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Sun shining on Islamic finance, says MAS chief

Ravi Menon highlights three promising global developments that Singapore can tap

Mr Menon: Addressing the 5th World Islamic Banking Conference Asia, he said Singapore has benefited from the favourable global environment for Islamic finance

[SINGAPORE] Islamic finance is developing rapidly but more work needs to be done if Singapore is to fully benefit from its growth.

As experts in the field gather here for the 5th World Islamic Banking Conference Asia, the consensus is one of promising prospects, but with gaps to plug.

"The sun is shining on Islamic finance," said Ravi Menon, Monetary Authority of Singapore managing director, in a keynote address.

The central banker highlighted three promising global developments for Islamic finance, which forbids the charging of interest. First, Islamic finance has grown at double digits last year, as it has for the previous five years, despite global economic uncertainties and market volatility. Global Islamic financial assets are estimated to have reached US$1.8 trillion by the end of last year, from US$1.5 trillion in 2012.

Second, global regulatory standards and best practices are being established for Islamic finance. Common standards are good for facilitating cross-border transactions, helping to address risks that are idiosyncratic to Islamic finance, such as Syariah non-compliance risk, he noted.

Third, more countries are catering to Islamic finance.

In Asia, Indonesia has set out to significantly grow its Islamic banking sector and develop its Islamic capital markets. India started introducing Islamic financial products and services last year.

There is growing cross-border sukuk or Islamic bonds issuance within Asia as well as between the Middle East and Asia.

"Singapore has benefited from this favourable global environment for Islamic finance," he said.

Singapore is the only non-Muslim-majority country among the top 15 countries for Islamic finance. Islamic assets under management have surged nearly fourfold over the last five years to US$3.5 billion in 2012. More than 40 per cent of the Islamic assets in Singapore are managed by the asset management industry.

Fifteen banks are involved in Islamic banking, double the number five years ago; they hold about a third of the Islamic assets in Singapore. The rest of Islamic assets are in outstanding sukuk and takaful or Islamic insurance.

Singapore has had nearly 30 sukuk issuances worth S$4.3 billion to-date, compared to seven in 2013.

And more funds continue to be established here, to meet demand from clients in Asia as well as from the Middle East. Several corporations have established sukuk programmes in Singapore to tap the market over the next few years, said Mr Menon.

Still, despite the impressive growth, industry players say Islamic finance here needs more depth - in a non-Muslim-majority environment, Islamic finance has yet to really take off.

Most Islamic banks tend to be retail-heavy, as seen in the more than 60 per cent retail weightage in Malaysia and 80 per cent in Indonesia, noted Syed Abdull Aziz Syed Kechik, OCBC Al-Amin Bank Berhad chief executive.

"This is invariably linked to a domestic centrism," he said.

"While organic growth remains a reality, the gap between Islamic banks on one side and conventional regional and global players on the other is widening. Bolder moves by Islamic banking players to expand via regional mergers and acquisitions would be the key to fast-tracking capacity and building scope," he said.

Other challenges include the lack of familiarity with Syariah structures, with Middle East investors and companies venturing offshore heading mainly to London.

According to Clifford Lee, DBS Bank's head of fixed income, much education still needs to be done on structuring Syariah-compliant deals.

"In the last 12 months, people I've spoken to say Islamic financing of a plane can't be done because it serves alcohol onboard; oddly enough, it could be done for the engine," said Mr Lee.

As for sukuk issuances in Singapore, companies which have done so in order to broaden their investor base have found that the benefits of diversification weren't obvious.

"Just making a bond Syariah-compliant does not mean there are investors tripping over themselves to get it," pointed out Mr Lee. Funds in the region may not also have the mandates to invest in these products.

As commercially driven entities, most banks would be wary of the added cost from ever-increasing regulatory requirements when investing capital into a nascent market that currently offers low prospects and has limited governmental support, said OCBC Al-Amin's Syed Abdull Aziz.

He suggested the government could do more to promote the sector. The government could consider the merits of developing a strategic plan with appropriate incentives for the key industry stakeholders, he said.

"This would help to nurture a comprehensive sizeable Islamic finance sector in Singapore, taking into consideration the long-term benefits of active participation in the Islamic finance channel within the context of the overall Asean integrated economic growth framework," said Syed Abdull Aziz.

Yeo Wico, Allen & Gledhill LLP partner, noted that due to the efforts of Singapore's regulators, there is a level playing field between Islamic finance and conventional finance.

"Singapore's attraction as an international finance centre in an economically vibrant region is key to the future growth of Islamic finance in Singapore," said Mr Yeo.

The Gulf Cooperation Council (GCC) region is transforming rapidly and Singapore companies should also seize opportunities there, said Zainul Abidin Rasheed, Singapore Ambassador to Kuwait and Foreign Minister's Special Envoy to the Middle East. The GCC comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Many may not be aware of the strong development and growth phase that the GCC is experiencing now. "The main cities of the GCC will be transformed, and Singapore should be part of this transformation," he said.