S'pore should sharpen its edge in Islamic finance

AT THE 2014 World Islamic Banking Conference held in Singapore last month, Monetary Authority of Singapore (MAS) managing director Ravi Menon said "the sun is shining on Islamic finance".

The sector, which covers financial activities compliant with Syariah law, has grown much faster than other areas of finance in the past two decades, thanks in part to petrodollars from the booming Middle East.

This makes it one of the brightest spots in global finance, an industry still riddled with dubious practices and stalled growth.

Singapore, however, risks being left in the shade. Like other financial centres, the Republic has tried to ride the sector's expansion, mainly by levelling the rules for Islamic and conventional finance and introducing tax incentives for issuers of Islamic financial products. It has recorded milestones such as the listing of Sabana Reit - the world's largest Islamic Reit - and a $750 million Islamic syndicated loan by Parkway Holdings.

But while Singapore remains one of the non-Muslim majority countries among the top centres for Islamic finance, its edge is being eroded.

In last year's Islamic Finance Country Index, Singapore was surpassed by Britain and the United States - both non-Muslim majority countries - in terms of Islamic financial assets. Of the global industry's estimated US$1.8 trillion (S$2.2 trillion) in assets last year, Singapore accounted for a mere 0.6 per cent.

Islamic assets under management in Singapore are worth about $4.375 billion, or less than 0.3 per cent of the total assets managed by Singapore-based asset managers.

Some efforts by the MAS to spur the sector's growth have also petered out. Its tax incentives for Islamic finance recently expired and have not been renewed.

To date, Singapore issuers have launched about $4 billion in Islamic bonds - just 4 per cent of the $105 billion issued by neighbouring Malaysia last year alone. Losing out?

THERE is good reason to worry about Singapore missing out on this fast-growing area of finance, which brings benefits not just to the overall economy but to individual issuers and investors as well.

My colleague Professor David Reeb, the government of Dubai's Harun Kapetanovic and I recently analysed Emirates' US$1 billion sukuk - bonds complying with Syariah law - last year, when the company also issued US$750 million in conventional bonds.

Even though the airline's conventional bonds had similar maturity and risk, the Islamic bonds provided capital at a significantly lower cost - roughly 50 basis points less, or $6.25 million in interest cost savings per year.

This likely arose from the huge mismatch between demand and supply.

For every Islamic bond issued, there are at least two willing buyers.

In general, firms can raise capital more cheaply through Islamic bonds, which also give Islamic investors a chance to invest in Syariah-compliant securities issued by reputable companies with strong credit credentials.

These perks have lured other global financial centres to engage in more Islamic finance activities.

Britain successfully issued a £200 million (S$425.7 million) Islamic bond last month, becoming the first Western country to sell such bonds.

The issue was 10 times oversubscribed and underpins London's efforts to be a global hub for Islamic finance.

Luxembourg, another large European financial centre, is now preparing to sell €200 million (S$337.8 million) worth of sovereign Islamic bonds.

In the Middle East, the Islamic finance industry centred in Dubai includes commercial banking, asset management, Syariah consulting, insurance, endowments and other financial services. Islamic assets in Dubai have grown 15 per cent yearly and represented about 16.7 per cent of overall finance in the emirate last year.

Closer to home, Hong Kong has eased tax laws for sukuk issuances and agreed to work closely with Malaysia, the leading hub for sukuk issuance, with more than half the global market share. The territory is also planning its maiden sovereign sukuk this year to raise up to US$1 billion.

Singapore's role

TO AVOID being left behind, Singapore should do more to foster the growth of Islamic finance.

The Republic can find its own niche in the sector by relying on its strengths, including its reputation for safety, security and stability.

All three are key requirements for Islamic wealth management, an area Singapore could focus on developing and promoting.

Like Hong Kong, Singapore could also collaborate with Malaysia for investors in both markets to benefit from their respective specialisations in Islamic finance.

In addition, given the healthy global demand for Islamic financial products, the Singapore Exchange could become a major trading arena for Islamic bonds.

This would increase the bonds' liquidity and help match institutional investors with firms needing funds.

Singapore might also consider issuing government Islamic bonds regularly - preferably with differing maturities - to attract international Islamic capital, while providing a benchmark for potential corporate issuers.

For Islamic equity investments, once there is enough critical mass here, it could be advantageous to provide a benchmark such as a Singapore Islamic Exchange Traded Fund or a Singapore Islamic Market Index.

To develop the necessary human capital and financial technology for a thriving Islamic finance sector, Singapore could also set up an institute for education and research in Islamic finance.

Finally, MAS could consider re-introducing the tax incentives for Islamic finance that expired last year. They might include tax deductions on the issuance costs and income tax exemptions for Special Purpose Vehicles.

Islamic finance in Singapore has yet to reach its full potential. Success in this sector needs robust, long-term government support. The game is global, and only long-term players will prosper.


The writer is director of education and outreach at the NUS Business School's Centre for Asset Management Research and Investments.

This article was first published on July 22, 2014.
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