Singapores Mood Turns Upbeat

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					                                Publication: Islamic Finance Asia
                                Date: 1 March 2010
                                Headline: Singapore’s Mood Turns Upbeat

Singapore’s Mood Turns Upbeat
As the world economy claws its way back to strength, Singapore’s nascent Islamic finance
industry is expected to experience a pickup in activity, as investors take their time to review
opportunities in the market. CAMILLE KLASS finds out how the cautious mood is turning

“The Islamic finance industry in Singapore is going through the same phase as the global
finance system,” said the head of Islamic banking at a bank in Singapore. “It’s coming out
of the woods, which means it’s at an interesting juncture.

“What is happening is people are doing their business plans, project plans, looking at
project needs, terms of cover,” said Afaq Khan, Dubai-based CEO of Standard Chartered
Saadiq. “It’s not that they are shying away from Islamic finance.”

Khan himself has been a busy man. “I’m doing deals everyday — certainly, it has not been
quiet,” he said. The deals have been related to equities, Sukuk, syndicated paper and
property. “A lot is happening at the private banking and institutional level. The customer’s
preference is not to publicize this, and we have to respect that.”

In line with the direction from the Monetary Authority of Singapore (MAS) — the country’s
de facto central bank — private and wholesale banking, together with asset management,
are the thrust of Singapore banks’ Islamic finance activities. “The direction coming from
MAS is based on incentives, which mainly cater to wholesale activities,” said a Singapore-
based Islamic banker, who requested anonymity. “There are deals, but mostly institutional.”

Despite the prevailing mood of caution, Singapore has sealed a handful of key deals over
the past year. Early last year, MAS issued a SG$200 million (US$141 million) reverse-
enquiry Sukuk Ijarah program arranged by Standard Chartered Bank. It marked the first
issuance in the market by a triple-A rated sovereign entity.

In addition, the Islamic Development Bank issued a 200 million Singapore dollar
denominated trust certificate while Singapore property developer City Development
introduced a SG$1 billion (US$706 million) medium term note program and Majlis Ugama
Islam Singapura or MUIS, the Singapore Islamic Religious Council, introduced a SG$29
million (US$20.5 million) Sukuk Ijarah.

Last year as well, food distributor Olam International and the Islamic Bank of Asia signed a
deal to offer a Murabahah based on agricultural trade flows, while Singapore’s Keppel T&T
and Saudi Arabia’s Al Rajhi Holding Group announced an agreement to establish a joint
venture asset management company to manage the world’s first Shariah compliant data
center fund.

While these firms showed that Singapore firms are warming up to the idea of accessing
funds through the Islamic finance market, the market lacks sufficient liquidity — a
consequence of having a small pool of players, market participants say.
                                 Publication: Islamic Finance Asia
                                 Date: 1 March 2010
                                 Headline: Singapore’s Mood Turns Upbeat

Still at a developing stage, the Singapore market has room for more players. Citibank,
Standard Chartered Bank, OCBC, Maybank and CIMB are among the few banks offering
both conventional and Islamic financial services in Singapore, with the Islamic Bank of Asia
being Singapore’s only full-fledged Islamic bank, according to MAS. On the Takaful front,
only HSBC Insurance, NTUC Income and Tokio Marine Nichido Re Takaful operate in

However, participation is bound to increase. After all, at stake is a piece of the roughly
US$1 trillion global Islamic finance market, based on statistics from the Asian Development
Bank (ADB). Having recently hired its head of Islamic banking, Malaysia-headquartered
RHB Bank, which currently operates as a conventional bank in Singapore, will commence
Islamic banking operations shortly.

While the outlook for Islamic finance is rosy, with growth pegged at 10%-15% annually for
the global industry, according to ADB estimates, Singapore, with its ambitions of becoming
a leading center for Islamic finance, does face a few challenges. Low level of public
awareness and education, difficulties in marketing, as well as insufficient talent and
expertise, are among the key issues market participants identify.

To be sure, MAS has done a fine job in creating a conducive environment for growth and
galvanizing the industry through measures and regulations to allow banks increased
flexibility in structuring instruments to manage their risks and create a level playing field for
the industry with its conventional finance sector.

Some of these regulations include waiving the double imposition of stamp duties in Islamic
transactions involving real estate and according the same concessionary tax treatment and
granting interest to Sukuk payouts as to conventional bonds.

As with any industry that’s developing and evolving, some tweaks are usually necessary.
The good thing, market participants say, is that MAS’ desire for Singapore to succeed in
Islamic finance, coupled with its responsive attitude towards change, ensures that it will
consider feedback on improvements to the industry.

“Given that this is not such a new industry, but a growing one, there needs to be
improvements and fine tuning,” said Song Seng Wun, regional economist at CIMB-GK
Research in Singapore.

And Singapore could take a leaf from Malaysia, market participants say. The comparison
with Malaysia is unavoidable, given that Singapore’s closest neighbor is a frontrunner and
rival in the race to become an Islamic finance hub. Malaysia capitalized on its headstart of
more than 20 years over Singapore by educating its population on the advantages of
Shariah compliant investing. That Malaysia’s population is largely Muslim has made
acceptance easier.

“Malaysia has been promoting the education of Islamic finance for a long time and has
been successful in attracting both Islamic banks and funds from the Middle East to set up
there to look for possible projects,” said Paul Ng, partner and global head of aviation at
international law firm Stephenson Harwood in Singapore.
                                Publication: Islamic Finance Asia
                                Date: 1 March 2010
                                Headline: Singapore’s Mood Turns Upbeat

Educating the investing public is vital for Singapore’s market to grow, especially as
knowledge and awareness of Islamic finance — whether about banking or Takaful products
— is low. “Islamic banking is still pretty new, so we need some time before the SMEs
(small- and medium-sized enterprises), corporates and individuals understand these
concepts and the economic benefits are seen,” the Singapore-based Islamic banker said.

While greater awareness will engender greater receptiveness towards investing in Islamic
financial products, the challenge for Islamic bankers lies in how to sell them. “In Singapore,
where funding is readily available through conventional means and Islamic finance is seen
as alternative, there’s no added motivation for clients to consider Islamic finance because
everything is on a level playing field and appears equal,” said the Singapore-based Islamic
banker. “So for (Islamic banks in Singapore), putting across the right value proposition to
institutions and corporates is a challenge.”

In its efforts to create a conducive environment for the Islamic finance industry to thrive,
MAS has made it a point to create a level playing field for both the conventional and Islamic
finance industries, to avoid giving one preferential treatment over the other. But currently,
“pockets of opportunity” lie in offering investors — both local and foreign — an alternative in
the form of investing in projects in the Middle East, where deals will be expected to be
structured in a Shariah compliant manner, market participants say.

With MAS’ efforts to encourage greater participation in the market and with more players
likely to take a more active role in the long term, more manpower and expertise in financial
instruments in areas such as fixed income — of which there is already a shortage in
Singapore — will become even more crucial.

To that end, in a move that will take some time to bear fruit, MAS has said it will sponsor
eligible students for undergraduate courses in Islamic finance at the Singapore
Management University, as well as for master’s courses in Islamic finance at the Wealth
Management Institute of Singapore.

As the industry evolves and grows in depth and breadth with the entry of more players,
Singapore should consider developing a separate regulatory framework to keep in step and
harmonize with Islamic financial practices in other markets and to ensure the enforceability
of Shariah, market participants say.

However, MAS has made it clear that it will not have separate guidelines for Islamic
banking. Rather, it has opted to apply a single regulatory framework to both conventional
and Islamic banking.

“The enforceability of Shariah is more of a problem here (in Singapore) should any disputes
go to court because we are governed by common law derived from English law,” said a
second Islamic banker. “In Malaysia, they have more specific Shariah guidelines and
enforcement for Islamic transaction disputes. In Singapore, banking guidelines are tweaked
to allow Islamic transactions.”

Looking at Malaysia as an example, market participants take heart that changes will take
place over time. Despite its Islamic finance industry having taken off decades ago,
Malaysia only started issuing separate banking licenses a few years ago. “The Islamic
                                 Publication: Islamic Finance Asia
                                 Date: 1 March 2010
                                 Headline: Singapore’s Mood Turns Upbeat

finance initiative needs to be a long term one,” the head of Islamic banking at a Singapore
bank said. “It doesn’t matter if it moves slowly.”

Like Singapore, Korea, Hong Kong and Indonesia are all vying to become centers of
Islamic finance and are each taking measures to capture opportunities in and a chunk of
the lucrative Islamic finance market.

But, citing its established position as a leading major center of conventional finance, its
good corporate governance, transparency and political stability as well as its close
proximity to Indonesia and Malaysia — two populous Muslim nations — the long-term
prospects for Singapore are excellent, market participants say.

“Singapore is a world-class jurisdiction — there’s stability and clarity, consistency in
applications of law and it’s very easy to get in and out of investments,” said Standard
Chartered Saadiq’s Khan. “After a period of time, Singapore will emerge as a leader in
Islamic banking in the areas it specializes in, such as asset management and wholesale

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