2015 represented a curious year for Islamic finance in Singapore. At the 6th World Islamic Banking Conference Asia Summit held on the 3rd June 2015, the Monetary Authority of Singapore (MAS)’s deputy managing director delivered a succinct speech highlighting, among other things, a growth in Islamic banking assets in Singapore by 73% since 2010, a 22% rise in assets under management since 2010, and a higher amount of outstanding Sukuk issuances in Singapore than any other conventional jurisdiction, reaching a high of SG$3.8 billion (US$2.71 billion) in 2014.
The MAS also cited the conclusion of a comprehensive free trade agreement with the GCC as one of the reasons for increasing trade interlinkages between Singapore and the GCC, resulting in the trend of GCC banks expanding their operations in Singapore to support the deployment of Islamic funds to corporates in the region through Islamic banking transactions and Sukuk issuances.
Despite these positive numbers and trends, there is a feeling among industry participants and watchers that the industry has stagnated in the face of strong headwinds, and lacks the optimism it enjoyed a decade ago. This feeling was compounded by the announcement by DBS Bank of its decision to gradually exit from Singapore’s only fully-fledged Islamic bank, The Islamic Bank of Asia (IB Asia). The establishment of IB Asia in 2007 was accompanied by much fanfare and excitement as industry watchers took it as a clear sign of Singapore being serious about developing Islamic finance. However, in a relatively short span of time, the bank went through a number of significant changes such as the departure of former CEO Vince Cook in 2009, a year in which the bank suffered a loss of US$77.1 million after making specific allowances on debt owned by customers in the Gulf region; and multiple shifts in business focus, to direct investments and of late to fee-based investment banking and private equity activities. When the announcement was made in 2015, there was noticeably a greater sense of sadness at an opportunity lost, rather than surprise.
Singapore’s early focus on leveling the playing field for Islamic finance was highly encouraging. Between 2005 and 2009, the MAS introduced a slew of enabling regulations for Islamic financial activities and transactions, legislating for a wide range of Islamic banking products such as Murabahah deposits and more complex Islamic financing structures such as Istisnah-based project financing. This was accompanied by amendments to tax regulations and the issuance of tax guides, to remove additional tax burdens that would arise from the more structured and asset-based nature of Islamic financial transactions. The most recent change to the tax framework came into effect on the 8th April 2015 through the Stamp Duties (Islamic Financial Arrangements) (Remission) Rules 2015, giving a provision for the remission of stamp duty to Islamic financial arrangements such as diminishing Musharakah, Istisnah and Ijarah Wa Iqtina, provided that the Islamic financial arrangements are endorsed by a Shariah council, body or committee formed for the purpose of providing guidance on compliance with Shariah law.
While industry players continue to lament Singapore’s refusal to seriously tilt the playing field in favor of Islamic finance the way many other jurisdictions have been willing to, in order to get a leg up in the race to attract Islamic investors and Middle East funds, the reality could be that any such incentives may not help much. In 2013, the MAS allowed two tax incentives for Islamic finance to lapse after they were first introduced in 2008. The first incentive was the FSI-Islamic Finance award, introduced to encourage more prescribed Shariah compliant financial activities to be done out of Singapore by granting a 5% concessionary tax rate for income from qualifying activities endorsed by an approved Shariah board. The second incentive was for offshore Takaful and re-Takaful business, which offered a 5% concessionary tax rate to an approved Takaful insurer for income derived from writing offshore General Takaful and re-Takaful insurance. In both cases, reports indicated a very low take-up rate for the tax incentives.
In response to the fallout from the withdrawal of the two tax incentives, the assistant managing director of MAS, Ng Nam Sin, explained at the Islamic Finance news Singapore Roadshow 2013 that the lapsing of the incentives was not a reflection of any reduced commitment to develop Islamic financial services in Singapore, and he tellingly remarked that Singapore’s proposition for Islamic finance must be broader than just tax advantage. The two points made by Ng quite aptly underscore Singapore’s long-term strategy for Islamic finance, and also explain the position Singapore is in today with respect to Islamic finance. While there exists a relatively good spread of Islamic financial products and instruments on the menu in Singapore, the reality is that such products and instruments are generally characterized by greater complexity, additional work, a longer time to market and ultimately higher costs, in comparison to conventional financial products, thereby making them a perennially weaker alternative.
It also means that the playing field is not really as level as it seems, due to the inherent characteristics of Islamic finance and more could be done. In order to remove these hurdles, the MAS and IRSA will need to start looking at ways to simplify the approval process for the clearance of tax issues for innovative or new Islamic financing structures, or those that do not fit squarely within the pre-defined list of approved or qualifying Islamic financing structures. Some form of grant to offset the additional legal and ratings costs associated with Sukuk offerings would also go a long way toward incentivizing first-time Sukuk issuers, and ultimately boost the industry.
Singapore’s Islamic financial market today reflects a relatively shallow Islamic capital market with sporadic Sukuk issuances, and an Islamic wealth management industry which has simply not taken off, with little interest and much less activity in Shariah compliant funds. Since the Islamic capital markets and Islamic wealth management sectors are the two areas which have long been touted as areas with the greatest Islamic finance potential for Singapore, questions should now aptly be asked as to whether a new approach is required.
Singapore’s torchbearer in Islamic finance remains Singapore-listed Sabana Shariah Compliant Industrial Real Estate Investment Trust (Sabana REIT), still to date the largest Shariah compliant REIT in the world by assets under management. Sabana REIT continued to tap into the Islamic debt markets in 2015 through a three-year secured commodity Murabahah facility of up to SG$50 million (US$35.65 million) from CIMB Bank (Singapore branch). It also entered into a SG$243 million (US$173.26 million) secured commodity Murabahah facility with HSBC, Malayan Banking (Singapore branch) and United Overseas Bank, as participants. It holds a diversified portfolio of 23 industrial properties in Singapore with total assets currently valued at approximately SG$1.3 billion (US$926.92 million), and has been assigned a ‘BBB-’ long-term corporate credit rating from S&P.
New players and new niches
Maybank and CIMB together offer the widest range of Islamic products in Singapore, including a mix of Islamic property financing for industrial and commercial properties, and residential properties in Malaysia, Islamic trade finance facilities, innovative upfront-paying fixed deposit products and structured deposit products, and Islamic automobile hire-purchase schemes.
Maybank remains the biggest player in the Islamic financial sector in Singapore, with 22 branches island-wide. It continues to see commendable growth in the Islamic banking segment in Singapore, with their financing and deposit portfolios reaping a compound annual growth rate of 71% and 43% respectively over the last five years.
CIMB Islamic has also experienced tremendous growth in the last few years and now boasts close to SG$3 billion (US$2.14 billion) in combined Islamic deposits and Islamic financing assets, resulting from a 30% year-on-year growth for Islamic deposits and a 80% year-on-year growth in Islamic financing assets.
The general consensus remains that Shariah compliant deposit and investment offerings have yet to gain much traction in the domestic retail banking market, largely as a result of low awareness of Islamic finance value propositions. Due to the small percentage of Muslims in the country, most of whom are relatively very well-banked and financially served, it is difficult to expect the level of growth in demand from the retail base which is necessary for the Islamic retail banking segment to reach a critical mass. Despite these challenges, the performance of Maybank Islamic and CIMB Islamic in Singapore seem to suggest reasons to be optimistic. Their dominance will now be tested with the emergence of news of RHB Islamic Bank’s intention to launch an Islamic window in Singapore by year-end.
In addition, a number of smaller players have emerged and taken up the baton by targeting small niches within the market. The Singapore Islamic Scholars and Religious Teachers Association (Persatuan Ulama dan Guru-Guru Islam (Singapore)), has announced its intention to take a leadership role in Islamic finance in Singapore, by offering a number of services to consumers and players in the Islamic finance space. Its Financial Syariah Advisory and Consultancy Unit now offers services to Muslims to help improve the Shariah compliance of their insurance/Takaful portfolios, their investment activities and their other financial arrangements (including the treatment of their Central Provident Fund monies). Their advisory work also includes helping businesses and investment firms structure their operations and investment structures/documentation in a Shariah compliant manner, and issuing Shariah pronouncements and certifications. Their two-pronged approach of providing Shariah advisory services to both product providers and consumers should lead to an increased understanding and appreciation for Islamic finance products and services over time, and simultaneously spur the demand and supply for Islamic financial products.
Singapore’s Club Ethis and KapitalBoost have also been making waves through their Islamic crowdfunding projects. They have arranged financing for some 13 projects to date, with crowd-sourced capital totaling approximately SG$2.7 million (US$1.93 million), largely from Singaporeans. The two crowdfunding setups rely on traditional asset-procurement Murabahah techniques to fund expanding businesses in need of working capital, and traditional profit-and-loss sharing Mudarabah contracts to fund contract-based construction projects. Apart from the attraction of utilizing relatively simple Islamic financial structures and documentation, Ethis, in particular, has been able to attract investors through their focus on socially impactful affordable housing projects which resonate well with the tenets of Islamic finance.
In 2010, back when there was considerably more optimism and excitement about the prospects for Islamic finance in Singapore, Haszeri Hussin, the Islamic treasury head at Oversea-Chinese Banking Corporation, said that: “Islamic finance will take off in Singapore but it’s going to be quite slow.” For the time being, Islamic finance players in Singapore remain confident that the predicted ‘take-off’ will come at some point, even though the Islamic capital market and wealth management sectors in Singapore may not have developed as quickly as planned.
Singapore’s approach of non-preferentialism in effect challenges Islamic financial players to find, create and sell real value propositions through Islamic finance, in order to draw issuers, borrowers, investors and retail consumers to Islamic finance. This approach eschews short-term artificial incentives in exchange for what should arguably be a more sustainable and competitive model of Islamic finance in general. Notwithstanding this, one cannot help but wish for the government to throw in some ‘booster shots’ every now and then, even if temporary, along the way.