It is perhaps unusual to begin a discussion of Singapore’s potential within Islamic finance by considering its disadvantages but, as we will see, an examination of Singapore’s apparent deficiency in reality points to its greatest strengths. One of the usual shortcomings attributed to Singapore in terms of prospects for developing into a center for Islamic finance is its relatively small Muslim population. While this is factually true —some 15% of a population exceeding 4 million is Muslim — it doesn’t take account of the robust presence of Muslims, Islam and indeed Islamic law in Singapore.
Not so recent developments
To take an example, the Islamic Religious Council of Singapore (MUIS), a statutory board of the government formed in 1968, concerns itself with the religious interests of Muslims in Singapore and administers over 100 Islamic endowments with a reported aggregate corpus of around S$350 million (US$247.7 million). Singapore has also had a Shariah court since before independence, though its jurisdiction is limited to essentially personal law, such as marriage and inheritance, rather than commercial law.
But the history of Muslim economic activity goes much farther back in Singapore, to within a few months of its founding in 1819, when Syed Mohammed Al-Junayd entered business here, attracted by the ease of conducting commerce — which at that time meant a duty-free port at the mouth of the Malacca Straits, serving as a conduit between the Far East and lands to the west. The significant presence of Muslim Arab traders in Southeast Asia, and Singapore’s very early attempt to attract them, is reflected clearly in founder Sir Stamford Raffles’ town plan of 1822, which included a Muslim Quarter, with Arab Street as its axis. Arab Street remains a distinctly Muslim area of densely packed textile and carpet shops.
Like other trader-immigrants from Hadramaut in what is now Yemen, Al-Junayd found fortune in Singapore. By the first few years of the 20th century, the Hadrami merchants were the wealthiest citizens of Singapore. The Al-Kaff family was the second biggest taxpayer in Singapore, after the port, and the Al-Saqqaf clan owned Raffles Hotel. Many Hadrami reared in or influenced by Singapore returned to Hadramaut to create enduring institutions and propagate news ways of thinking.
There is evidence that the Hadrami Muslim community in Singapore and South East Asia did conform their commercial activities, at least to some extent, to Shariah dictates. For instance, they avoided entering the lucrative banking business, focusing instead on consumer goods trading, steamships, textiles and property investment, quintessentially Shariah compliant ventures. When they did lend, they appear to have done so under artifices (which would not pass modern muster) meant to package the transaction as non-riba based. But they sought to be Shariah compliant, whatever their failings, and as any current student of Islamic finance will recognize, debating whether a particular structure is compliant or not is a timeless aspect of Islamic finance.
More recent developments
To provide some context for examining the state and direction of Islamic finance in Singapore, it would be useful to turn from history to recent stories, and to look briefly at the most recent developments in the area. Herewith, a summary of what has been happening:
MAS Sukuk facility: The Monetary Authority of Singapore (the central bank) announced in May that it will be developing a facility to make sovereign-rated Sukuk available. This is different from the typical broadly distributed sovereign term Sukuk issuance, and more like a typical central bank facility afforded to financial institutions.
The MAS Sukuk facility will operate on a reverse inquiry basis, so that Sukuk will be issued as and when client financial institutions’ needs dictate. This approach also cleverly avoids dealing with underwriters, raters or investors, with a ready-made pricing mechanism against government securities. This is a typically Singaporean approach to financial leadership: innovative yet measured and done in a way that is unlikely to not succeed, or at least not succeed publicly.
Permissibility of Murabahah: In 2005 and 2006, MAS permitted Singapore banks to enter into and offer commodity-based Murabahah structures (which account for a large majority of Islamic structures) as an exemption from the general restriction on banks engaging in non-financial trading activity.
Following this, OCBC Bank a launched a treasury Murabahah account, the first Murabahah-based investment product launched in Singapore, aimed at regional Islamic corporates, financial institutions and non-profits. Taking advantage of the exemption, Citibank also introduced various Murabahah-based products including fixed-term investment products and products that mimic interest rate swaps, currency swaps and currency forward contracts.
Tax changes: In June 2006, MAS granted remission of stamp duty for property transfers in relation to Sukuk structures in excess of the duty chargeable for conventional bond issues. Similar action has been taken in the UK. It is instructive to note that after a period of time the UK treasury had to revise the stamp duty relief afforded to Islamic financings because some GBP1 billion (US$1.86 billion) of non-Islamic property transfers were structured in a way to take advantage of the exemption. Every party has uninvited guests.
More recently, in February 2008, Singapore sought to further level the tax treatment of Islamic and conventional financings. For instance, financiers’ profits on Islamic financings are treated for tax purposes in the same way as interest is (rather than being taxed at the general corporate tax rate, as was previously the case). Expenses incurred in lieu of interest and profits payable to customers are also taxed in the same manner as interest. Singapore also extended its 5% concessionary tax rate for Qualifying Debt Securities to qualifying Sukuk.
Islamic Bank of Asia: Any serious Islamic financial center needs well-capitalized and well-run Islamic banks, and MAS licensed Singapore’s first (and so far only) such bank, The Islamic Bank of Asia, in May 2007. The bank is a joint venture between Singapore’s largest bank, DBS (60%) and two dozen or so Middle Eastern institutional and family investors (40%). DBS’s Shariah advisory board includes Sheikh Nizam Yaquby, Dr Mohamed Ali Elgari, Dr Abdul Sattar Abu Ghuddah and Dr Mohd Daud Bakar, all internationally esteemed scholars. As the inaugural Islamic bank in a jurisdiction with conservative prudential regulators, the bank spent much of its early effort getting the regulatory authorities comfortable with aspects of Islamic financing which conventional bank regulators have little occasion to consider, for instance, routine trading of commodities in the course of entering into Murabahah facilities.
SGX developments: In February 2006, the Singapore Exchange (SGX) launched the FTSE SGX Asia Shariah 100 Index, consisting of 100 Shariah compliant shares listed in Singapore, Hong Kong, Japan, South Korea and Taiwan. This is the first of a series of planned equity indices that benchmark against Shariah compliant equities. More recently, SGX has been active in pursuing listings of Shariah compliant instruments, with a Daiwa exchange-traded fund based on Shariah compliant Japanese stocks and a Maybank Sukuk issue (the first international bank regulatory capital Sukuk). An initial Sukuk listing is viewed as quite helpful by arrangers and lawyers, signifying that the exchange has overcome the usual preliminary hurdles to listing (like deciding whether the debt, asset-backed or equity listing rules apply to Sukuk).
Cambridge REIT: Recently, a major Singapore-listed real estate investment trust (REIT), Cambridge Industrial Trust, with assets of almost S$1 billion (US$710 million), announced its intention to transform itself into an Islamic property trust. National Australia Bank is investing US$35 million for a stake in the trust. And the trust is restructuring its existing S$369 million (US$261.1 million) in interest-bearing debt. Following the restructuring, Cambridge will likely be the first Shariah compliant listed industrial property trust anywhere.
IFSB: The Islamic Financial Services Board (IFSB) is an international standard-setting organization which issues prudential standards and guiding principles for the broader Islamic financial services industry. Its members are a broad range of central banks and prudential regulators as well as commercial banks. MAS became a full member in 2005, raising its profile within Islamic regulatory circles and allowing it to participate in developments at the highest level. Singapore will host the sixth annual IFSB summit in May 2009.
Where to?
There are a number of cities vying to be Islamic finance centers or hubs, but what does that really mean, in particular for Singapore? Perhaps Islamic finance “centers” can be viewed as falling on a spectrum, from wispy to complete. At the lightest end of that spectrum, one thinks, for instance, of listing venues. Somewhere in the middle would fall jurisdictions where borrowers look outward to attract Islamic financing. At the comprehensive end of things, one would expect centers where issuers, investors and intermediaries such as bankers, lawyers and accountants come together to transact, while regulators create a conducive and enabling setting.
Where will or should Singapore fall in this spectrum? Singapore undoubtedly aims for what naturally suits it, which is to be an embracing center bringing together the right ingredients and catalyzing them. Singapore’s clearest path to prominence in Islamic finance is to continue developing a favorable regulatory framework and encourage the development of a critical mass of Islamic finance experts so that investors, financiers and borrowers turn here to structure or invest in Islamic deals with an Asian focus.
Singapore is not only a natural distribution point for Shariah compliant investment products aimed at regional Islamic investors who hold assets here but also a conduit for Islamic investment from the Middle East into Southeast Asia as an asset management center. Recent data point in this direction: according to MAS, there was some S$1.2 trillion (US$0.85 trillion) in assets under management in Singapore at year end 2007, of which 57% was invested in the Asia-Pacific region, with over half of total investments in equities (which of course are more Shariah-friendly than debt). Tellingly, only 20% of these assets were from outside the Asia-Pacific, the US and Europe, meaning there is much room to attract Middle Eastern investment funds to Singapore.
There are also signs of a developing mass of Islamic finance expertise in Singapore. For instance, a number of ground-breaking Sukuk issuances have already been handled by bankers and lawyers based in Singapore, including the inaugural global Sukuk (by the Malaysian sovereign), sovereign Sukuk in Qatar, Brunei and Sarawak and the first Shariah compliant “mortgage” securitization.