Like most Asian nations that survived the 1997/98 regional financial crisis, Singapore is facing the global economic downturn better than most in the northern hemisphere. One of its strategies is to forge ahead with Islamic finance, as AYU AZIZ learns.
About three years ago, Singapore announced its aspirations to become an Islamic financial hub in Asia. The nation of about five million was confident that it was more than ready to put itself in competition with Hong Kong and Kuala Lumpur.
The announcement did not come as unexpected because the tiny island republic is already an established financial hub for the region. In fact, it was almost natural for Singapore to embrace Islamic finance as the move only enhances its much vaunted reputation as a financial hub.
The Singapore government swiftly made the necessary regulatory changes to achieve its objective. In 2005, banking regulations were amended to enable banks to offer Murabahah financing. The amendments allowed global banks such as Standard Chartered Bank (StanChart), HSBC and Citibank to offer a wider range of Shariah compliant products in Singapore.
That same year, StanChart concluded a US$96 million Murabahah facility for Baitak Asian Real Estate Fund I. The government also compelled Islamic products to be covered under Singapore’s Deposit Insurance scheme to the extent that they fulfill the conventional definition of “deposit” under the Deposit Insurance Act.
The FTSE SGX Asia 100 Shariah Index was launched in 2006 on the Singapore Exchange (SGX). The index comprises 100 Shariah compliant stocks from the Asia Pacific region.
The Islamic Bank of Asia (IB Asia), Singapore’s first fully Shariah compliant bank, was launched in 2007. It was formed as a joint venture between Asian financial services group DBS Bank and 34 Middle Eastern investors. Kuwait Finance House and Arcapita followed suit soon after. In May 2008, Daiwa Asset Management listed its FTSE Japan Shariah ETF (exchange-traded fund) on the SGX.
It also leveled the playing field for Islamic transactions by waiving the double stamp duties on real estate deals and accorded the same concessionary tax treatment on income from Islamic bonds as is afforded to conventional bonds.
“For the past 18 months, we have progressively made changes to certain regulations that could impede Islamic finance activities such as those concerning deposits as well as tax treatment. In addition to this, the ministry of finance has a 5% tax rebate on Shariah compliant banking activities,” Heng Swee Keat, managing director of the Monetary Authority of Singapore (MAS), told Islamic Finance Asia.
Singapore ahead of Hong Kong
With all the regulations in place, the country launched its first sovereign Sukuk on the 19th January 2009 — the first non-Muslim nation to do so. The maiden sovereign Sukuk, which aimed to raise SG$200 million (US$133 million), was initiated by MAS to promote further growth of Islamic finance and to meet the needs of financial institutions conducting Shariah compliant activities on the island republic. IB Asia and StanChart were the arrangers of the innovative Sukuk, while legal counsel was provided by Allen & Gledhill.
The Sukuk operates on a reverse-inquiry basis which means the size, maturity and pricing will depend on investor requirements and market conditions. It is expected to rejuvenate the market and confirms that government interest in Islamic finance has not waned.
It has also put Singapore ahead of Hong Kong, which has kept mum about its first sovereign Sukuk for the past few months. More importantly, the launch of the Singapore Sukuk was a pleasant surprise for the Islamic finance market, which has not seen much movement for the past few months.
Analysts believe that the Sukuk would help banks and financial institutions gather assets that comply with the local regulatory requirements, specifically concerning Minimum Liquid Assets (MLA) under the Singapore Banking Act.
The Sukuk should also serve as a benchmark for all Shariah compliant assets in Singapore ranging from treasury bills to bonds up to five years, and provides price discovery.
“The much awaited Sukuk issued by the Singapore government is certainly a market mover that would encourage more Sukuk being issued in the near future,” said Vince Cook, CEO of IB Asia. A few days after MAS launched its Sukuk, a corporate Sukuk was raised.
The second-largest developer in Singapore, City Developments, issued SG$100 million (US$67 million) Islamic notes to fund its Shariah compliant businesses. The 3.25% Islamic Trust Certificates are expected to mature in 2010 with CIMB as its sole dealer. It is too early to tell, but there are clearly signs of a healthy interest in Islamic finance despite of the gloomy economic environment.
Glum pre-Sukuk mood
Prior to the launch of the Sukuk, the mood in Singapore’s financial district was somber. Conventional finance had slowed down considerably with banks tightening their belts, bracing themselves for an uncertain future. Even now, very few conventional banks are lending money to businesses and the slowdown has had an impact on the Islamic side.
“While we are still seeing interest from some large Asian-based corporates in accessing Islamic funding, actual deal flow is low,” said Gervais Green, a partner at legal firm Norton Rose (Asia), when Islamic Finance Asia spoke to him. He attributed the low volume of deals in Singapore to a number of factors, one of which was the uncertainty in the property market.
Ambreesh Srivasta, senior director of Fitch Ratings based in Singapore, that businesses in Singapore rely more heavily on the state of the US economy compared to other countries in the region. Most businesses have little option but to wait for a recovery to take place. Companies that are based in the US are the ones that are more concerned.
“Our US office had to let go quite a number of people last year, just before Christmas, which is sad for everyone. If things don’t improve before the middle of the year, others from different global offices could face the same fate,” warned a director at a prominent US-based company that has an office in Singapore.
Kenneth Aboud, managing partner of Allen Overy in Singapore agreed that things prior to the launch of the Sukuk were rather quiet, especially where Islamic finance is concerned.
“One area where we see some level of interest is debt restructuring since businesses are having difficulty refinancing existing indebtedness. On the equity side, investors are waiting for market prices to stabilize before they consider equity issuances,” he said.
But there was another factor that had significantly slowed down Islamic finance activity in the Lion City. When plans for the Cambridge Industrial Real Estate Investment Trust (REIT) to be the first Islamic REIT in Singapore buckled, many were skeptical of the feasibility of Islamic structures.
According to a source, the Islamic structure was deemed too complicated and confusing — so much so that after months of deliberating on the best Islamic structure for the REIT, the final decision was to go conventional. The scrapped plans for the REIT to be Shariah compliant had a negative impact on Islamic finance in Singapore.
“In fact, the Cambridge REIT was considered a litmus test among the players and the decision to go conventional was bad publicity for Islamic finance indeed,” admitted the source, an Islamic finance analyst.
To industry players who are considering Islamic finance, the Cambridge REIT case makes it relatively easier to reach a decision.
“If Islamic finance is to be accepted by all, it needs to do a lot of convincing and eliminate certain levels of procedures that are time consuming and costly. No one wants a product that is costlier to produce,” said a senior fund manager at an international bank in Singapore.
Retail banking overlooked?
While the wholesale side of Islamic finance was in the doldrums, the retail side of business was not looking any better either. The segment is not the focus of the Singapore government and it is thus not surprising that it has, to some extent, been neglected.
Islamic Finance Asia found that there aren’t many banks in Singapore that provide the Muslim populace of approximately 500,000 with Shariah banking facilities. OCBC Bank is the only local bank that offers the Al Wadiah savings and current account facility. And Maybank, which is considered a foreign bank, offers limited retail Islamic products for its customers in Singapore.
According to an international bank that has opened Islamic windows in other countries, the reason is because there is no official data available on the demographics of the Muslim population in Singapore.
“We would like to open a retail bank in Singapore but first we need to do research on whether there is demand for it,” said the CEO of the Islamic division of an international bank. He explained that customers of Islamic finance could be divided into two segments. The first consists of individuals or corporations who are self-motivated as it complies with their beliefs. The second comprises those who choose Islamic finance for commercial purposes.
One banker who prefers to remain anonymous said retail customers in Singapore don’t see the advantage of Islamic banking unless they can get higher returns from deposits or obtain financing.
“Some Muslim bodies and congregations have shown interest in investment products but they are not savvy enough about the products,” he said. “In my opinion, the products that they have chosen were in the same league of products like the Lehman Mini Bonds, wrapped as an Islamic note, where underlying assets still involve gharar and riba.”
Potential growth sectors
Despite the gloomy outlook for the global economy which has affected Singapore, and projections that depict the recovery of the global economy as an “L-shaped” rather than a “V-shaped” curve, Islamic finance still has room to grow.
An optimistic analyst believes the shipping sector is one of the drivers of growth in Islamic finance. The shipping sector has had seven huge years before “falling off a cliff” due to the global credit crisis. “The sector is now looking to Islamic financing and refinancing facilities either in the form of Ijarah or Musharakah structures with fixed returns in 20 years,” he said.
“Islamic finance will continue to grow in the wholesale commercial banking, wealth management and capital market segments. Singapore is an open economy that has all the necessary experience and groundwork to facilitate the domestic growth of Islamic finance. MAS has been supportive of the sector, and it will continue to do so.