Singapore has long been recognized as one of the key financial hubs in the global economy. In September 2016, PwC’s Cities of Opportunities Index ranked Singapore at number 2 ahead of Paris and Amsterdam. The results exhibit Singapore’s growing business clout, driven in part by an expanding financial and insurance industry, which makes up about 13% of the economy, according to PwC’s ‘Cities of Opportunities 7’ report dated the 7th September 2016.
However, 2016 has proven to be a challenging year for Singapore’s economy. As the global economy remains in the doldrums and its key trading partners faced with economic woes, Singapore’s economy contracted by 4.1% in the third quarter on a seasonally adjusted annualized basis, from the previous three months, recording the biggest slump since 2012. Analysts have forecasted a mere 0.3% growth, as reported by AsiaOne, for 2016.
The downturn in the oil and gas and commodity industries has resulted in several companies cutting jobs and defaulting on debt obligations. August 2016 saw the first-ever default in a local currency Sukuk facility by a subsidiary of Swiber Holdings, followed by several bond defaults by other oil and gas players in the industry. This has raised concerns on the financial sector’s exposure to the oil and gas sector, with the expectation that market conditions are expected to continue in 2017.
Review of 2016
Not surprisingly, Islamic finance activities in Singapore are not spared from the woes plaguing the global economy. In November 2015, DBS Group had announced its intention to wind down the Islamic Bank of Asia (IBA), citing the inability to meet economies of scale as the reason for its decision.
While the winding-down of the IBA may be viewed as a setback to Singapore’s aspirations to become an Islamic finance hub in the ASEAN region, 2016 was the year where Islamic finance was still able to make headlines and garner interest from the public in Singapore. Notable news include:
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The RB Capital transaction: April 2016 saw a one-of-a-kind Islamic financing deal worth SG$260 million (US$182.16 million) involving Maybank Singapore and RB Capital. The deal involved structuring Shariah compliant financing using Holiday Inn Express Singapore Clarke Quay as the underlying security and is one of the biggest Islamic deals in Singapore. This landmark deal showcases the ability to structure a Shariah compliant financing facility using hospitality assets as underlying assets in a secular country.
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Sabana REIT refinancing: In August 2016, Sabana REIT, the first and currently the only Shariah compliant REIT listed in Singapore, takes up Islamic financing facilities amounting to SG$181 million (US$126.81 million) involving banks like Maybank Singapore, HSBC and UOB. The facilities included a 3.5-year term commodity Murabahah facility of up to SG$90 million (US$63.05 million) that was used to refinance existing financings.
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Awareness in Islamic finance: Maybank Singapore was invited by Singapore Polytechnic to give a presentation to its students in August 2016. Among the topics presented included a brief history in Islamic finance and developments in the global Islamic industry which provided insights into the world of Islamic finance for students of finance.
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The Swiber Sukuk default: Swiber Capital, a subsidiary of Swiber Holdings became the first company to default on a local currency Sukuk facility in Singapore. On the 2nd August, it was announced that Swiber Capital was unable to service the profit payment amounting to US$4.88 million under its US$150 million Sukuk facility issued in 2013, as reported by The Straits Times.
Preview of 2017
With economic growth in 2017 expected to remain flat, the key is to create and sustain awareness of Islamic finance in Singapore while at the same time identifying the pockets of opportunities with the aim to grow further once economic conditions have improved by addressing the following areas:
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Islamic wealth management: With Singapore poised to be one of the world’s key wealth management centers coupled with its Islamic finance regulations already in place, the development of Islamic wealth management in the country would help to further increase the fund flows between the Middle East and Singapore. It is timely that Islamic wealth management capabilities are developed in order to further attract the increasing number of wealthy Muslim investors looking to invest without the need to compromise on their religious beliefs.
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Increase in product offerings: Financial institutions need to identify the current gaps in the Singaporean market where Islamic finance is not present. Products including Islamic credit cards, home financing and Takaful are only some of the areas which can be explored and developed further. For example, total assets for Singapore’s insurance industry are estimated to stand at approximately US$163.8 billion as at the end of March 2016, up 4% compared to a year ago, according to the January to June 2016 results from Life Insurance Association Singapore. This coupled with the increase in Islamic financing assets can potentially present an opportunity to reintroduce Takaful into the Singaporean market.
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Increased awareness in Islam and Islamic finance among Malay Muslims: according to the Department of Statistics of Singapore, Malays make up 13.4% of Singapore’s population at the end of June 2016. Discussions with key players in Singapore’s Halal industry such as MY Outlets have indicated that there is an increased awareness of the Halal concept among Malay Muslims with further enquiries into Islamic financing and how Islamic finance in Singapore can grow to serve the Malay Muslim community. Collaborations between Islamic financial institutions and key Malay Muslim organizations in Singapore are one of the ways to penetrate and increase the participation of Malay Muslims to grow Islamic finance in Singapore.
Conclusion
With the challenges faced in 2016 expected to continue well into 2017, it is key for financial institutions offering Islamic finance to sustain the public’s level of awareness and interest in Islamic finance and to identify the gaps which could be converted into opportunities once the economy recovers.
It is important there is continuous engagement between Islamic financial institutions, regulators, the academic community and members of the public for secular nations such as Singapore to ensure the awareness and relevance of Islamic finance amid the current economic uncertainty.
Lim Say Cheong is the head of Islamic banking at Maybank Singapore. He can be contacted at [email protected].