these niches by harnessing these strengths.
Yeo Wico and Suhaimi Zainul-Abidin are partners at Allen & Gledhill. They can be contacted at
[email protected]
and
[email protected]
, respectively.