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 around.

“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.

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 Singapore.

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.

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 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 banking.”